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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.

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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.

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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

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The initiative also represents a significant part of Armenia’s peace agenda in the South Caucasus amid negotiations with Azerbaijan. Armenian leaders envision these renovated and newly built routes as conduits for cultivating economic, political, and cultural ties between the countries involved, thus advancing long-term peace and stability in the region. With the potential to economically benefit the region, promote peace and cooperation in the South Caucasus, and reduce Armenia’s dependence on Russia, the West should support the Crossroads for Peace plan with more robust diplomatic backing and infrastructure investment.

Decades of instability

The South Caucasus, straddling the juncture between Europe and Asia, has long been a region of strategic importance plagued by persistent instability and conflict. Most notable has been the Karabakh conflict between Armenia and Azerbaijan, which emerged in the early 1990s and led to the closure of the Armenia-Azerbaijan and Armenia-Turkey borders, severely restricting Armenia’s trade and hardening political divides.

The conflict experienced a significant turning point on September 27, 2020, when Azerbaijan launched a major offensive, triggering the worst escalation since 1994. After six weeks of intense fighting, a Russia-brokered ceasefire was signed on November 9, 2020, which stipulated concessions of Armenian-controlled territory within the internationally recognized borders of Azerbaijan. Azerbaijan blockaded Karabakh for nearly ten months starting on December 12, 2022, leading to a humanitarian crisis. On September 19, 2023, Azerbaijan launched a military assault that seized full control of Karabakh and forced more than one hundred thousand ethnic Armenians to flee to Armenia. The United Nations estimates that only about fifty Armenians remain in the region.

The Karabakh conflict ended on January 1, 2024, with the Karabakh authorities announcing that their unrecognized government ceased to exist. Consequently, the initial rationale behind the closure of the Armenia-Azerbaijan and Armenia-Turkey borders no longer holds. Despite this, both Azerbaijan and Turkey, with the latter often aligning with the former’s policies, continue to refuse to reopen their borders with Armenia. This refusal persists even in the face of Armenia’s Crossroads for Peace initiative—a proposal that would be beneficial for regional development.

Corridors and crossroads

The Trans-Caspian Corridor, also known as the “Middle Corridor,” is an increasingly important channel for transportation and cross-border trade connecting the Central Asian states with Europe. It primarily involves the transport of goods and resources across the Caspian Sea, bridging Central Asian countries such as Kazakhstan and Turkmenistan to Azerbaijan via maritime routes. From Azerbaijan, the goods are then transported through Georgia and Turkey, reaching European markets. Though trade volumes and capacity are still relatively low, the corridor holds immense strategic opportunities, as it offers a viable alternative to the traditional, longer routes through Russia or the southern maritime paths via the Suez Canal, significantly reducing transit time and avoiding geostrategic hotspots.

The Eurasian Northern Corridor, offering both road and rail options, is currently the primary route for transcontinental transport but largely traverses Russian territory. Western sanctions, investment deterrents, and financial restrictions tied to Russia’s war on Ukraine complicate this corridor’s use, and potential instability in Russia might eventually further weaken this route’s reliability. More direct routes through Central Asian and South Caucasus nations could diminish the value of the Eurasian Northern Corridor, aligning with US and European Union efforts to reduce dependencies on Russia. The development of the Trans-Caspian Corridor offers such a strategic alternative, diversifying energy supplies to Europe and enhancing trade connectivity between Asia and Europe, while bypassing Russian influence.

Armenia’s Crossroads for Peace initiative, therefore, would create a vital complementary set of routes, enhancing the strategic depth and utility of the Trans-Caspian Corridor. By developing infrastructure such as the Yeraskh-Julfa-Meghri-Horadiz railway, Armenia would offer new logistic pathways linking the Caspian region directly to the Mediterranean and Black seas through Armenian territory. This would not only shorten transit times and distances between Asia and Europe but would also introduce reliable alternative routes.

Additionally, the integration of Armenia into the Trans-Caspian Corridor could stimulate economic growth in the region by attracting foreign investment focused on logistics and infrastructure development. Armenia could become a central node in Eurasian trade, enhancing the corridor’s capacity and security. This strategic expansion would diversify the transport routes available to major trading powers and fortify the economic independence of Armenia and its neighboring countries by reducing their reliance on Russia.

Moreover, the Crossroads for Peace initiative is premised on the principles of sovereignty and jurisdiction, ensuring that infrastructure within each country’s borders remains under its control. The idea is to promote mutual respect and cooperation among its neighboring nations, facilitating equal and reciprocal management of border and customs controls. This ensures that each country would be able to safeguard its interests while promoting shared economic growth.

Obstacles in the path

However, Crossroads for Peace faces significant geopolitical hurdles. Azerbaijan has so far refused to support Armenia’s initiative, with analysts stating that neither Baku nor Ankara had been consulted. While the Armenian government should intensify its outreach on Crossroads for Peace, Armenia’s neighbors should judge the initiative in good faith on commercial viability, rather than on geopolitical grounds.

If realized, Crossroads for Peace could significantly benefit both Azerbaijan and Turkey by boosting regional trade and opening new markets. For Azerbaijan, it could provide a more direct route to European markets, while Turkey could see enhanced trade corridors that bypass less stable regions. Additionally, the project could serve as a diplomatic bridge, easing longstanding tensions and transforming a historical conflict into a hub of international commerce. For Turkey in particular, supporting this initiative could strategically position it as a peace broker in the region, which could strengthen its diplomatic relationships not only with its immediate neighbors but also across Europe and into Asia. 

Baku has instead called for the development of the “Zangezur Corridor,” which would connect mainland Azerbaijan directly with its exclave of Nakhchivan through Armenia’s southernmost Syunik province. Azerbaijan’s conception of Zangezur includes not only a railway link, but also a highway between the two parts of Azerbaijan, and demands that it would have extraterritorial status, which would require Armenia to cede control over a strip of its own territory. Crucially, Zangezur envisions opening a single transit route with Azerbaijan, whereas Crossroads for Peace aims to open several border crossings with both Azerbaijan and Turkey.

Armenia has firmly stated that any discussions involving the loss of sovereignty and territorial integrity or third-party control over its territory are nonnegotiable red lines. Indeed, Baku has insisted that a detachment from Russia’s Federal Security Service guard Zangezur; having just kicked Russian border guards out of the country, it’s understandable why Armenia would balk at the installation of more Russian agents on its territory.

Azerbaijan’s Zangezur plan is also detrimental to Western interests in several ways. First, it would hinder the broader Western strategic objective of stabilizing and economically developing the South Caucasus—critical for energy routes and geopolitical balance among Europe, Asia, and the Middle East. By stalling broader regional integration initiatives, Azerbaijan’s position perpetuates dependence on existing routes that run through Georgia, which face logistical and capacity hurdles, and which could be susceptible to disruptions by external geopolitical influences.

This ongoing tension and the resultant lack of comprehensive peace and cooperation in the South Caucasus allows Russia and Iran to exert their influence there. Armenia’s isolation forces it to maintain its reliance on Russia, countering Western efforts to promote democratic governance and market liberalization in the area. This situation becomes increasingly dangerous as autocratic Azerbaijan deepens its ties with Russia. Simultaneously, Iran benefits by positioning itself as a crucial partner for Armenia in energy and trade, while also providing diplomatic support by rejecting the Zangezur plan to maintain clout in the South Caucasus.

By keeping the Armenia-Azerbaijan and Armenia-Turkey borders closed, Azerbaijan impedes Armenia’s economic and connectivity opportunities, limiting the scope for Western engagement and investment in the region. This keeps Armenia overly dependent on trade with Russia. Baku has long complained about Armenia’s close ties with Russia and should welcome Yerevan’s desire to open trade with Azerbaijan and Turkey, as well as its commitment to leave the Moscow-led Collective Security Treaty Organization.

The Crossroads for Peace initiative, therefore, offers a more promising path. By opening up the region and paving the way for a new era of mutual economic growth and cooperation in the South Caucasus, Crossroads for Peace could serve as a catalyst for regional stability and prosperity. This initiative not only counters the restrictive nature of the Zangezur plan but also aligns economic incentives with geopolitical opportunities.

How the West can help

Armenia’s Crossroads for Peace initiative deserves more robust support and engagement from Western nations. By backing Armenia’s efforts to integrate into the Trans-Caspian Corridor and promote cooperation across the South Caucasus, Western countries can help ensure that the region develops into a vibrant economic hub that is less dependent on Russia. Increased investment in infrastructure, clear diplomatic backing, and strategic partnerships, such as the recent upgrade in US-Armenia relations, can solidify the West’s commitment to promoting a more balanced geopolitical landscape in this region.

This should start with applying diplomatic pressure on Turkey and Azerbaijan to engage constructively with the initiative and entering security pacts with Armenia that help deter aggression and maintain open and secure trade routes. Subsequently, Western countries should implement targeted funding and financial incentives along with technical assistance for the construction and modernization of infrastructure in the region. Potential new trade agreements and the promotion of private sector involvement encouraging Western businesses to invest in and partner with local firms within the framework of Crossroads for Peace would also help make the initiative more viable.

Enhanced Western support for Armenia could also serve as a catalyst for broader regional cooperation and prosperity, setting a precedent for peaceful conflict resolution and cooperative development efforts. Western policymakers should therefore help integrate Crossroads for Peace into regional connectivity plans that promote open, stable, and cooperative international systems and can make Armenia a key player in the diversification of transit routes across Eurasia.

Sheila Paylan is a human rights lawyer and senior legal consultant with the United Nations. The views expressed herein are her own and do not necessarily reflect those of the United Nations.

The post How Armenia’s ‘Crossroads for Peace’ plan could transform the South Caucasus appeared first on Atlantic Council.

Access to justice is a crucial component of the rule of law and the defense of democracy. A robust judicial system ensures that laws are applied fairly and equitably, strengthens confidence in institutions, protects rights, and promotes transparency and accountability, which are essential for democratic stability and economic development.¹ In a global context where threats to democracy are increasing, strengthening access to justice and the rule of law becomes even more critical. An accessible judicial system acts as a safeguard against those threats.² Access to justice for businesses and the general Colombian population is vital to ensure both fairness and economic efficiency. When businesses can resolve disputes quickly and fairly, uncertainty is reduced, fostering a favorable investment climate and sustainable economic development.

This research, based on a holistic and integrated approach, involves two key elements: a thorough understanding of access to justice and a comprehensive view of the justice system. The first element implies that effective access to justice extends beyond the initial approach to legal systems; it encompasses both the entry point and the ongoing journey within the system. The right to access justice is fully realized when it results in a prompt, comprehensive, and enforceable solution. This understanding of access to justice is essential for addressing the multifaceted challenges faced by individuals and corporations in Colombia.

Building on this thorough understanding of access to justice, this research sheds light on the problems faced by actors within the system, which affect companies of all sizes and citizens alike, regardless of their socioeconomic status. It explores the procedural journey, revealing systemic issues and managerial barriers embedded in the justice system. Forty-four percent of respondents expressed medium to high concerns about judicial corruption and threats to judicial independence and impartiality.

The second element is the comprehensive view of the Colombian justice system. Such a view requires data collection regarding the three routes of access to justice in Colombia, all different in nature: the judicial branch; administrative officials with jurisdictional functions; and individual entities that have the right to administer justice, such as conciliators and arbitrators.

The Colombian constitutional system allows the congress to delegate certain judicial powers to specific administrative authorities including superintendencies (regulatory agencies) of industry and commerce, finance, corporations, and health; police inspectors; and family commissariats, among others. However, it is worth noting that administrative authorities’ judicial power excludes criminal prosecutions and proceedings.³ When administrative authorities exercise jurisdictional functions through resolutions, they act as judges rather than as administrative entities. Individuals can choose, preventively, whether to approach judicial-branch judges or superintendencies judges with jurisdictional functions to resolve their disputes.

This report seeks to identify public policy recommendations that can enhance the efficiency and equity of the justice system through a holistic and integrated approach. Tackling access to justice during the process is crucial not only for the private sector, which relies on the justice system to protect its interests, but also for the broader Colombian society. This will ensure that justice is accessible and equitable for all.

“This timely and deeply researched report exposes another one of Colombia’s many paradoxes: although it has perhaps the most legalistic society in the hemisphere, the justice system is widely seen as incapable of delivering consistent and reliable results. The report’s authors suggest specific, concrete, and practical policy recommendations to improve justice delivery. As the report notes, a credible and efficient justice system is key to a thriving democracy, and this report will be a key resource for those committed to justice reform.”

Kevin Whitaker, Nonresident Senior Fellow, Adrienne Arsht Latin America Center, Atlantic Council; Former US Ambassador to Colombia, US Department of State

For all jurisdictions and types of disputes included in this study (both judicial and administrative proceedings), fewer than half of the companies surveyed fully or partially agreed that the duration of proceedings is reasonable. This finding is consistent with the study’s qualitative research component and existing cross-country data on unreasonable civil-justice delays from the World Justice Project (WJP). Colombian scores on timeliness of civil-justice delivery in the WJP Rule of Law Index are lower than those of both best-in-class nations (e.g., Germany or the Netherlands) and regional and income peers in Latin America (See Graph 1).

Delays permeate the system, affecting small, medium, and large companies. When companies were asked about the obstacles limiting effective access to justice when dealing with judicial authorities, the number of legal processes that never concluded scored as the highest obstacle, with 51 percent of companies ranking it as their top obstacle and 15 percent ranking it as a medium level obstacle (See Figure 1).

Similarly, when asked about the obstacles limiting effective access to justice when resorting to administrative authorities, interviewees ranked unjustified delays as the biggest obstacle. Forty-one percent of companies ranked it as the top obstacle and 20 percent ranked it as a medium-level obstacle (See Figure 2).

In terms of judicial independence from hierarchical superiors and other sources, superintendencies perform worse than all other paths to justice, and considerably below all judges (44 percent of companies either totally or mostly disagree that this path is free from this pressure). Critically, in terms of access to justice, it is the second-worst mechanism (34 percent of companies find it difficult to access this mechanism), (See Figure 4).

Report Nov 30, 2023

Advancing US-Colombia cooperation on drug policy and law enforcement

By Atlantic Council US-Colombia Advisory Group

Consumption and price of the drug has remained stable in the United States in recent years. However, the current trend of falling coca leaf and cocaine prices in Colombia present a natural incentive for coca growers to find alternative forms of income, which could mean a higher rate of success for alternative development programs.

Civil Society Colombia

New Atlanticist May 7, 2024

Colombia’s president must focus on economic stewardship in the second half of his term

By Enrique Millan-Mejia and Geoff Ramsey

President Gustavo Petro should adopt a steadier hand on domestic issues and a more cooperative stance toward international private sector investment.

Colombia Economy & Business

Sep 29, 2021

US-Colombia Advisory Group

The Atlantic Council’s US-Colombia Advisory Council, with Senators Ben Cardin (D-MD) and Bill Hagerty (R-TN), as honorary Co-Chairs, is a nonpartisan, binational, and multi-sectoral group committed to advancing a whole-of-society approach to addressing the most vital policy issues facing the US-Colombia relationship—with a recognition of the broader implications for bilateral interests across the region more broadly.

The Adrienne Arsht Latin America Center broadens understanding of regional transformations and delivers constructive, results-oriented solutions to inform how the public and private sectors can advance hemispheric prosperity.

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

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

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

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

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

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

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

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

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

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

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

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

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

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On July 17th, Global China Hub Nonresident Fellow Leland Lazarus published an article on the potential national security concerns of the Chinese-build port in Chancay, Peru in China US Focus.

Fellow

Leland Lazarus

Nonresident Fellow

Global China Hub

Caribbean China

The post Leland Lazarus on the Chinese-built port in Chancay, Peru in China US Focus appeared first on Atlantic Council.

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

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

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

The communiqué also highlights other important goals and approaches.

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

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

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

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

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Three years ago, Brian Deese, then the director of the National Economic Council at the White House, came to the Atlantic Council to announce the Biden administration’s new “industrial policy.” Considering that the term had largely been taboo in economic orthodoxy in recent decades, the announcement took many of us at the Council—and throughout Washington—by surprise. But what Deese outlined that day will turn out to be one of the enduring legacies of the Biden administration: coordinated policy to steer public and private capital toward revitalizing domestic manufacturing and prioritizing the technologies needed to compete with China.

The legislation that made up the backbone of this industrial policy will have ripple effects for the rest of the decade: the Inflation Reduction Act, the CHIPS and Science Act, and the Bipartisan Infrastructure Law. In total, the legislation authorized more than two trillion dollars in spending and tax incentives over ten years. But it wasn’t just the money; it was also the fact that major subsidies were directed to US companies producing semiconductors, clean energy, and electric-vehicle batteries. The Biden administration will point to the eight hundred thousand manufacturing jobs and fifteen million total jobs created in the past four years as proof of the success of these policies. Critics will say that the spending was misallocated, fueled the deficit, and contributed to inflation.

The final verdict will come in the years ahead, when all the investments finally pay off—or don’t. But already, the legacy of the decision is clear: There is a bipartisan consensus now on investing in domestic manufacturing. Whether former President Donald Trump or Vice President Kamala Harris becomes the next president—and even if the sectors he or she chooses to focus on are different—that kind of economic policymaking is not going away.

Of course, the rest of the world took notice of the world’s largest economy making a major macroeconomic shift. The Inflation Reduction Act in particular alarmed European allies who saw their own companies racing to set up US subsidiaries and take advantage of the new law’s incentives to manufacture in the United States. 

The administration tried to explain that this new economic approach wasn’t about the United States going it alone. Two years ago, Treasury Secretary Janet Yellen announced the administration’s “friendshoring” strategy at the Atlantic Council. She spoke in detail about how one of the lessons of the COVID-19 pandemic was the need to rethink supply chains and work more closely with partners and allies to achieve economic security and resilience, not just maximize speed and reduce cost. Her choice of the term “friends” was intentional. It was meant to be an outstretched hand to countries such as Vietnam and Indonesia, not just traditional US allies.

Being a friend didn’t mean being a full partner—at least in the ways other countries had come to expect during the previous decades. The Biden administration has remained unwilling to open the US market to allies and other countries any further and has instead pursued trade-facilitation dialogues through plurilateral arrangements, in particular the Trade and Technology Council with the European Union and the Indo-Pacific Economic Framework for Prosperity with the Asia-Pacific. While these were welcome steps, officials from several countries who met with the Atlantic Council’s GeoEconomics Center team over the years said privately that it wasn’t enough. 

What motivated the Biden administration’s economic framework wasn’t only creating jobs at home, although that certainly was a goal. The equally important ambition was competing with China. Biden maintained Trump’s unprecedented tariffs on Chinese goods and added to them earlier this year. The lines between economic policymaking and national security continued to intertwine—and will be impossible to disconnect in the years to come.

Commerce Secretary Gina Raimondo best encapsulated this dynamic when she discussed Chinese electric vehicles at the Atlantic Council in January. Raimondo pointed to the unfair trade distortions created by Chinese subsidies, which could hurt US automakers. (That’s the domestic part of the Biden administration’s economic policy.) Then she pointed out that sensors in those cars could be used for surveillance; Chinese authorities, in fact, are worried enough about US surveillance that they do not allow Tesla cars near secure facilities. (That’s the national security argument.) 

It would be a mistake to say that Biden created a new paradigm in economic policymaking. Instead, he helped rediscover an old idea—one that was part of the founding of the Bretton Woods institutions in 1944, but that the United States largely had the luxury of forgetting in recent decades: Economic security and national security are deeply interconnected. Whatever policies come next, that lesson won’t be forgotten again anytime soon.

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

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Amidst the assertions of commitment to Ukraine’s defense and eventual membership in NATO, conversations at last week’s NATO summit here in sweltering Washington, DC featured another hot topic: China.

The final communiqué, approved by all thirty-two NATO members, took the unprecedented step of calling China “a decisive enabler” of Russia’s war against Ukraine, noting how this is undermining China’s interests and reputation in Europe. NATO Secretary General Jens Stoltenberg underscored that China cannot have it both ways, sponsoring the largest war in Europe in recent memory while attempting to maintain productive relationships across the continent.

These developments on the security front come as European countries with deep ties to the Chinese economy wrestle with how to protect industries from an onslaught of Chinese exports. This dynamic has been most notable in the EU’s recent provisional tariffs on Chinese electric vehicles. While far short of the 100 percent tariffs announced by the Biden administration, Brussels’ move indicates there is growing transatlantic symmetry on derisking relationships with China.

There is far more to be done—not to mention the potential impact of a change in US leadership next year—but a more united transatlantic approach on economic security regarding China does appear to be progressing alongside that on hard security issues.

Meanwhile, as your Global China Editor-in-Chief Tiff Roberts writes below, there is no indication from the Party’s just concluded Third Plenum of hoped-for economic reforms or reduced reliance on emerging and green technology industries—and their export—to spur lagging growth. That’s a recipe for growing confrontation with developed economies, highlighting again the need for continued transatlantic convergence. We cover all this and more below—take it away, Tiff!

-David O. Shullman, senior director, Atlantic Council Global China Hub

Fellow

Dexter Tiff Roberts

Nonresident Senior Fellow

Global China Hub Indo-Pacific Security Initiative

China Chinese

Third Plenum focused on ‘shiny new industries,’, neglected real reform

As Dave notes, many had been hoping China’s just-closed Third Plenum, a once-every-five-year party meeting that usually focuses on the economy, would deliver the reforms needed to jumpstart the country’s lackluster growth. That does not seem to have happened. “Instead of focusing on China’s current problems, the Third Plenum … will prepare China for a confrontation with the United States by building industries powered by massive investments in cutting-edge technologies,” GeoEconomics Center’s Jeremy Mark rightly predicted earlier this month. “China has clearly decided to direct all available resources to next-generation technologies while neglecting to support the vast majority of the population who scrape by outside the tech sector. That suggests Chinese leader Xi Jinping will end up with shiny new industries built on a weak economic foundation.”

As expected, the communiqué, released on July 18, highlighted high tech as well as reiterated Xi’s strident emphasis on the importance of security—something that has spooked both foreign and private investors before. China must achieve a “healthy interaction between high-quality development and a high level of security,” the document stated. And while it name-checked important areas like strengthening consumption and the need to improve “basic and bottom-up livelihood,” there were few specifics about the path ahead. A more detailed document will come later.

(Xi Jinping’s much-anticipated first Third Plenum in 2013 promised ground-breaking reforms to China’s economic system that many expected to see realized. I was far less optimistic, writing at the time of the “central paradox”: China needed major reforms to spark growth but “by pursuing these reforms the party is diluting its control.” That same dilemma remains today.)

The US and EU tariff war with China ramps up as the Global South welcomes Beijing’s embrace

Another big concern is China’s mercantilist trade practices, including subsidized exports undercutting global industries. But while the US and European Union (EU) have taken strong steps to retaliate, putting tariffs on Chinese electric vehicle imports as Dave noted above, Global South countries often welcome Beijing’s economic embrace.

Europe’s tariffs on Chinese EVs max out at 38.1 percent. But, as the Europe Center’s Jacopo Pastorelli and James Batchik write, while this “signal[s] greater alignment between Washington and Brussels on China,” there are differences. Washington’s tariffs will be implemented quickly and applied broadly, yet Europe’s tariffs targeted specific Chinese companies and were “provisional”—a final ruling on tariff levels won’t happen for another four months.

And while a tough approach to China has bipartisan support in the US, “another factor is European unity—or lack thereof,” particularly from export-oriented members, write the report authors. On July 15, Germany, Finland, and Sweden abstained in a non-binding vote on the tariffs, while Italy and Spain voted in favor, with a German economy ministry spokesperson saying “it is now crucial to seek a rapid and consensual solution with China.”

In marked contrast, many Global South countries are throwing their economic lot in with China. Take Peru, whose president Dina Boluarte visited Beijing on June 28. The state visit “follows a decade of increased Chinese economic influence in the Andean country. Between 2018 and 2023, Peru became the second highest recipient of Chinese foreign direct investment (FDI) in Latin America and the Caribbean,” writes the Adrienne Arsht Latin America Center’s Martin Cassinelli. “In 2024, Peru’s relevance to China will be transformed, as Lima becomes a crucial partner in China’s economic engagement with Latin America. In November, Xi plans to inaugurate the Chancay port, a $3.6 billion deep-water mega-port forty-four miles north of Lima.” Other Global South leaders who have recently visited Beijing include top officials from Guinea-Bissau, Vanuatu, Bangladesh, and the Solomon Islands.

NATO says China presents “systemic challenges to Euro-Atlantic security”

As Dave notes above, the just-closed NATO meeting singled out China for criticism like never before. The thirty-two-nation organization declared that China presents “systemic challenges to Euro-Atlantic security,” citing the buildup of its nuclear arsenal, disinformation and cyberattacks. More than anything else, concern centered on China’s role as a “decisive enabler” of Russia’s invasion of Ukraine. “We call on the People’s Republic of China (PRC) … to cease all material and political support to Russia’s war effort,” read the communiqué.

As the below chart shows, China’s trade with Russia is expanding. That trade is helping China to prop up Russia’s “war machine”, writes the Atlantic Council Global Energy Center’s Joe Webster. “While there is  no publicly available evidence that Beijing is providing lethal arms to Russian forces, its goods exports are nonetheless likely facilitating Moscow’s invasion,” the senior fellow notes, citing shipments of Chinese machinery, vehicles and parts, and dual-use technologies (In the communiqué, NATO singled out “weapons components, equipment, and raw materials that serve as inputs for Russia’s defense sector”). And it’s not just direct exports. There likely is significant indirect trade via Central Asia and Belarus, with dual-use goods exports more than doubling over the last year. “It is very prudent to examine if China’s shipments…are simply being re-exported on to Russia,” Webster writes.

Meanwhile Hungary, unlike other NATO members, showed strong support for China in recent weeks, continuing a trend that began a decade ago. “Under [far-right leader] Orbán’s leadership, Hungary has oriented its foreign policy around Russian and Chinese interests since 2014, doing the two powers’ bidding inside the European Union and NATO and becoming increasingly hostile to the leaders of the United States and the EU,” writes the Global China Hub’s Zoltán Fehér. Many EU leaders have not taken kindly to Orbán’s meeting with Xi Jinping in Beijing (and earlier with Vladimir Putin in Moscow) just before attending the NATO summit.

• Next Wednesday, the Global China Hub will be co-hosting a public conversation on exposing and countering Chinese information operations in collaboration with the Atlantic Council’s Digital Forensic Research Lab (DFRLab), Radio Free Asia, and Freedom House.
• Atlantic Council President and CEO Fred Kempe and Scowcroft Center for Strategy and Security’s Indo-Pacific Security Initiative Director Markus Garlauskas reflected on their participation in the Atlantic Council’s annual delegation trip to Taiwan in June. The delegation was hosted by the Taiwanese government, and they met with Taiwan government leaders, including President Lai Ching-te, think tanks, and business representatives to discuss security and economic issues facing Taiwan and the Indo-Pacific.
• The Scowcroft Center also published a report, “Strengthening Taiwan’s resiliency,” recommending actions for Taiwan’s new leadership to enhance its societal resilience against Chinese aggression in the context of both “gray zone” conflict and wartime attacks.
• Two years after Elon Musk’s acquisition of Twitter and rebranding as X, the platform is far from winning the battle against spambots. DFRLab led an investigation into how spambots continue to suppress authentic posts in Chinese-language searches on X.

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The Global China Hub researches and devises allied solutions to the global challenges posed by China’s rise, leveraging and amplifying the Atlantic Council’s work on China across its 16 programs and centers.

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What can be expected from a von der Leyen 2.0? Ahead of her confirmation, she laid out a raft of proposals in her political guidelines for the next Commission term—a combined effort to outline her vision and win over votes. The guidelines prioritize:

1. Building a more competitive Europe that balances regulation and innovation that facilitates Europe’s green transition, 
2. Boosting the EU’s defense ambitions, 
3. Pushing social and economic policies such as affordable housing, 
4. Sustaining agriculture and environmental policies, 
5. Protecting Europe’s democracy, and 
6. Standing up for Europe’s global and geopolitical interests.

In practice, this means her next term will mean more of a central and active role for the Commission—and for von der Leyen. But there will also likely be more roadblocks from the European Council and Parliament.

Start with her leadership style. In her first term, von der Leyen turned the Commission into the most important arm inside the EU at a time when crises came new and often. She served as the EU’s chief decision maker and negotiator during the COVID-19 crisis, helped coordinate Europe’s response to Russia’s full-scale invasion of Ukraine, and shaped the EU’s economic de-risking strategy and general hawkishness toward China, serving as Europe’s “bad cop” standing up to Beijing’s coercive and unfair trade practices. The grumblings of an overstepping and power-hungry Commission president from other arms of the EU and national capitals aside, European leaders still looked to the Commission and von der Leyen to take action.

The Commission’s role was boosted by its policy successes too. Her first term oversaw the adoption of major rules on the digital and green transitions. The EU pushed through world-leading digital regulations on artificial intelligence, online content moderation, and platform competition, and it incentivized semiconductor manufacturing. She also prioritized green policies to reduce emissions, including the Carbon Border Adjustment Mechanism and setting new emission reduction targets for cars, shipping, and factories.

For her second term, von der Leyen will seek to pick up where she left off. The Commission will also look to build itself a stronger role in the traditional defense and the economic security agendas, with an eye to boosting Europe’s defense capabilities against Russia and de-risking from China. Von der Leyen’s focus on a competitiveness agenda will push for greater innovation and industrial support while furthering the green transition. On Thursday, von der Leyen promised a “European competitiveness fund” and a “clean industrial deal” within the first hundred days of the Commission’s next mandate, along with greater investment in energy infrastructure and technologies. This will all come with a price tag, and more responsibility for the Commission.

As a consequence of a busy 2019-2024 legislative cycle, von der Leyen and her Commission must now see through a raft of new rules. On digital policy alone, the to-do list is a tall order. The EU is standing up new offices and hiring a new army of competition lawyers, boosting the already massive size and scope of the Commission.

But there will be limits to von der Leyen’s ambition as member states and the parliament will look to exercise their own power.

Europe’s political center is not what it was in 2019, and EU members will want their influence felt. Von der Leyen will have to contend with a growing number of populist leaders around the table at Council meetings. More far-right governments may pop up over the next five years, including in major countries such as France as Marine Le Pen’s National Rally gets ever closer to power. And as the Commission tries to take on a bigger role in traditional member-state driven policies, such as security and defense, von der Leyen will need to deal with more engaged member states looking to exact concessions or carveouts, or to wield their own influence at the EU level.

Far- and hard-right groups in the European Parliament are also on the rise, and they are looking to make a mark. In a shift from her first term, emboldened hard-right politicians are more eager to influence EU policy rather than just play spoiler to it. The growing number and influence of far-right and hard-right groups will likely add extra complexity to the legislative process, and legislation may need to pass with ad hoc coalitions rather than the tradition of grand coalitions of parliaments past.

Greater influence on the right may hamper the Commission’s regulatory ambition. Von der Leyen promised she would continue the green transition, but the EU’s green rules have already become a political target. The platforms of the center-right European People’s Party (EPP), von der Leyen’s own group, and the further right European Conservatives and Reformists, both have peppered in objections to onerous new regulations, especially those associated with the green transition. And the competitiveness debate is in large part spurred on by this backlash to the Commission’s regulatory appetite. This may be difficult for the Commission. Institutionally, the Commission is designed to present new regulations and proposals. It is the only arm inside the EU that can. But that desire will be a point of friction with the aversion among member states and Parliament to new, seemingly onerous, rules.

Von der Leyen will face challenges from beyond Europe, too. “We have entered an age of geostrategic rivalries,” notes the policy guidelines. To the east, Beijing will continue to try to split Europe and poison the EU’s de-risking agenda just as it is starting to take off. And supporting Ukraine against Russia’s full-scale invasion will require sustained attention and funds.

To the west, von der Leyen cannot ignore the upcoming US elections. A transatlanticist at heart, she pushed the EU closer together with the United States in her first term—in large part benefiting from a new EU-friendly US administration. She will likely face an uphill battle in strengthening transatlantic ties in the event of a second Trump administration. “They treat us very badly,” former President Donald Trump said to Bloomberg News when asked about the European Union on June 25.

Von der Leyen’s confirmation this week goes a long way already to set up the EU for success and avoids an own goal for team Europe. Rejecting her would have forced the European Council back to the drawing board to pick a new—and likely weaker—appointee, wasting more time on internal bickering and politicking when predictability, not chaos, is critical. It’s not hard to picture the jubilee from Beijing, taunts from Moscow, and even snide comments from Washington about EU dysfunction in the face of a no vote. In the words of Greek Commissioner Margaritis Schinas (and von der Leyen ally) on her appointment, “There is no plan B.” It is a good thing plan A worked.

James Batchik is an associate director at the Atlantic Council’s Europe Center.

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Instead of focusing on China’s current problems, the Third Plenum of the Chinese Communist Party’s (CCP) Central Committee—so-called because it is the third session of the committee’s five-year term—will prepare China for a confrontation with the United States by building industries powered by massive investments in cutting-edge technologies. This program is aimed at reinforcing the party’s hold on Chinese society and paying obeisance to paramount leader Xi Jinping, whose policy mistakes—ranging from zero-COVID-19 lockdowns to a crackdown on major online companies—have produced economic malaise. It will also underline China’s shift away from its longtime economic strategy of growth for growth’s sake.

Among the policies expected to be announced at the July 15-18 plenum (which was inexplicably delayed from late 2023) will be reforms restructuring tax and fiscal policies, as well as greater coordination of regional economic development. Both are policies that will reinforce the role of the central government in guiding development. There will probably also be declarations of support for China’s beleaguered private sector, which accounts for more than 60 percent of gross domestic product and over 80 percent of urban employment. But Xi and his subordinates have emphasized that the policy pendulum is swinging decidedly toward statist solutions.

This strategy will offer little respite to a population struggling to make ends meet and businesses that have lost the will, or means, to invest. Beijing’s drive for what it calls a “high-level socialist market economy” based on “new quality productive forces” will be powered by Xi’s willingness to see the Chinese people—especially its young people—“eat bitterness” in pursuit of national ideals. Government resources are being directed to research and development and industrial subsidies, not social programs.

It should come as no surprise that as the plenum approaches, the Chinese media has featured renewed calls for “common prosperity,” a Mao Zedong-era egalitarian slogan that Xi returned to prominence during the 2021-2022 crackdown on online conglomerates. While that campaign was subsequently de-emphasized, the party-run People’s Daily on June 24 published a full-page article “solidly promoting common prosperity in high-quality development” (originally reported by the Sinocism blog) and a contribution from the secretary general of the Chinese Academy of Social Sciences advocating for China to “resolutely abandon the erroneous tendency of putting capital first, material first, [and] money first.”

All of this is a far cry from the late leader Deng Xiaoping’s call nearly five decades ago to “let some people get rich first.” It is also a clear shift from the landmark directives of previous Third Plenums that heralded market-oriented economic policies. Deng’s turn away from Maoist “class struggle” and toward modernization came at the 1978 Third Plenum. His endorsement of China’s full-fledged opening to the global economy was the theme of the 1993 meeting. And even Xi’s first Third Plenum in 2013 called for more than three hundred market-related reforms (most of which were never implemented).

Since then, however, the ideological tide has turned. The 2018 plenum rubber-stamped the elimination of term limits for CCP general secretaries, allowing Xi to hold power indefinitely and heralding a marked change in policy direction. Recent CCP speeches and articles have featured a word salad of Marxist-Leninist jargon justifying new statist policies and endlessly praising Xi, but the propaganda boils down to greater government control over the economy.

Beijing justifies this policy shift as necessary because of national security concerns, or what the State Council, in announcing the plenum, called “the increasingly fierce international competition” with the United States and its allies as they tighten controls on the flow of technology and capital to China. As a result, Beijing is prioritizing “high-level technological self-reliance,” by investing tens of billions of dollars in research into advanced semiconductors, quantum computing, new types of renewable energy, and many other areas. This high-octane industrial policy has the government supporting state-owned enterprises and picking winners among private companies to achieve rapid growth in “a single-minded pursuit of technological progress,” as Arthur Kroeber wrote in a recent Brookings Institution paper.

Chinese officials certainly pay lip service to addressing the current economic difficulties, and the plenum likely will trumpet its intention to deal with the property crisis and depressed business confidence. But while Beijing has spoken for months about a “new model” of real estate and the need to expand domestic demand, there are few signs of major measures to pursue these goals. Instead, the plenum will push the reform of tax and fiscal policies. This will be aimed at channeling more money to heavily indebted provinces, cities, and counties, whose main source of cash—land sales—has dried up amid the property slump. With the economy struggling and tax revenue falling, Beijing will be hard-pressed to make up the difference, even with more central government resources slated to be shared with local governments. In the end, a newly empowered bureaucracy could end up squeezing the citizenry—especially if, as Xi has envisioned, local authorities are to assume some of the burden of supporting new technologies and industries.

The plenum is also expected to announce measures to reduce restrictions on Chinese citizens’ movement from the countryside to cities, and thus ostensibly offer new opportunities to millions who have not benefited from the country’s growth. But Beijing does not appear to have policies to generate jobs for them. Nor is it taking adequate steps—either social programs or fiscal stimulus to lift consumption—that would assist all those who are feeling the pinch of youth unemployment, lower income, sinking housing prices, corporate downsizing, and a struggling stock market. A highly touted effort to subsidize purchases of new cars and appliances has fallen flat.

China has clearly decided to direct all available resources to next-generation technologies while neglecting to support the vast majority of the population who scrape by outside the tech sector. That suggests Xi will end up with shiny new industries built on a weak economic foundation.

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

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The success of Chinese economic diplomacy in Peru

In 2024, Peru’s relevance to China will be transformed, as Lima becomes a crucial partner in China’s economic engagement with Latin America. In November, Xi plans to inaugurate the Chancay port, a $3.6 billion deep-water mega-port forty-four miles north of Lima under exclusive operating rights by China’s state-owned COSCO. The port is set to reshape global trade between Asia and Latin America, reducing the travel time for shipping vessels between both countries by ten days. COSCO’s exclusivity over the port would make Chancay China’s first logistics hub in South America. Similarly, China Southern Power Grid’s ongoing acquisition of Italian Enel’s equity stakes in Lima’s electricity distribution will put 100 percent of Lima’s electricity in the hands of Chinese companies.

Beyond these two projects, Boluarte’s state visit to China follows a decade of increased Chinese economic influence in the Andean country. Between 2018 and 2023, Peru became the second highest recipient of Chinese foreign direct investment (FDI) in Latin America and the Caribbean, and the largest recipient of Chinese FDI in South America, standardized by gross domestic product.

Chinese investment has grown in Peru despite its political instability. From 2016 onward, the country has been entangled in an institutional and political crisis. With six presidents governing the country since 2016, Peru has been hardly able to offer any political stability to investors. As Chinese companies’ interests increase in an institutionally weaker Peru, it becomes essential for the Chinese government to secure support at the highest political level to shield its strategic investments from this instability. The state visit provides an example: In the months preceding the visit, both the Chancay port and China Southern Power Grid’s acquisition were scrutinized by Peru’s port and antitrust authorities, respectively. The National Port Authority even revoked COSCO’s exclusivity deal, which threatened to stymie China’s control over the port.

But after months of legal disputes, and upon the announcement of Boluarte’s state visit to China, the Peruvian government withdrew its request to revoke COSCO’s rights for Chancay, and China Southern Power Grid was able to finalize its acquisition, just days before the visit. Boluarte and her delegation even met with the presidents of COSCO and China Southern Power Grid during her trip to Beijing, demonstrating that the state visit was a successful tool of economic diplomacy for China.

What does the state visit mean for US economic diplomacy?

The United States should be concerned. Boluarte’s state visit represents the pinnacle of a successful economic engagement strategy between China and Peru that has resulted in deeper political ties between both countries. The projects that are the fruits of these deeper ties could directly counter US interests in the region.

The United States has already raised concerns over the Chancay port and the possibility that it could be used as a dual-use facility by the Chinese navy. US officials have also encouraged the Peruvian government to create a committee to vet foreign investment in strategic sectors, such as electricity, on national security grounds. But expressions of these US concerns haven’t yielded significant results. The limits of US diplomacy in Peru have much to do with its limited economic engagement with the country relative to China.

While the US-Peru free trade agreement doubled the trade volume between both countries in the fifteen years since its signing, US FDI represents about one-third of Chinese FDI in Peru, and Peruvians export five billion dollars more in goods to China than to the United States. And while the Peruvian government prides itself on its membership in the Americas Partnership for Economic Prosperity—the Biden administration’s pillar of economic diplomacy toward Latin America—the framework will take time to deliver tangible trade and investment benefits that can rival China’s. As Peru is still looking to recover economically from the effects of the COVID-19 pandemic, the United States can open doors for closer diplomacy with the country by working with it to foster economic growth.   

Why deeper collaboration between the US and Peru matters

As the US government seeks to expand and diversify supply chains away from China and advance its energy transition, it can benefit from increased collaboration with Peru, not least because of its mineral abundance. Peru is the second largest world producer of copper, and stands among the top producers for silver, lead, and zinc.

To compete with Chinese investment, US companies will have to participate in the bidding for large infrastructure projects and should present an alternative partner for building out Peru’s critical infrastructure, such as energy, port, or telecommunications infrastructure. For this to happen, Washington needs to better align the risk appetite of US investors and firms with Peru’s project and country risks. While the United States won’t model China’s state-led investment, agencies such as the International Development and Finance Corporation should collaborate more closely with the private sector to de-risk and incentivize US bids on infrastructure projects in Peru.

Deeper US economic engagement with Peru is also in Peruvians’ interests. The United States is the only global superpower interested in and capable of assisting the Peruvian political class to exit nearly a decade of institutional corrosion. US diplomacy toward Peru has rightfully focused on addressing the country’s democratic instability and political crisis, recognizing these issues as the country’s biggest challenges. The US government has encouraged Peruvian officials to respect the constitutional order and has expressed concern when they have deviated from it, such as when then President Pedro Castillo attempted a self-coup in December 2022.

When the Peruvian government abused its power in the demonstrations of January 2023, US representatives called out the government for its human rights violations. In March of this year, as Peru’s Congress sought to weaken the judiciary watchdog, the Junta Nacional de Justicia, US senators Ben Cardin and Tim Kaine publicly expressed their concern. It is no overstatement to say that Peruvian democracy is at risk, and the United States has been right to recognize its fragility. But the United States’ capacity to assist Peru in building out its institutions will yield very little unless its statements of concern are accompanied by economic tools that incentivize cooperation with the United States.

Martin Cassinelli is a program assistant in the Adrienne Arsht Latin America Center at the Atlantic Council.

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

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

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

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

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

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

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

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

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

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

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These new tariffs on both sides of the Atlantic signal greater alignment between Washington and Brussels on China. That is good news for the transatlantic partnership. But the technical differences in the latest salvos by the United States and Europe point to important differences in where Washington and Brussels are starting from and where they each might move next.

The Biden administration’s tariffs, announced on May 14, cover a wide range of strategic industries deemed critical to national security. These industries include steel, aluminum, microchips, EVs, and batteries. The most eye-grabbing figure was US tariffs on Chinese EVs quadrupling to 100 percent. The news from Brussels on June 12 delivered a similar but smaller effort, and one based less on a national-security framing. Moreover, Europe’s new tariffs are part of an ongoing investigation into Chinese practices, and therefore they are provisional.

The European Commission began its probe into Beijing’s massive subsidies of key sectors in October 2023. It has focused on the threat of cheap Chinese imports flooding the European market, driving down prices, and hurting Europe’s automotive sector. The investigation reflects a calculated approach, aligning with the EU’s new de-risking approach, but still, as is typical for the bloc, centering on adherence to World Trade Organization-complying trade defense regulations. 

Unlike Washington’s tariffs, which apply to the entire sector, the new European tariffs target specific Chinese companies. They do not, in the words of German Vice Chancellor Robert Habeck, amount to “punitive tariffs.” Europe’s tariffs on battery EVs will cover a wide umbrella of companies, including Western brands with production facilities and joint ventures in China. This leaves open the option for carmakers to relocate their production to Europe, thereby avoiding the tariffs.  

Much of the difference between Washington and Brussels is due to the different immediate market threats posed by Chinese EVs. The United States imported fewer than three thousand EVs from China last year, and the tariffs are in part intended to prevent Chinese market share from growing. In Europe, in contrast, China is already a major player. Chinese-made EVs account for around 25 percent of the European market, with Beijing exporting 430,000 such vehicles to the continent in 2023, a number that has quadrupled in the past five years. The EU decision therefore must be seen as an attempt to strike a balance between protecting Europe’s internal automobile industry and avoiding escalation into a trade war with Beijing.

Another factor is European unity—or lack thereof. European Commission President Ursula von der Leyen has underscored that Europe “will not waver from making tough decisions needed to protect its economy and its security” and she has not shied away from directly confronting China’s leadership on Chinese overcapacity “flooding the European market.” But von der Leyen is well out in front of many of her European counterparts with her economic security agenda. Export-oriented members, such as Germany, Sweden, and Greece, have expressed reservations toward the increased tariffs, and the Commission’s announcement came only after an eleventh-hour push by Germany to lower the tariffs.

This hesitance from certain member states is spurred on by Beijing, which has fought the investigation since its inception and sought to sow division within the bloc. Even though Europe’s countervailing duties are likely insufficient to offset the advantage China holds in production, Beijing has warned that the EU’s moves could lead to a trade war. On June 17, Beijing opened a dumping probe into imports of pork from the EU in response to Brussels’ tariff announcement.

Prior to the news of the EV tariffs, China also threatened retaliatory tariffs targeting German carmakers, French luxury products, and the European aviation and agricultural sectors, highlighting the breadth of China’s appetite to hit back at sectors that will hurt specific EU countries.

Another difference between the US and EU tariffs is the finality of these announcements. The Biden administration can move relatively quickly and decisively, but the European Commission’s tariff announcement is provisional. The investigation is still ongoing, and final tariffs will come four months after the provisional tariffs’ imposition on July 4. The EU’s tariffs could realistically be lowered during this time if China continues to push back and if EU member states get skittish. The EU and China have already begun consultations on the tariffs, which may bring about some revisions to the EU’s actions.

Finally, there is the issue of leadership. The United States will hold an election in November, but Washington is generally united on its approach toward China. As the Biden administration’s extension of many of the Trump administration’s policies toward Beijing signal, tariffs and a hardline approach on China will likely feature in any next US administration. There is far less certainty of consistent support in Europe, however.

Over the summer, the European Commission leadership will turn over. If von der Leyen were to win a second term leading the next Commission, it would solidify the EU’s increasingly tough trade policy approach toward China, signaling continuity and alignment with Washington. But nothing is guaranteed. Von der Leyen has yet to be nominated by the EU’s member states or confirmed by the European Parliament. She will certainly defend her Commission’s decisions on China, but she may be forced to make concessions on future action to secure her post. This trade saga is far from over.

Jacopo Pastorelli is a program assistant with the Atlantic Council’s Europe Center.

James Batchik is an associate director at the Atlantic Council’s Europe Center.

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The United States is outperforming all of its advanced economy peers in post-COVID growth, and it is not particularly close. As we’ll surely hear from Biden on Thursday, fiscal policy has played a role. The major infrastructure investments through the Inflation Reduction Act and CHIPS and Science Act, have started to create new jobs in the manufacturing sector. The Federal Reserve also played a key role by keeping interest rates near zero for twenty-two months and pumping trillions in liquidity and backstops into the US economy after the crisis. But there are other factors at play as well, including the rise of homegrown artificial intelligence companies and producers such as NVIDIA that make those machines hum, boosting the United States ahead of its fellow Group of Seven (G7) countries. Combined with increased productivity growth, you have the recipe for an unexpected surge in the US economy. 

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

How does inflation in the United States compare to the G7? It’s falling, but not as fast as in Europe. The tradeoff with higher growth has been somewhat sticky inflation in the United States and a struggle to get back to the Fed’s 2 percent target range for price growth. It’s the surge in inflation during the pandemic and the still-elevated price levels that have generated so much discontent domestically about the US economy. Voters can’t feel that they may be doing better than citizens in Japan or Germany—what they can feel is how much it costs them to go to the grocery store this year compared to last. 

—Josh Lipsky

One of the biggest points of contention during the debate will be about job creation. Biden will say Trump was the first president since Herbert Hoover to leave office with the United States having lost jobs during his presidency. If there’s one rule in US economic history, it’s to try not to be compared to Herbert Hoover. Of course, the reason for that fact was the COVID-19 pandemic. What’s most surprising, though, is what happened after. Unlike previous recoveries, the US labor market rebounded swiftly and within twenty-nine months had recovered all the jobs lost during the crisis. As of May 2024, over fifteen million jobs have been created during the Biden administration. The numbers are the numbers. The big debate that we will see play out Thursday is which factors drove which parts of the crash and recovery, and who gets the credit or blame. 

—Josh Lipsky

One issue on which both sides of the aisle seem to agree is taking a strong stance on economic competition with China. The question of how strong will be up for debate, with Trump suggesting a 60 percent tariff on Chinese goods and Biden following a more targeted approach in his recent tariff increases on electric vehicles, steel, and other goods. Biden likely won’t mention that most of the Trump-era tariffs remain in place, and Trump won’t want to admit that the share of US imports coming from China is lower now than at any point in the last decade. Two of the driving forces—China’s economic slowdown and zero-COVID policies—probably won’t be part of the discussion. But they should be. 

—Sophia Busch is an assistant director at the GeoEconomics Center.

The US economy continues to show declining emissions intensity of gross domestic product (GDP), meaning the amount of carbon emissions per unit of GDP. Crucially, the United States is cutting emissions while continuing to grow the economy. The Rhodium Group projects that emissions fell 1.9 percent even as the economy expanded by 2.4 percent in 2023. Accordingly, US emissions intensity of real GDP continues to decline even though the US economy is larger than it has ever been. 

—Joseph Webster is a senior fellow at the Atlantic Council’s Global Energy Center.

US energy production stands at an all-time high because of the country’s higher output of oil, gas, and renewable energy sources such as solar and wind. Energy from oil production in 2023 rose by 5 percent compared to pre-COVID times in 2019, while natural gas output increased by 32 percent. Solar energy production has soared by a whopping 104 percent, as wind energy output grew by 44 percent. These developments have put pressure on coal output, which has fallen by 17 percent and is poised to decline further. Crucially, solar generation outpaced coal consumption for the first time in March 2024 in Texas, the country’s largest coal-consuming state. The US energy production mix is changing. Energy production—including for clean energy sources such as solar, wind, and nuclear energy—seems poised to surge if onerous permitting roadblocks, such as for siting transmission lines, are lifted. 

—Joseph Webster

While the United States outperforms other G7 nations in economic growth, it falls behind in broader measures of well-being. Over the past decade, the United States has seen a decline on the Atlantic Council’s Prosperity Index, the only G7 country to experience a decline. More striking is the fact that even in the prosperity components in which the country has experienced improvements, such as education, these gains have been smaller than its peers’. As a result, the United States’ ranking has fallen in virtually all categories of the Prosperity Index since 1995. Yet this decline must be put in perspective, as the United States remains well established among the top countries on the Prosperity Index—ranking thirty-sixth out of 164 countries.

—Joseph Lemoine is the director of the Atlantic Council’s Freedom and Prosperity Center.

Life expectancy, an important health indicator, remains a challenge for the United States. Not only does it lag behind other G7 nations, but it also experienced the worst decline among G7 nations during the COVID-19 pandemic. Furthermore, the United States is one of only two G7 countries, alongside Germany, that hasn’t fully recovered from the pandemic’s impact on life expectancy.

—Joseph Lemoine

Income inequality has been a persistent problem in the United States for decades. While there might be temporary fluctuations, the overall trend shows minimal improvement. There has been some progress made in the last five years, but the United States remains worse off compared to 2010 when it comes to income inequality.

—Joseph Lemoine

Alisha Chhangani, Clara Falkenek, Gustavo Romero, and Konstantinos Mitsotakis of the GeoEconomics Center contributed to the data visualizations in this article.

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Defense Journal by Atlantic Council IN TURKEY (DJ): ATBR is a fairly new enterprise but one with potentially big impact on US-Turkish strategic cooperation. Can you tell us a little about its mission and purpose?

Bloom: The American Turkish Business Roundtable, or ATBR, is a nonprofit organization with 501(c)(6) legal status in the United States with a singular purpose of promoting bilateral trade between the United States and Turkey. The organizers have deep experience with the US defense industrial base (DIB) and a related interest in energy infrastructure and energy security. Simply put, ATBR is an initiative to improve stability and advance the interests of the United States and its treaty allies through cooperation in defense and energy, where there are obvious synergies but also numerous roadblocks—thus the need for a forum to seek creative, mutually beneficial solutions to common challenges. The ATBR is a priority for the Jones Group, a business run under the guidance of former Supreme Allied Commander Europe and former US National Security Advisor Gen. James Jones. Gen. Jones’ time in NATO, and later as head of the American-Turkish Council, formed his understanding of Turkey as a defense and strategic partner for the United States—but also a potentially very important trade and economic partner. The Jones Group sees ATBR as a form of public-private partnership that enables cooperation in defense, energy, and trade.

DJ: If the focus is trade, how is this different from other commercial support groups, such as the US Chamber of Commerce and its Turkish counterpart?

Bloom: We focus on helping Turkish companies engage with potential US partners and seek areas of mutual benefit. This is a bit different from the mission of US trade promotion organizations, such as the US Chamber of Commerce, that promote the interests of US companies abroad. ATBR looks to collaborate and cooperate with other trade promotion organizations and strengthen the bilateral relationship. We are seeking synergies. The Turkish DIB benefited in many ways from partnerships with US companies, including F-16 production over several decades and early development of the F-35, the contentious end of Turkish production for the F-35 notwithstanding. This demonstrated that the US and Turkish DIBs have a synergistic capacity in a number of areas. Partnerships and collaboration can benefit both sides. As we like to say, defense cooperation begins not on the battlefield but on the factory floor.

DJ: Defense industrial collaboration went into a deep freeze between 2010 and 2024. The approval of the F-16 deal and announcement of artillery ammunition coproduction in early 2024 seem like the opening of a new stage. Is defense cooperation now increasing in scope? 

Bloom: We are engaged with a great number of defense sector producers in both Turkey and the United States; we, and those we talk with, see the current fragility of the US DIB as an urgent call for partners. Turkey has the ability and resources to be a great partner in this regard. US defense manufacturers focus on high-end but frequently expensive solutions—what we might call the few and exquisite. Turkish defense industry produces items at a lower price point but an effective level of performance—what we might call the many and adequate. In terms of defense strategy, there is a need for both.  

DJ: If the need is obvious, why is there a need for an organization to facilitate? Won’t the governmental or corporate organizations find opportunities for collaboration?

Bloom: This is not always a natural or easy strategic partnership, though it is one with great present and potential value. There are many differences in politics, strategic culture, and position that make this a thornier relationship on both sides than, say, the one between the United States and the United Kingdom. Given the number of complicating factors, private sector facilitation, especially from the US side, provides an important balancing and catalytic element to motivate both sides to overcome the known obstacles.

DJ: The hallmark of bilateral cooperation during the Cold War was defense, but ATBR focuses on energy as an important second pillar. Why?

Bloom: Energy policy is a central strand of statecraft. Strong partnership in geopolitical matters requires not just cooperation on defense but a common approach to stability—and energy matters as much as military or counterterrorism and counterintelligence for stability. Cooperation on energy makes the region more stable—in the case of the United States and Turkey, multiple regions. Washington and Ankara are both interested in energy flows from the Caucasus, through the Black Sea, Iraq, the Gulf, North Africa, the eastern Mediterranean. Energy policy is a key tool to incentivize partnerships and reconciliation—if we get this right with Turkey, the profits will be geopolitical and strategic, as well as economic.

DJ: Is the ATBR interested in areas beyond defense and energy?

Bloom: Our project is about connecting Turkish companies and US partners for mutually beneficial and strategically important projects. We’ve talked to both sides about minerals, heavy industry, construction, and tourism. But defense and energy are the most tangible projects that generate momentum for the others, and so they have been an early focus.

DJ: Given the turbulence in bilateral relations over the past fifteen years, is the private sector gun-shy or risk-averse? Is there an appetite on both sides for new initiatives?

Bloom: For certain, there is appetite on defense and energy. People who understand the limitations of the US DIB get the need for it. The “few and exquisite” combined in a package with “the many and adequate” in terms of price and sophistication is the sine qua non of warfare in the early twenty-first century. Tons of Turkish and US defense and industry experts see this, so we see an increasing desire for corporate cooperation. With the recent deal between Turkish Repkon and General Dynamics as an example, we find that when the private sector finds complementary solutions, the policy process becomes easier. Sometimes, bottoms-up works better than top-down in defense-industrial cooperation.

DJ: Final thoughts on what the ATBR might achieve in the defense sector?

Bloom: ATBR is chaired by Gen. Jones. Gen. Tod Wolters, another former SACEUR, is a board member. This shows that the most authoritative voices on transatlantic security consider the US-Turkish bilateral relationship as a critical component of security for those two countries but also for the Alliance as a whole. There is a parallel to the thinking behind the Abraham Accords—that trade and mutual interest can overcome frictions and disinclinations. The overriding logic of mutual benefit, operationalized by US and Turkish companies, will benefit the strategic interests of both countries.

Gregory Bloom is a board director of the American-Turkish Business Roundtable (ATBR). He also serves as Chief Operating Officer for the Jones Group International, and as a senior advisor to the Atlantic Council’s Scowcroft Center for Strategy and Security.

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It isn’t so much the contents of the new Putin-Kim agreement, which depending on who you listen to is either a mutual defense “alliance” (the North Korean leader’s characterization) or something far less. Putin said Russia “does not exclude” military-technical cooperation and that the agreement provides for “mutual assistance in the event of aggression against one of the parties.”

It isn’t even the ride-through-the-town-together bromance atmospherics of a relationship that not so long ago was frosty over Pyongyang’s nuclear breakout. Putin’s arrival gift to Kim was a Russian limousine because he knew the forty-year-old fellow autocrat likes a snazzy ride. Kim’s gift to Putin was a North Korean portrait of the Russian leader himself, Kim’s assessment of how best to endear himself to Putin.

In fact, the most terrifying point is that Putin’s full-scale invasion of Ukraine in February 2022 should have left the leader isolated and weaker due to Russia’s heavy military losses and the storm of sanctions that followed. It has instead resulted in the closest defense-industrial confederation of autocrats—Russia, China, North Korea, and Iran—perhaps ever.

For details on the whole picture, read today’s front page Wall Street Journal story, based on sourcing from US defense and intelligence officials, on how “Russia’s military cooperation with Iran, North Korea, and China has expanded into the sharing of sensitive technologies that could threaten the [United States] and its allies long after the Ukraine war ends.”

For a narrower but no less revealing view of the consequences of North Korea’s burgeoning relationship with Russia, I turned to the Atlantic Council’s own Markus Garlauskas, the director of our Scowcroft Center for Strategy and Security’s Indo-Pacific Security Initiative.

He previously served in the US government for two decades, including as the national intelligence officer for North Korea. It was a job in which, among other things, he provided direct analytical support to then President Donald Trump for his meetings with Kim in Singapore and Hanoi. Garlauskas knows his stuff.

What worries him isn’t just the military wherewithal that North Korea is providing Russia, which has concerned US intelligence officials so much that that they recently chose to expose sensitive details of what they have unearthed. According to the latest figures released by the US State Department this week, North Korea’s support to Russia in recent months has included more than 11,000 containers of munitions, which range from run-of-the-mill artillery to dozens of ballistic missiles.

Beyond the capabilities North Korea has given Putin to kill more Ukrainians and sustain his illegal war, Putin’s embrace of Pyongyang is “making North Korea a far more challenging problem,” says Garlauskas.

Putin’s support for Kim, he says, is allowing North Korea to more effectively evade United Nations resolutions and sanctions on its weapons capabilities, providing Pyongyang greater access to dual-use technology and badly needed access to hard currency.

Russian support is emboldening Kim, through the robust embrace of a United Nations Security Council member, to be more aggressive against South Korea and the United States. In effect, Putin is protecting the back of one of the world’s premier rogue actors from the consequences of his nuclear saber-rattling and missile launches.

Beyond that, Russia’s use of North Korean ballistic missiles against Ukraine is providing Kim a live-fire opportunity to refine his weapons’ capabilities and improve his tactics and techniques against US-designed missile defenses. The world usually notices and responds when North Korea fires off one of its ballistic missiles, but now the weapons are being lost in the fog of the Ukraine war.

What brings me and Garlauskas to Taiwan is a high-level Atlantic Council delegation, one that includes former Latvian President Egils Levits, former Czech Foreign Minister Tomáš Petříček, former US Defense Intelligence Agency Director Scott Berrier, and Matthew Kroenig, who runs our Scowcroft Center for Strategy and Security.

A future missive will report on Taiwan and Ukraine’s role as the front-line states that this fast-evolving confederation of autocracies has in its sights. Putin’s Pyongyang gambit is all a part of this effort, and its relevance and significance are easy to see from our delegation’s view, one thousand miles to the south.

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

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

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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.

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Dollar Dominance Monitor

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

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China’s direct exports to Russia since Moscow’s invasion of Ukraine have fallen only twice, both during times Chinese firms feared sanctions risks. Chinese exports first dipped in the initial days of Russia’s invasion in early 2022 amid sanctions concerns, but Chinese corporates reestablished these links, often at the urging of Chinese officials. Second, China-to-Russia shipments have declined in recent months, likely owing to stricter Western sanctions imposed in December 2023 and to Lunar New Year production pauses. This downtick is likely only temporary, and the bilateral relationship at the highest level remains strong, as the meeting between Chinese leader Xi Jinping and Russian President Vladimir Putin in Beijing in May indicates.  

Chinese imports from Russia have risen consistently throughout the conflict, largely owing to surging global commodity prices and the redirection, whenever possible, of Russian hydrocarbon exports from Europe to China.

Russia’s crude oil exports to China rose significantly after Moscow launched its full-scale invasion in February 2022. Still, Russia’s exports of other mineral fuels to China—such as natural gas, coal, and other hydrocarbons, including diesel—have grown more rapidly in percentage terms. Pipeline natural gas trade increased on the Power of Siberia pipeline as upstream production ramped up, while Russia’s coal exports to China also rose sharply. 

While Russia’s exports help finance its war effort, its imports of industrial goods are vastly more important for sustaining the economic, political, and military dimensions of its war effort, at least in the short term. Russia’s imports prevent shortages, maintain political support for the war by stabilizing living standards, and, in some cases, facilitate military capabilities. China’s exports to Russia, including of machinery, vehicle-related items, and dual-use technologies, have underpinned the Kremlin’s ongoing war effort.

Chinese automobile manufacturers, due to a mixture of massive subsidies and genuine innovations, have become global exporters. China has essentially replaced the West in vehicle trade across Russia, Central Asia, and Belarus, as a comparison of each country’s total 2021 imports versus China’s 2023 exports to those same countries suggests.

Vehicle imports by country

Russia receives Chinese vehicle-related shipments both directly and indirectly, via transshipments from third countries. While Kyrgyzstan routinely undercounted imports even prior to the war, it is not spending a quarter of its gross domestic product on auto imports from a single country. Additionally, Kazakhstan reported importing nearly $7.8 billion in autos from all sources in 2023, more than double what it imported in 2021. Many Chinese vehicle-related exports notionally bound for Central Asia are in fact headed to Russia. 

Chinese vehicle-related direct and indirect exports to Russia seem to be significantly bolstering the Kremlin’s war effort. Some Chinese-made vehicles, such as excavators, have been employed directly on the front lines. In most cases, however, Chinese vehicle-related items serve as logistic enablers, allowing Russia to avoid bottlenecks and repurpose its existing truck fleet to the front lines.

Trucks, which ease goods shortages and bottlenecks for the civilian sector and enable battlefield logistical support, are illustrative. In 2021, Russian total imports of heavy-duty trucks reached 12,785 units, for a total cost of $1.04 billion, with more than half of these shipments derived from Western sources. By 2023, conversely, China alone exported 42,562 units of these heavy-duty trucks to Russia, to the tune of $2.1 billion. Russia’s surging trucking imports are driven by wartime needs, as well as the collapse in domestic auto production, which has only recently stabilized. Here, it has found a willing supplier in China.

Chinese firms are also enabling Russia to maintain its existing civilian and military vehicle fleet. Chinese exports of vehicle spare parts to Russia and its neighbors nearly tripled since 2021, rising from $383 million to $1.12 billion. Again, while some fraction of this trade was commercial, it’s noteworthy that much of it—more than $415 million in 2023—was routed through Kyrgyzstan, which is importing 642 percent more than it did in 2021. Russia’s access to Chinese-made vehicle spare parts may have removed severe operational constraints that otherwise would have limited its recent military offensives. 

While China’s direct and indirect vehicle-related exports to Russia have been instrumental for the war effort, other exports have been even more critical for Russia’s defense industrial base. The United States, European Union, United Kingdom, and Japan imposed strict export controls on the “Common High Priority List,” a list of fifty products that Russia may seek to obtain for use in its military sector. Since then, Russia has sourced these materials directly from China and, almost certainly, from procurement agents across Central Asia. The extent of Western companies’ participation in this trade, especially via Central Asia, is an important question for policymakers to consider.

Chinese exports to Russia of high-priority goods exhibited the same pattern seen throughout the conflict. First, there was a surge in exports in the last months of 2021, due to year-end production surges (and potential stockpiling by Moscow); followed by a sharp drop in the first months of the war; a rise throughout mid-2022, as Beijing began to back Moscow’s war effort more vigorously and openly; and a decline beginning at the end of 2023, due to stricter Western sanctions (as well as the Lunar New Year).

Conversely, a look at China’s exports of dual-use goods to Central Asia and Belarus shows a nearly continuous increase since the war started.

Some of these export shipments could be legitimate. On the other hand, it is very prudent to examine if China’s shipments of dual-use goods to Central Asia and Belarus, which more than doubled in 2023 from the prior year, are simply being re-exported on to Russia. Western sanctions officials should continue to monitor Chinese dual-use exports to third-party countries, especially in Central Asia, that may serve as transshipment points and evaluate these transactions on a case-by-case basis. 

In sum, trade between China and Russia has risen sharply since the beginning of Moscow’s full-scale invasion of Ukraine, facilitating the Kremlin’s war effort. Direct trade, including in vehicles, machinery, and dual-use components, aids Russian forces in Ukraine and eases shortages in the Russian economy. Indirect trade, especially via Central Asia and Belarus, serves as a supplement for the already-considerable commercial ties between the world’s two most powerful autocracies. When examining China-Russia trade, analysts must consider the totality of their interactions, including indirect linkages via Central Asia.

Joseph Webster is a senior fellow at the Atlantic Council’s Global Energy Center and its Indo-Pacific Security Initiative. He is also an editor of the independent China-Russia Report. This analysis reflects his own opinion.

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

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

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

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

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

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

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

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

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

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

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

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Click to jump to an expert analysis:

John Herbst: Putin’s bad late spring continues

Charles Lichfield: The beauty of compromise

Daniel Fried: After some wobbling, this was a week of solid Western backing for Ukraine

Rachel Rizzo: Amid G7 political uncertainty, Meloni is emerging as a bulwark of support for Ukraine

Ian Brzezinski: The US-Ukraine security deal can’t just be a bridge to indefinite NATO delay

Kimberly Donovan: New US sanctions are already impacting Russia—will China feel them too?

Olga Khakova: Ukraine’s allies should keep up the momentum to rebuild its energy sector

Putin’s bad late spring continues

Good news arrived from Italy today because of the superb work of the Biden administration. The G7 finally agreed to Deputy National Security Advisor Daleep Singh’s ingenious initiative to offer Ukraine this year a fifty-billion-dollar-low interest loan collateralized by frozen Russian state assets. US Treasury Secretary Janet Yellen’s strong intervention with reluctant G7 partners­—France, Germany, Italy, and Japan­—helped turn this initiative into G7 policy, which is critical for Ukraine as it fights intensifying Russian attacks on its energy infrastructure. This loan follows the renewal of US aid, the prompt dispatch of US war materiel to Ukraine after the renewal, the decision by the United States and several of its allies to permit Ukraine to use their weapons in Russia, and the subsequent halting of Moscow’s offensive in the north. In other words, Russian President Vladimir Putin’s bad late spring continues. This latest blow to the Kremlin underscores how important strong US leadership can be.

This leaves Putin’s coterie fulminating that it will strike back by expropriating Western assets in Russia. Maybe, but prudent firms­—like France’s Total­—have already written off investments in Russia; and if Russia wants to further mortgage its future by taking this step, it will make even more unlikely the return of foreign capital after its aggression in Ukraine flops and it tries to rejoin the community of nations. Put another way, Russia needs Western investment far more than Western investors need Russia. The havoc created in Russia’s financial markets by this week’s new US sanctions is just the latest indicator of who has the whip hand in the economic relationship between Russia and the West.

This tactical victory against Russian aggression is sweeter because it is also a defeat for Putin’s partner, Chinese leader Xi Jinping, who tried to bully the reluctant G7 members to deter them from embracing this policy. It might also provide a lesson to India, Saudi Arabia, Indonesia, and others who needlessly embarrassed themselves by supporting this failed Chinese effort.

While we should celebrate this day’s accomplishment, we must not rest on our laurels. The Biden administration should follow up its big win by building support for the initiative launched by Philip Zelikow, Lawrence Summers, and Robert Zoellick to seek the transfer of nearly all the roughly $300 billion in frozen Russian state assets to Ukraine.

—John E. Herbst is the senior director of the Atlantic Council’s Eurasia Center and a former US ambassador to Ukraine.

The beauty of compromise

The G7 has struck a deal on bringing forward the value of interest income made off Russia’s immobilized assets. Given that the group was acrimoniously divided over what to do as recently as February, this is an extraordinary achievement.

While it remains unclear exactly how, the United States will be involved. As one of the strongest supporters of the approach, Washington saw itself providing the biggest contribution to a sovereign loan of fifty billion dollars or more. But the European Union (EU) sanctions legislation, which keeps the bulk of the assets blocked, has to be renewed every six months, and the United States could not convince the twenty-seven member states of the EU to switch to a different approach. Reportedly, the United States will still now participate—though the full details of the plan have not yet been made public. Washington may use the five to eight billion dollars allegedly still in the United States to make a smaller loan, while the United Kingdom, Canada, and the EU make a bigger loan. Or perhaps the parties have agreed to keep working on a risk-sharing formula in case EU sanctions are lifted before the United States and other lenders have been paid back.

Fifty billion dollars is over half of Ukraine’s total expenditures in 2023—a game-changing amount. Still, supporters of confiscation are already calling today’s achievement “step one.” But we should appreciate how elegantly today’s compromise navigated the red lines of France, Germany, and other EU member states, while still providing a substantial amount. Let’s take the win and accept that confiscation remains off the table until a multilateral solution can be found.

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

After some wobbling, this was a week of solid Western backing for Ukraine

Western backing for Ukraine has firmed up in the wake of the miserably delayed vote for additional assistance by the US Congress in late April. On June 12, the United States issued its most effective sanctions against Russia in two years, a well-thought-out set of measures by the departments of Treasury, State, and Commerce that struck at Russia’s military industry; energy production; evasion of technology controls by firms in China, Turkey, the United Arab Emirates, and elsewhere; and more. One interesting measure was the expansion of authority for sanctions against non-Russian banks and other firms that support Russia’s military industry (“secondary sanctions” that European governments have loudly opposed but now seem to tacitly accept). It’s about time the United States took that step, and it needs to follow through, but it’s a welcome step all the same.

In another welcome move, the G7 has finally agreed (at least in principle) on an arrangement to use immobilized Russian sovereign assets, estimated at around $280 billion, to back Ukraine. In a swift and bold move days after the all-out Russian invasion of Ukraine in February 2022, the G7 locked down Russian assets but has ever since debated whether to use those funds to help Ukraine and, if so, how. Some argued for simply taking Russia’s money and having Russia pay directly for its war against Ukraine. But many in Europe resisted taking that step as too aggressive, even given Russia’s own aggressive war.

Extended European discussions produced a soft consensus to use the interest on the Russian assets. But that would generate only about three billion dollars per year, a sum not commensurate with Ukraine’s need. The United States came up with a creative (and complex) solution: Use twenty years’ or so worth of that interest to back funds to Ukraine, a scheme that could generate a sum of about fifty billion dollars. After much effort, the G7 has reached consensus on that plan. While details have yet to be worked out, fifty billion dollars is nothing to sneer at. The United States was right to close the deal on this compromise and also right in what seems to be its intention to use the principal, the full $280 billion.

​​In a third action, the United States and Ukraine have signed a bilateral memorandum of understanding (MOU) providing for ten years of security cooperation. This is the most recent of a series of bilateral MOUs between Ukraine and the countries supporting it in its fight for national survival. It’s not NATO membership, but the US and other security MOUs are arguably part of Ukraine’s “bridge to NATO,” as the Biden administration has put it.

Much depends on the battlefield, and the news is mixed: Ukraine seems to have halted the Russian ground offensive against Kharkiv, but the Russians could attack elsewhere. Russia is battering Ukraine’s energy infrastructure, but Ukraine has hit Russian military infrastructure in occupied Crimea and elsewhere. Still, it’s been a week of solid Western backing for Ukraine.

—Daniel Fried is the Weiser Family distinguished fellow at the Atlantic Council. His last position in the US government was as sanctions coordinator at the Department of State.

Amid G7 political uncertainty, Meloni is emerging as a bulwark of support for Ukraine

As leaders from the world’s G7 countries gather in Puglia, it’s hard to ignore a few big elephants in the room. First, French President Emmanuel Macron’s trouncing in the recent European Parliament elections by Marine Le Pen’s party led to his potentially politically fatal decision to dissolve parliament. Second, German Chancellor Olaf Scholz’s Social Democratic Party faced a similar result from the center-right Christian Democrats, and a map of Germany’s European Parliament voting results shows that the country is still clearly divided between east and west, with the former solidly in the Alternative for Germany (AfD) camp. Finally, US President Joe Biden arrived in Puglia after a months-long battle on Capitol Hill to pass the latest tranche of Ukraine aid and as the November election looms. 

Who seems to be left out of all the political drama? Italian Prime Minister Giorgia Meloni, whose Brothers of Italy party took home a solid win in the European Parliament elections and who is taking the opportunity to bask in the limelight of transatlantic leadership. In fact, she said Italy is going into the summit with the “strongest government of them all.” She’s not wrong. It’s a surprising turn for Italy’s famously mercurial internal politics: Not only is she seen as a leader on the world stage, supporting Ukraine and NATO, but her leadership is also expected to hold through the entirety of her term. Meloni is using this moment to chart a new course for Italy, including by bringing leaders from outside the G7 to the summit, such as Narendra Modi of India, Cyril Ramaphosa of South Africa, and the pope for his first G7 appearance. She is also solidifying the country’s place at the center of a new relationship between the West and Africa, as well as supporting the EU’s plan to provide a fifty-billion-dollar lifeline to Ukraine using frozen Russian assets. 

Not only is this good for Meloni, but having a bulwark of support amid uncertain political futures in much of the West is good for Ukraine, too.

—Rachel Rizzo is a nonresident senior fellow with the Atlantic Council’s Europe Center.

The US-Ukraine security deal can’t just be a bridge to indefinite NATO delay

The just-announced US-Ukraine security agreement has much good in it, if the US government chooses to execute it in a manner that enables Ukraine to defeat Russia’s invasion quickly, decisively, and on Kyiv’s terms. 

However, the language presenting “a bridge to Ukraine’s eventual membership in the NATO alliance” is yet another repeat of the Alliance’s sixteen-year-old assertion that membership is not a matter of if but when—this time backed by extensive inferences that Ukraine is far from ready for NATO membership.

Nothing is further from the truth. Ukraine meets all the requirements spelled out in Article 10 of the Washington Treaty. It’s a European state. Its democratic credentials are codified in repeated elections found to be free and fair—even when subjected to Russian interference. No country has sacrificed more blood in the defense of transatlantic security in NATO’s history.

That Ukraine would sign up to such language reflects its own disillusionment in the face of US resistance to its aspirations for NATO membership—a disillusionment that was reinforced by Biden’s recent assertion to TIME that peace in Europe does not require Ukrainian membership in NATO.

To reverse this disillusionment and convince Ukraine that this bridge to NATO is not a route to indefinite delay, the Alliance must take tangible steps to integrate Ukraine into its operations and decision making. For too long, Ukraine has remained an outsider to the Alliance amid empty promises of eventual inclusion.

Ukraine should be invited to assign personnel to NATO headquarters and command structures and to sit as an observer at the North Atlantic Council, the Alliance’s top decision-making body. The latter privilege was afforded to countries such as Sweden and Finland, after they were invited to join NATO but before they became members. While that privilege gave those allies a voice in NATO deliberations, it came with no vote and no veto in Alliance decisions and no Article 5 security guarantee.

Ukraine has much to add to the Alliance in those capacities. No country has more experience and expertise to share when it comes to fighting Russia.

These proposals would resonate powerfully in Ukraine and would receive broad support across the Alliance. Even if there is resistance, just by pressing them forward, the United States, as the leader of NATO, would significantly bolster the credibility of its—and the Alliance’s—promise to fulfill Ukraine’s well-deserved transatlantic aspirations.

—​​Ian Brzezinski is a senior fellow at the Atlantic Council and a former US deputy assistant secretary of defense for Europe and NATO policy.

New US sanctions are already impacting Russia—will China feel them too?

The US Treasury’s latest round of sanctions targeted critical aspects of Russia’s financial infrastructure, including the Moscow Exchange (MOEX) and National Clearing Center, among others. These new sanctions are already having an effect. The Central Bank of Russia and MOEX halted trading in US dollars and euros in response to the announcement.

Treasury’s announcement also came with an expansion of secondary sanctions. The secondary sanctions authority that was announced in December was specific to Russia’s military industrial base. The expanded definition of secondary sanctions now includes any Russian individual and entity designated pursuant to Executive Order 14024, which accounts for most of the US Russia-related sanctions. This means that banks that are still transacting with Russia in places such as China and India are exposed to the risk of secondary sanctions. It will be interesting to see how China, and specifically Chinese financial institutions, respond to the latest US actions, considering how Russia has become economically and financially reliant on China over the past two years.

Further, Treasury clarified that the foreign branches of designated Russian banks, such as VTB in China and India, are sanctioned and added their entity names and addresses to the Specially Designated Nationals list. We called out this sanctions gap in the latest edition of the Russian Sanctions Database that we published in May. This action should restrict how Chinese companies do business with Russia, but we’ll have to see, as much of the transactions occur in renminbi, not US dollars. 

—Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center and a former senior official with the US Treasury Department’s Financial Crimes Enforcement Network.

Ukraine’s allies should keep up the momentum to rebuild its energy sector

The G7 agreement to deliver fifty billion dollars for Ukraine, generated by the interest from seized Russian assets, embodies the West’s reinvigorated willingness to deploy bold, innovative solutions to hold Russia accountable for its immeasurable crimes against Ukraine, particularly when Moscow’s damages (direct and indirect) account for at least $56 billion in losses to Ukraine’s energy sector. 

Some of this interest could be used for air defense against the further destruction of power plants and for rebuilding the energy sector—half of its 18 gigawatt capacity has been blown up. Unsurprisingly, energy dominated the conversations this week at the Ukraine Recovery Conference in Berlin, as energy supply security and affordability underpin every facet of Ukraine’s society and will be the backbone to the success of Ukraine’s rebuilding and recovery. Reliable energy access is vital for citizens’ survival but is also a lifeline for large industries and small and medium-sized enterprises, which have shown inspiring resilience and tenacity in the face of an unrelenting assault. 

It’s crucial to appreciate the novelty, speed, and monumental diplomatic lift of building consensus over such agile solutions. Such a cadence should continue for all work on protecting and rebuilding Ukraine—especially its invaluable energy sector. Most urgently, allies should:

• Overcome speed bumps in the procurement of gas piston and gas turbine power plants, transformers, and other technical equipment 
• Support Ukraine’s further progress on decentralization reforms 
• Empower municipalities in their role in replacing lost power generation 
• Accelerate investments in efficiency solutions to reduce peak demand 
• Lift restrictions on how Ukraine can deploy Western weapons to defend its critical energy infrastructure

—Olga Khakova is the deputy director for European energy security at the Atlantic Council’s Global Energy Center.

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The G7 has an unusually long guest list for the 2024 summit: thirteen world leaders, including the pope. The 2021 summit had four guests, the 2022 summit had six, and the 2023 summit had nine. The bulge in the number of guests reflects the nature and scale of challenges on the G7’s agenda, from wars in Europe and the Middle East to regulating artificial intelligence (AI) to countering China’s manufacturing overcapacity to addressing climate change. Notably, five of the 2024 guests (India, Brazil, South Africa, Saudi Arabia, and the United Arab Emirates) are members of the developing country grouping known as BRICS. While the G7 is trying to show these countries that it can still work together on global challenges, the guests are also eager to indicate that BRICS is not an “anti-West” coalition—yet.

How did the United States outpace the rest of the G7 in gross domestic product (GDP) growth after the pandemic? There’s no one answer. Extraordinary fiscal stimulus, flexible labor markets, productivity growth, and technological leadership, including in AI, all played a role. But the bottom line is that the United States is the fastest-growing advanced economy in the world—and it is not particularly close. To put the US surge in perspective, in the third quarter of 2023 the United States had the same GDP growth as China: 5 percent. That statistic would have been improbable just a few years ago. 

Enforcing sanctions and other economic measures against Russia will be one of the main objectives of the G7 summit. Last year, Russia reported a 28.3 percent drop in total exports from 2022. Russian media outlets cited sanctions as an important reason for this decline, specifically the December 2022 European Union (EU) ban on Russian crude oil sold above the G7 price cap. However, Russia has mitigated some of the price cap’s effects by reorienting oil exports to Asia, mainly to China and India. Last month, G7 finance ministers and central bank governors issued a joint statement in which they reiterated their commitment to enforcing the price cap. At the upcoming summit, G7 members should commit to strengthening enforcement with third countries such as China and India to further reduce Russia’s commodity revenues and ability to fund its war in Ukraine.

Inflation across the G7 reached its lowest point since April 2021 by January this year. In the lead-up to the summit this week, the US Federal Open Market Committee held rates steady and emphasized the importance of returning inflation to 2 percent. This follows the first rate cuts last week from the Bank of Canada and the European Central Bank. For Germany and the United Kingdom, both of which experienced a technical recession at some point in 2023, looser monetary policy is long-awaited. Meanwhile, the Bank of Japan faces a more complicated task in managing deflation. But the US Federal Reserve’s 2 percent inflation target still appears to be a distant objective—meaning the United States’ much-anticipated loosening may be put off a bit longer. 

At last year’s G7 summit, the leaders pledged both to “drive the transition to clean energy economies of the future through cooperation within and beyond the G7” and to coordinate their approaches to de-risking. The past year suggests that it may be difficult to make progress on these somewhat contradictory objectives. With Chinese manufacturing overcapacity flooding markets, G7 countries have ample incentive to follow the Biden administration in levying higher tariffs on Chinese goods, especially those that compete with infant green energy industries, such as lithium batteries and electric vehicles. The European Commission did just that on Wednesday, proposing higher tariffs on Chinese electric vehicles. What may be beneficial to their domestic industries is not necessarily beneficial to the green transition overall, and coordination on these approaches will be difficult. G7 nations have proven their ability to coordinate since Russia’s invasion of Ukraine, but they are still economic competitors. 

Have you ever wondered why it takes your bank account two to five days to show a transaction? Banks and other financial institutions are connected to each other and to a central bank through a payments network, a complicated pipeline consisting of messaging and settlement infrastructure that enables money to move. Usually, your paycheck or rent payments go through a service that is not instantaneous. However, in the past decade, some payments networks have become close to immediate, which allows users to see their transactions settled in less than a day—sometimes in as little as a few seconds.

This type of infrastructure is usually referred to as a fast payments system. There are many economic benefits to fast payments, since they are accessible around the clock to users and can improve businesses’ liquidity, reliability, and usability. While the biggest networks of fast payments are outside of the G7, the group’s member countries have also undertaken measures to create a fast payments system. As the graph above shows, the United Kingdom and Japan have been early adopters of fast payments systems; France, Italy, and Germany enabled their fast payments systems as part of the EU in 2018; and the United States and Canada trail on adoption. The development of a fast payments system is a marker of maturity, innovation, and modernization of the payments infrastructure in a country.  

Can the G7 figure out a way to provide fifty billion dollars to Ukraine using immobilized Russian assets? This is perhaps the biggest litmus test of the success of the summit’s success. The issue of the assets has been a hot topic since the day they were blocked over two years ago. As we have long said, the fact that the majority of the money was in Europe (in Belgium’s Euroclear) was going to be the determining factor. For two years, there’s been little agreement on how to make the best use of the money. Earlier this year, there was small progress, with Europe agreeing to use the windfall profits so at least the yearly interest earned on the bulk of the $280 billion could be given to Ukraine. But for many who wanted full confiscation of the assets, that wasn’t enough. Enter the US-led plan to pull forward future interest earnings over the next twenty years. It’s a creative financial solution that is gaining momentum in the G7. The difference it could make is shown above.

Contributions from: Charles Lichfield, Mrugank Bhusari, Ryan Murphy, Josh Lipsky, Sophia Busch, Ananya Kumar, Alisha Chhangani, Kimberly Donovan, and Maia Nikoladze.

Research support from: Clara Falkenek, Gustavo Romero, and Konstantinos Mitsotakis. 

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1. Why is the EU taking this step now?

By putting in place additional tariffs of up to 38.1 percent (much higher than the anticipated 15-30 percent), the Commission has shown its commitment to aggressively protecting the EU auto industry from a massive increase in Chinese EV imports. By setting these countervailing tariffs lower than the United States’ 100 percent and by applying rates differentially based on firm-specific levels of Chinese subsidization, production sites within the EU, and cooperation with the Commission, the EU is also communicating that its primary goal with these tariffs is to level the playing field rather than completely wall the single market off from Chinese EV imports.

The size of these tariffs indicate that the French have more influence than the Germans in EU trade policy, at least for now. French carmakers, in contrast to German auto brands, are less dependent on the Chinese market and more willing to use tariff policy to protect local production capacity. Indeed, the tariffs and their political fallout reflect a split between EU member states with deep ties to China’s car industry, such as Germany, Sweden, and Hungary, and member states that view China as more of a threat than an opportunity, such as France and Italy.

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

The European Commission unveiled its higher-than-expected countervailing tariffs on some EVs imported from China. With this move, European Commission President Ursula von der Leyen’s economic security agenda has won out against even a last-minute push by Germany to soften the decision. Concerns and disappointment have already echoed from German industry, criticizing the Commission’s “Trumpian protectionist” decision and denouncing detrimental economic consequences for Germany’s automotive industry. However, apart from the howls of opposition from some large German auto and chemical actors, almost 70 percent of German industries support protective measures against China’s unfair trade practices and market distortion. This fracture between Germany’s Mittelstand and major global players (such as Volkswagen, Siemens, BMW, Mercedes-Benz, BASF, and Bayer) reflects the underlying contrast between the EU’s need to protect its industries against Chinese overcapacity versus certain export-dependent sectors within the European bloc. 

With a strong chance of von der Leyen leading the Commission for the next five years and an increasingly protectionist-oriented global economy, it will be interesting to watch who catches up with whom. Will von der Leyen’s ambitious economic security agenda that echoes Washington’s tougher stance on China be reined in by export-dependent member states such as Germany? Or will Berlin come to a realization that the EU has to address key vulnerabilities vis-à-vis Beijing? This is only the opening salvo in a longer-term policy debate. 

—Jörn Fleck is the senior director of the Atlantic Council’s Europe Center.

—Jacopo Pastorelli is a program assistant in the Atlantic Council’s Europe Center.

In order to not affect the European Parliament election campaign, the European Commission waited to announce its decision to impose additional tariffs on Chinese EVs. But now that the election is over, it can finally move. It is indeed high time for the EU to react to China’s subsidized industrial overcapacities. The United States and other countries, such as Turkey, had already announced additional tariffs on Chinese EVs, thereby raising the pressure on the EU, because China could further divert its exports to Europe. 

But the decision by Brussels is not backed by all EU member states. While France is in favor, auto giant Germany has been wary of these tariffs and made an eleventh-hour bid to dilute and reduce the Commission’s planned tariff hike. In the corridors of the German chancellery and parts of the German economics ministry, there is great concern that the German automotive industry could bear the brunt of Chinese retaliatory action. And this remains a space to watch. So far, this is a provisional predisclosure by the European Commission. It now has four months to adopt definitive measures, which will require an implementing act with an examination procedure, which usually implies a qualified majority vote in a comitology procedure, meaning it is not final and set in stone, yet.

—Roderick Kefferpütz is a nonresident senior fellow at the Atlantic Council’s Europe Center and the director of the Heinrich-Böll-Stiftung European Union office in Brussels. The opinions expressed are those of the author and do not necessarily represent the views of the Heinrich-Böll-Stiftung.

The EU is undertaking tariffs on China-made EVs due to surging shipments to Europe. Additionally, the US imposition of tariffs on EVs and other products—especially batteries—forced the EU’s hand. 

The EU is of at least two minds regarding tariffs on China-produced EVs. Germany, Sweden, and Hungary all oppose the tariffs, which they feel will damage existing commercial ties with China. Germany fears retaliation against its own auto sales to China. Sweden’s Volvo brand is owned by the Chinese firm Geely. And Hungary has received substantial EV investments from Chinese EV and battery companies. Conversely, France, Italy, and several other EU actors advocated for additional tariffs, as these measures could protect EU automakers from subsidized competitors while attracting inward investments from China. 

Owing to a lack of internal consensus, as well as the rapidly changing nature of the EV landscape, the EU may well revisit its decision in the coming months. The EU’s decision is caveated at several points and could be reassessed if the European-US alliance weakens over the next year.

—Joseph Webster is a senior fellow at the Atlantic Council’s Global Energy Center, where he leads the center’s efforts on Chinese energy security.

2. How does this step compare with the new US tariffs?

Because the United States has very little Chinese EV market penetration as of now, its recent Section 301 tariffs on Chinese EVs are largely preventive. In contrast, the EU’s tariffs are responding to a rapid increase in Chinese EV imports. In this way, the EU tariffs are more in keeping with the manner in which antidumping/countervailing duty investigations are usually undertaken, and the EU announcement makes it clear that it is at least attempting to impose these duties in a World Trade Organization-compliant manner, including by offering to enter negotiations with the Chinese government.

The EU tariffs are both lower than the United States’ and more complicated. By choosing to apply tariffs on a company-by-company basis, the EU is trying to demonstrate that its actions are rooted in factual determinations about Chinese subsidies, which themselves are provided on a company-by-company basis. By ensuring SAIC cars are hit with the highest tariff rate, the EU is also differentiating between state-owned car companies (which SAIC is) and private firms (such as BYD and Geely). This also gives the EU tools to incentivize car companies on an individual basis to transfer more production to the EU in order to gain better market access. The message is clear—site production in the EU or be subject to a tariff designed to eliminate the subsidization benefits of building vehicles in China.

The differences between the US and EU tariffs further highlight how much more dependent major European car manufacturers are on China—as a market, a production site, and as a source of inward investment. US carmakers are much less reliant on China for revenue, largely because as Chinese automakers have grown, US brands have been pushed out. The sense that China is a declining market for US autos has also blunted organized industrial opposition to tariffs on Chinese vehicles. Across the Atlantic, European car manufacturers have been much more vocal and concerned about tariff action against Chinese EVs due to the potential for retaliation, and this shows in both the tariff level—which is much lower than the United States’—and the firm-specific carve-outs.

—Sarah Bauerle Danzman

The EU’s tariffs are vastly different from the US measures in several key aspects. The EU-announced tariff rates are substantially lower than comparable US measures; are differentiated on a company-by-company basis; and, unlike the United States’, indicate a receptiveness to inward investment. 

The European Commission’s investigation determined that Chinese automakers BYD and Geely will receive preferential tariff rates of 17.4 percent and 20 percent, which will be applied on top of the existing 10 percent tariff rate that Chinese EVs face. Other producers would face additional tariffs ranging from 21 percent to 38.1 percent. 

While the criteria for determining provisional countervailing duties is not transparent, it appears that the European Commission awarded lower rates to automakers investing into the European ecosystem. 

It is not clear how the Commission determined a level of subsidization on a company-by-company basis—or if this exercise is even possible. The Chinese system of subsidies is diverse, complex, and opaque. Chinese firms often receive direct or implicit support via preferential interest rates, directed credit, tax credits, and cross subsidies—such as in the steelmaking and shipbuilding sectors. Moreover, these subsidies take place at the national, provincial, and even local level. 

While it’s not clear how the European Union could determine the level of these subsidies, especially on a company-by-company basis, it can calculate which firms have the largest local footprint. Both BYD and Geely have substantial investments in Europe. BYD has already opened an EV plant in Hungary and plans to open another facility. Geely owns the Swedish brand Volvo and has begun to shift production of some vehicles from China to Belgium. 

Finally, China’s SAIC group received the maximum tariff rate of 38.1 percent. The automaker has a limited footprint on the continent, and it has yet to select a site for its first European production facility, despite nearly a year of consideration. Accordingly, Europe seems to be warning SAIC to site a facility within Europe or face tariffs.

—Joseph Webster

3. How might China react?

China will likely issue some corresponding tariffs on European-made goods, even if only for symbolic purposes. Yet, it may have no choice other than to accept that Europe will accept its investment, but not its exports. Beijing may also seek to re-engage with Europe on electric vehicles after the US presidential election, which will have significant implications for transatlantic ties. 

Beijing will closely watch Europe’s posture toward lithium-ion batteries, which can be used for grid storage or electric vehicles (and also have potential military implications). With US tariffs on lithium-ion batteries beginning in 2026, Europe will be flooded by these products unless it applies its own measures.

—Joseph Webster

China has already indicated it may retaliate with tariffs against internal combustion engine vehicles, aviation equipment, and agriculture. It remains to be seen whether China makes good on that threat, but it did send a letter to the Commission in the aftermath of the tariff announcements, asking for a negotiated settlement and threatening to start retaliatory measures in aviation and agriculture in the absence of a deal. Agriculture and aviation are both politically sensitive sectors, with exports to China representing more than 6 percent of the EU’s agricultural trade. It’s less clear how easily China could absorb the costs of aviation tariffs given that Airbus planes represent more than 50 percent of China’s commercial aviation fleet.

At some point, the usefulness of tariffs in changing governments’ behavior displays decreasing returns. This is especially true as rounds of protectionism reduce firms’ market share in each other’s markets. The lack of strong US industrial opposition to tariffs on Chinese EVs is a case in point. The lesson here is that governments are going to eventually have to sit down and work out their differences; trade wars might be on-trend at the moment, but eventually the downsides—including increased costs and reduced consumer choice—will become more apparent to citizens.

—Sarah Bauerle Danzman

The post Europe is gearing up to hit Chinese EVs with new tariffs. Here’s why. 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.

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Click to jump to an expert analysis:

Kapil Sharma: A Modi-led coalition government is good news for India’s economic growth

Seema Sirohi: The BJP came into the election overconfident. It leaves humbled.

Ratan Shrivastava: After surprise results, Modi will need to govern more cautiously to keep his coalition together

Shék Jain: Expect Modi to keep pushing back against the West on climate policy, while making changes at the local level

Srujan Palkar: Factionalism split India’s political parties—and their voters

Adnan Ahmad Ansari: India’s democracy is alive and kicking

Jeff Lande: The BJP won, but uncertainty has been introduced to the picture

Nish Acharya: Indian voters just proved the axiom that “all politics is local”

Atman Trivedi: A surprising election verdict puts the BJP on notice

A Modi-led coalition government is good news for India’s economic growth

The Indian electorate handed Modi and the BJP a historic third consecutive five-year term. After an election supported by more than 642 million voters, 312 million of whom were women, Modi, the BJP, and their coalition members have secured a mandate to continue their ambitious political and economic agenda—albeit with a bit more political maneuvering and a much stronger opposition.  

Modi’s win was not a surprise, although it was not expected to be under a coalition government. Still, he is prepared to hit the ground running. Modi’s agenda will likely be executed by a new and younger coalition cabinet, though the exact portfolios and officials are yet to be announced. Even under a coalition government, this is good news for India’s economic growth and business environment. The agenda will continue to include reforms for industrial manufacturing, infrastructure, digitization, regional trade, supply chain agreements, and even land reform—with a coalition government even more likely to emphasize economics. While the Indian equities markets have not reacted favorably to the news of a coalition government, businesses will welcome continued certainty. But as the results have shown, the voters need to feel the success of these policies on the ground with jobs and economic growth.

The BJP has many challenges going forward. The party’s popularity rides on Modi—he polls twice as popular as the BJP as a party and drives a third of its votes. Looking to the future, Modi is seventy-three years old and does not have a clear successor. This is likely his last national election. His popularity and a weaker national opposition party have allowed the BJP to paper over its weaknesses—especially at the state and local levels.

Indian voters have shown that they have taken their vote seriously with the Congress party and other regional parties taking seats in traditional BJP strongholds in the north and west (specifically in Uttar Pradesh and Maharashtra). As former US House Speaker Tip O’Neill famously said, “all politics is local,” and that has never been truer in India.

At this stage, there are three big takeaways from this election: 1) Democracy is alive and well in India; 2) Indians want jobs, jobs, and jobs; and 3) the Indian voter will hold the government to growing the economy over religion. On the third point, it’s worth noting that the BJP is losing in Ayodhya, the site of the Ram Mandir, a temple the BJP fulfilled a campaign promise to build to replace a sixteenth-century Mughal-era mosque razed by Hindu groups in 1992. The site is considered to be one of Hinduism’s holiest sites and has been the center of Indian politics for decades.

The BJP struggled to translate its economic policies and benefits to the average voter. Coupled with a stronger anti-incumbency mood and operating under a coalition government, the BJP will need to work hard to maintain its position as India’s largest party. The BJP and its coalition government are now operating in a “now or never” moment.

—Kapil Sharma is the acting senior director of the Atlantic Council’s South Asia Center.

The BJP came into the election overconfident. It leaves humbled.

The Indian elections were long, spread over six weeks, but they proved to be a thriller in the end. Early results show that the Indian voter decided to humble the mighty and restore balance. The ruling party has done worse than projected and the opposition alliance much better than expected. 

As vote tallies come in, it appears Modi’s BJP may not secure on its own the 272 seats needed for a majority in the 543-member Lok Sabha, the governing lower house. The BJP will be beholden to its allies, something the party has been able to avoid since Modi first came to power in 2014.

The reduced numbers are a far cry from an overconfident projection of four hundred seats by the BJP and its allies and a campaign centered around Modi’s personal appeal. In the end, a host of real issues—inflation, unemployment, rural distress, caste divides—mattered more than a slick message designed to project Modi not just as an Indian leader but as a global statesman. 

The opposition Congress party under Rahul Gandhi has made a spirited comeback with a campaign that emphasized economic issues over religious divides. Gandhi’s two yatras, or journeys, through huge parts of India listening to people and learning about their problems seemed to have resonated with voters. The performance is all the more significant given the uneven playing field—the Modi government is accused of using various ploys to hobble the opposition.

Shrunken and humbled, the BJP will still be able to form a government with Modi as prime minister for the third time, but the party’s allies will extract a bigger price for coming along. 

—Seema Sirohi is a columnist for the Economic Times.

After surprise results, Modi will need to govern more cautiously to keep his coalition together

Heading into his third term as prime minister, this election was marred for Modi by the unrealistic expectations that he set for himself—a target of four hundred parliamentary seats for the ruling National Democratic Alliance (NDA). NDA’s numbers have been diminished, as some parties have left the alliance—including Shiromani Akali Dal, which could have helped the NDA in Punjab, and the Shiv Sena, which could have added eleven more members of parliament (MPs).

This election has seen a close contest in Uttar Pradesh, a state that sends eighty MPs to the parliament. It witnessed the consolidation of minority voters and support for affirmative action, based on the opposition INDIA coalition’s narrative that the ruling NDA would change the constitution and end the reservation system, under which historically disadvantaged castes and communities receive quota-based jobs and educational opportunities.

The election also saw candidates intelligently align themselves in key constituencies, where the Samajwadi Party and Indian National Congress avoided direct clashes and made the BJP/NDA candidates sweat, especially in the eastern Uttar Pradesh and western Uttar Pradesh belt of Jats, which had substantial opposition to the NDA and BJP because of the controversial farm law proposals.

The BJP is still the single largest political party in the parliament, and the NDA coalition will return to power, as it has comfortably crossed the required majority of 272 seats in parliament. But Modi’s administration will be weakened by the pressures of running a coalition government and catering to demands based on regional mandates, which makes bold economic or political decisions long in the making. This may impact policy formulation and the financial investments by big corporations as well as the stock market, in the near term.

Modi may not be seriously impacted by the election results, nor is his image in the international arena likely to suffer. He will still be the prime minister and thus represent the government and India in international fora, but he will need to tread with caution to keep his coalition together.

—Ratan Shrivastava is a nonresident senior fellow at the Atlantic Council’s South Asia Center and managing director at Bower Group Asia. He previously served in the Indian Ministry of Defense.

Expect Modi to keep pushing back against the West on climate policy, while making changes at the local level

Modi and the BJP will garner another five years to implement their vision of Bharat with the assistance of coalition partners. Modi’s support appears firm, while the BJP experienced stronger regional challenges than expected.  

Voters seem satisfied with Modi’s efforts to elevate India on the global stage and with many of his policies for national economic growth. Viewed from the lens of climate change, the electorate appears content with Modi’s performance at the COP26 climate change summit in 2021—where Modi committed to reducing India’s carbon emissions to net-zero by 2070—and as president of the Group of Twenty (G20) last year. Constituents largely agree with Modi’s position that India needs balance in solving climate change and deserves an opportunity to develop like Western nations. I expect to see Modi double down on this position and work with the developing nations grouping known as the BRICS to deflate pressure from the West. Modi will flex more on global climate change, arguing that sustainability encompasses poverty alleviation and economic opportunity as much as environmental stewardship.

But Modi cannot ignore the fact that his party lost ground in this election. Modi’s support as a strongman facing the rest of the world may be intact, but the BJP’s strong-arm approach domestically seems to have made the electorate wary. The climate corollary is that, while India’s international stance on climate change is popular, the BJP’s approach at the local level has been less effective (notwithstanding the borderless nature of most pollution). Constituents do not seem to be able to connect the dots on how BJP climate policies benefit them. The air is still polluted, clean water remains scarce, heat is reaching unlivable levels, and climate catastrophes keep occurring. To shore up his party, Modi likely will start connecting these dots by promoting new, farmer-friendly alternatives to burning crop residues, doing more on water recycling and floodwater detention/retention, and making lower-carbon cooking fuels more accessible. Look for new programs, or revamping of existing programs, in these areas.

—Shék Jain is a nonresident senior fellow at the Atlantic Council’s South Asia Center and chairman of the Pura Terra Foundation.

Factionalism split India’s political parties—and their voters

Despite India’s massive scale, Indian national elections are largely local. More accurately, these elections are contested on a regional level. Recognizing these regional issues is crucial to understanding the national result. For example, the increasing political factionalism at the regional level split the loyalty of politicians and voters alike. In various regions, political parties from across the ideological spectrum have split into opposing factions or allied with ideologically unaligned parties—running with the BJP to hold onto power or teaming up with the rest of the opposition to topple the BJP. Amid the factionalism, the BJP has relied largely on Modi to sway voters.

To understand the complexity, consider just one state, Maharashtra. Maharashtra’s politics since the state’s formation in 1960 have been eccentric and eclectic to say the least—with only one chief minister (the equivalent of a governor in the United States) having completed a full five-year term. Four major parties ran in Maharashtra in the 2019 elections. Over the years, two of these parties split, resulting in different factions of them being simultaneously in government and opposition. As the results come in, the BJP and the Congress party are leading in Maharashtra, but in third and fourth place are the surviving factions of the broken parties running against the BJP. In Maharashtra and several other states, factionalism worked to secure power for the BJP by bringing together diametrically opposed right-wing and left-wing parties, but this method has not received validation from the Indian voters in Maharashtra as the results of this election cycle show. 

Maharashtra is only one example, and political factionalism is only one topic that has trended in India in the last five years. The results show that Indian citizens have paid attention to the regional issues affecting tens and hundreds of millions—political factionalism, women’s rights, employment, government employment in all sectors including the military, communal strife, controversial legislation, caste discrimination, and regional discrimination. 

—Srujan Palkar is a program assistant at the Atlantic Council’s South Asia Center.

India’s democracy is alive and kicking

India’s election results held a surprise that very few expected. Modi is expected to become the prime minister for a third consecutive term, unless there are any last-minute surprises or changes in coalitions, which cannot be ruled out—stranger things have happened in Indian democracy. Yet, this victory should feel like a setback for Modi. He gave a clarion call for his coalition to get four hundred seats. However, his coalition is struggling to gain even three hundred seats and his party is falling short of an absolute majority. The BJP has won, but it’s a victory of a different kind. The Congress party is celebrating, despite winning only around one hundred seats in the parliament. But for them, it’s a defeat that must feel like a victory, since they performed much better than expected. 

However, the key takeaway from this election is that India’s democracy is alive and kicking. It is a myth that the Indian economy and polity thrives under especially strong majority governments. Some of India’s biggest economic reforms happened under the coalition governments of the 1990s and 2000s. This result, in which the BJP will need to form a coalition to govern, should give us hope.

India has a parliamentary form of government, which some say was slowly turning into a “prime ministerial” form of government (with power concentrated in the executive). These election results will give back some of the power to the legislature. 

We can expect India’s parliament and parliamentary committees to become more active, with more bills being debated and deliberated. This is also a vote that shows that the Indian electorate does not cast its votes based on singular issues. Regional issues cannot be neglected, every vote needs to be earned, and overconfidence can be lethal. The best politics is building an economy that works for everyone—these elections have reminded us of this fact. The country will see policy continuity, but with checks. India will have the strongest opposition it has had in the past ten years, but a decisive leader still at the top.

Both sides may claim victory based on these surprising election results. But India’s democracy has been the biggest winner in these elections. And that is the best outcome we may have asked for.

—Adnan Ahmad Ansari is a nonresident senior fellow at the Atlantic Council’s South Asia Center and associate vice president at the Asia Group.

The BJP won, but uncertainty has been introduced to the picture

The election results are a surprise given the predictions going into the vote count. The results reinforce the difficulty of gathering such polling data around the world. Exit polls and media reports from across the country had set the expectation of a massive win—and perhaps even an absolute majority—for Modi and his ruling BJP.

The BJP did win, but by a significantly smaller margin than many predicted. Instead of looking at an absolute-majority rule, the BJP appears headed for a return to coalition politics. This surprise creates political and policy uncertainties that will have at least short-term consequences. A reversal of the sort of investments and capital expenditure that the government has advanced in recent years, in favor of a return to subsidies, protectionism, and welfare programs, is unlikely. But uncertainty has been introduced into the picture. Policy and political decisions will likely be delayed. Industry, particularly multinational corporations, and partner governments may hold off on some decisions as they wait and see how the new government develops.

Among the sectors least affected could be the technology sector, particularly software and services. This is because the ruling parties, throughout the past several decades, have all seen the tech sector as a growth engine for the economy, exports, and jobs. In contrast, infrastructure, agriculture, and large banks are among those that face questions about the shape and impact of potential policy changes.

—Jeff Lande is a nonresident fellow at the Atlantic Council’s South Asia Center, president of the Lande Group, and senior advisor to Conlon Public Strategies.

Indian voters just proved the axiom that “all politics is local”

Listening to the speakers at a recent business conference in India, as I did recently, one would never have predicted the election results announced today in India. Business and government leaders spoke about export-driven growth, artificial intelligence, advanced manufacturing, and ambitious visions for India over the next twenty-five years. But every so often, election results prove that voters are not necessarily as monolithic or unsophisticated as elites may think them to be. Clearly, it was what the chief executive officers and ministers did not speak of—income inequality, local development, and the fabric of society—that was on the minds of voters.

India is at an important transition point that will make life difficult for any leader. The prime minister, MPs, and business leaders should be speaking about India’s emerging role on the global stage. They should be positioning India in the Quadrilateral Security Dialogue as a leader on climate change and investing in emerging technologies.

And the BJP was rewarded for strong stewardship of the economy over the past ten years. India’s hard infrastructure—roads, bridges, and airports—have all improved significantly. Electricity and clean water are far more accessible than before. And the tough implementation of economic reforms, such as the goods and services tax and digital public infrastructure, are rapidly bringing millions of people into the formal economy.

But, as the US politician Tip O’Neill famously said, “all politics is local.” Despite strong overall economic growth, the real numbers are more complex. After subsidy adjustments, the growth rate is really closer to 6 percent. Growth remains concentrated in the south and west. Pollution and extreme heat are unbearable for large portions of the year in Delhi. And India still has nearly two hundred million people living below the global poverty line of $1.25 a day. 

This wasn’t a Hindutva election. It was not an embrace or rejection of the BJP’s majoritarian agenda. Instead, it was the type of pushback that voters around the world often provide when politicians and business leaders lose sight of the important issues in front of them.   

 —Nish Acharya is a nonresident fellow at the Atlantic Council’s South Asia Center.

A surprising election verdict puts the BJP on notice

While vote counting is ongoing, the BJP has won significantly fewer seats than expected. This national poll was, first and foremost, a referendum on Modi and his populist policies. After all, the BJP ran a presidential-style campaign with its charismatic leader front and center.

The party is still on track to remain by far the largest in the lower house, but its results fall well short of expectations. Nevertheless, voters seem comfortable with Modi and much of his agenda—the BJP’s vote share may prove to be comparable to 2019. Indians also appear keen to voice their concerns over economic distress and rising inequality.

Under Modi’s reign, the country has begun to witness robust economic growth after uneven progress during the pandemic. The economy grew at 8.2 percent in the fiscal year ending March 31, and the International Monetary Fund forecasts that it will grow by 6.8 percent in 2024 and 6.5 percent in 2025. India’s hard and digital infrastructure has improved, as well.

The problem is most Indians have not adequately participated in the fruits of an economy with gaudy headline numbers. Growth is unequal, and jobs are few and far between. Unemployment was the top concern for 27 percent of respondents in a recent poll. Against this backdrop, it’s not difficult to understand why both domestic consumption and investment are tepid.

In these elections, the BJP appealed to the religious identity of India’s Hindu majority, while Congress cautioned that a BJP landslide would result in changes to the constitution, removing exceptions afforded to the historically marginalized. Building temples, no matter how grand, doesn’t put food on tables. To address everyday concerns, Modi has accelerated welfare support, but at the cost of reducing already low public investment in education and health.

The surprising partial results begin to puncture Modi’s aura of invincibility, chip away at the BJP’s dominance, and breathe new life into Congress. The BJP still casts a large shadow over Indian politics, but it lacks a policy mandate. 

Coalition governments require compromises. That reality could complicate any plans for ambitious structural reforms on land, labor, or opening India’s markets to unfinished and intermediate inputs. 

Despite the skittish reaction from equity markets, a governing coalition could lead to a sustained period of strong economic growth, like in the 1990s and 2000s. Additional consultation, while perhaps slowing reforms, promises to strengthen the health of India’s democracy. 

Until now, most questions about succession and party leadership have been pointedly directed at Gandhi, the sometimes-reluctant leader of India’s most storied political family. While it is hard to imagine anyone filling Modi’s shoes, there will likely be more open discussion about who in the BJP succeeds the seventy-three-year-old. 

Voters have once again defied expectations and, once more, confirmed the resiliency of India’s democracy. So close to solidifying his status atop the list of the world’s most popular democratically elected leaders, Modi must now rely on kingmakers to help determine the BJP’s future.

—Atman Trivedi is a nonresident senior fellow with the Atlantic Council’s South Asia Center and partner at Albright Stonebridge Group, where he leads the firm’s South Asia Practice. He previously worked on US-India affairs in the US Commerce Department, the US State Department, and for then US Senate Foreign Relations Committee Chairman John Kerry.

The post Experts react: Modi loses ground in an electoral surprise. What will his third term look like now? 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

“We need to evolve the way we do trade,” warned US Trade Representative Katherine Tai. “You can’t do that by yourself.”

At an Atlantic Council Front Page event on Monday, Tai discussed how the United States and the European Union (EU) should work together to adapt their trade relationship to a new geopolitical reality.

“Basing that community on a community of democracies is really important,” she said. And while China may have been considered a cooperative partner in the past, Tai noted, “the China that we’re dealing with now, the PRC, is not a democracy; it’s not a capitalist, market-based economy.” And with China having “an incredibly large footprint” across the world, the United States and its partners will need to rethink how to “coexist” with China and “adapt” to today’s global economy, she said.

With the US elections in November pitting the current president against his predecessor, Tai said that a commitment to changing the US approach to trade is something that the Biden and Trump administrations have shared. “The world is significantly different, and . . . the benefits here in the United States are not inclusive enough,” she argued. “I think we share a lot of the same diagnoses.”

Below are more highlights from the conversation, moderated by Atlantic Council President and Chief Executive Officer Frederick Kempe, during which Tai discussed adapting to today’s new geopolitical challenges.

“Hit pause” and “come back”

• Tai said that the quick pace of technological change is putting pressure on traditional approaches to trade. “When we’re talking about data, it’s not just about the bits and bytes that help to facilitate a traditional goods transaction anymore,” she said. “Data is the game itself.”
• She added that this shift on data may require a rethink of traditional approaches to trade. “Isn’t it time for us to hit pause on this, come back . . . and try to get our arms around what is actually happening here and what is in the public interest?” she asked.
• In doing so, the Office of the US Trade Representative (USTR) would need to reconnect with decision makers from “all the other policy silos” across the government, Tai said. “A USTR-led answer to how we should be regulating tech and data . . . is not going to be the right answer.”
• “We have got to figure out what works for the United States . . . what works for our democracy,” she said. “It’s a domestic policy issue first before we bring it to the international realm.”

“Another new world order”

• Today’s globalization “has created a lot of efficiencies.” Tai acknowledged; however, it has also incurred “costs”: for example, fragile supply chains in which a single country can dominate a specific part of the supply chain or a sector. Another cost, she said, is tense geopolitical competition that is “built on pitting our workers against each other . . . creating this kind of a zero-sum competition for economic and industrial growth opportunity.”
• To avoid those costs, Tai said that leaders in the United States and EU will need to adopt a “holistic” approach to trade that incorporates domestic and international needs and economic and security priorities. That holistic approach, she said, will be needed to bring about “another new world order,” she explained.

Eighty years on, are Bretton Woods institutions fit for purpose?

• Tai said that the institutions that formed the foundation for the post-World War II world order—including the Bretton Woods institutions and the United Nations—“are all showing their age.”
• “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,” Tai said. But the architecture of such organizations, she added, needs “revisitation.”
• “They need to be improved and supported in growing and realizing their full potential,” she explained, “which may require some revamping and some education and investment.”

Katherine Walla is the associate director of editorial at the Atlantic Council.

Watch the full event

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

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

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

Economy & Business Europe & Eurasia European Union International Financial Institutions

Event transcript

Uncorrected transcript: Check against delivery

Speaker

Katherine Tai
United States Trade Representative

Moderator

Frederick Kempe
President and CEO, Atlantic Council

Introductory Remarks

Mark Gitenstein
US Ambassador to the European Union

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

KATHERINE TAI: That’s right.

FREDERICK KEMPE: Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FREDERICK KEMPE: Thank you. Thank you for that. 

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

DAVID WESSEL: David Wessel, at Brookings.

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

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

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

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

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

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

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

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

FREDERICK KEMPE: Yeah.

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

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

KATHERINE TAI: Yeah. Absolutely.

FREDERICK KEMPE: Let’s do that. Please.

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

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

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

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

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

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

FREDERICK KEMPE: Please. Over to you.

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

FREDERICK KEMPE: I know.

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

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

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

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

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

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

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

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

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

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

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

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

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

Watch the full event

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The visit’s timing and destinations show that the Chinese leadership realizes its fortunes in Europe have turned. While the EU has not taken as tough an approach toward China as the United States has since the Trump presidency, European thinking on Beijing has changed in the past few years. Especially since Russia’s full-scale invasion of Ukraine in February 2022, Europe has toughened its approach to China, moved its policies closer to those of the United States, and launched its de-risking strategy. Several Western European countries that previously championed greater trade with China have since moved more toward a balancing and de-risking approach.

Many Central and Eastern European countries, too, have turned against greater cooperation with China. Russia’s war in Ukraine and the region’s political turnover have pushed Czechia, Slovakia, Latvia, Lithuania, Estonia, and Slovenia to take a more skeptical stance toward China. This has left Hungary and Serbia as the remaining champions of China’s interests in the region and, not surprisingly, two destinations of Xi’s visit. Of course, Hungary, as a member of the EU and NATO, is the more useful of the two for Beijing’s bid to expand its influence in Europe.

To better understand where China-Europe relations go from here, it is worth looking at each stop on Xi’s trip. Each had a very different choreography and emphasis.

France: What a difference a year makes

While French President Emmanuel Macron did his best to receive Xi with as much pomp and circumstance as possible, he disappointed the Chinese leader on the substantial issues of Russia’s war in Ukraine and Chinese state subsidies. During the French president’s visit to Beijing last year, Macron presented himself as opposed to the United States’ balancing strategy on China and in favor of a rapprochement with Beijing, especially on Taiwan. During this visit (and under pressure from Washington), Macron took a different approach.

On Russia’s war in Ukraine, Macron pushed Xi to stop supporting Moscow’s war efforts. He also invited European Commission President Ursula von der Leyen to the meeting, and they jointly pressed the Chinese leader to stop giving unfair advantages to Chinese companies operating in the global market. Xi, however, offered no compromise on either issue. Although Macron and von der Leyen presented a rather unified front, the fact that German Chancellor Olaf Scholz had taken a conciliatory tone in Beijing in April and then declined Macron’s invitation to the Paris summit indicates that the European disunity Xi hopes for may indeed be in the making.

Serbia: “Confront hegemony and power politics”

Next, Xi visited Serbia, where he and Serbian President Aleksandar Vučić further elevated their strategic partnership and made joint verbal attacks on the United States and NATO. Xi touted that Serbia became China’s first strategic partner in Central and Eastern Europe eight years ago, and it is now the first country in Europe with which China has said it will build “a community of shared future,” one of Beijing’s new flowery terms for its international relationships. The two leaders signed a free trade agreement—the first between China and a European country in a long time—and twenty-eight other agreements, including launching new Belt-and-Road-Initiative infrastructure projects.

Notably, Xi and Vučić used the visit to take a verbal swipe at the United States and NATO. The two leaders commemorated the twenty-fifth anniversary of NATO’s accidental bombing of the Chinese embassy in Belgrade, with Xi saying that the two countries will “jointly oppose hegemony and power politics,” a clear reference to opposing the United States’ role in the world.

Hungary: An “all-weather” partnership

Much like Macron, Hungarian Prime Minister Viktor Orbán received Xi with much ceremony. But unlike in Paris, the two leaders in Budapest spoke in unison on most issues, from “cooperating for a multipolar world” to wanting “peace” in the Ukraine war, with Hungary endorsing China’s proposed peace plan.

Under Orbán, Hungary has in the past decade become China’s main champion in the EU and NATO, doing Beijing’s bidding on Taiwan, downplaying concerns about China’s human rights record, and opposing de-risking. During their meeting, Xi and Orbán vowed to establish an “all-weather comprehensive strategic partnership” and take their relationship on a “golden voyage.” Cash-strapped and having most of its outstanding EU reconstruction, structural, and cohesion funds blocked by the European Commission, Hungary is increasingly relying on Chinese financing for its economic development. As a result, it is letting Beijing penetrate its critical infrastructure, from new railways to border fortifications to, as Orbán said, the “whole spectrum of the nuclear industry.”

The timing of Xi’s visit was crucial in several respects. Hungary will assume the rotating presidency of the Council of the European Union in July. Orbán promised Xi that Hungary, as the holder of the presidency, will try to advance China’s interests and, in effect, reverse de-risking.

The Hungarian prime minister may talk big, but there are serious limitations to what he can do during his country’s time leading the Council. The country in charge of the presidency is mostly constrained to setting the schedule and agenda of the Council, rather than substantially influencing its decisions. That said, the Hungarian government will seek to shape the Council’s work through these limited powers. It is likely to seek to minimize the actions that could harm Chinese interests.

More importantly, it is not the Council of the European Union (an intergovernmental legislative body of the EU) but the European Commission (in essence, the EU’s “cabinet”) that drives most of the de-risking initiatives aimed at curbing China’s penetration of the European economy. Among these initiatives, the Commission launched in October 2023 a crucial investigation into subsidies for Chinese electric automakers that could conclude shortly and result in EU tariffs against Chinese imports. The Commission has several similar ongoing anti-subsidy investigations against China on wood flooring imports, public procurement of medical devices, wind turbines, solar panels, and flat-rolled iron or steel products plated or coated with Chinese tin, and those initiatives are expected to progress further. Hungary’s presidency of the Council will have no real effect over these investigations.

Xi’s visit was also timed a month before the upcoming European Parliament elections in early June. While it is not the sole legislative body of the European Union, the European Parliament has nonetheless significantly increased its influence in the past decade and, importantly, has a say in choosing the composition of the next European Commission. Orbán and other nationalist radical right-wing leaders hope that their parties will make strong gains in these elections, shrinking the influence of the traditional center-left and center-right mainstream parties and making the European nationalist right the kingmakers of the new Parliament and Commission. While the European radical and far-right is divided on its approach to China, Orbán’s Fidesz party still has several like-minded partners that want to improve EU-China relations and reverse de-risking. Xi’s visit also served to boost the strength of these political forces ahead of the crucial European Parliament election.

It is too early to tell whether Xi achieved his geopolitical goals, but he was certainly able to appear to the Chinese audience and the international public as a world leader who is received with ceremony in Europe. He has also exposed some fissures between countries on the continent that could grow larger and cause problems. The second half of 2024 will be the real test of whether Xi’s visit managed to fulfill the Chinese leadership’s goals of sowing European disunity and creating a pushback against de-risking in the service of China’s interests and damaging Europe’s own.

Zoltán Fehér is a nonresident fellow with the Atlantic Council’s Global China Hub. Previously, he worked as a foreign policy analyst at the Hungarian embassy in Washington, DC, as Hungary’s deputy ambassador and acting ambassador in Turkey, and as Joseph Nye’s assistant at the Harvard Kennedy School.

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 On May 30, IPSI/GCH nonresident senior fellow Dexter Tiff Roberts was quoted in a South China Morning Post article discussing Americans’ potential tax increases resulting from Trump’s proposed China import tariffs. 

Fellow

Dexter Tiff Roberts

Nonresident Senior Fellow

Global China Hub Indo-Pacific Security Initiative

China Chinese

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Following the official three-month presidential campaign, polling indicates that one candidate has a firm lead. Assuming former Mexico City Head of Government Claudia Sheinbaum performs on par with expectations—the latest Reforma poll gives her a 20 percentage point lead over former Senator Xóchitl Gálvez—the candidate of the governing MORENA party will become Mexico’s first female president on October 1. The lack of movement in this poll since the campaign season began on March 1 is noteworthy. Sheinbaum has only dropped 3 percentage points (to 55 percent support) in the last three months. Other polls give Sheinbaum a lead of anywhere from 11 to 22 percentage points, with voter turnout one of the major factors to watch on Sunday.

More uncertain is what will happen in Mexico’s Congress. What has scuttled attempts by the current Mexican president, Andrés Manuel López Obrador, to fully carry out some elements of his government’s plan has been the checks provided by Congress. With a simple majority of seats—rather than the supermajority of two-thirds of the seats—the MORENA coalition rallied to pass some important pieces of legislation, but it has been impeded from making major constitutional changes, including controversial proposals for the popular election of Supreme Court judges and eliminating independent regulators.

Thus, this Sunday’s vote will determine whether López Obrador’s hand-picked successor, Sheinbaum, could advance the outgoing president’s stymied constitutional proposals. Polls—although less numerous and harder to calculate given the sheer number of candidates up for election (628 combined senators and deputies)—indicate continuity in Congress. Polls by the newspaper El Financiero, for example, predict that the MORENA coalition will secure 49 percent of the seats in the Chamber of Deputies with opposition parties taking 40 percent. The check on power provided by Congress in this scenario, in which MORENA would lack a supermajority, would likely give assurance to international markets, since uncertainty around such reforms and their repercussions can generate anxiety for investors.

Counting the ways to count

How does Mexico’s unique vote-counting work? While the final congressional breakdown will take some time to determine, expect declarations on the presidential winner on Sunday night. Hours after polls close, results will begin to be shared from two different systems that count votes: the quick count and the preliminary electoral results program (PREP).

The quick count takes a predetermined, statistically representative sample of polling stations, and then it gives a minimum and maximum possible vote percentage for each candidate. Results are expected to be announced around 11:00 p.m. (CST), with all eyes on whether the margin of possible votes indicates a clear winner. The PREP, which is operational beginning at 8:00 p.m. (CST), reports results in real time from all polling stations as transmitted, which means that urban votes are likely to be accounted for earlier in the process. And to make things even more complicated, the official counting does not begin until June 5, thus the importance of the earlier vote-counting methods to give more timely results.

The other election

The next Mexican president will also have a keen interest in the vote-counting on November 5. The US election, and in particular how Mexico figures into the campaign leading up to election day, will set the stage for the coming years of bilateral ties. A newly inaugurated Mexican president may be forced to immediately respond to US campaign rhetoric.

Security and migration are top issues both north and south of the Rio Grande. While Sheinbaum has pledged to continue the current government’s focus on social and educational programs to reduce violence, Gálvez favors a strategy that puts greater emphasis on the security apparatus to combat crime. On migration policy, both candidates would continue to take a human-centered approach that recognizes and seeks to find solutions to the high demand for labor. A third important bilateral issue will be the review period of the United States-Mexico-Canada Agreement, also known as USMCA, as the 2026 sunset clause approaches. This is all the more important now that Mexico is the United States’ number one trade partner. Here, a new Atlantic Council report suggests several ways that the next Mexican administration can unlock even greater border commercial efficiencies and new trade and investment.

Amid a fast-changing global order, a prosperous Mexico and strong US-Mexico ties will be increasingly important for the United States. US and Mexican security and economic concerns are deeply intertwined, as are their people. Sunday’s vote will set a crucial marker for how the relationship develops for the rest of the 2020s.

Jason Marczak is vice president and senior director of the Atlantic Council’s Adrienne Arsht Latin America Center.

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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.

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He announced the launch of an international initiative to “enable the Sahel countries to have access to the Atlantic Ocean.” Landlocked Mali, Niger, Chad, and Burkina Faso are at the center of the Moroccan plan, which involves making Morocco’s road, port, and rail infrastructure available to them and implementing large-scale development projects.

Even if it is not detailed yet, the Moroccan initiative comes after military regimes came to power by unconstitutional means or through coups d’état, which for three of these states resulted, at various points, in having sanctions imposed on them. For example, Niger was sanctioned by the United States, European Union (EU), and European countries such as France and the Netherlands. Notably, Malian army officers who collaborated with the Wagner Group or were suspected of crimes were sanctioned by the United States. And the Economic Community of West African States (ECOWAS), which had sanctioned Niger, Mali, and Burkina Faso, lifted its sanctions on Niger and Mali in February this year, a month after the three Sahelian countries left the organization and soon after the countries formed the Alliance of Sahel States. Chad has not yet seen sanctions imposed after the undemocratic accession of its president following the death of his father. While the sanctions imposed on the three countries are intended to apply pressure on those who seized power by force or defied the constitution, in the hopes of restoring democratic systems, these sanctions also impact the populations.

The people in these countries are essentially penalized twice: On the one hand, they are led by governments that have revoked the right of the people to choose their leaders. On the other hand, these populations also suffer from the effects of sanctions, which cause them economic hardship, limit their access to essential goods, cut them off from the world, and deprive them of trade opportunities.

That creates a quandary for the democratic world: While sanctions are intended to target unconstitutional governments, it is the ordinary people in these countries who suffer the most from them.

Behind the initiative

Morocco’s efforts to cooperate with the states in the Sahel seem inspired by Morocco’s 2011 Constitution—mainly the preamble.

In this preamble, Morocco commits itself to supporting the Maghreb Union (which it says is a “strategic option”), deepening its bonds with the Arab-Islamic Ummah, intensifying cooperation with European countries around the Mediterranean, strengthening cooperation across Africa, and diversifying its relations with the rest of the world.

Specifically, when it comes to Africa, the preamble states that Morocco intends to “consolidate relations of cooperation and solidarity with the peoples and countries of Africa, particularly the countries of the Sahel and Sub-Saharan countries.” This short sentence helps explain Morocco’s initiative. The Moroccan Constitution does not drown the Sahel in the mass of Africa, but on the contrary highlights it by mentioning it separately. In his November 6 speech, the king of Morocco even called the Sahelian countries “African sister countries.”

In addition, the Moroccan Constitution’s commitment to the Islamic world—each of the three sanctioned countries are majority Muslim—and its pledging solidarity with the “peoples and countries of Africa” help explain Morocco’s new initiative. By specifying that its solidarity goes to the countries as well as to the peoples, Morocco is distinguishing people from the regimes that govern them.

As for the content of the Atlantic initiative, it has been received well by the Sahelian states because it offers alternatives for growth and development—and indeed, even survival. For example, Niger (one of the poorest countries in the world) depended on international aid for its annual budget, which was slashed by 40 percent in 2023 due to donors and creditors withholding support. Following the coup, malnutrition skyrocketed, only compounded by the fact that the United Nations (UN) World Food Program’s cargos were getting blocked from reaching Niger due to border closures, with one UN coordinator saying that their goal—to deliver humanitarian aid to at least 80 percent of 4.4 million vulnerable people—was in jeopardy.

The success of this initiative is contingent on several factors: It will require funding, a robust regulatory framework, efforts to address challenges such as piracy, and harmonization with and between maritime governance actors. In addition, the economic activity this initiative would create could have benefits for the governments, as well as the people, in the sanctioned Sahelian countries. However, the focus of this initiative is on helping the people, who have continued to suffer for decades.

The Atlantic advantage

The initiative underscores the importance placed—across centuries—on accessing the Atlantic Ocean. For example, El Hadj Omar Tall (founder of the Toucouleur Empire) and Samori Ture (a leader of the Wassoulou Empire) each governed landlocked areas of West Africa in the nineteenth century. Burkinabe historian Joseph Ki-Zerbo chronicled how the two African heroes, facing the inevitable advance of European colonial conquest, hurried to “capture, before it was too late, the political initiative and keep it in African hands.” They both did that by directing their troops to the ocean. Eventually, however, their efforts to reach the sea were halted by the French.

The strategic importance of the Atlantic as taught by history resonates today.

Today, over one hundred countries border the Atlantic Ocean, and importantly those countries include the world’s leading power (the United States), other permanent members of the United Nations Security Council (including the United Kingdom and France), Latin American powers (such as Argentina and Brazil), and African nations stretching from Morocco (which itself has a 1,800-mile coastline on the ocean) to South Africa.

For countries that have the means to take full advantage of their coasts, such as Morocco and Senegal, the Atlantic is a boon. Indeed, Africa’s twenty-three coastal nations are home to 46 percent of the continent’s population, 55 percent of its gross domestic product, and 57 percent of its trade. They also contain a large amount of natural resources, including oil.

But access alone won’t grant people in Sahelian countries access to the boon. Here is what is needed for this initiative to succeed:

• Defining common strategic priorities between the countries participating in this initiative and also their partners in order to focus on the most pressing issues.
• The integration of projects already underway such as the Nigeria-Morocco gas pipeline project or the Great Green Wall. Their inclusion will bring a more holistic approach to the Moroccan initiative, which focuses on road, rail, and maritime infrastructure.
• The inclusion of the African Union (through the 2050 African Integrated Maritime Strategy) as well as maritime governance mechanisms, specialized institutions, and other important stakeholders such as the Maritime Organization of West and Central Africa, African Port Management Associations, Union of African Shippers’ Councils, maritime training institutions, the UN, and the International Maritime Organization. This inclusion in discussions will help to harmonize the maritime rules and avoid double governance systems.
• Access to substantial financing, particularly via international partners such as in the private sector and development and financial institutions. Financing will be needed to support the blue economy and the modernization of road, rail, and port infrastructure.

Sahelian civilian populations have been suffering from the effects of a twenty-year war against jihadist attacks. These populations deserve peace and prosperity. After the security failures of so many domestic and foreign military interventions and the unfolding of the coups, this proposal offers a much-needed brighter perspective for these people.

Rama Yade is the senior director of the Atlantic Council’s Africa Center and senior fellow for the Europe Center.

Abdelhak Bassou is a nonresident senior fellow at the Atlantic Council’s Africa Center and a senior fellow at the Policy Center for the New South.

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

Summary

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

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

I. The rise of China in regional economic context

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

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

1. Trade

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

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

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

2. Investment

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

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

3. Lending

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

4. Infrastructure development

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

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

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

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

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

II. Recent US economic engagement and regional reception

1. Recent US economic engagement including APEP

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

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

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

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

2. Regional reception

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

a. Policy attention

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

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

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

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

b. Resources

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

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

c. Policy continuity

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

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

III. Tools and pathways for future enhancements

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

1. Trade policy

Trade policy instruments include both tariff and nontariff measures.

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

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

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

2. Industrial policy

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

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

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

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

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

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

3. Development policy

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

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

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

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

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

IV. Recommendations

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

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

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

The post Pepe Zhang provides testimony to the US-China Economic and Security Review Commission appeared first on Atlantic Council.

• Foreword
• Explainer video
• Related events

Foreword

Countries representing half the world’s population are voting in 2024. On June 2, just over five months before Election Day in the United States, Mexican voters will set a historic milestone with the election of the country’s first female president. Over the course of her six-year term, Mexico’s new president will face enormous challenges—internally and in the country’s relationship with the United States. But, like never before, there is also a unique opportunity to strengthen the commercial and economic ties that bind the two countries and reimagine how our shared border could better serve our shared interests.

Although the United States and Mexico have long been economically intertwined, in 2023, Mexico became the United States’ most important trading partner. Now more than ever,  with great geopolitical headwinds, the commercial ties that bind our two countries will be increasingly critical to advancing US economic interests globally. Here, greater border efficiency will yield economic gains alongside improvements in our shared security.

The Atlantic Council’s Adrienne Arsht Latin America Center, in partnership with internal and external colleagues and partners, sought to envision the future of two key aspects of the US-Mexico relationship: commercial flows and investment. With extensive feedback and numerous consultations with border stakeholders, including business owners, truck drivers, port operators, civilians, and local and federal elected officials, we sought out fresh perspectives and actionable recommendations. Our goal with this report is to spark dialogue among policymakers, business leaders, and civil society in both countries on the urgent need to address the immediate challenges of border efficiency and investment attraction over the next Mexican president’s term while paving the way for a more prosperous and secure future in our countries.

The Rio Grande and its surrounding towns are more than a physical barrier separating the United States and Mexico. Rather, they are a vibrant artery of commerce, migration, and cultural exchange. Livelihoods depend on our border, but inefficiencies prevent us from maximizing the possible economic opportunities and achieving the necessary security gains. The pages that follow build on previous center findings and emphasize the need for a nuanced approach to foreign investment, infrastructure development, and security measures that prioritize efficiency and our national interests.

This publication also seeks to bring the human dimension to the forefront. Public policy, after all, should reflect how to improve everyday lives. We consolidate the stories of real people affected by the US-Mexico border daily. The combined stories we have gathered over the last two years remind us of the impact of policy decisions. That reminder is particularly poignant with the 2024 elections on both sides of the border. Indeed, we stand on the cusp of a new chapter in our shared history.

This report is a call to action for visionary leadership and bold, pragmatic solutions to the complex issues facing the United States and Mexico. We urge policymakers to embrace policies and strategies that address immediate challenges while laying the groundwork for both an even more inclusive and prosperous future. Let’s seize this unique moment in time.

Jason Marczak
Vice President and Senior Director
Atlantic Council’s Adrienne Arsht Latin America Center

Online Event Thu, May 23, 2024 • 1:00 pm ET

Mexico’s path forward: A conversation with Ildefonso Guajardo

Ildefonso Guajardo discusses Xóchitl Gálvez’s view on a more efficient US-Mexico border and increased opportunities of economic investment.

Economy & Business Elections Latin America Mexico

Online Event Thu, May 23, 2024 • 2:30 pm ET

Mexico’s path forward: A conversation with Diana Alarcón

Diana Alarcón discusses Claudia Sheinbaum’s view on a more efficient US-Mexico border and increased opportunities of economic investment.

Economy & Business Elections Inclusive Growth Latin America

The Adrienne Arsht Latin America Center broadens understanding of regional transformations and delivers constructive, results-oriented solutions to inform how the public and private sectors can advance hemispheric prosperity.

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The post With the 2024 Mexican election looming, here are two major recommendations for the next president appeared first on Atlantic Council.

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

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

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

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

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

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

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

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

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

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

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

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

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

Ryan Murphy contributed research to this piece.

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

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

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It is an honor to provide testimony to the US-China Economic and Security Review Commission on the topic of outbound investment from the United States to China, its potential to create national security concerns, and ways in which to address these concerns in a balanced and effective manner. In this testimony, I provide:

• Descriptive data that show the United States is the primary overseas investor in China, mostly through venture capital, though the volume of these flows has declined substantially in recent years.
• An overview of the four key components of the executive order on regulating certain types of US investment to China that I believe are most important to maintain, primarily at the strategic design level.
• A review of three key questions/challenges in implementation that remain after reading the advanced notice of proposed rulemaking (ANPRM) that was released in August 2023, along with recommendations for how to address these challenges.

My core recommendations are as follows:

1. That the Commission should affirm the importance of maintaining any outbound regulation as a notification/prohibition regime rather than a screening apparatus.
2. That the Commission should endorse a sector-based approach to outbound investment regulation. List-based approaches, notably the NS-CMIC list, can be judiciously used to complement sector restrictions, but the bulk of the outbound regime should rest on narrow sectoral restrictions.
3. That the US Congress should consider providing a statutory basis for the NS-CMIC list and extending its reach to include non-public subsidiaries of NS-CMIC listed companies as well as to non-public companies that are determined to be part of China’s military-industrial complex.
4. That Congress should refrain from adding non-national security-related tests, such as supply chain diversity or local employment considerations, to any legislation related to outbound investment regulation.
5. That Congress recommend that Treasury’s final rule for implementing E.O. 14105 include an intangible benefits test to scope covered investments as described above and that any legislation regarding outbound regulation include the same provision.
6. That Congress recommend that Treasury’s final rule for implementing E.O. 14105 further clarify “routine intracompany actions,” and ensure that the rule does not allow for material expansion or operational pivots into covered activities. Any legislation regarding outbound regulation should include similar clarity.
7. That Congress, in addition to adopting recommendation 3, further modify the CMIC program to authorize the designation of Chinese entities beyond the current scope to include any Chinese entity operating in sectors important to US national security, as defined through a regulatory process. These sectors may be broader than the three sectors identified for the purpose of the current implementing rules for E.O. 14105 but should be relatively narrow and stable. A subset of the Critical and Emerging Technologies List (CETL) is a good place to start.

Level-setting the scale of US outbound investment to China

US outbound non-passive investment flows to China have declined substantially in recent years, likely due to policy changes in the United States as well as the Chinese Communist Party (CCP)’s crack down on Chinese tech companies.

Greenfield investment

According to available data, in recent years greenfield investment in China has declined dramatically – both from US investors and the rest of the world. Figure 1 comes from fdiMarkets, the pre-eminent data source for greenfield investment. This chart illustrates that greenfield investment from any foreign source – not just the United States – has declined from a peak in 2018 of roughly $120 billion to under $20 billion in 2022. Note that fdiMarkets uses announcement data rather than realized investment, so many FDI experts believe their numbers are likely to be a bit inflated. Clearly, global investors are avoiding greenfield investment in China, likely due to a mix of push and pull factors. US sources of greenfield investment totaled $8.69 billion in 2020.

Mergers and acquisitions (M&A), private equity (PE), and venture investment (VC)

Pitchbook data can provide more insight into non-greenfield US investment to China. As Figure 2 illustrates, Pitchbook data reports a high watermark of US investment in companies headquartered in mainland China, Hong Kong, or Macau in 2018. Investment volumes have declined every year since 2021; in 2023, US outbound investment to China was 30 percent of its 2021 value. To compare volumes across greenfield and these other forms of investment, US investment through M&A, PE, and VC was about three times as large as global greenfield FDI to China in 2022. A key feature of US investment in China is that a large portion of these flows happen through VC. However, an important caveat is that Pitchbook’s data relies on systematic web crawling and is unable to capture investments that have not been reported in regulatory filings, news articles, or press releases. Because US investors are not currently required to notify outbound investment – at least until E.O. 14105 is implemented – we simply do not know the full universe of US investments into China. Indeed, the reporting component of the E.O. will be very important to better understanding the full scale of US investment to China, and better allow policy makers to scope any regulation appropriately given the true volume of such investments. A costly and burdensome regulatory process to address a tiny concern is not in the long-term interest of the United States.

A deeper dive into the sectors that E.O. 14105 currently contemplates regulating suggests that US participation in these areas is quite small and almost exclusively concentrated in VC, as Figure 3 reports. Furthermore, this investment is almost entirely in the semiconductor industry; in 2020, investments in all other sectors amounted to only about $700 million.

Furthermore, the US is the most important global source of investment to China. Figures 4 and 5 present capital raised in China from investors headquartered in places other than China and the US in all industries (Figure 4) and in key national security technology industries (Figure 5). The United States supplies greater than half of all inward FDI to China and is even more dominant in the relatively small volumes of FDI into national security technology. Moreover, we do not see the United States’ relative position as major supplier of FDI to China diminishing, even as the US government has indicated it will place more restrictions on these kinds of flows.

Taken as a whole, these figures suggest that the size of U.S. investments in Chinese companies of concern is relatively small, but also that the United States is the primary global investor in these sectors. Even small deal values can generate national security concerns if US investors provide capital and expertise to a small set of key entities. However, the available data suggest that the scale of the concern – and particularly outside of the semiconductor industry – is modest. The data also suggest that an effective approach to this potential national security problem needs to address VC, since that is the dominate mode of US investor participation in these core sectors of concern.

Assessing E.O. 14105 – Addressing US investments in certain international security technologies and products in countries of concern – and its proposed rules

The executive order, for which we expect draft rules to be released within the next several weeks, is directionally an appropriate step forward in addressing national security concerns that arise from US investment in sensitive, national security-relevant technology in China. Four of the likely design features outlined in the related ANPRM that are important to maintain are:

1. A notification and prohibition regime rather than a case-by-case review. Initial policy conversations around an outbound regulation envisioned a screening process typically referred to as “reverse CFIUS.” However, the administrability of outbound case-by-case review would be much more complicated than is inbound. This is because The US government has better visibility into the capabilities and national security vulnerabilities of US businesses – which are the targets of inbound investments – than of such capabilities and vulnerabilities of businesses based in China. Additionally, the US government has more leverage over companies that wish to invest in its market – and therefore need its ongoing regulatory approval – than it has over companies that operate in foreign markets over which the US government does not enjoy regulatory authority. In the absence of such investigatory capability or compellence power, a screening mechanism would likely be very challenging to implement effectively. A notification and prohibition regime has the added benefit of providing industry and investors with bright lines about what investments are allowed and which are prohibited, which makes compliance and developing forward-looking business strategies more possible.
   
   Recommendation 1:  The Commission should affirm the importance of maintaining any outbound regulation as a notification/prohibition regime rather than a screening apparatus.
   
   
2. A (narrow) sector-based approach rather than an entity/list-based approach. Some in Congress have suggested that a sector-based approach is inadvisable because, while a sector-based prohibition regime would prevent US persons from investing in Chinese sectors of concern, it would not prevent investors from other countries from doing so. To make restrictions more biting, and to make them apply to investors beyond the United States, some have suggested a list-based approach in which the US government would regularly update a list of Chinese entities that are connected to the Chinese defense and/or surveillance industrial base and impose asset blocks on these entities through the Specially Designated Nationals (SDN) List.
   
   It is my view that this approach creates many problems. First, overuse of the SDN list generates substantial incentives for economic actors to further shift their activities out of the US dollar. While dollar dominance enjoys substantial persistence due to network effects, there is mounting evidence that country governments and related economic actors are increasingly finding ways to avoid US dollars – and thereby the reach of US financial sanctions – through cross border payments systems that do not use the dollar as an intermediary, and by shifting economic activity into other currencies. Dollar avoidance not only erodes the power of financial sanctions more generally, but it also makes it harder for the United States to track patterns in investment flows globally. This, in turn, makes enforcement of existing sanctions and disruption of money laundering activities more challenging. Thus, the unintended negative consequences of a list-based approach are high. Furthermore, the designation process is investigatively burdensome and exposes the US government to litigation. As a civil action, SDN packages need to provide substantial evidence that a designated entity is a national security threat, and designated persons can sue the US government to be removed from listing. Because of this legal structure, an SDN approach would be unable to address risks associated with US investments in Chinese entities working on more speculative but high consequence technologies. This is the exact type of national security concern – that is, early-stage investments and assistance through knowhow in pre-commercialization stages – that the US government identified as a gap in authorities because US export controls are not able to capture these kinds of emerging technologies well.
   
   Recommendation 2: The Commission should endorse a sector-based approach to outbound investment regulation. List-based approaches, notably the NS-CMIC list (more below), can be judiciously used to complement sector restrictions, but the bulk of the outbound regime should rest on narrow sectoral restrictions.
   
   
3. A focus on non-passive investments. There has been a flurry of policy entrepreneurship and innovation around addressing national security concerns related to US investments in Chinese military/surveillance technology. The current E.O. develops a regulatory structure around non-passive investment (colloquially, often referred to as “money plus,” meaning money that comes with control, knowhow, or other forms of more active engagement with the Chinese entity obtaining the investment. Others have argued that such an approach does not go far enough, and instead desire to completely remove all US money from the China market, including passive investment through securities. Indeed, proponents of a list-based approach argue that designations would stop flows of all kinds of US investments to listed entities, not just foreign direct investment (FDI) orVC. While preventing any US money from entering the China market may be symbolically satisfying, this kind of divestment is least likely to have an appreciable effect on decreasing China’s capacity for indigenous development and deployment of advanced technology for military and surveillance purposes. This is because money is fungible and the global equity market capitalization outside of the United States is roughly $62.8 trillion. Moreover, US share of global capital markets is projected to decline from about 42.5 percent today to about 27 percent in 2050.
   
   Thus, the bar for preventing such passive investments much be higher than restrictions on non-passive investments since the benefit-cost ratio of such actions is lower. Already, the non-SDN Chinese Military-Industrial Complex Companies (NS-CMIC) List allows the US government to prevent passive investment in designated entities that are identified as part of China’s military industrial complex, even if they are not state-owned. These authorities exist through E.O. 13959 and amendments. Currently, these restrictions only apply to relevant Chinese companies that are publicly traded.
   
   Recommendation 3: The US Congress should consider providing a statutory basis for the NS-CMIC list and extending its reach to include non-public subsidiaries of NS-CMIC listed companies as well as to non-public companies that are determined to be part of China’s military-industrial complex.
   
   
4. A focus on national security objectives rather than broader “economic security” or supply chain resilience concerns. Discussions on outbound investment regulations began in earnest after Senators Bob Casey and John Cornyn circulated a preliminary version of their draft legislation – the National Critical Capabilities Defense Act – in 2021. As the name implies, this early version of an outbound regulation concept was rooted not only in national security but also broader objectives around supply chain resilience. Over time, and through substantial and rigorous policy discussions, supply chain resilience components were eliminated from draft legislation on this matter and from the E.O. that was ultimately released. I view this as sound policy.
   
   As discussed in greater detail in a 2022 policy report I co-authored with Emily Kilcrease, supply chain concerns are largely due to features of the domestic and global economy that make supplier diversity and localized production commercially unviable. In that report, we recommended that the US government address supply chain resilience concerns through industrial policy and other actions that could incentivize re-shoring and friend-shoring to trusted suppliers. The Congress’ actions on supporting the semiconductor, EV, infrastructure, and other related industries and supply chains through legislative action such as the CHIPS and Science Act and the Inflation Reduction Act are far better able to address the underlying market challenges that have created supply chain fragilities in the first place.
   
   Moreover, by focusing squarely on national security and related technology, the United States is better able to act in a coordinated fashion with partners and allies. The Summer 2023 G-7 communique on economic resilience and economic security is indicative of the positive returns to such multilateral engagement, as leaders affirmed the legitimacy and importance of targeted outbound investment measures to protect “sensitive technologies from being used in ways that threaten international peace and security.” The European Commission’s January 2024 package on economic security, which includes monitoring and evaluation process for considering outbound controls, further illustrates the benefits of multilateral engagement around narrow, technology-related regulations on outbound investment.
   
   Recommendation 4: Congress should refrain from adding non-national security-related tests, such as supply chain diversity or local employment considerations, to any legislation related to outbound investment regulation.
   
   Outstanding design issues for an outbound investment regime
   At time of writing, the draft rules for the outbound E.O. have not yet been released. However, the advanced notice of proposed rulemaking surfaced several issues that a final rule will need to address.
   
   
5. Aligning covered investments more closely to the concept of intangible benefits. As discussed above, it is my assessment that it is correct to focus on non-passive investments. To do so well, the final rules will need to differentiate between purely passive investment and capital that confers some form of intangible benefit. Currently, there is no such test. Instead, the draft rules scope jurisdiction to investment that either rise above a control threshold or confer some form of special rights. But this rights-based approach may not be appropriate for a country with weak rule of law and shareholder protection such as China where control and influence are often exercised in more informal and extralegal ways. Such an approach may also lead to rule circumvention as investors interested in maintaining or expanding China presence simply shift their activities in China away from traditional FDI and VC structures and into uncovered forms of participation such as venture debt, business consulting, and/or university-to-university research collaborations. A final rule may better ensure that all relevant forms of intangible benefits are covered by constructing an intangible benefits test, in which a transaction would be covered if any one of the following conditions is met:
   
   • The US investor has a role in “substantive decision making” regarding the invested entity, leveraging this concept as it exists in the CFIUS context (see 31 CFR 800.245);
   • The US investor conducts one of a range of specified activities with respect to the invested entity, including the provision of management expertise;
   • The US investment conveys control of the invested entity to the US investor, with “control” set as a clearly defined percentage threshold; or
   • The US investment conveys a defined set of management or governance rights short of “control.”
     
     Recommendation 5: That Congress recommend that Treasury’s final rule for implementing E.O. 14105 include an intangible benefits test to scope covered investments as described above and that any legislation regarding outbound regulation include the same provision.
     
     
6. Coverage of growth transactions and operational pivots. Under the current text, it is unclear how the new outbound authorities will apply to follow-on transactions that are made after an initial investment, both in scenarios where the initial investment was made prior to the effective date of the new authorities and those made after the effective date. The ANRPM envisions exempting “routine intracompany actions,” providing an explicit exemption for the “intracompany transfer of funds from a US parent to a subsidiary located in a country of concern.” This text would allow for a US company to sustain an existing operation in a country of concern and to undertake the necessary financial transactions to do so. However, it also appears that this provision allows for a company to expand its investment without constraint if the funds to do so are made available via an intracompany transfer of funds.
   
   Material expansion of existing investments is likely inconsistent with the policy intent of the E.O. If so, the final rule should include clear standards for which intracompany transfers will be considered “routine” and therefore exempt from notifications or prohibitions and which will trigger new obligations under the notification/prohibition regime. The Chips Act guardrails set clear standards around material expansion, with respect to the investments in China of companies receiving Chips Act funding, that could be leveraged for the purposes of this rulemaking as well, at least for covered semiconductor investments.
   
   Similarly, the rule should anticipate scenarios in which a US person invests in a Chinese entity that is not a covered transaction at the time of investment, but, through a change in business strategy, pivots to operate in a covered national security technology or product. This is not a hypothetic exercise: for example, a US person could invest in a Chinese facial recognition software company that plans to develop its products for commercial use, but subsequently the Chinese entity could change its orientation to instead focus on selling its products to the Chinese government for surveillance use. This is of particular concern for cases in which the US person holds a non-controlling interest in the entity, and therefore cannot exert influence to prevent problematic changes to business plans. The final rule should clarify whether US persons are required to notify such investments and/or if the rule would require divestment if entity into which the US person invested subsequently operated in a prohibited national security technology or product.
   
   Recommendation 6: That Congress recommend that Treasury’s final rule for implementing E.O. 14105 further clarify “routine intracompany actions,” and ensure that the rule does not allow for material expansion or operational pivots into covered activities. Any legislation regarding outbound regulation should include similar clarity. 
   
   
7. Differences in corporate supply chain expansion vs. venture & technology startups. As outlined in the section above on trends in outbound investment from the United States to China, there are two types of investment that the US government is most worried could create national security concerns. First are corporate investments, usually made either to execute a global supply chain strategy or to serve the China market. The second are VCinvestments in early-stage companies operating in emerging technologies that may be used for military or surveillance purposes. E.O. 14105 attempts to address both kinds of investments in the same manner, but the differences in the incentives for and structure of corporate operational versus venture investments are substantial. In particular, venture investments are more speculative in that early-stage investment is made before it is clear what the commercial use for a nascent technology will be. Additionally, divesting from a venture capital position is very challenging as early-stage investment is all but frozen until an eventual liquidity event – usually after fifteen or more years of holding the investment position.
   
   Thus, venture investments present three key challenges to policy makers that are usually absent or less relevant to corporate operational investments:
   
   
   • The speculative nature of their technologies’ capabilities and use make it harder to draw narrow bright line distinctions between permissible and impermissible investments.
   • Funding structure flexibility provides VC investors with more opportunities to design their investments in ways that avoid generating reporting obligations or prohibition requirements.
   • Venture positions are illiquid over the medium term, making divestment more challenging.
   
   
   • Given this, it is advisable for the US government to consider additional ways in which forward guidance can help shape the commercial incentives of VC investors in ways that disincentivize early-stage investment in Chinese entities involved in the development of technology that may not be consider national security technology or products at the time of investment but that have a high likelihood of future national security implications. As outlined in greater detail in a report co-authored with Emily Kilcrease, it is advisable for the US government to undertake a set of actions designed to reshape investor expectations about the long-term financial payout to, and the reputational risks associated with, early-stage investments in technologies that are likely to develop into national security technologies or products.
     
     The goal of such actions is to better align investor incentives such that they are less willing to participate in particularly problematic start-ups, thus reducing the need for the US government to be prohibiting transactions or issuing divestment requirements in a heavy-handed manner. Already, the Congress has made steps in this direction by introducing legislation requiring the disclosure by previously exempted investors of their holdings in China and other adversarial jurisdictions. Additionally, the Congress can codify an expanded version of the NS-CMIC list to commit to preventing US persons from investing – even passively – in a set of designated Chinese entities that operate in a narrow set of particularly concerning national security technology areas. Doing so will communicate to VCs that their early-stage investments will not be rewarded by big payoffs during future liquidity events because US investors will be unable to participate in initial public offerings for these companies or private placements. Thus, the value of this approach is its deterrent effect on shifting the calculus of early-stage investors against participating in Chinese startups with technology that are likely to have use cases of particular concern for national security.
     
     Recommendation 7: That Congress, in addition to adopting recommendation 3, further modify the CMIC program to authorize the designation of Chinese entities beyond the current scope to include any Chinese entity operating in sectors important to US national security, as defined through a regulatory process. These sectors may be broader than the three sectors identified for the purpose of the current implementing rules for E.O. 14105 but should be relatively narrow and stable. A subset of the Critical and Emerging Technologies List (CETL) is a good place to start.
   
   
   

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But just as important as Ruto’s visit to the United States is how soon the US president visits Nairobi in return. Such a visit is vital to keep momentum up on several important ongoing initiatives by the two countries. The danger to avoid here is that, as soon as Ruto boards the plane back to his country, US attention on Kenya and Africa falls away again.

Trade, climate, and security on the agenda

On a continent where the United States and European allies are struggling to maintain historic partnerships, Nairobi is an enthusiastic partner in security and trade. These will undoubtedly be a focus of Ruto’s visit this week.

Since 2022, the United States and Kenya have been working on a Strategic Trade and Investment Partnership, which has been supported by recent visits by US Trade Representative Katherine Tai and US Secretary of Commerce Gina Raimondo to Nairobi. A Free Trade Agreement between Kenya and the United States was under discussion during the Trump administration, but it was halted during the COVID-19 pandemic. More recently, House Democrats introduced the US-Africa Strategic Trade and Investment Partnership Act this month.

For Kenya, a new trade agreement would be a shift away from the “Look East” policy that previous Kenyan presidents followed in search of investment. Kenya, for example, partnered with China on a new railway connecting Nairobi and Mombasa, as well as on a prominent expressway project, during President Uhuru Kenyatta’s administration. In contrast, Ruto may discuss funding for the construction of a new two billion dollar international airport in Nairobi with US partners during his visit to Washington. Bringing in the United States as the main financier for this project would challenge China as Kenya’s primary partner for large infrastructure projects.

Regarding security, Kenya has put forward a plan to lead a police mission to Haiti to help stabilize the country following widespread violence by rival gangs and a collapse of the government’s authority. Kenya’s judiciary has so far blocked the plan, but Haiti will likely nonetheless be on the agenda for both leaders. In preparation for the arrival of a Multinational Security Support Mission in Haiti led by Kenya, the US military has been providing extensive logistical support on the ground. The United States had previously pledged a hundred million dollars in support of the mission. Kenya’s Defense Minister Aden Bare Duale also visited the Pentagon in February and, in the same month, Kenya hosted US Africa Command’s largest exercise in East Africa. All of these developments indicate that a greater degree of security cooperation between the two countries is possible.

No major breakthroughs during Ruto’s visit this week are expected, though it is possible. Nonetheless, the past few months already indicate that Washington and Nairobi are making steady, gradual progress on trade and security initiatives. Climate—which Ruto has championed since the start of his presidency—will likely be another important focus. His state visit is an opportunity to focus attention on these initiatives to continue this progress. The challenge, then, is to make sure that this week builds momentum on these initiatives that continues into the weeks and months ahead.

The wider US-African relationship

But Ruto’s visit must also be seen in terms of broader US-African relations, the course of which has not run smoothly in recent years.

The United States was caught flatfooted by the outbreak of civil war in Sudan in 2023. Its forces have been expelled—and in some cases replaced by Russian forces—or asked to leave from Niger and Chad. And opinion polls show that the United States has lost its historic leadership in Africa. South Africa’s relations with the United States, for instance, are strained over Israel’s campaign in Gaza, leaving the two countries at odds. These events also come at a time when the Brazil, Russia, India, China, and South Africa grouping known as BRICS is expanding in Africa, gaining Egypt and Ethiopia as partners in its goal to build an increasingly multipolar world. All these are potentially affronts to US standing in Africa.

A reset in US policy toward Africa is desperately needed.

In the White House announcement of Ruto’s visit, Press Secretary Karine Jean-Pierre was eager to highlight and reaffirm the principles set forth during the 2022 US-Africa Leaders Summit. During this summit, the Biden administration pledged that it is all in on Africa. It also made clear that under its strategy toward sub-Saharan Africa, it would seek equal partnership with African nations, regardless of their ties with other powers. At the conclusion of the summit, in front of the assembled visiting leaders and delegations, US President Joe Biden pledged to visit Africa in 2023.

He did not.  

This has had an effect, and while the Biden administration is right to tout an impressive lineup of senior US officials and cabinet members who did make the trip to the continent in 2023, the fact remains that the president’s pledge was left unfulfilled.

It is also worth noting that while both the leading Republican and Democrat in the House Foreign Affairs Committee requested that Ruto be issued an invitation to address a joint session of Congress, Speaker Mike Johnson declined to issue the invitation. In the past several years, leaders from Japan, Israel, India, Ukraine, and South Korea have addressed a joint meeting of Congress. But much like Biden’s travel itinerary, Africa is again left off the list.

Equally as important to Ruto’s visit to Washington is Biden’s visit to Nairobi—or to another African capital—soon. While this would be particularly challenging in an election year, fulfilling his pledge as soon as possible would be a much-needed step. It would be a symbol of Africa’s importance to US interests and help move substantive issues in US-Africa relations forward. When it comes to Africa, where policy has a tendency to get stuck or move too slowly, a US presidential visit can be a forcing mechanism to move important projects forward.

Ruto’s state visit this week is very much welcomed by Africa watchers and policymakers, but it serves to keep US-Africa relations on life support. New approaches, further engagement, and firm commitments that bear results are sorely needed.

Sibi Nyaoga is a program assistant at the Atlantic Council’s Africa Center.

Alexander Tripp is the assistant director for the Atlantic Council’s Africa Center.

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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.

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

Over-reporting the Euro’s share

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

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

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

Underestimating the international use of the RMB

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

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

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

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

Conclusions

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

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

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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.

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The legislation had been a long time coming. It was first introduced in the US House of Representatives in February 2023, with US lawmakers caught between the need to cut off a significant source of revenue for Russia on the one hand, and demand for enriched nuclear fuel to keep the US reactor fleet running on the other.

The United States can import the uranium that is required for nuclear fuel from several countries other than Russia. The top two exporters of uranium to the United States, for instance, are Canada and Kazakhstan, with the United States importing 27 percent of its uranium purchases from Canada and 25 percent from Kazakstan. However, Russia, which was in third place at 12 percent of US purchases in 2022, plays a crucial role in the nuclear fuel supply chain, both through conversion and enrichment of uranium. Russia supplies about 20 percent of the US reactor fleet’s nuclear fuel, at a cost of about one billion dollars each year. This is why the new legislation allows for waivers to import from Russia through 2027 if the Department of Energy determines that no alternative source of fuel for a US reactor is available.

One of the big questions that the US nuclear energy industry has grappled with is whether it can enrich enough uranium (or procure enough enriched uranium from other sources) on its own to compensate for the loss of Russian-enriched uranium. Earlier this year, three uranium mines began production in the United States, the first domestic uranium mines to operate in eight years. But uranium extraction and uranium enrichment are two separate issues, and—until recently—the only enrichment capability in the United States had existed at a facility in New Mexico owned by Urenco, a multinational company owned in equal parts by the British government, the Dutch government, and German utilities. Outside of Russia, the commercially relevant sources of enrichment are European facilities owned by Urenco and Orano, a French company. China also operates enrichment capacity, which has historically been used to fuel Chinese reactors. Together, the Urenco and Orano capacity is not sufficient to fuel all the reactors outside Russia and China.

Last October, Centrus—a US-owned nuclear fuel company—began enrichment operations in Piketon, Ohio. However, production at this facility is small and is geared toward the high-assay low-enriched uranium fuel required by new advanced reactors expected to become operational in the next several years. That means the fuel cannot be used in many of the older reactors currently operating.

Crucially, the new legislation unlocks $2.7 billion to support domestic enrichment. That money had been included in previous legislation, but it was contingent on passing sanctions against Russia’s state-owned nuclear company Rosatom. These funds will be required as the US nuclear energy industry moves away from dependence on Russian fuel supply. The money will be available through competitive processes to support fuel production for both existing and future advanced reactor designs. These steps are part of the United States’ commitments as part of the Sapporo 5, a partnership with Canada, France, Japan, and the United Kingdom founded in April 2023 to secure a reliable nuclear fuel supply chain.

The US Congress has taken what many see as a crucial step in sanctioning Russia and moving away from dependence on Russian nuclear fuel. However, a strong commitment—on the part of the US government and industry—to domestic enrichment is necessary in order to ensure that the US domestic fleet continues to operate and to ensure that the next generation of nuclear reactors can be demonstrated and deployed.

Jennifer T. Gordon is the director for the Nuclear Energy Policy Initiative at the Atlantic Council’s Global Energy Center.

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

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

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

Read the full issue brief below

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

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Report Oct 4, 2023

Running out of road: China Pathfinder 2023 annual scorecard

By Atlantic Council GeoEconomics Center and Rhodium Group

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

China Digital Policy

Issue Brief Feb 5, 2024

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

By GeoEconomics Center and Rhodium Group

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

China Economy & Business

Econographics Dec 11, 2023

China’s manufacturing overcapacity threatens global green goods trade

By Niels Graham

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

China Economy & Business

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

They are about prevention in that the sweeping tariff increases across a range of strategic industries include a whopping 100 percent tariff on electric vehicles (EVs), although these vehicles account for only 1 percent of the US market.

“Fundamentally,” says Josh Lipsky, senior director of the Atlantic Council GeoEconomics Center, “Biden administration officials are trying to avoid repeating the mistakes of past decades, when the United States and its allies did not do enough to counter China’s unfair trade practices until it was too late and Chinese products flooded markets and cost jobs. So this is about the future and not about now.”

The tariffs are also about Biden administration resignation that China isn’t going to converge with the market-driven trade model or adopt fairer trade practices in the foreseeable future.

Biden not only kept all the Trump administration’s tariffs on China, after long months of studying them, but now has added to them as well. That’s intended to counter both direct and indirect harm to US supply chains generated by Beijing’s manufacturing overcapacity.

China has a long history of overproducing and then dumping those products on foreign markets. What is new, however, is that this is now hitting sectors considered critical for US national security. Watch next for US coordination even with countries, such as Brazil, that are generally skeptical of Washington. They have grown concerned about Chinese overcapacity as well.  

The new tariffs impact EVs, lithium-ion batteries, semiconductors, solar panels, medical products, aluminum and steel, and more. US officials expect China to respond, but they reckon it will do so in a manner that might only accelerate what the Biden administration hopes to achieve: the de-risking and friendshoring of US supply chains.

“The trillion-dollar question,” says Lipsky, is whether Europe and Japan match or mirror US policies at their Group of Seven (G7) summit this June in Italy. If they don’t, expect Chinese EVs and other products to flood their markets—with Beijing concluding that its problem is primarily with Washington.

Most unfortunate is that both political parties in the United States continue to balk at new trade negotiations and agreements, while China continues to strike trade deals all around the world. That leaves Washington with plenty of sticks but few carrots.

“We’re fighting this battle with one hand tied behind our back,” says David Shullman, senior director of the Atlantic Council’s Global China Hub.

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 Biden’s China tariffs are big and preemptive appeared first on Atlantic Council.

1. What is the Biden administration trying to accomplish with these tariffs?

The Biden administration’s objectives are threefold. First, it seeks to foster the growth of the fledgling US clean energy complex against Chinese rivals, many of which have received vast subsidies from national, provincial, and local governments. 

Second, and relatedly, the tariffs aim to ensure that clean energy technologies are not dominated by a sole supplier. This action reduces the probability that a single entity can establish control over vital technologies such as EVs, lithium-ion batteries, and other products.

Third, the tariffs may slow China’s development of certain dual-use technologies that have latent military potential. Lithium-ion batteries, for instance, are used for not only EVs and electricity grid storage, but also for military applications such as diesel-electric submarines, aerial drones, and unmanned maritime platforms. 

The tariffs will, all else being equal, curb China’s industrial capacity, which could be repurposed for its defense industrial base. They will also reduce the probability that China will be the first to make technical or commercial breakthroughs in battery technologies, such as solid-state batteries, that could be military game-changers. 

—Joseph Webster is a senior fellow at the Atlantic Council’s Global Energy Center, where he leads the center’s efforts on Chinese energy security.

Fundamentally, Biden administration officials are trying to avoid repeating the mistakes of past decades when, they believe, the United States (and its allies) did not do enough to counter China’s unfair trade practices until it was too late and Chinese products flooded markets and cost jobs. Now they want to get ahead of the curve, especially on EVs with a staggering 100 percent tariff. It’s worth noting that only 1 percent of all US EV imports currently come from China—so this is about the future, not about now.

It’s not that China hasn’t been creating overcapacity for decades; it’s that the sectors China is now doing it in are considered critical for national security. That is what is driving so much of this reaction.

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

The Biden administration has made several large strategic bets in industrial policy around semiconductors, EVs, solar, and infrastructure investment. As the administration has sought to onshore productive capabilities throughout these supply chains, one looming concern has been overcapacity and the potential for gluts of cheap imports shuttering newly built US plants. In many respects, these tariffs are preventive measures to guard against that possibility. By taking preventive measures, rather than post hoc remedies, the administration may also be trying to signal to the private sector that any investments they make in onshored critical supply chains will be protected from wild price swings. In this regard, this slate of tariffs attempts to make the long-term math on supply chain resilience work.

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

The Biden administration has two main goals. The first is protecting infant or currently undeveloped industries supported by the Inflation Reduction Act and other efforts. The second is protecting US critical supply chains, such as for personal protective equipment, the importance of which became clear during the COVID-19 pandemic.

Posing the announcement as the outcome of the long-running, multiyear investigation under Section 301 of the 1974 Trade Act, the Biden administration believes that its tariffs will be much more effective than Trump-era tariffs, which the Biden team believes inadvertently caught intermediate goods that hurt US producers. These tariffs will be more targeted to the two goals above. For example, semiconductor tariffs are expected to be on imports of chips themselves, not final products that include semiconductors.

—David Hathaway is a nonresident senior fellow at the Atlantic Council’s Global China Hub and principal for China at the Asia Group.

2. What will be the practical effect on the affected industries in the United States and China, and on the fight against climate change?

In the short term, this will likely raise the price of key clean energy goods, or at least prevent these goods from decreasing as quickly in price as they otherwise would. However, emerging markets could very well be flooded with extremely cheap clean energy items from China, which could help them in their energy transition, but might also be seen as threatening from the perspective of the United States.

—Sarah Bauerle Danzman

Due to existing high tariffs, there is virtually no trade in EVs between the United States and China. But China is, by far, the largest exporter of lithium-ion batteries to the United States. Chinese imports are especially consequential for grid storage that complements intermittent solar power. Consequently, and depending on details of the tariffs, US efforts to decarbonize its grid could slow down. 

Certain critics of the tariffs will likely decry their impact on the US electricity grid. But the reality is it’s too soon to say how the tariffs will impact the global fight against climate change, in either the short term or the long term. In the short term, higher US tariffs will divert certain clean energy products to other markets, including China’s own domestic market. It’s possible that short-term trade diversion could actually deliver a higher environmental return on investment, given global carbon emission patterns. For instance, deploying solar and battery storage projects in certain coal-addicted Chinese provinces would deliver greater climate benefits than, say, installing more clean energy capacity in California. Over the long term, the tariffs could deliver climate benefits by preventing a single country from forming its own clean energy cartel. The Chinese government has a long history of using economic coercion to achieve its desired political ends. It is naïve to believe that Beijing would not exercise this same leverage in certain clean energy fields. 

—Joseph Webster

It’s worth noting that tariffs on several major ticket items, such as lithium-ion batteries, don’t kick in until 2026. This gives some adaptation time but also signals that the United States doesn’t think this policy will actually change China’s behavior.

—Josh Lipsky

There will likely be impacts to affected US industries, which could indeed complicate US efforts on climate change. The announcement included tariffs on some batteries, for example. For China, the tariffs, if effective, may blunt China’s ability to trade in products seeing heavy overcapacity, although Chinese producers will likely seek to shift to other markets, including in Europe. (See more below.)

—David Hathaway

3. How will this move affect the broader economies of both countries?

Tariffs on Chinese EVs will have comparatively little impact since US consumers are not buying many Chinese EVs. Economic impacts are more likely in other sectors in which replacements for Chinese products are considerably more expensive. However, the administration likely believes that the tariffs are necessary to support its goals to protect key industries, increase capacity via friendshoring, and secure critical supply chains.

—David Hathaway

Tariffs do create deadweight loss, so we can expect them to exact some costs on the US economy. The Biden administration has insisted that this approach to tariffs is more targeted and less inflationary than the across-the-board tariffs that former President Donald Trump has proposed. The tariffs have a couple of years to set in, which may help with adjustment. And, as mentioned above, the certainty in price protection that these tariffs afford producers could induce new investments in the US supply chains for these items.

—Sarah Bauerle Danzman

4. How might China react?

China won’t be shocked—in fact, it’s likely that US Treasury Secretary Janet Yellen and US Secretary of State Antony Blinken previewed this announcement on their respective trips there in April. China will, as is typical, play a long game—and accelerate its own reshoring policies as it tries to expand production in a range of countries, including Mexico. The United States is aware of that strategy, and that’s why you’ll see a lot of shuttle diplomacy between Mexico City and Washington ahead of the United States–Mexico–Canada Agreement renewal in 2026.

—Josh Lipsky

China has likely already baked such actions by the United States into its thinking. It must already understand that actions on trade are to be expected in the run-up to the US presidential election in November. However, the Biden administration is certainly expecting some form of material retaliation, likely below a level that could be considered escalatory. There is an awareness that one Chinese industry response may be to shift production to places such as Southeast Asia and Mexico. I understand that the US government is working actively with partners to prevent this.

—David Hathaway

I expect the Chinese government to consider more export controls on raw and processed critical minerals. The problem is that this might create short-term supply constraints for the United States. But the Section 301 tariffs cover some of these minerals, and so such moves will only further help the administration achieve its goals of independence from Chinese supply.

As David mentioned, Chinese companies are likely to try to invest in third markets to serve the United States and other protected markets. Attempts to build EV battery plants in places with trade agreements with the United States, such as Mexico, will further push Washington to engage with partners to shore up their investment regulatory regime. The United States may also start thinking about how to address ownership and control issues in its supply chain, especially since rules of origin through which tariff rates are set are based on the location of production, rather than on who ultimately owns that productive capacity.

—Sarah Bauerle Danzman

5. How does the US approach compare with Europe’s?

That’s the million- or trillion-dollar question. If Europe and the Group of Seven (G7) countries match or mirror US policies at the summit in Italy in June, it may cause Beijing to realize that this time is different. On the other hand, if Europe hedges coming out of its own antidumping review, it could affirm China’s view that their challenge is primarily with the United States, not the rest of the advanced economies. The next few weeks will be telling.

At the same time, the United States is not only going to rely on the G7 here. Watch for coordination with countries that have been skeptical of the United States, including Brazil, because they also share a concern about Chinese overcapacity.

—Josh Lipsky

I really hope that the United States provided ample notice to Brussels about this move. The Europeans are currently undertaking their own anti-dumping review of Chinese EVs, and their market is far more vulnerable to Chinese EV imports than the United States’. 

Europe is a bit handicapped compared to the United States when it comes to a more forceful use of tariff policy. The Biden tariffs arising from this Section 301 review are quite prospective in nature; they are anticipating a problem and applying tariffs preventively, particularly with respect to EVs. Additionally, the United States is able to pass well-funded industrial policy measures to further aid domestic production. The European Union (EU) has traditionally been more attentive to World Trade Organization rules around when and how to apply tariffs, and generally needs evidence of actual, realized harm before it acts. This means that EU producers will have to be hit hard by Chinese imports before the EU is likely able to act to protect them. Additionally, the intra-EU politics of industrial policy is much more complicated than in the United States, which further limits its scope of action.

—Sarah Bauerle Danzman

The tariffs may force Brussels’ hand, since higher tariffs in the United States on Chinese goods could result in substantial trade diversion to Europe. Brussels will have to act quickly, either to put its own tariffs in place or to accept a flood of Chinese-made products. 

—Joseph Webster

The post What to know about Biden’s new tariffs on Chinese EVs, solar cells, and more appeared first on Atlantic Council.

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Flagship Event Thu, May 16, 2024 • 9:00 am ET

2024 Distinguished Leadership Awards

This year’s Distinguished Leadership Awards celebrate leaders navigating the world through multifaceted crises.

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Event transcript

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JOHN F.W. ROGERS: I want to welcome everyone to the Atlantic Council Distinguished Leadership Awards. And it’s a pleasure to see all of you here tonight. And we gather to honor some of the world’s most impressive and influential leaders, and to highlight the Atlantic Council’s time-honored commitment to providing the intellectual, engaged global leadership necessary to meet the world’s most demanding challenges, and to ensure that self-determination, that freedom and prosperity can one day be an enduring reality across all nations.

We convene, however, at a decisive moment for the Atlantic Council and the world over. In an era of uncommon geopolitical uncertainty and unrest, as we navigate the social, economic, and political issues that define one of the most fragile, if not foreboding, moments of our time. It is vital that we are guided by people of insight, and experience, and resolve. Leaders who confront obstacles with the confidence and the steady hand that will help chart a course towards a more stable and secure world order. We are fortunate to have such individuals with us as we honor them tonight.

Moreso, the collective interest of peoples and of cultures and countries everywhere, with so much at stake, are fortunate to have our slate of honorees as their—at their posts, defending the principles of democracy and promoting a peaceful way of life [to] which all are entitled as a basic tenet of humanity—intrinsic and universal actually to all humankind. In no small way, the formidable trials we face in the world today are a reminder that the Atlantic Council raison d’être has never been more relevant or critically central to geopolitical harmony.

We must acknowledge that the work will be difficult, that the solutions are hard earned. But I say, with optimism and confidence, that we are prepared as we’ve ever been in our sixty-year history, with world-class thought leadership, tactical acumen, and operational expertise, to meet this moment with a single-minded resolve that is second to none. In doing so, working in tandem with our international partners, we are able to galvanize an influential network of global leaders and policy experts, whose own intellectual contribution and actionable strategies both complement and buttress the work of the Council. In solidarity we stand proven and ready to shape the global future together. That mission is greatly enriched by the distinguished leaders that we celebrate tonight.

An American president once observed, if your actions inspire others to dream, to learn more, to do more, and become more, you are a leader.

This year, the Atlantic Council recognizes that undeniable few who inspire us and the world to become more, to envision something better, to strive for something brighter, and safeguard those ideals that we hold dear. They represent the very best of our transatlantic partnership and serve as shining examples of the Atlantic Council’s highest aspirations.

And it’s now my privilege to add four exemplary leaders to the rolls of our past honorees who have distinguished themselves each in their own way and made an enduring if not indelible impact on the world.

Tonight we salute a high school physics teacher who became a mayor of his hometown, a leader of a national political party, and eventually reaching the highest rungs of his land, the president of Romania; an army brat who earned a degree in biology from Princeton, who speaks four languages, and who has forged a career from a combat infantryman to a supreme allied commander of Europe; a precocious student, one of the very first women ever to attend La Salle Academy, who would graduate valedictorian, become a Rhodes scholar, governor of her home state, and now the US secretary of Commerce; and an Academy Award winner, an action hero, and a reluctant Miss World contestant, an actress whose acclaimed roles include goodwill ambassador for the United Nations.

Ladies and gentlemen, these are our 2024 Distinguished Leader honorees, and I know I speak for all of us in this room when I say that we are in awe of their achievements, inspired by their character, and humbled in their presence.

Now please turn your attention to the screen, and we will begin the first of our videos honoring the president of Romania.

ANNOUNCER: To present the Distinguished International Leadership Award, please welcome Atlantic Council International Advisory Board chairman, Stephen J. Hadley.

STEPHEN J. HADLEY: Good evening. Thank you all for being here for this terrific evening program. We have a wonderful group of awardees, and I have the honor of introducing one of them to you now.

From his early days as a physics teacher in the small town of Sibiu, to serving as head of state of Romania, President Klaus Werner Iohannis has always had a vision for the future of his country. Over the course of his career, President Iohannis has led his country in bolstering judicial independence and strengthening the rule of law, increasing electoral participation, protecting the rights of minorities, and reforming Romania’s educational system. He has shown what nations of vision can achieve with a steadfast commitment to democracy, fairness, confidence, and rule of law.

Importantly, President Iohannis has always believed that there is no contradiction between a united Europe and a strong transatlantic alliance. Quite the contrary; they are mutually reinforcing.

As national security adviser to President George W. Bush, I was present in Romania’s capital city of Bucharest during the 2008 NATO Summit. I witnessed the failure of NATO to offer a membership action plan to Ukraine and Georgia, a failure that gave Russian President Vladimir Putin the belief that he could invade each of these countries without fear of a unified NATO response.

Now, with Russia’s full-scale invasion of Ukraine at their doorstep, Romanians have an enormous stake in maintaining and reinforcing European and allied unity. President Iohannis has responded by bolstering Romania and NATO’s defense of the alliance’s eastern flank, strengthening the US-Romanian strategic partnership, advocating for continued NATO and EU enlargement, and forging strategic partnerships with Japan and South Korea. Under his leadership, Romania has provided critical support to Ukraine in its fight for freedom and has been the most important route for Ukrainian grain shipments to the Global South by sea, road, and rail. As we celebrate President Iohannis tonight, let us hope that his principled leadership inspires others to face this historic moment as he has, with courage, with dedication, and above all, with vision.

And now, please join me in welcoming President Iohannis to the stage.

KLAUS WERNER IOHANNIS: Thank you very much. Good evening.

I am honored to receive this award. I accept it as a recognition of Romania’s leadership over the past twenty years as a proud NATO member, and US partner and friend.

Starting in 2001, a few years before we joined NATO, and then throughout our two decades of membership, Romania and the Romanian people have made bold, brave, and determined decisions to strengthen the democratic fabric of our society, live up to our transatlantic security commitments, and turn our country into an anchor of strategic stability, prosperity, and progress in a still troubled part of Europe.

Romania has set an example in many areas in Central and Eastern Europe from defending the eastern flank of NATO to investing in democracy, human rights, and the rule of law. These Romanian efforts have consequences that go far beyond our national borders. They, in fact, have helped strengthen Europe and the transatlantic alliance and they deserve to be recognized.

So I would like to thank Fred Kempe and the Atlantic Council board of directors for making this choice to recognize and honor Romania for these efforts. I’m also grateful to the former National Security Adviser Stephen Hadley for the introduction tonight and for the unparalleled work in helping to shape and implement President George W. Bush’s vision of a Europe whole and free where Romanians and the other Central and East European nations can embrace dignity, democracy, and prosperity. We should honor this tonight as well.

In 2011 Vice President Joe Biden was on this stage for the same award and at the time made a very powerful statement about America’s engagement in Central Europe. He said, I quote, “The time for Central Europe has come. You have shown yourselves ready for common challenges, willing to tackle them, and able to overcome them. That’s why in America we no longer think in terms of what we can do for Central Europe but, rather, in terms of what we can do together with Central Europe.”

And, indeed, our country stepped up to meet the responsibilities of being America’s eastward partners and allies. That is how the Bucharest Nine format occurred, an initiative spearheaded in 2015 by Romania and Poland that includes all eastern flank nations and provides a robust platform to coordinate our security resources within NATO.

This is how most of our countries on the eastern flank have started to make progress in raising defense budgets and upgrading our military infrastructure and equipment. That is how our countries have been empowered to act with unity and resolve and to put up a strong deterrent against the Russian expansionism while at the same time holding true to our core transatlantic democratic values.

There is no other more powerful proof of that than the way in which our countries on the eastern flank have responded to Russia’s unjustified aggression against Ukraine and to Ukraine’s vital needs to defend itself and to reject this horrible Russian attack.

As president of Romania I can tell you that Romania has truly been standing out in the first line through its efforts to help Ukraine. Over 7.5 million Ukrainians have crossed the border into Romania seeking refuge, safety, and safe passage. Almost forty thousand children are now studying in Romanian classrooms.

Millions of tons of humanitarian assistance have crossed into Ukraine through and from Romania. Romania also helped Ukraine maintain a vital economic lifeline, leveraging our unique maritime connections and facilitating the transit of almost forty million tons of grain, almost 70 percent of Ukrainian grain exports through the Romanian ports on the Danube River and the Black Sea. All these efforts continue for as long as it takes because we know that Romania plays a key role in helping Ukraine achieve victory and peace, succeed economically, and integrate into the European Union.

So my message to you tonight is, Romania took this call seriously. What can America do, together with Central Europe? We are working together to enhance our collective security, advanced freedom and economic progress, and make sure that democracy continues to deliver. It is our shared responsibility. And you can count on our ability to carry through because the United States has no better ally than Romania. I dedicate this award to all Romanians and to the partnership and friendship between Romania and the United States of America. Thank you very much.

ANNOUNCER: To present the Distinguished [International] Leadership Award, please welcome back John F.W. Rogers.

JOHN F.W. ROGERS: Ladies and gentlemen, on behalf of the Atlantic Council it’s a great privilege to recognize the honorable Gina Raimondo with a Distinguished International Leadership Award. We do so for her pioneering spirit, and her extraordinary record of achievement, for selfless service to people and causes that rise above self-interest or parochial interests, and for unflinching determination to always do what’s right to find a way forward and to see her vision through. In short, we honor Gina not for what she has accomplished but what she has accomplished for and on behalf of others.

And she does so with grace, and with understanding, with empathy, and, yes, with a relentless tenacity and a sense of purpose that make her an undeniable force of nature. And I think it was her son who best described it to me: Never stand in between an Italian woman and her objective. It’s no hyperbole to say that Gina is set apart with a rare handful who come along each generation, the most gifted and self-driven among us, be that innate or shaped by one’s experiences, with a capacity to help the rest of us not only see what the future can be, but can lead us to it. Who can show us the way.

You have all heard the expression, it is the hope that kills you. Now, usually that’s applied to my favorite sports team. But when you are on Gina’s team, it is the lack of hope that is fatal. Because she views the world through the optimistic lens of opportunity rather than dwelling on how difficult things may be, she focuses on getting things done. It’s something that I’ve had the opportunity to witness firsthand, or more aptly put, the privilege to be able to learn from, as we’ve partnered to support programs for small businesses during her tenure as Rhode Island’s governor. In a state where small enterprises employ nearly 50 percent of the private workforce, Gina made it her personal mission to create jobs and opportunities, if not a better way of life, for her constituents. From my front row seat, both her efforts and outcomes were nothing shy of awe-inspiring. But I’ve come to learn that that’s just Gina.

You know, an English poet once wrote, originality is being different from oneself, not others, which has at its essence, a message about exploring more, growing more, becoming more than who we are at the outset of life’s journey. And from her earliest years, Gina demonstrated a markable aptitude for progressive achievement. Further still, it seemed to be a rare sort of success, boldly crossing any lines of expectation. She was always improvising, innovating, pushing boundaries, even her own, showing us that being different from oneself is perhaps the most authentic way to be true to oneself, when considering the outer limits of our potential.

As an adolescent riding the public bus to school, Gina proved destined to be a trailblazer. She was among the first girls allowed to attend her high school, not an insignificant display of courage and grit for those, and all of us here, who can remember the tribulations of teenage years. She would go on to graduate as the class valedictorian, ratifying her right to be there in spades, and paving the way for girls to follow. More than that, Gina showed them what was possible, a real-world application of the adage, if you can see it, you can be it.

Continuing on to Harvard where she would graduate, here again, as the top economic student in her class, Gina found new areas for growth, if not her fair share of sprains, and bumps, and bruises by joining the women’s rugby team which she has since credited as being the good training for her career on politics. Something that I’m sure all of us can certainly understand.

She would go on to become a Rhodes Scholar and earn her doctorate at Oxford, where her thesis on single motherhood and her experiences with housing and poverty clinics inspired her passion for advocacy, and eventually, a law degree from Yale. Years later, having spent time in the private sector working for a venture capital firm before deciding to start her own investment firm, Gina recounts that it wasn’t until the prospect of local public libraries closing—the same institution that taught her immigrant grandfather to read English—that she redirected her efforts toward public service, first becoming the treasurer of her state, and four years later, the first woman governor of the state of Rhode Island.

And from her perch today as commerce secretary, Gina continues to create the conditions for good-paying jobs, thriving entrepreneurship, and a competitive business landscape. In doing so, she is roundly recognized for being innovative, pragmatic, open-minded, and most of all, collaborative. And by the way, if you ever took a college course on legislative processes in the US, you have come across a book, The Dance of Legislation, and you only need to look at the dance of the CHIPS Act as the case study of how she gets things done. All the while, she has managed to fulfill what she would describe as her most important duties, as a spouse and a mother of two. And I’m very happy that her husband is here tonight, Andy Moffit, to see her.

Let me conclude with these remarks: I think all of you may remember Robert Frost’s poem “The Road Not Taken”: “Two roads diverged into a yellow wood, and sorry [I could not travel both. And be one traveler, long I stood, and looked down [one] as [far] as I could.”

But in the end of this poem, it is all that one road is chosen. “Took [the] one less traveled by, and that has made all the difference.” Now, whether that is a satire on decision making, or a commentary on destiny, in any event, in Gina’s case her road has been few would ever be able to take, even if they wanted to, as it requires an echelon of insight, tenacity, charisma, and character. As such, by fortitude or fate, Gina Raimondo’s road has indeed been the one less taken, and that has made all the difference. Ladies and gentlemen, please welcome Secretary Raimondo.

GINA RAIMONDO: Thank you, John. I certainly feel unworthy of this award, but I think I feel even more unworthy of that introduction. A better friend you will not find then John Rogers, a man of grace, integrity, and passion. Thank you. He also knows me extremely well, so I was a little nervous when I heard he was introducing me. So I appreciate the kindness.

A huge thank you and gratitude to the Atlantic Council for this award. And more important, thank you for your work which has endured for more than sixty years to promote transatlantic cooperation and the core values that have made our world a better place. I also have to congratulate my fellow awardees. Mr. President, congratulations. Thank you for being with us. Thank you for your leadership. It’s quite humbling for me to share the stage with the honorees this evening.

I asked, why would I be chosen for this award? And I was told that it was in part because of the work I’ve done to advance US national security and the security of democracies around the world. Now, I have to be honest with you. When President Biden, or president-elect, asked me if I would serve as his commerce secretary, truth be told I wasn’t really sure what a commerce secretary did. Then you start learning about the job, and you realize you do everything from running the weather service to national fisheries, to space commerce, to export controls. So really, honestly, there’s not much you don’t do.

But it didn’t take me long to realize the absolutely vital role that the Commerce Department plays in ensuring our national security. And here’s why: Because our economic strength, our economic competitiveness is national security. And that is truer now than it has ever been, because in the twenty-first century, this technological age, the source of our strength isn’t just that we have the best, most advanced military in the world—although, of course, we do and we need to.

But the truth of the matter is that our ability to operate in the world, to lead the world, depends vitally on our economic strength. And as this institution knows well, the world is a safer place when America leads. And our ability to lead depends entirely on the strength of the US economy, its dynamism, and the speed at which we innovate. And so that’s why I’m so focused—persistent, as John would say, obsessed, as I have said—with helping US businesses to out-compete, and out-innovate, and to do that with our allies.

Because when I travel all around the globe, I often bring private sector leaders with me. And it’s America’s brands, America’s entrepreneurs, and our technical leadership that are the envy of the world. And it helps to make the US a partner of choice. But I’ll tell you, some of my most successful trips have included—have included trips where I’ve invited a top member of the US military to join me. I’ve done this several times, most recently to Costa Rica.

I had the great privilege to travel to Costa Rica with the [US Southern Command] Commander General Laura Richardson, first female four-star in the US Army. And why did we go together to Costa Rica? We went together to focus on diversifying and strengthening our semiconductor supply chains in the Western Hemisphere. This helps US companies to be more competitive, to diversify away from just one or two countries in Asia, and it enhances our national security. And as the president just said, it also allows us to show that democracy delivers. Democracy delivers jobs, investment, and opportunity.

And so whether we’re talking about enhancing supply chain resiliency with our investments in Latin America, working with our allies in Europe, expanding our commercial presence in the Indo-Pacific, it has never been truer that our national security and our economic competitiveness are interconnected and inexorably linked. If we want to secure resilient supply chains, if want a safe and prosperous future, and if we want to maintain US leadership, it all depends on the strength and dynamism of our economy and our private sector.

So tomorrow when I go back to work, or later this evening, it means we’re going to get back to work investing at home, investing in broadband, investing in manufacturing, investing in chips, investing in AI. It means we’re going to continue to work to deepen our commercial relationships with commercial partners and allies all across the world. And it means we’re going to work alongside our allies, many in this room, to fuel innovation, and to do it consistent with our shared values. And of course, we must always protect our most sensitive technology from falling into the wrong hands, those countries who don’t share our values.

So now I know what the Commerce Department secretary does. That’s what we’re focused on, the commerce secretary. And I will end by saying none of the work that I do, none of the work that the fifty thousand incredible employees that I have at the Commerce Department does would be possible without your support. With partners like the Atlantic Council, every person in this room—private sector, public sector, civil society—we have to stay committed now more than ever. So thank you to the Atlantic Council for your decades of dedication to supporting a strong international system, and thank you again for this great honor. Thank you.

ANNOUNCER: Please welcome Atlantic Council President and CEO Frederick Kempe.

FREDERICK KEMPE: So, first of all, congratulations to President Iohannis and Secretary Raimondo. What a wonderful start of the evening.

We’re about to go into the dinner break, and then after that we’ll be honoring General Cavoli and Michelle Yeoh.

But first I wanted to say something about the flags that you see here along the wall. These flags are to commemorate the seventy-fifth anniversary of NATO, history’s most successful and enduring alliance. The flags represent all thirty-two members of the alliance, with the recent addition of Finland and Sweden. So welcome, Finland and Sweden.

Right now, and in honor of the alliance and before the break, and also in recognition of General Cavoli’s award upcoming, we’re going to present you a delicious appetizer in the form of a musical tribute to honor this year’s seventy-fifth anniversary of NATO. Joining America’s Own, an incredible brass and wind ensemble, please welcome Jazz at Lincoln Center favorite, trumpeter and celebrated recording artist, Bria Skonberg.

[Dinner break]

FREDERICK KEMPE: Hello, everybody. If you could take your seats, we’re going to continue our awards.

Ladies and gentlemen—ladies and gentlemen, distinguished guests, tonight’s honorees, thank you so night—for all coming out tonight for this small birthday party for my wife, Pam. Now, I promised Pam that I would do nothing to embarrass her in front of this vast audience. As one of America’s leading deception detectors, she should have known I was lying. But happy birthday, Pam. Thanks for participating with us. By the way, it’s also the 140th birthday of Harry Truman, but I’m going to come back to that. Pam is much younger.

With apologies, Pam, and on a more serious note, as you all know by now, we are here to celebrate a birthday that’s somewhat more fundamental to the purpose of the Atlantic Council. NATO was born seventy-five years ago, just down the street from here at Mellon Auditorium on April 4, 1949. That is when the alliance founders signed the world’s most—the world’s most enduring, history’s most enduring and successful alliance into being.

As I wrote on that anniversary, President Truman and other founders had an advantage, a really significant advantage, that today’s leaders cannot replicate. All of them had experienced—all of them had experienced the horrors of World War II. All the founders of the Atlantic Council—Dean Acheson, Mary Pillsbury Lord, Henry Cabot Lodge, Lucius Clay, they had all experienced those horrors. And a great many of them also personally knew the ravages of World War I. They understood the urgency of the moment. I’m not sure we do.

That deficit of memory is our greatest peril in 2024, a time when we are facing the greatest threats to global order since the 1930s. It’s perhaps why we have, in my view, responded insufficiently to the challenges of our age, recognizing too slowly the dangers posed by Russian despot Vladimir Putin and like-minded autocrats. One cannot change the historical experience of today’s alliance leaders, nor can one change the historic experience of their electorates. Even President Biden, at age eighty-one, was only two years old when World War II ended.

The best we can do is listen to President Harry S. Truman’s words from the day of the signing of the North Atlantic Treaty, and heed its warnings. And I quote: “Twice in recent years nations have felt the sickening blow of unprovoked aggression. Our peoples, to whom our governments are responsible, demand that these things shall not happen again. We are determined that they shall not happen again,” end quote, Harry Truman.

He called the treaty, a simple document. He likened it to a homeowner’s agreement to protect the neighborhood. He said, if it had existed in 1914 or 1939, the community it brought together could have prevented the acts of aggression which led to two world wars. It is in Truman’s spirit that we come together this evening as a global neighborhood and, as I said, by coincidence, this would be his 140th birthday.

You are sitting among six hundred individuals from more than fifty countries to celebrate Distinguished Leadership and tonight’s honorees. You are senior officials, global business executives, military brass, leading journalists, civil society leaders, and more. President Iohannis, General Cavoli, Secretary Raimondo, and Michelle Yeoh, congratulations and thank you for inspiring us all with your example of principled leadership toward a better world.

President Iohannis, you don’t know this, but my relationship with your country dates back to the time of Ceaușescu, when I was working as a journalist for Newsweek and the Wall Street Journal. And anyone who’s experienced any of that can only wonder at the miracle of Romania’s free markets, free peoples, membership in the European Union, NATO. None of that was to be taken for granted. So congratulations to Romania for that.

I can tell you a lot about my time in Romania. Our relationship, the Atlantic Council’s relationship with Romania, dates back to the NATO summit of 2008, where we hosted a youth summit, supported by Dinu Patriciu, who became a member of the Atlantic Council, in partnership with the intelligence leader at that time of Romania, George Maior, who was an ambassador here, with speakers that included President George W. Bush.

I think Steve Hadley was right that the outcome of that summit was not great. But I think the Atlantic Council’s relationship with Romania started there, and that’s terrific.

It’s great to have in the audience Alex Serban, who has been one of our strongest supporters in Bucharest ever since. It’s wonderful to be working with your embassy here and Ambassador Muraru. We have our partner in the audience, Remus Pricopie. And Remus, it’s so wonderful to work with you and your university.

President Iohannis, for us this is not a one-off event. We understood the strategic importance of Romania early on. And we’ve just wondered at how you’ve built it, and we agree with you that there is no better American ally than Romania. There are a lot of good Romanian allies, so we’ll count them equal. But there is no better.

Our honoring of you this evening marks a high point in this long and strategic relationship.

General Cavoli, we’ll be turning to you soon for your award. I know you’re joined tonight by members of your family. Oh, my God, how proud you must be of General Cavoli. It’s nice to have your family here.

In the early 1960s, the Atlantic Council’s founders debated a core question: How should they define the scope of their organization’s mission? Mary Pillsbury Lord, the sole signatory of the Council’s certificate of incorporation in 1961, argued for a global approach to transatlantic concerns. And there were people who were against her. But she wanted an approach for the Atlantic Council that went far beyond the United States and Europe.

I wish she were here today to see the Atlantic Council in this room. She foresaw the challenges we would face together. The Atlantic Council’s mission is to shape the global future together with partners and allies, building from our transatlantic base, but working closely with our global partners.

We do this at a time when we confront wars in Europe and the Middle East, continued tensions regarding China, a contest for the commanding heights of technological change, and a breathtaking slate of elections around the world. More than 50 percent of humanity is voting in this year, including our own elections this November.

We act, at the Atlantic Council, in the conviction that with sufficient political will, we can not only navigate these difficulties, but emerge even stronger. We do that across sixteen dynamically collaborative programs and centers, both regional and functional in nature.

Just last year, we were involved in major convenings in Asia, the Middle East, Africa, Latin America, Europe, and, of course, the United States. We took leading roles at COP28 in Dubai and at the IMF-World Bank meetings in Marrakesh.

Mary Pillsbury Lord, I wish you were here.

Our functional centers tackle geopolitical and geoeconomic issues, energy and climate issues, security and technological issues, the connection between freedom and prosperity. Tonight I’m delighted to announce the creation of something new, something we’re calling Atlantic Council Global Technology Programs, which will help galvanize all the amazing technology-related work we’re doing across the organization, with a focus on harnessing technology for good.

Managed by Atlantic Council Vice President Graham Brookie, this will bring together our GeoTech Center, our Digital Forensic Research Lab, our Cyber Statecraft Initiative, and our Technology and Democracy Initiative. It’ll work closely with the Scowcroft Center, which remains the lead on defense-related and strategic-related technologies, and the Europe Center, which leads our work on transatlantic technological cooperation, trying to build a transatlantic digital marketplace, and the Global Energy Center, which focuses on clean energy technology.

Bolstered by programmatic innovations like this, the Atlantic Council will move this fall—and I hope you’ll all come there—into a new global headquarters at 1400 L, just two blocks from our current office. It’s a gorgeous space. It will be a transformative move for the Atlantic Council. You will be in great company with members of our board and international advisory board leadership, who have also contributed and named high-profile spaces in the building. And on that score, let me thank Adrienne Arsht, John Rogers, and Phillipe Amon for stepping up first. I encourage anyone interested in learning more about our new global headquarters to speak to me or anyone else at the Atlantic Council.

These two announcements, the creation of the Atlantic Council Global Technology Program and the opening of our new global headquarters, are just two examples of our continued story of growth and innovation, a story so many of you in this audience helped write. Thanks to you, the Atlantic Council has become a remarkable force multiplier, and for our transatlantic and global partners in our quest to navigate these difficult times, hugely difficult times, and shape a freer and more prosperous and secure future.

And in that spirit, we now want to thank many of you who are here this evening as co-chairs of tonight’s distinguished leadership awards dinner. I’d ask you to turn your attention to the screens as we salute those individuals who have made this possible tonight. And I join my finance chair in George Lund, in thanking you so much for this. Please hold your applause so that everyone can hear the names and companies who have co-chaired this evening.

ANNOUNCER: And now, please join us in saluting the co-chairs of the 2024 Atlantic Council Distinguished Leadership Awards. We thank all of tonight’s sponsors for their generous support for this evening’s program, and for the Atlantic Council’s ongoing work to shape the global future together.

Adrienne Arsht. Sarah Beshar. John F.W. Rogers. RTX, represented by Greg Hayes. Airbus, represented by C. Jeffrey Knittel. Alpha Ring International, represented by Peter Liu. Robert J. Abernethy. Bank of America, represented by Larry Di Rita. Blackstone Charitable Foundation, represented by Stephen A. Schwarzman. Ahmed Charai. Chevron Corporation, represented by Albert J. Williams. Edelman, represented by Richard Edelman. E-INFRA Group, represented by Teofil Muresan. FedEx Corporation, represented by Gina F. Adams. Georgetown Entertainment Group, represented by Franco Nuschese. Google, represented by Karan Bhatia. Kirkland & Ellis, represented by Ivan Schlager. John and Susan Klein. KNDS, represented by Marcel Grisnigt. Leviatan Group, represented by Cătălin Robert Podaru. George Lund. Mapa Group, represented by Mehmet Nazif Günal. William Marron. Alexander V. Mirtchev. MITRE, represented by Keoki Jackson. Ahmet M. Oren. Pernod Ricard USA, represented by Tara Engel. Charles O. Rossotti. SAIC, represented by John Bonsell. Serban and Musneci Associates, represented by Alex Serban. Squire Patton Boggs, represented by Edward J. Newberry. Steptoe, represented by Karl Hopkins. Thales, represented by Alan Pellegrini. UPS, represented by Laura Lane. Ambassador Clifford M. Sobel.

FREDERICK KEMPE: I want to ask all the co-chairs to rise. If all the co-chairs could rise, so we can applaud you. Thank you so much. We can’t do our work without you. Thanks so much for that.

And finally, I’d like to ask the following individuals to rise. Some of you will be rising for a second time. So, International Advisory Board members of the Atlantic Council and Atlantic Council staff and board members of the Atlantic Council, please rise. Please join me in applauding this remarkable community of action.

One last point before our next honoree. Don’t forget to take your gift bags tonight. Which include my dear friend David Ignatius’ new novel, hot off the press, Phantom Orbit, generously contributed by Adrienne Arsht, and Frank McCourt’s provocative new book about managing our new digital age, Our Biggest Fight.

With that, ladies and gentlemen, please turn your attention to the screens as we salute tonight’s next honoree.

ANNOUNCER: To present our next awardee, please welcome General John Abizaid.

GENERAL JOHN P. ABIZAID (RET.): Good evening, everybody. It’s great to see you. I have the great honor of introducing to you General Chris Cavoli. Now, Cavoli and I have known each other for a long time. That’s very difficult for him to imagine what I’m going to say. But it’s all right. Relax, Chris.

But before we do that, I really want all the veterans of the United States armed forces and our allied nations in NATO to stand up and be recognized. Thank you. It’s great to have veterans in the audience.

I first met Chris when he was a lieutenant of infantry when I assumed command of the Third Battalion 325th Airborne Battalion Combat Team in Vicenza, Italy. In a battalion packed with the most talented junior officers in our Army, most of whom were top West Point graduates, Chris distinguished himself as a skilled leader and superb trainer. A Princeton graduate, he was well known for his famous undergraduate thesis entitled The Effect of Earthworms on the Vertical Distribution of Slime Molds in the Soil. As you could imagine, this work held him in good stead with the sergeants of the US Army Ranger School.

However, Chris demonstrated his true genius by marrying Christina Dacey, a smart, dynamic leader in her own right. These two professionals not only built wonderful careers together, they also built an Army family that traveled the world and had two sons who exhibit the great talents of both their parents.

Chris’s career is filled with remarkable achievements: a master’s degree in Russian studies at Yale, a foreign area officer who speaks Italian, Russian, and French. He personifies our nation’s commitment to the Atlantic alliance.

Not only does he understand the complexities of our most dangerous adversary but he knows how to fight and win. As a general he reformed the doctrine and structure of the alliance to reflect the realities of modern warfare and he ably assists our Ukrainian friends in their difficult struggle against Russian aggression.

He, along with his partners, have forged a formidable alliance. While his accomplishments of a general officer are great, I also honor him for his combat leadership. I can remember visiting his infantry battalion in one of the most restive dangerous provinces of Afghanistan.

There he led tough, disciplined American soldiers of the 10th Mountain Division while at the same time building professional confidence and competence of his Afghan allies. Here was a fit, dedicated, charismatic young colonel serving in one of the most isolated, dangerous places on earth and it was clear he held the respect of all.

His leadership is marked by courage both on and off the battlefield, by professional competence second to none, and by a remarkable common sense often not seen. Many officers aspire to high command but too few understand that being a warfighter means forging a team that must be able to fight and win tomorrow.

It’s been remarkable to know Chris all these years. He was the best lieutenant I ever knew, the best lieutenant colonel I ever knew, and the best general I know. In Chris Cavoli, our nation has built a gifted soldier, statesman, and leader. Thank God for his leadership at this dangerous time in our history.

Ladies and gentlemen, please welcome this remarkable soldier.

GENERAL CHRISTOPHER G. CAVOLI: Good evening, ladies and gentlemen, distinguished guests. Way too many to mention you all. What a gathering.

Thank you all. I’m very deeply humbled to stand before you tonight, mostly because I recognize that this honor is really not about me. It’s really about the defenders of thirty-two nations, the men, women, and families of the United States and our NATO allies who tirelessly stand guard to secure our freedoms, and I thank them for that in front of you tonight.

General Abizaid, thank you for the far too kind introduction. Thank you for reminding everybody why I became an infantry officer, because I was not a biologist. Thank you for your leadership and your inspiration since I met you when I was a young lieutenant. There is no one I have wanted to emulate more. I’m so lucky to have you and Kathy here tonight.

To the Atlantic Council, thank you for this award. Your dedication to transatlantic cooperation is exemplary and it contributes to the peace and prosperity that we have come to enjoy.

My fellow honorees, it’s a privilege to share the stage with you. Your accomplishments remind us that security requires a full commitment from across all elements of society from everyone. So thank you. We salute you.

Finally, to my family—my wife, my brothers Jim and Steve, my parents. I think they provide a fitting backdrop to this evening. You see, my dad was born and raised in Italy. He lived there without his own dad throughout the war, the Second World War. Afterwards, he came to America. He became an officer. He married my mom, who is from the exact same small town in the Dolomites of northern Italy. We’re working with a very shallow gene pool here. He served a career devoted to our country and to the transatlantic alliance.

My brothers and I grew up as Army brats, as you have heard: Kansas, Texas, so forth, but also Germany and Italy. And my own sons—not here tonight, unfortunately; out in California—grew up the same way, in an Army family living abroad, living the alliance—living the alliance—because our alliance is so much more than simply a promise of collective defense. It’s a promise of a wonderful future. It’s a promise of a future based on shared values of liberty, freedom, and democracy.

It’s the promise that twelve nations made to each other seventy-five years ago this year. Standing amid the ruination of the Second World War, twelve nations banded together and they declared never again. For seventy-five years, we have held that line: An attack on one would be an attack on all. And so there was not an attack on anyone. There has been peace. It hasn’t been easy. We’ve been tested. We’ve been tried. But we have always come through, always. And we have together produced a world that was at peace and growing and prosperous.

But today, dark clouds gather on the horizon. The specter of war once again hangs over the European continent and, indeed, the world. Russia’s ruthless, unprovoked, senseless war in Ukraine stands as yet another, as the latest test to our alliance and to the globe.

And so NATO does what it does: It rises again to its mission. We are reinvigorating our system of collective defense. We have developed and approved plans to defend every square inch of our alliance. Nations are racing to resource those plans. Nations have raised their defense spending dramatically in the past two years. Our exercise program demonstrates our readiness, and we are learning and modernizing at the speed of innovation that we see in the war in Ukraine. We are stronger today than ever.

It is fantastic, unexpected, and yet it’s not unexpected. It’s what we do. We have always banded together. For seventy-five years, we have spotted the key problems, organized against them, and then faced them down. And we are doing that again. NATO is now stronger, it’s more united, it’s more determined, it is bigger than I have ever seen.

These are truly historic times, ladies and gentlemen. History doesn’t always come easy, doesn’t always flow nicely, and this is one of those times. An adversary has threatened us, and we respond. But our response is historic.

It’s such a privilege for me to be part of that response. It’s such a privilege to be part of that response. And it’s a privilege to be here tonight receiving this award on behalf of the brave men and women of our alliance. God bless you all. Thank you very much.

ANNOUNCER: To present our final award this evening, please welcome the Oscar-nominated, Tony, Grammy, and Emmy Award-winning artist, Cynthia Erivo.

CYNTHIA ERIVO: Good evening, excellencies and distinguished guests. It is an honor to be here with you tonight. I would like to thank the Atlantic Council, John Rogers, and the extraordinary Adrienne Arsht, who is also extremely stylish, for giving me the pleasure of presenting the 2024 Distinguished Artistic Leadership Award to my dear friend, Michelle Yeoh.

As we come together in celebration and recognition of global champions, it is no doubt that Michelle embodies the dedication, grace, and empowerment deserving of such an award. Her decades-long career is stellar in depth and dazzling in variety. From her captivating performances in martial arts to her magnetic portrayals in epic drama, her charisma and star quality is undeniable. Michelle is simply a trailblazer, a pioneer who has shattered glass ceilings and defied stereotypes, paving the way for future generations of artists to follow in her footsteps, just like me. Her dedication to her craft, her commitment to excellence, and her unwavering passion for storytelling serve as an inspiration to us all. She’s the reason I want to do my own stunts. Truly.

But it’s more than just her artistic talent that we recognize tonight. Any friend of Michelle knows that beyond her remarkable gifts on screen, she is a woman of humanity and compassion which extends well beyond her work in front of a camera. Her longtime advocacy for gender equality, ending poverty, and environmental protection is a testimony of her moral obligation to help others and fight against global inequality. In 2016, Michelle was appointed as goodwill ambassador of the United Nations Development Programme, a title she has taken dutifully to promote the United Nations Sustainable Development Goals. She continues to use her platform to promote and mobilize her humanitarian efforts in hopes of securing a brighter future for our entire planet.

She is a symbol of perseverance, empowerment, and an inspiration to us all. So tonight, in honoring her excellence, unwavering passion, and inspiring character, it is my absolute pleasure to present—now, wait a minute. I also have to say that this extraordinary woman is one of the most stylish people I have ever met in my life. She is also one of the kindest, most gentle human beings I have ever had the privilege of standing in front of a screen with. It is not easy to sing in front of a camera, and now we have discovered that she can. And I can’t wait for all of you to hear that.

But, it is my absolute pleasure to present the 2024 Distinguished Artistic Leadership Award to the one and only, ever graceful and always elegant, Michelle Yeoh.

MICHELLE YEOH: Oh, gosh. Thank you, Cynthia. I can’t wait for all of you to see Elphaba played amazingly by Cynthia in October—no, November, Thanksgiving, soaring to the skies, not just physically but with her voice, as well. You all are in for a real treat, and thank you for all those kind words! I’m going to have to make up for that. Lovely, thank you.

Good evening, ladies and gentlemen. It is a true pleasure and privilege to spend this evening in such amazing, great, and warm company. Thank you, Atlantic Council, for this prestigious honor. I don’t know what I did to deserve this.

Last week was surreal with the Medal of Freedom; this is—I think I’ve just gone to the heavens and I’m not coming back down for a while.

I would also like to congratulate my fellow honorees: Your Excellency, President Iohannis; Secretary Gina Raimondo; and Commander General Christopher Cavoli. I want to be a general like you. I am so humbled to share the stage with you tonight.

Over the past year, my life has been a whirlwind. It’s not an exaggeration to say that my life was everything everywhere all at once—changed in an instant when the Academy made me the first Asian to win an Oscar for best actress. It did take us ninety-seven years to get there, but at least we are there.

But tonight I would like to talk about another life-changing moment, one that shook my outlook on the world nine years ago. It was April 25, 2015, and I was in Nepal with my husband, Jean, visiting local organizations and doing advocacy for road safety.

Suddenly the ground beneath me began to shake, literally. I’ve never felt that type of instant gut-wrenching fear and panic as the earth trembled violently all around me. And you know I do some crazy stunts in some crazy action movies.

That moment, I dropped to the ground. I crawled to a door to escape the low-rise building we were in. A massive, deadly earthquake was ravaging the country. I was fortunate to survive that day unscathed, but the experience was truly harrowing. Its effects linger with me still.

As we made our way to the airport to be evacuated, I saw the ruins and destruction all around me. I couldn’t shake the thought of how unfair it was that I had a home to go to, unlike the thousands of families whose entire lives were suddenly reduced to rubble. This feeling stayed with me so much that I had to return to Nepal three weeks later to try and help with the relief efforts, and my family did try to stop me. But it was a calling that I felt that I needed to be there.

Disasters of such magnitude cause irreparable damage to the lives of those who already have so little, and for generations after. Many were homeless—were left homeless without means to rebuild or keep their families safe. What I witnessed in Nepal made me realize that crises like this expose deep, pre-existing inequalities. Those living in poverty, especially women and girls, bear the brunt of it. A world that is already unfair becomes even more unfair.

My experience in Nepal inspired me to leverage the platform I was given through my work in film and use it to help others. I wanted to shine a light on the inequalities around the world, particularly how disproportionately they impact women and girls. That’s one of the reasons why I became a goodwill ambassador for the United Nations Development Programme, UNDP.

I was—I am determined to use my voice to advocate for gender equality globally. The issue of gender equality is very personal to me. As an actor in Hollywood who is female, Asian, and now in my early sixties—oh, thirties. Did I say sixties? I know a thing or two about discrimination. I have spent my decades-long career fighting against stereotypes based on gender, race, and age.

As a society, we are far from where we need to be when it comes to gender equality. Much like the film industry, gender bias continues to hold women back. According to the Gender Social Norms Index released by UNDP, almost 90 percent of the world’s population is still biased against women. A staggering 2.4 billion working-age women live in countries that do not grant them the same rights as men. This inequity is ingrained in the fabric of our society at all levels, from our lives at home, to our economy, to our governments. Because of social norms, women around the world shoulder the bulk of unpaid care work, such as childcare, cooking, cleaning, which are viewed as female responsibilities. Caring for our families and households is an essential part of being human, and it’s the backbone of our economies. But the uneven distribution of it means that women miss out on opportunities for stable, paid employment, and are blocked from equal participation in economies that depend on their free labor.

Progress to ensure women’s full and equal economic participation is alarmingly slow. At the current pace, it will take three hundred years to achieve full gender equality. Sorry, but I’m really too impatient for that.

Here’s the thing. When women earn more, everyone wins. That’s because global wealth would potentially increase by 172 trillion [dollars] if women had the same lifetime earnings as men, according to the World Bank. But instead of benefiting women, many countries’ fiscal policies push them deeper into poverty. We are only hurting ourselves. To state the obvious, government policies have a direct impact on women’s lives. This is why UNDP launched a new campaign to advocate for building gender-equal economies, and is working with countries to transform their systems and policies to advance true gender equality in all aspects of life and society.

We have a long road ahead, achieving full gender parity, but it all begins with us here and now.

The film industry I’ve spent a lifetime working in is notorious for unequal pay for male and female actors. In many corners, gender-based discrimination runs rampant. Throughout my career, I have been typecast, stereotyped, put in boxes, and faced a lot of rejection. But I have fought against it all, with varying degrees of success. But time and time again, I refused to accept an unfair world. Today, I am living proof that change is possible.

So let’s not let anyone tell us that our goals are too ambitious, or that we will never achieve them. It’s never too late. After all, I won my first Golden Globe and Oscar at sixty. I know something about perseverance. And I know that we can fight for gender equality. But we have to do it together, and we have to go all in. And it can’t take three hundred years.

So thank you all for listening to me, and have a wonderful night. Thank you.

ANNOUNCER: Please welcome Atlantic Council Executive Vice Chair Adrienne Arsht.

ADRIENNE ARSHT: Congratulations again to Michelle Yeoh. I want to take a moment of personal privilege to mention someone who just spoke and who inspires me every day, Cynthia Erivo. And it’s not just her nails. Cynthia is one of the most talented and extraordinary individuals I know. Specifically, I’m thinking of her stirring portrayal of Harriet Tubman in the title role in the movie Harriet Tubman, and her Oscar-nominated song that she wrote for the movie, entitled, “Stand Up.”

I’m going to read you the lyrics, not sing them. It goes this way: “I’m gonna stand up, take my people with me. Together we are going to a brand-new home far across the river. Do you hear freedom calling?” It’s so very powerful. She too is a rock star. And, as was mentioned, she’ll play Elphaba in the upcoming film Wicked. Cynthia, you told me so many times that when you grow up you wanted to be me. Well, tonight I say I want to be you.

Again, congratulations to all our honorees this evening. And a huge thanks to all who presented and took part in this evening. I’d also like to thank America’s Own and the American Pops Orchestra, led by Luke Frazier. And now, speaking of music, to close out tonight’s program you’re in for a real treat. As we gather to celebrate individuals who understand the importance of democracy, and in honor of the seventy-fifth anniversary of NATO, this song couldn’t be more appropriate. As I bring the performers on, she was recently featured in PBS’s Black Broadway, and he is currently gearing up to star in the Metropolitan Opera’s production of Turandot. Please welcome Brittany Chanell Johnson and Soloman Howard.

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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.

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That’s the view of Jörn Fleck, who runs the Atlantic Council’s Europe Center, reckoning that both sides have some soul-searching to do before they’ll be able to restore trust and better manage their growing list of disputes.

Europe’s increased concerns about China’s malign influence on politics and business across the continent form the backdrop for the six-day trip, even as many countries are just as eager to safeguard and expand trade and investment.

Several recent arrests and charges of espionage have given Europeans a glimpse into China’s shadowy activities. Last week alone, six individuals in three separate cases, four in Germany and two in the United Kingdom, were charged with spying on behalf of China.

Last month, European Union (EU) competition regulators raided the Polish and Dutch offices of Chinese security company Nuctech, which is a leader in providing European airport security scanning devices. (US authorities blacklisted Nuctech in 2020.)

That is part of a growing European Commission crackdown on companies believed to be receiving unfair Chinese state subsidies. European officials, like their US counterparts, are increasingly concerned about China exporting its excess capacity. EU Trade Commissioner Valdis Dombrovskis told POLITICO’s Brussels Playbook this week that the EU investigation of Chinese subsidies for electric vehicles is “advancing,” and he hinted that new tariffs could come before summer.

On the other hand, the Wall Street Journal reported over the weekend that Germany, with its own stagnating growth as context, is considering rolling back plans to increase government scrutiny of Chinese investments through a foreign investment-screening law.

That brings us to the “moment of truth.”

For the European Union, it’s whether its members can remain united in addressing Beijing’s malign actions, while at the same time not unnecessarily losing economic opportunity. On that score, it’s a good sign that French President Emmanuel Macron has invited European Commission President Ursula von der Leyen to join him in Paris, where he will do a solo and a joint meeting with Xi.

But across Europe and in Washington the French president’s messaging will also be watched closely for any talk of a European “third way,” which would undermine European and transatlantic unity.

For China, the moment of truth is whether Xi recognizes that it’s his country’s own actions that have Europe on edge toward Beijing. The Chinese leader could address that through reducing his support for Russia’s war effort, addressing manufacturing overcapacity, reining in industrial and political spying, and ending efforts to divide and conquer the continent.

In that respect, how Xi has chosen his European stops is concerning, with France being followed by Serbia and Hungary, two countries that have been coziest with China. Hungary, which just marked twenty years as an EU member, has been opposed to Brussels’ tougher approach to China and has willingly played into Beijing’s divide-and-conquer tactics.

With Xi unlikely to mend his ways in Europe, it will take all the unity Europe can muster to convince him otherwise.

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

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

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The visit by Erdoğan and a large delegation of ministers and other officials yielded a raft of new bilateral agreements, positive optics after several years of tense relations, and new opportunities for strategic cooperation in critical fields such as energy, trade, and security.

The visit marked a major pivot in the Iraq-Turkey relationship—and how Ankara and Baghdad portray it. Despite parts of the visit that may come off as performative, the meeting did set the stage for improved regional stability and prosperity, with knock-on effects for the Kurdistan Regional Government (KRG).

Iraq-Turkey relations have been fraught for the past decade, driven in part by an acrimonious international legal battle over the export of KRG oil through a pipeline to Turkey without Baghdad’s permission. The two have bickered over Turkish military operations against Kurdistan Workers’ Party (PKK) militants on Iraqi soil, with Ankara charging Iraq with tolerating presence of the Foreign Terrorist Organization-designated group and Baghdad charging the Turks with violating Iraq’s sovereignty. Disputes over water flows from the Euphrates and Tigris remain thorny too.

Yet with the broader Middle East roiling due to the war in Gaza and increasingly open conflict between Israel and Iran, leaders in Turkey and Iraq seem to have realized the need to protect their interests and shore up stability through regional cooperation. With a year of careful diplomatic groundwork laid since the May 2023 Turkish elections, the two sides prepared an agenda with an ambitious set of economic, security, and diplomatic goals. Chief among these have been Baghdad’s decision to ban the PKK, a commitment to repair the portion of the Iraq-Turkey oil pipeline that doesn’t run through the KRG, and a multilateral agreement (also signed by ministers from Qatar and the United Arab Emirates) to cooperate on a trade corridor from the Gulf to Europe with a new network of roads and railways through Iraq and Turkey.

The United States and Iran, although not openly discussed, played a role in motivating the visit. Baghdad remains dependent on Washington for counterterrorism assistance and financial assistance, despite calling publicly for US troops to leave—and would like to reduce that dependence through stronger security and development cooperation with Turkey and the Gulf. Iraqi Prime Minister Mohammed Shia’ Al-Sudani has to cope delicately with Iranian influence over Iraqi politics and security as he tries to balance or reduce it, and better ties with Turkey are another dimension of that strategy. In a region subject to cutthroat competition among great powers (and also mid-sized ones), local cooperation strengthens defensive leverage.

As one observer in Erbil noted during the visit, the symbolic purpose of the visit for Iraq was to show that Baghdad has productive relations with its neighbors to the north and south, not just with the dominant one to the east. “Caliph Abu Jaafar al-Mansour built four gates for the city, the main one facing Khorasan . . . but the gate of Baghdad was not only open to Iran and Khorasan,” the commentator wrote. He relayed remarks from several Iraqi officials that “Erdogan’s arrival signifies a new stage for them. This shows that not only the Khorasan gate of Baghdad is open.”

Generally low trust in US plans for the region provides Turkey and Iraq—both US allies—additional incentives to hedge through local cooperation. Most Iraqis (and Turks) doubt US commitment to stability, sovereignty, and democracy in the region. Regional observers are skeptical whether the United States has militarily deterred Iran in Iraq or Syria or whether it is even possible for Washington to do so—and such observers aren’t that anxious to see it try. Tellingly, the United States has backed a major development and transit project, the India-Middle East-Europe Economic Corridor (IMEC), that bypasses both Turkey and Iraq.

Countering IMEC seems to have given new impetus to efforts at a bilateral reset between Baghdad and Ankara. The Development Road project (launched by Iraq in 2023) centers on a 1,200-kilometer highway and rail system linking al-Faw Grand Port in Iraq’s Basra province to international markets. Now, with the agreements solidified last week, that route is set to run through Turkey, with investment and participation from both Qatar and the United Arab Emirates. The project is expected to not only generate a projected four billion dollars in annual income (on a seventeen-billion-dollar initial investment) but also create over one hundred thousand jobs and further integrate Iraq into regional and global economic networks.

Beyond the quadrilateral signing of the agreement to cooperate on the Development Road project, Erdoğan’s visit yielded a Turkey-Iraq strategic framework with nearly thirty separate agreements. Senior officials from both the Iraqi and Turkish ministries of trade, energy, agriculture, transportation, health, defense, and foreign affairs participated and agreed to permanent joint committees to reenergize the 2008 High Level Strategic Cooperation Council mechanism. From Ankara’s perspective, cooperation and legal authorization for its anti-PKK operations is the most pressing area to see concrete developments. For Iraq, a collaborative and mutually profitable approach on water and oil are high priorities. Of course, fulfillment—not just the announcement—of these cooperative agreements will be the parameter for success, but to hold such a high-level, detailed, and ambitious foundational meeting was a good start.

The visit was portrayed positively, albeit with different emphases, in the Iraqi and Turkish national press. Turkish reporting noted Foreign Minister Hakan Fidan’s patient diplomacy and strategic design, highlighted the potential mutual economic gains, and outlined potential benefits of the Development Road—such as its role in possibly eroding de facto PKK control of large areas in northern Iraq. Iraqi media focused on the need to overcome longstanding problems and on the ample room for growth and improvement in ties. Kurdish coverage quoted officials and experts praising Turkish engagement in Iraq and underscoring the need for Ankara to sustain close ties with Erbil, as well as Baghdad, to prevent the Kurdistan Region of Iraq’s exclusion from the benefits of closer national ties.

This apparent new chapter in bilateral relations has limits and brings risks. One limit is the central Iraqi government’s relatively limited reach with regards to the PKK. It has scarce military or intelligence resources in the remote border areas where the PKK operates and scant motive to commit them. There is some possibility that Baghdad is dangling potential counter-PKK support to co-opt Ankara into reducing support to the KRG. Therein lies a strategic risk for Ankara to guard against: Close Ankara-Erbil ties have had tremendous economic and security benefits for both. Another limit is Iran’s continuing influence over Baghdad and suspicion of Turkish influence there, which its agents and proxies will certainly seek to minimize.

The Development Road adds a dynamic new economic element to the bilateral equation, though, making it likely that the promise of more neighborly ties is less theatrical, and more substantive, than past expressions of intent. A practical and institutionalized strategic framework, coupled with an increasingly turbulent region and a newly compelling economic project with Gulf support, means that the current pivot may be both sincere and strategically significant. Handled deftly, it may produce the most stable Iraq—and a real community of interest between the two neighbors—the world has seen since Saddam Hussein’s invasion of Kuwait in 1990.

Colonel (retired) Rich Outzen is a nonresident senior fellow at the Atlantic Council’s Turkey program. He served thirty years in the US Army—with tours in Iraq, Afghanistan, Turkey, Israel, and Germany—and served in senior policy positions at the State Department and Department of Defense.

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Catalyzing climate financing through the Green Climate Fund

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

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

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

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

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

An optimistic outlook on Egypt’s economic reforms

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

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

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

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

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

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

Moving from stabilization to reform in the Egyptian economy

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

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

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

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

Conflict resilience and economic integration in the MENA region

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

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

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

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

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

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Public Event Wed, April 24, 2024 • 3:00 pm ET

CEO Scott Nathan on DFC’s work on energy security and other strategic priorities

An #ACFRONTPAGE EVENT—Scott Nathan, chief executive officer of the US International Development Finance Corporation, discusses the agency’s role in US efforts to advance global energy security and other strategic US priorities.

Energy & Environment Energy Markets & Governance Geopolitics & Energy Security

The US International Development Finance Corporation (DFC) isn’t “directly competing” with China, according to its chief executive officer Scott Nathan, but it is “offering an alternative.”

Nathan spoke at an Atlantic Council Front Page event hosted by the Council’s Global Energy Center on Wednesday, explaining that the DFC is different from Chinese development banks or Chinese investment initiatives (such as the Global Development Initiative and Belt and Road Initiative) because it supports the private sector directly. The DFC doesn’t lend money to governments for “big and also sometimes bloated” projects that aren’t “appropriate for local laws and conditions,” he said, alluding to China’s investments that have pushed countries into deep debt.

The DFC head recalled how foreign government officials have told him that “they don’t want to be dependent on one country for their source of finance.”

“Good development is good foreign policy,” he explained. “That’s in our national interest.”

Here are more highlights from the conversation, moderated by Amelia Lester, executive editor of Foreign Policy.

Standing out in the marketplace

• How exactly does the DFC differ from China’s investment engines? Nathan said it’s in part because “we maintain the highest standards possible” when it comes to “environmental, social, [and] labor” practices. It is “critical,” he added, not only to support economic development but also to “promote . . . values.”
• One important area is in internet connectivity—in which China is investing heavily, particularly in the Indo-Pacific. The DFC, meanwhile, is supporting projects that push forward secure equipment and networks that protect privacy, Nathan said, highlighting specific DFC-supported projects in Australia and Africa that are offering an alternative to China’s services. “This is critical for growth,” he said, adding that infrastructure is “not just energy, airports, and railways. You need the infrastructure of the twenty-first century for economic development.”
• Nathan explained that the DFC was created by Congress in 2018 due to a “strong sense” among both Republicans and Democrats that the United States needed to improve its economic-diplomacy game. “We needed to show up in the developing world and offer an alternative to what was being offered by authoritarian governments and our strategic competitors,” he said.
• The DFC is due to be reauthorized by Congress in 2025. “There is a strong demand signal for us to do more to show up,” Nathan said. “That requires us being reauthorized; it requires continuous funding.”

Showing up for Ukraine

• Nathan explained that the DFC has provided nearly $500 million in financing to businesses in Ukraine and has offered political risk insurance—which includes coverage for war-related risks—that has catalyzed more investments in Ukraine’s private sector.
• The most critical tool to support Ukraine’s private sector, however, is “solid air defense,” Nathan said. It’s “hard to make decisions around investment and capital expenditure in an environment of such high insecurity.”
• Nathan explained that the United States has had a long history of providing political risk insurance. Since the Overseas Private Investment Corporation (DFC’s predecessor) started offering the insurance, he said, the United States has “done over $50 billion. . . of political risk insurance” and has had “just over a billion dollars of claims.” The institutions have covered 97 percent of those claims, he added. “So it’s not only been very important for economic activity. . . but it’s been very profitable.”
• Working in Ukraine, Nathan said, has shown him how important it is for the DFC to work closely with its peers, including the European Bank for Reconstruction and Development, International Finance Corporation, and European Investment Bank.

A diversified system

• Earlier this year, the DFC provided a $500 million loan to US company First Solar to build a new solar panel manufacturing facility in Tamil Nadu, India. Nathan said that the plant, which will use cadmium telluride sourced from India instead of China, “fits into the [DFC’s] supply chain diversification goals. . . We need to make sure that we’re not dependent on one country or one company for the inputs of the industries of the future.”
• “If we can do this kind of thing elsewhere in the world to make sure that supply chains are broadly diversified, that helps with resilience,” he argued, adding that the United States must not “replace dependency on oil” with dependency on “a couple of nations,” as that would bring “all sorts of strategic vulnerabilities.”
• “Having countries be able to be self-reliant, to have the energy they need for economic development, that promotes stability. . . that’s good for our security,” he said.
• On critical minerals, Nathan highlighted several projects underway in Africa, including one on graphite in Mozambique. And, he added, as the DFC invests in that project, it will also be working with the US Department of Energy, which has loaned a company in Louisiana funds to expand its capacity to produce graphite-based materials for batteries. “It’s critical to start with the sourcing of the minerals,” Nathan said. “But there’s a whole value chain” to support.

Katherine Walla is an associate director on the editorial team at the Atlantic Council.

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Below are his prepared remarks.

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

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

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

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

China’s diplomatic activities in the Middle East

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

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

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

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

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

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

China’s involvement in MENA conflict mediation

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

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

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

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

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

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

China’s response to the Hamas attack on Israel

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

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

China’s global initiatives and international order

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

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

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

The issue of Xinjiang

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

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

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

Policy Recommendations

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

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

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

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

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

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

• This week in one word: Clarity

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

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

• See day five analysis

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

IMF-World Bank Week at the Atlantic Council

WASHINGTON, DC APRIL 15–19

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

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

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

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

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

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

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

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

This week in one word: Clarity

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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.”

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

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

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

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

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

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

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

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

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

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

Regarding the IMF:

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

Regarding the World Bank:

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

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

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

• Mixed developments on sovereign debt restructuring

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

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

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

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

• Spooking the spirit of Bretton Woods

• See day two analysis

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

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

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

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

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

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

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

Mixed developments on sovereign debt restructuring

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Spooking the spirit of Bretton Woods

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

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

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

• What the World Economic Outlook left out

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

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

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

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

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

• Read day one analysis

What the World Economic Outlook left out

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

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

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

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

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What should be done with Russia’s blocked reserves?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• Geopolitics is eroding the IMF’s relevance

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

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

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

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

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

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

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

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

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

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

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

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

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

Geopolitics is eroding the IMF’s relevance

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

New Atlanticist

Apr 11, 2024

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

By Katherine Walla

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

China Financial Regulation

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

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

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

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

Keeping this up is a daily, expensive challenge. For just a few thousand dollars apiece, Russia buys kamikaze drones from Iran that do millions of dollars of damage. Ukraine is using air defenses sparingly because of uncertainties surrounding how long Western military and financial support will last. Kyiv and its backers tend to say that reconstruction cannot wait for the war to end. But when cash becomes sparse, as it has recently, resources will clearly go to the war effort and urgent basic services first.

On our recent research trip to Kyiv, we were struck not only by the size of the challenges, but also by the encouraging coherence of nascent strategies meant to deal with them. Ukrainian officials and civil society are demonstrating the plucky and determined resolve that has characterized Ukraine’s heroic fight against the invading forces. The problem is that, quite like on the battlefield, they haven’t been provided with all the tools for success.

Earlier this year, prevarication by the US Congress over supplemental funding combined with farmers’ and truckers’ protests at Ukraine’s borders triggered cash flow problems. If Japan hadn’t acted by bringing forward two donations of just under half a billion dollars, which had been scheduled for later, Kyiv would have struggled to pay soldiers’ salaries in March and April. The government now has a little more visibility for the months to come, as the first 4.5 billion euro tranche from the European Union’s (EU) Ukraine Facility was disbursed in March, as well as two billion Canadian dollars in financial assistance from Ottawa.

The EU funds are meant to “provide predictable financial support to help Ukraine in its recovery, reconstruction, and modernization,” but this first tranche will most likely end up funding the Ukrainian state budget—some of which will go to repairs to civilian infrastructure, but not all. It’s already clear that the longer the war lasts, the more it will consume funds initially meant for long-term investments.

Despite dwindling stockpiles, Ukraine has demonstrated impeccable efficiency and precision in repelling attacks and maintaining critical systems. This was on display in the Dnipropetrovsk region in March when electricity systems were quickly recovered after Russian drone and missile strikes. But recent attacks on critical energy infrastructure in Kharkiv (where most of the energy infrastructure has been destroyed), Kyiv, Zaporizhzhia, Odesa, and Lviv must be a wake-up call to US leaders to pass a supplemental aid package now. Every day that additional US military aid is delayed, Ukraine incurs loss of life and millions in damages, increasing already massive reconstruction costs.

So, what does Ukraine need now for its economic survival? To start with, more certainty that its air defenses will continue to be supplied would help Ukraine move to more long-term planning on reconstruction. For now, insurance contracts—though heavily subsidized by Western governments and international financial institutions—can only cover shipments lasting a few short weeks. The much–vaunted solution of “war insurance” covering the risk the private sector would take by investing in Ukraine requires contracts lasting several decades. That will only become possible if air strikes become less frequent and less damaging. Before moving in, investors also need more visibility on how they will be able to move their return on investment out of Ukraine. The National Bank of Ukraine’s strict capital controls are justified given uncertainties over cash flow. But clarity on the conditions under which these will be lifted would be helpful.

In addition to more funding sources for Ukraine, a revitalized Ukrainian economy will also provide benefits to Western economic security. Restored mining capacities can replace the titanium countries used to buy from Russia. With the right tools, the mighty agricultural sector can continue to diversify into biomass energy and sell more into the EU single market without upsetting its farmers.

There is potential in every region of Ukraine. For now, it is still up to Ukraine’s backers to provide enough certainty on weapons and immediate financial assistance to make it possible to tap into that potential. It was heartening to see that the major players all traveled to Kyiv this week to be represented at the Steering Committee of the Multi-agency Donor Coordination Platform. It is now likely Kyiv will avoid major cash-flow issues for the rest of 2024. Let’s hope the picture on weapons—still the key ingredient to unlock long-term projects to revitalize Ukraine’s economy—has improved by the Ukraine recovery conference in Berlin in June. Otherwise, the conference will suffer the same fate as its London predecessor: a succession of sympathetic statements from the private sector, but nothing concrete.

Olga Khakova is the deputy director for European energy security at the Atlantic Council’s Global Energy Center.