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Trade wars, currency wars and geopolitical clashes

Giancarlo Elia Valori

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The Chinese yuan has already plummeted to the historic lows of the last seven months as against the dollar and nothing prevents us from thinking that the Chinese government is organizing a real devaluation of the yuan-renmimbi.

In fact, on June 27 last, the Chinese central bank set the parity as against the dollar at 6.596, by also cutting additional 391 points compared to the levels of the previous day.

A move that could largely expand the already significant size of China’s foreign trade, as well as avoid further tension with the USA on trade tariffs, and finally increase and differentiate Chinese exports.

This does not necessarily mean, however, that China really wants to significantly and clearly devalue the yuan. We rather fear that this threat is a sword of Damocles to be placed right on President Trump’s head.

The problem is, above all, of a geopolitical rather than of a financial nature.

As early as the 1990s, the US ruling classeshave ridden  their project of globalization, which has inevitably been matched by universal financialization.

On the one hand, this has created a new power – that of the major international regulators (the World Bank, the Basel Bank for International Settlements, the Monetary Fund, etc.), which have largely changed the course of US geo-financial interests since the USSR collapse – while, in the meantime, the advanced technologies have migrated to Asia and partly to the European Union.

Asia is currently a US global competitor, while Europe is now perceived by the United States as a useless buffer vis-à-vis the pan-Russian region and, above all, the pleasant geopolitical region that believes it has a currency, namely the euro,  preventing the dollar from fully developing.

By all accounts, on July 15 next, Trump and Putin could just decide to stop the escalation between Russia and the USA, thus together weakening the European region.

The region that has so far followed the new American Cold War blindly and even against its own clear interests.

Hence currently China wants to direct the whole globalization and financialization process of the world economies.

According to China’s decision-makers, the United States can no longer afford it, considering that -based on 2017 data – its trade deficit amounts to 567 billion dollars and its public debt is equal to 21.5 trillion dollars.

It should be recalled that this is the real bone of contention.

Moreover, despite President Trump’s tax reforms, the US companies still have 2.7 billion dollars held in tax havens.

All global tax havens hold 21-35 billion US dollars of private funds. Resolving this tension means becoming global leaders, both financially and industrially.

This holds true also for corruption.

For example, the African nations alone lost at least 1 billion US dollars in 2017 due to the capital flight, while the sum of these African countries’ foreign debt is currently only 200 million dollars.

This year Switzerland ranks first in the list of tax havens, but followed by the United States and the notorious Cayman Islands.

Hence while the capital market is grey and inelastic, as shown by most tax havens, when the public revenue stemming from corporate income decreases, personal income taxes can only increase. This is certainly not a formula for economic development, neither driven by exports nor by other operations.

Not surprisingly, over the last ten years the US public debt has grown at the rate of 1.23 billion dollars, but it has recently doubled, rising from 8.9 trillion dollars in 2007 to 20.1 trillion dollars in December 2017.

Hence, while currently the US globalization trick mainly favours China, military pressure and protectionism are the main and inevitable models of behaviourand protection of the US interests in the world.

Furthermore, protectionism is worth as much as manufacturing, considering that finance is already globalized everywhere: nowadays the US industry, including the energy system, produces only 21% of GDP, while the rest is produced by the service sector.

President Trump’s new proposals, however, i.e. the mix of FED’s “moderate” monetary policy, of trade deficit reduction and of tariff protection through the buy American policy, are worth approximately 1 billion dollars of increase in federal spending, with support to some new infrastructure, but with additional 4.4 trillion dollars relatingto tax reform.

The reduction of personal income and corporate income taxes from 35 to 20% – the focus of President Trump’s new tax policy – as well as the reduction of taxes on repatriated capital and the other corporate tax cuts, are all operations leading to a depreciation of capital income and hence, according to neoclassical models – to a corresponding investment increase which, however, never really materialize.

Therefore President Trump’s tax reform could certainly stimulate domestic demand and hence the GDP growth rate, thus resulting in greater household spending, but above all enabling companies to deduct new investment from taxes until 2022.

However, the amount of recently-issued US debt securities can raise interest rates significantly.

Hence short-term investment expands in the USA, while the market is well aware that, as from 2025, the public deficit and hence interest rates will fall significantly.

There could therefore be the corporations’ temptation to postpone investments for a few years. Nevertheless, in the short term, the tax rebate policy is a drain on public revenues, which are expected to decrease by 11 trillion dollars until 2027.

Corporations can stand it.

Currently the US debt-to-GDP ratio is equal to 105%, but in 2027 it is expected to reach 110% with a foreseen 3-3.5% yearly annual growth rate.

The US Congress calculates that the tax losses caused by President Trump’s reform should be 414 trillion dollars staggered over ten years.

Over the same period, the reduction in revenues is expected to be 1,633 trillion dollars.

Moreover, the increase in direct household income is supposed to be 8%, with a clear increase in taxable income.

Nevertheless, this obviously does not offset the primary decrease in revenues – otherwise we would have discovered the perpetual motion.

Hence US corporations could save 1.2-1.3 trillion dollars, which previously went on taxeswhile, if all goes well, President Trump’s reform could stimulate a further 9% GDP growth in the medium to long-term.

However, the US domestic market’s dependence on foreign markets is very high, even with a population of 320 million inhabitants and a high average consumption rate.

Hence if a policy is implemented to substitute imports from abroad to the USA, where the labour cost and taxes are comparatively higher, this will imply an obvious increase in inflation.

It should be recalled that currently the Russian Federation has already put in place as many as 780 projects of import substitution, while last March Chinese imports rose by 14.4% – a higher rate than expected – but with a corresponding 2.7% yearly fall in Chinese exports denominated in dollars.

For the time being, China aims mainly at import diversion, not so much at import substitution.

As we all know, another piece of President Trump’s tax and economic domino is the dismantling of Obamacare.

A substantial cut would be a dangerous political mistake on such an important issue from an electoral viewpoint.

Probably President Trump’s cuts will be mainly focused on education and research, considering that under President Obama’s Administration the social spending for income support had reached 66% compared to 15% of the previous Presidencies, including the Democratic ones.

The United States is not good at implementing Socialism- this is a specialty of the best Europe, as is also the case with social Catholicism.

The welfare Catholicismwas certainly not born only to take away votes from the Left, but also resulted from a long and  elaborate analysis that the Catholic Church made on capitalism, from the French Revolution until the Encyclical Rerum Novarum, with the refined philosophy of Mounier’spersonalism and, in Italy, with the extraordinary season of the Code of Camaldoli.

Within the framework of US typical capitalism, however, high social spending is a danger to the economic system and to domestic financial markets.

The US friends can afford neither democratic Socialism nor the social Catholicism of the Code of Camaldoli.

Furthermore, President Trump’s idea to repeal the Dodd-Frank Act – which, after the 2007-2008 crisis, redesigned the clear separation between investment banks and savings banks, invented by the Fascist legislation on the State holding IRI and later revivedby President Roosevelt in the Glass-Steagall Act of 1933, repealed in 1999 – is not entirely wrong.

If anything, President Trump wants to revive the 1933 Act, with an eye to the new “21st century” Glass-Steagall Act proposed by John McCain and Senator Elizabeth Warren – a new Act specifically banning the current dual role played by banks, both as institutional investors on behalf of corporate clients and as classic collectors of savings from small clients.

President Trump probably agreeswith the lines of a new Glass-Steagall Act that, according to the US President’s economic advisors, should favour the control and management of bank credit and the mass of credit liquidity.

Theringfencecurrently required of US banks is certainly not enough to regulate the cycle, but nowadays it is hard to well define the different types of financial investment.

Moreover, duration is not the only index to assess its dangerousness or not. We will talk about it at a later stage.

It is also worth recalling, however, that private consumption in the USA amounts to 70% of GDP, while the US citizens’ private debts are currently worth as many as 18.94 trillion dollars, equivalent to 96% of current GDP.

Hence either private debts are rescued or also the GDP is jeopardized, with ripple effects which are hard to foresee.

In our opinion, the policy line supported by President Trump, who wants a federal law regulating current and future financial markets, goes in the right direction.

This means that, as already happens, President Trump will do everything to provide stable employment to the Americans (158 million employees) by curbing the foreign manpower whocarries out direct wage dumping against US citizens, thus competing with them at a minimum wage level.

Domestic wage dumping will no longer be allowed in President’s Trump era and investment in manufacturing will be aimed at turning temporary jobs for Americans into stable jobs.

The President wants to do exactly the opposite of what the European Union is doing – and he will succeed.

During President Obama’s Administration, legal and illegal migrants totalled 27 million people.

Hence the three goals of what has been defined as Trumponomics are essentially the expansion of national production; the increase of the US  labour market in terms of size and income, as well as the repatriation of the huge amount of US capital held abroad.

Nevertheless, with specific reference to trade regulations,  rebalancing the US market is a complex process: in the USA there is no VAT for imported goods, except for a sales tax which, however, is applied only in some States of the Federation.

The solution would be to manipulate taxation on imports in such a way as to remove the difference between the external taxation levels of the various countries exporting to the USA and hence abolish the comparative advantages of the various countries selling in the US market.

Let us now analyse, however, the overall policy line and, above all, the energy tax policy that President Trump wants to implement.

The USA is still the first energy consumer in the world since it uses as much as 25% of all energy produced globally, with a share that is more or less equivalent to the US share of global economy.

The United States currently uses 19.7 million oil barrels a day.

Nowadays, based on March 2018 data, the North American autonomous oil production amounts to 10.4 million barrels a day- a share which, however, is worth only 52% of US consumption.

Nevertheless, it should be recalled that 68% of oil imports into the USA are duty-free.

It is also worth recalling that, based on the most reliable  predictions on shale oil and gas, by the end of 2022 the Americans expect to produce two-thirds of their own energy needs autonomously -hence it is extremely probable that NAFTA exporters to the USA, especially Mexico, shall accept an unexpected share of taxation on oil barrels exported to the United States.

This, however, could lead to a price war between NAFTA producers and competitors in the Gulf or other areas.

Obviously the taxes and duties on energy imports would mainly favour the US domestic production, thus allowing the massive internal consumption of US oil and gas and the re-exporting of thetaxed ones coming from the NAFTA regions.

With specific reference to natural gas, the US situation is equally rosy. Since 2009 the United States has gradually become the world’s largest producer of natural gas, with proven reserves in North America equal to Saudi Arabia’s, but 5.5 times less than Russia’s and 3.7 times less than Iran’s.

This will explain many things in the future.

In 2017, the USA produced 73.6 billion cubic feet of natural gas per day, especially in the Appalachian regions, while the North American government agencies expect that gas – as long as it lasts – will not only saturate all domestic consumption, but will also enable the USA to become a net exporter of liquefied petroleum gas (LPG), with facilities in Louisiana and Maryland, which are now on the point of being completed.

This new US presence in the energy sector will be a powerful lever to deal with the new tariff balances from a strong bargaining position.

With specific reference to infrastructure, there is a “Roosevelt-style” plan that, not surprisingly, President Trump is putting in place, by using a bill – originally submitted by the Congress – which provides for investment to the tune of 1.5 trillion dollars to stimulate private individuals and entities to further invest in this sector that is usually unattractive for US capitalists.

Only 200 billion dollars would be direct federal funds, while the remaining 1.3 billion dollars would, in fact, come from private individuals or entities or from States of the Union.

The goal is to modernize the railway network, motorways, airports and sea ports, as well as waterworks and hydroelectric dams.

Additional 50 billion dollars will be allocated to agricultural infrastructure and irrigation.

The States of the Federation will be responsible for the entire infrastructural operation, but we do not see how the necessary external investment can come to the USA  – an investment that will be unavoidable, considering the amounts at stake.

Hence, with Trump’s Presidency, the United States will basically tend to become an economic organization virtually impervious to external shocks. It will make all the companies which are essential for both military or economic national security go back into the Federation’s perimeter. It will finally expand the manufacturing sector to the detriment of the service and financial sectors.

Along with these geo-economic prospects, Trump’s Presidency will try to foster peripheral and marginal tensions in the world arena, above all to sell arms and later create the flow of high-tech investments which, as usual,   starts from the military sector and then affects also the civilian sector.

Trumponomics has so far worked well and has reached some good results.

In 2017 domestic demand rose by 4.6%, the fastest growth in the last three years.

Consumer spending, which is worth two-thirds of all US domestic trade, grew by 3.8% in late 2017, but families also benefited from the steady increase in stock market indices, as well as from the increase in property and real estate prices and in wages- which is certainly not a negligible fact.

Most of the growth in consumption, however, was directed to imports, which grew by 13.8% in the last quarter of 2017. In terms of balance of payments, this offsets the increase in US exports deriving from the relative weakness of the dollar.

The diversification of the North American economy has increased by 19% and the USA are collectively less dependent on the results of the various productive sectors.

Unemployment is falling also for the “Latinos” and the black people, with the lowest unemployment rate of the last 40 years, as well as the return of Chrysler-FIAT to the USA, for example, through a new factory for 2,500 workers in Michigan, while the opinion polls show that 70% of the US population believe that the economy is “excellent” or good”.

In 35% of cases,temporary jobs are turned into stable jobs -without particular racial differentiation.

According to Moody’s, since 2014 the US economy has produced over 2 million new jobs a year, while the unemployment rate is currently lower than 4%.

Nevertheless, imports obviously continue to be the Achilles’ heel of President Trump’s project.

The more the US economy grows, the more the share of imports increases.

In 2017 the USA imported 2.79 billion dollars of goods and services with a related export share of 2.32 billion dollars alone, resulting in a trade deficit equal to 566 billion dollars.

The imbalance between imports and exports, however, always leads to a 1.13% decrease of GDP.

The sectors that contribute most to this imbalance are the automotive and consumer goods sectors.

In 2017 the USA imported drugs, cars, clothes and other goods to the tune of 602 billion dollars, while it exported 198 billion dollars of consumer goods only.

The United States imported 359 billion cars, but exported only 158 billion ones.

In this sector the real US competitor is still China. In late 2017, however, the USA recorded a 375 billion dollar balance of payments deficit vis-à-vis China; a 71 billion dollar deficit with Mexico and a 69 billion dollar one with Japan, as well as a 65 billion dollardeficit with Germany.

Nevertheless the trade wars – which, as President Trump maintains, are “easy to win” – are not so much so.

The introduction of a single tariff on goods imported from China, as well as a 45% duty – 35% for Mexican goods –  would increase the cost of all imports, from any country, by 15%, with a 3% average price increase resulting in a 85 billion fall of US exports compared to the initial data.

Furthermore, the EU could easily increase its duties within two months.

Finally, China could respond by increasing customs rights and duties on as many as 128 types of imports from the USA, in addition to imposing a further 25% duty on cars, aircraft, oil and food from the USA.

In short, for a President very focused on the economy like Donald J. Trump, the prospect of protectionism will be less likely than we can currently anticipate and, however, the slow reconstruction of the US manufacturing and internal market – which are President Trump’s electoral and geopolitical goals – will continue.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

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The Yuan versus the Dollar: Showdown in the Global Financial Arena

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At the 1944 Bretton Woods Conference, the United States laid the foundation for the U.S.-centric international monetary system, thus ensuring the dollar’s status as the key reserve currency for the next 75 years. The fact that other countries accepted the dollar as the main currency of international payments, loans and investments allowed U.S. transnational corporations to dominate global markets in the post-war period quickly. However, if we are to proceed from the development patterns of the international monetary and financial system, then it follows that the dollar will eventually be replaced by the yuan, the currency of the new global economic and financial leader (China). Will Beijing manage to build its own system of global institutions, one that is capable of internationalizing the yuan and competing against the U.S. currency when it comes to servicing global flows of commodities and finance? In order to answer this question, we need to look at the trends of the global financial architecture as it stands today and identify the strengths and weaknesses of the U.S. and Chinese financial systems.

The Global Financial Architecture

The global financial architecture (GFA) is the combination of institutions involved in the regulation of global finance. It consists of a model for organizing international financial relations, institutional mechanisms for managing these relations, and the principles underlying the participation of countries in decision-making processes. The GFA model is based on the competitiveness and openness of global financial markets. The institutional mechanisms include fiat (intrinsically valueless) money, the free trans-border movement of capital and a system of floating exchange rates. The influence of individual countries on the development of the GFA depends on the size of their quotas and votes within the Bretton Woods institutions of the IMF and the World Bank.

One feature of the current transformational processes as applied to the GFA is the concentration, in individual countries, of financial assets that exceed the size of their economies by tens, hundreds and even thousands of times. For example, the financial assets controlled by Luxembourg exceed its GDP by 248 times, and those of the Cayman Islands exceed its GDP by 1861 times. These imbalances are caused by the fact that the modern GFA is formed not along the lines of the formal Bretton Woods institutions, but rather informally, via the offshore financial system.

It is in offshore jurisdictions, i.e. outside the national borders of the countries that issue international currencies, that the bulk of global monetary liquidity is generated. For example, in 2007–2008, the Federal Reserve Bank of New York opened temporary dollar swap lines for the central banks of 14 countries worth over $10 trillion to refinance the dollar liabilities of lending institutions operating out of those jurisdictions. The swap lines were discontinued in February 2010, but were reinstated three months later in a different format between the Federal Reserve System (FRS) and five key central banks that are closely linked to the United States: the European Central Bank, the Swiss National Bank, the Bank of England, the Bank of Japan and the Bank of Canada. These C6 swap lines were made permanent and unlimited in October 2013. It is thanks to these currency swap operations that the U.S. FRS can create euros, pounds and yen in offshore jurisdictions. The other countries involved can participate in the creation of offshore U.S. dollars. The massive swap agreements involving the most significant central banks undermine the importance of the Bretton Woods institutions as the providers of global liquidity and make it difficult to record and control global capital flows at the intergovernmental level.

The U.S. Financial System

The main strength of the U.S. economy is that it issues the key global currency, as well as the fact that it has created the world’s biggest stock market, in which more than half of all U.S. households participate. The United States has the most liquid bond market, which means that the dollar is the international benchmark for value and the main reserve asset for the rest of the world (its share in the international reserve portfolios of central banks exceeds 60 per cent). Over 50 per cent of all international deposits, loans and promissory notes are nominated in U.S. dollars. Washington is home to the headquarters of the Bretton Woods institutions, which are responsible for macroeconomic oversight and addressing structural imbalances in the 189 member nations. Three U.S. rating agencies account for 96 per cent of all credit ratings assigned in the world, U.S. investment holdings manage more than 50 per cent of global corporate assets. These and other factors explain the dominant role of the United States in the formation and development of the GFA.

The main weakness of the U.S. financial system is that the country’s economy is based on debt and is extremely dependent on bank lending terms and the dynamics of stock market operations. A sharp increase in interest rates or a decline in demand as a result of economic overheating leads to a nosedive in share prices, which, in turn, leads to a depression, as was the case in 1929 and 2008. One other vulnerability of the U.S. financial system is its dependence on external financing, which is due to the status of the dollar as the key reserve currency. Should the international demand for dollars decline, U.S. funding from external sources may also decrease.

China’s Place in the GFA

China leads the world in terms of monetary aggregates (in the dollar equivalent), purchasing power parity GDP, production and exports, and the labour force size. However, China’s economic growth continues to be largely dependent on imports of foreign investments and technologies.

China’s leading positions on a number of economic indicators still has a negligible effect on the country’s ability to influence international financial relations. As before, the head of the IMF is a European citizen and the head of the World Bank is an American. Unlike other international organizations within the UN system, which make decisions based on the “one vote per country” principle, the IMF and the World Bank are stock companies whose capital is owned by the member nations. Decisions on the most critical issues on the agenda of the Bretton Woods institutions are made by a qualified majority of 85 per cent. Following the reform of the IMF quota and voting system in 2010–2016, the BRICS countries failed to gain the minimum number of votes (15 per cent) to obtain veto power and assert the multipolar principle within the organization. Just like before the reform, the United States continues to be the only IMF member nation that has the power veto.

China certainly owes much of its global economic achievements to its membership of international financial and economic organizations that the United States was instrumental in founding and running. That said, in order for China to protect its economic interests in an effective manner and exert tangible influence on decision-making processes in the global economy, Beijing needs to participate in those international institutions in which its vote has a decisive role. In this sense, China has high hopes for its recent initiatives to create pan-Asian institutions for monetary policy, finance and economics, such as the BRICS Contingent Reserve Arrangement, the Chiang Mai Initiative Multilateralisation, the BRICS New Development Bank and the Asian Infrastructure Investment Bank.

The opening of the Shanghai International Energy Exchange (where transactions are carried out in Chinese yuan) on March 26, 2018, was a particularly significant event. This was China’s first step towards the formation of a “petroyuan” pricing system on the global energy resources market. The Shanghai Futures Exchange has begun trading in new oil futures, known as INE, which are expected to compete against British Brent and U.S. WTI contracts. The pricing of oil in yuan is an important component of the drive to internationalize the Chinese currency and lessen the global economy’s dependence on the dollar.

By late 2017, the People’s Bank of China had signed 37 swap agreements with different countries worth more than 3 trillion yuan. The agreements were aimed at facilitating the use of the yuan in doing business with foreign banks and companies, so that the central banks receiving liquidity in yuan can act as lenders of last resort after the activation of currency swap lines. However, the agreements have not resulted in a significant increase in the global use of the yuan, which is what was originally expected. Since the 2008 initiation of the swap agreements, the share of the Chinese currency in the denomination of international promissory notes has stood at roughly 0.3 per cent, whereas the share of the U.S. dollar has grown from 47 per cent to 63 per cent.

In addition, currency transactions involving the yuan are mostly done via London, not Beijing. The United Kingdom accounts for 33.79 per cent of all global currency operations involving the yuan. Hong Kong remains the largest clearing centre for international transactions in yuan, serving 76.36 per cent of all such global operations (the United Kingdom is second with 6.18 per cent). Thus, most international transactions involving the yuan are performed outside continental China.

One more obstacle to the faster internationalization of the yuan is China’s preoccupation with domestic problems stemming from the rapid growth of debts (especially in the property market), the growth of the shadow banking system and the disproportionate allocation of loans to large and small businesses. In its attempts to conduct a softer monetary policy, the Chinese government is facing a difficult choice between supporting short-term growth and countering unfavourable external shocks. A monetary easing could increase the vulnerability of the Chinese economy, because continued lending growth is capable of slowing down or complicating the restoration of banks’ balance sheets and aggravating the existing imbalances in the allocation of loans.

University of California professor Barry Eichengreen, who is one of the most respected experts on the development of the international monetary system, says the yuan does not qualify as an international currency for three reasons: 1) the high costs of financial transactions involving the acquisition and distribution of information; 2) China’s great dependence on Hong Kong as a regional offshore centre; 3) China’s inability to exert political pressure on the other global economic centres, primarily the United States and the European Union. At the same time, according to Eichengreen, there are four factors indicating the growing status of the yuan as a regional currency: 1) the potential growth of incomes in Asian countries, which results in increased demand for Chinese commodities; 2) the implementation of multilateral projects as part of the Belt and Road initiative, which results in the growing use of the yuan in Central and Southeast Asia; 3) the development of the Asian bond market, which leads to the standardization of international promissory notes nominated in yuan; 4) the growing demand for yuan on the part of commercial banks and companies in swap transactions between central banks as part of the Chiang Mai Initiative.

Points of Conflict between the United States and China

Unlike the Cold War era, which was characterized by the polar confrontation between two systems, today the United States and China are members of the same international financial organizations, they both interact in the uniform global capitalist market and follow the same principles of competition, effectiveness and profit maximization. For this reason, the main point of conflict between the United States and China concerns mutual restrictions when it comes to allowing the other country’s finished products and services onto their national markets.

Nobel Memorial Prize in Economic Sciences recipient Joseph Stiglitz believes that the United States stands to lose more from its trade war with China than China does, as the Chinese authorities have far greater opportunities to restrict the operations of U.S. corporations working in China than the U.S. authorities do when it comes to Chinese goods imported into the United States as part of international trade. In addition, raising the prices of Chinese commodities on the U.S. market may cause dissatisfaction among end customers.

Another point of conflict between the two countries is connected to China’s limited ability to influence major international organizations. Despite the IMF reform, China did not secure a tangible increase in its influence within the organization, with its quota only growing from 4.0 per cent to 6.41% per cent. We should note here that when the IMF began operating in 1947, China’s quota was bigger than it is now, at 6.56 per cent (even though the country was the world’s fifth-largest economy at the time, not the second largest as it is today). The formal inclusion of the yuan in the special drawing rights (SDR) basket (the IMF’s cashless reserve asset) in 2016 was largely symbolic, because the use of SDRs has no effect on the actual balance of forces in the GFA. The value of the SDRs in circulation stands at $204.1 billion, or under 4 per cent of the international currency reserves calculated in dollars. The share of the yuan in the structure of international currency reserves and international transactions stands at approximately 2 per cent, which does not reflect China’s global role as the largest manufacturer and exporter.

One more potential point of conflict is the development of artificial intelligence (AI) technologies. In accordance with the Made in China 2025 plan to develop strategic technologies, the country expects to have assumed global dominance in the world in the field of AI by 2030. The financial sector has high hopes for AI in terms of its potential to increase effectiveness and profitability, much like the effect that the introduction of information technologies had on financial services. China has already outstripped Europe in the number of AI-related startups and is gaining ground on the global leader in AI, the United States.

Conclusions

Experts view pan-Asian financial institutions as an instrument used by China to establish its status as the leading Eurasian and global power. Chinese officials repeatedly stress that the newly established institutions aim to compete with the Bretton Woods institutions, not replace them. In other words, at the current stage in the development of the GFA, China has no intention of changing the neo-liberal principles of its functioning.

Despite the significant increase in China’s influence on the global economy and the addition of the yuan to the SDR basket, the dollar continues to play the key role in the global financial market and in servicing international trade in commodities and services. China’s growing influence on the GFA thus depends on strengthening the global role of Sino-centric financial institutions and on the broader use of the yuan in international payment systems and in transactions on the global financial market. At the same time, the active creation of offshore dollars that are not controlled by the U.S. regulators increases the risk of the dollar-centric currency system collapsing.

It is obvious that the current GFA configuration is not likely to undergo any significant changes in the foreseeable future (unless another global financial crisis breaks out) because the United States has a significant number of institutional instruments and mechanisms for influencing the global economy at its disposal. In the long run, however, any growth in China’s actual role in the international financial system will depend on the successful promotion of a conceptual alternative to the current GFA model for the purpose of overcoming global imbalances between the financial sector and real economy.

From our partner RIAC

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Why Wealthy Countries Must Step Up Their Contribution to Fight Global Poverty

Ferid Belhaj

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Member countries of the International Development Association (IDA), a part of the World Bank Group, are meeting shortly to discuss the 19th replenishment of IDA, which will set the agenda for assistance to the poorest developing countries for the three-year period starting in July 2020. Algeria, Egypt, Iran, Kuwait, and Saudi Arabia contributed funds for the 18th replenishment for IDA, which covers the period July 1, 2017 to June 30, 2020. It is critical that these countries — and others in the Middle East and North Africa (MENA) region who could potentially contribute — sustain and increase their presence and participation in this important international forum and support a global public good.

This coming IDA replenishment is an opportunity for MENA countries to make their contribution and presence felt. Starting in 2020, MENA will be the epicentre of several global discussions and events: The Kingdom of Saudi Arabia is hosting the G20 members, Egypt is the chair of the African Union, the first World Expo in the region will be held in Dubai, the 2021 World Bank-IMF Annual Meetings will take place in Marrakech, and the region will see its first soccer World Cup in Doha in 2022. While these events are significant in their own right, a substantially higher financial contribution from MENA countries to IDA will demonstrate the region’s capacity to lead on long-term global challenges such as poverty reduction, inclusive growth, and climate change.

IDA was created in 1960 to provide ‘soft-loans’ — grant funding, concessional loans, debt relief — to the poorest developing countries who could not afford to borrow on the terms that could be offered by the International Bank for Reconstruction and Development (IBRD). IDA has become one of the largest sources of assistance for the world’s 77 poorest countries and the foremost instrument to channel multilateral funding where it is needed the most and in the quickest and most efficient way possible. There is no bigger source of donor funds for basic services in these countries.

Since 1960, IDA has provided almost $400 billion for investments in over 100 countries. IDA’s support has paved the way toward equality, economic growth, job creation, higher incomes, and better living conditions. IDA’s work covers primary education, basic health services, clean water and sanitation, agriculture, business climate improvements, infrastructure, and institutional reforms. More recently, IDA has intervened in a big way to bring hope to people affected by conflict and violence, including in the MENA region. Of course, IDA is now prioritizing investments to deal with the worst impacts of climate change.

Since 2000, IDA has provided more than $88 billion in financial assistance to Arab and Muslim countries. In IDA18, more than 50% of the resources were allocated to 28-member countries of the Organization of Islamic Cooperation. Countries like Bangladesh, Pakistan, Burkina Faso, Niger and Mali are among the biggest beneficiaries of IDA. In the MENA region, Djibouti, Syria, and Yemen are IDA beneficiaries.

In Yemen, through its many contributions, IDA has played a critical role to provide relief and mitigate the long-lasting impacts of the country’s tragic conflict. Quite literally, IDA has saved lives! It has helped Yemenis fight diseases and famine. IDA helped train nearly 12,000 health personnel and immunize 6.9 million children (five million of them under 5 years old). Through an emergency program, IDA has helped ensure around 9 million vulnerable Yemenis have access to food and other basic necessities.

In Djibouti, from 2014–18, IDA provided essential services to 1.9 million people. Thousands of pregnant and lactating women, adolescent girls, and children under age 5 benefited from basic nutrition services. During the same period, over 24,000 women gave birth attended by a qualified health practitioner, up from just 1,000. IDA also helped immunize 78% of children before their first birthday in 2018, up from 33% in 2012.

The conflict in Syria, now into its eighth year, continues to take a heavy toll on the life of Syrian people and on the Syrian economy. The death toll in Syria directly related to the conflict as of early 2016 is estimated to be between 400,000 (UN, Apr 2016) and 470,000 (Syrian Center for Policy Research, Feb 2016), with many more injured, and lives upheaved. The conflict has internally displaced about 6.2 million people, including 2.5 million children. Over 5.6 million are officially registered as refugees (UNHCR, 2019). In Lebanon, IDA is helping the country enrol 200,000 Syrian children in public schools. In Jordan, IDA assistance is creating 100,000 jobs for Jordanian nationals and Syrian refugees.

Beyond the MENA region, from the conflict ravaged Democratic Republic of Congo to the earthquake affected Pakistan, or from Haiti and Nepal to Tajikistan and Myanmar, IDA is a strong development partner for the poorest countries. Building on its experience of supporting Syrian refugees and host communities, IDA has helped reintegrate displaced people in more than 10 countries including Afghanistan, Bangladesh, Niger, and Pakistan.

International institutions, of which IDA is a recognized leader, remain important for some of the most lagging regions and communities in the world. Independent assessments have documented the tremendous benefits of IDA’s support for the development of poor countries. Many people are unaware that countries such as China, India, and South Korea were beneficiaries of IDA assistance in the past, but now they have become donors giving back to the international community.

Institutions like IDA deserve our utmost support because when misfortune strikes countries, the knowledge and financial resources of institutions such as IDA can save, protect, and nurture lives. These institutions can provide ideas for development strategies and funds for critical infrastructure. To eliminate extreme poverty and boost shared prosperity, institutions like IDA are a valuable ally for governments and citizens.

The World Bank Group is grateful for generous financial contributions to IDA from the international donor community. However, I believe that the more fortunate MENA countries can and must enhance their contribution to IDA. Some countries in the MENA region are among the wealthiest in the world. Their good fortune presents an opportunity for the MENA region to take on a leadership role in this important forum. It is also a wonderful opportunity to help those in need, which is fully in line with the region’s rich history of generosity towards the less fortunate.

IDA has a critical global mission — and its successes to date are only possible because of the generosity of its members. More substantial financial contributions to IDA are good for MENA’s standing in the international community. It is also the right thing to do.

 World Bank

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Economy

BRICS countries deem a single crypto currency

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Speaking on the sidelines of the BRICS summit, which took place in Brazil in mid-November, President of the Russian Direct Investment Fund (RDIF) Kirill Dmitriev came up with a proposal to create a common crypto currency for servicing a unified payment system of the member countries. According to RBC, the idea of a unified payment system has already received the backing of the BRICS Business Council. The parties concerned held a heated discussion on the possibility of using a single digital currency for conducting payments.

Virtual currencies or crypto currencies, and the blockchain technology that underlies them have been major trends in the information technology market since the early 2010s. Experts deem the blockchain technology as revolutionary: we are talking about a distributed electronic database (a register, ledger), in which each “cell” contains information about all others. Cryptographic methods are used to ensure the functioning and protection of the “register”. Such characteristics of block chain technology as its distributed decentralized nature and the availability of information about all transactions make it useful in those areas of business where many participants are involved who are not able to verify the credibility of counterparties. Resources transferred via a blockchain cannot be blocked (or arrested), even temporarily, by anyone except their owner. Meanwhile, what remains a major problem of all private and corporate crypto currency projects is their credibility.

If a digital currency is issued by the state or a community of states, then most, if not all, problems private crypto currencies are faced with are solvable. In this case, the advantages of Bitcoin and the underlying block chain technology are preserved, while the risks, such as the anonymity and simplicity of uncontrolled cross-border operations, which evoke the anxiety of authorities around the world, are neutralized. The issue of crypto currency would make it possible for the authorities to assume control of the technology that can otherwise reinforce global speculators, and even, according to critics, undermine the very existence of states in their classical format.

Meanwhile, many capitals have been keeping a close eye on the growing concern of the US authorities over the prospect of a global spread of crypto currencies. Washington’s major fears are that the “foes of America,” be it states or non-state entities, will be able to create a financial network independent of the US dollar. In this case, the United States would lose the most important instrument of  non-military pressure that it uses to influence its opponents.

At present, more than 85 percent of all currency exchange transactions are made in dollars. All Washington has to do to block unwanted financial transactions is just  add suspicious individuals, organizations or states to the “black list” which is sent to all banks in the world. For fear of falling under sanctions or losing the ability to make payments in dollars, the overwhelming majority of financial institutions have until now been following the instructions of the American authorities. In May this year, Republican Brad Sherman submitted a bill which proposes to ban US citizens from buying or selling crypto currency. In July, a number of Congressmen from the Democratic Party drafted a bill that prohibits online platforms and social networks with an annual income of at least $ 25 billion from providing financial services and issuing crypto currencies. According to commentators, the authors of both bills make no secret of the fact that their initiatives are motivated by by geopolitical considerations. For one, Congressman Sherman argued during the hearings: “Crypto currencies must be nipped in the bud also because the lion’s share of our international influence is based on the fact that the dollar is the standard of the international financial system. For oil and other transactions, it is vital that they be cleared by the federal reserve … Crypto currencies undermine our international policy … ”.

According to RT columnist Max Keiser, an ever more number of countries are beginning to understand what influence the United States has on other states only because the dollar is the principal currency for commercial and intergovernmental settlements. In addition to gaining profit from the dominant role of the dollar in international trade, Washington possesses levers of influence that affect the policies of most countries through sanctions or threat of sanctions and are beyond the reach of anyone else. Keiser deems sanctions as an “act of aggression,” because, in his opinion, the dollar has long turned into a weapon. Not surprisingly, countries that value their sovereignty are looking for ways to minimize or completely neutralize America’s ability to exert pressure through denial of dollar transactions. Before the arrival of crypto currencies, gold was a major protective shield. Nowadays, national digital currencies are considered  a new powerful tool, devoid of many shortcomings of gold in terms of everyday use.

Given the circumstances, as reported by one of the most authoritative Russian resources in the field of crypto currencies, DeCenter, all BRICS members are either on the point of issuing digital fiat money, “or are looking into such a possibility.”  The BRICS countries are thereby following the global trend as the prospect of issuing digital currencies by central banks, the Central bank digital currency (CBDC), has been attracting the attention of governments in an increasing number of countries. On November 26, Vice President of the European Commission Valdis Dombrovskis spoke about plans of the European Union to launch a EU digital currency by the end of 2021. One of the problems that could be solved with the help of such a system, according to ECB Board member Benoit Kere, is putting an end to Europe’s dependence on US-based international payment services, such as MasterCard, Visa, Apple, PayPal and Amazon.

What could serve as an example for the rest of the BRICS members is the position of Beijing, which has changed its attitude to crypto currencies by “180 degrees” over the past few months. According to Leonid Kovachich of the Moscow-based Carnegie Center, “President Xi Jinping refers to blockchain as a breakthrough technology, while major Chinese media outlets are  talking at length  about the benefits of blockchain and urge the community not to miss the historic opportunity to challenge the global hegemony of the dollar.”

This fall, representatives of the People’s Bank of China said they were “considering the possibility of launching a digital yuan at an early date.” President of the Digital Currency Development Center of the Central Bank of China Mu Changchun has identified the basic criteria for issuing the crypto currency of the PRC. “CryptoYuan will not function only on the basis of blockchain, the issue will proceed in two stages: from the Central Bank to commercial banks and then into further circulation.” The digital yuan will replace the M0 aggregate, while the processing capacity of the payment system will be “up to 300 thousand transactions per second”. As an official currency, the digital yuan will be issued on a centralized basis and regulated by the government. The digital yuan is set to incorporate the best characteristics of crypto currencies, including minimum transaction time, “reliability, invariability and irreversibility”, and fiat money – its sovereignty and liquidity guarantees.

The fact that the Central Bank and the Ministry of Finance are considering the possibility of introducing crypto currency in Russia was reported by Kommersant back in 2016. In June 2017, Deputy Chairperson of the Central Bank of the Russian Federation Olga Skorobogatova announced prospects for launching a national digital currency. Skorobogatova said Central Bank specialists had started work on a digital ruble project. Similarly to the digital yuan, it is assumed that the issue of the Russian virtual currency will be strictly regulated, its exchange for rubles and other currencies will be possible only on special electronic platforms and the identity of the crypto currency buyer will have to be established. According to DeCentre, the draft law on digital financial assets (DFA) was adopted by the State Duma in the first reading in 2018. However, amendments have been made and continue to be made since then, also regarding the very definition of crypto currency. 

Russian experts view the digital ruble as one of the options to respond to  the intensifying Western sanctions. As Iran’s disconnection from the SWIFT banking system at the request of the United States demonstrated, the creation of an interbank payment system that can replace SWIFT is “of paramount importance for the BRICS countries”. As an instrument for conducting mutual payments in such a system, the central banks could issue a limited volume of digital currency and all transactions in this currency will be registered in a single register and will be verified by agents appointed by the authorities of the BRICS countries. The use of a common crypto currency would make such a payment system universal and would safeguard payments against foreign sanctions.

In this respect, at the initial stage, the BRICS digital currency may not become a  payment instrument in the full sense of the word. A couple of years ago, Russian venture investor Evgeny Gordeev called for launching a government program to attract investments and ensuring the safety of capital at the blockchain level. Technically, such an investment mechanism would enable Russia’s foreign partners interested in investing in Russian assets to avoid the legal consequences of the sanctions that have been imposed on the Russian Federation in recent years. A member of the State Duma’s expert panel, Nikita Kulikov, believes that a common crypto currency that is currently being considered by BRICS experts could become a means of “fixating obligations”, a conversion tool, and an instrument to ensure the “autonomy of interstate remittances”.

Thus, as experts continue to speculate about the extent to which crypto currencies are capable of revolutionizing the entire system of financial relations, the changes that have occurred in the economic and monetary policies of some of the world’s leading states in recent years demonstrate that they are beginning to take crypto currencies more and more seriously regarding them as a useful tool to strengthen their national economic sovereignty.

From our partner International Affairs

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