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Trade Negotiations: Geo-economics and Geopolitics

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Trade negotiations have been increasingly used as a political tool. This is the first thing that comes to mind when one is trying to understand what is happening around the trade war unleashed by the administration of Donald Trump practically on all fronts: against the EU, China, Russia, Mexico and Canada.

On the eve of a visit to Washington of the European Commission President Jean-Claude Juncker, Donald Trump suggested that the EU, at the same time as the USA, abandon customs duties, barriers and subsidies. He said in his Twitter account that he suggests this because they will refuse just the same …

The visit ended with the conclusion of a trade deal, including the deal on duties on car industry products, but the question remained: of course, geo-economics and geopolitics are strongly interrelated, but is it permissible to use trade negotiations as an instrument of political bargaining, and why do we increasingly see this?

Just before Junker’s visit the European Union and Japan signed world’s largest free trade agreement, the volume of which is estimated at one-third of the World gross product (GWP), and which directly affects about 600 million people. In contrast to the actions of the Trump Administration, which recently tightened import tariffs, this was seen as an important step in protecting free trade.

It was also reported that the European Commission is completing negotiations on the establishment of a free trade zone (FTA) with MERCOSUR, which in its scale can exceed the FTA with Japan (the members of this trade and economic union account for 250 million people and over 75% of Latin America’s total GDP ). Again, the question arises: is there still an immediate political context here, since the negotiations on the establishment of the FTA have been going on for years, if not for decades, and why is it announced right now about their triumphant conclusion?

The USA has a recent experience of large-scale trade negotiations, the politicization of which ended in a fiasco. The issue is the establishment of the Trans-Pacific Partnership (TTP), which implied the borders expansion and the deepening of interstate agreements on the unification of the legal field. It was planned to supplement the agreements on the liberalization of trade in goods and services under the norms of free trade agreements with the legal regulations on investment, innovation exchanges, protection of intellectual property, labor relations, management of migration flows, environmental standards and competition standards.

The USA tried to involve many Asian and Pacific countries in the creation of the TTP, but China, the main economic entity in Asia, was excluded from this union. For China, with its state protectionism in sensitive industries that provide economic growth and employment (and therefore important for political stability), the conditions of the TTP were initially unacceptable. Beijing, not without reason, suspected that the USA wanted to create a trade bloc in Asia without the participation of the PRC in order to kick China out of integration processes. That’s why China has tried to create an alternative to the TTP by promoting its project – the Regional Comprehensive Economic Partnership (RCEP).

As we recall, Donald Trump “buried” the TTP as a legacy of Barack Obama, and now this partnership under the “TTP Plus” brand is already living its life without the participation of the United States. The main thing is that after the TTP deal any other initiative of this kind (for example, the idea of the Indo-Pacific partnership) automatically raises fears among its potential participants: whether they will be drawn into confronting China, whose trade and economic relations are so important for many countries in South-East and South Asia.

The experience and lessons of US trade negotiations are, of course, important for Russia, but mainly in “how not to do.” In the same Asia-Pacific region, a large number of trade agreements operate, differing in the depth of liberalization and in the number of participants, which creates the potential danger of dividing the region into separate competing associations. Therefore, for Russian participants in trade negotiations, the choice is unambiguous: to avoid their unnecessary politicization and to act on the basis of transparency and openness, with mutual consideration of the interests and capabilities of the parties, by relating any possible agreements with the multilateral trading system of the WTO.

Russia’s participation in the negotiations on the creation of free trade zones and integration projects is determined by its long-term geo-economic and geopolitical considerations, and at present, when Russia is in search of an “entry point” to this process, the latter can be assessed as the most relevant.

Equally, and perhaps even more important for Russia is the fact that, unlike such trade and economic “giants” as the United States and China, it is now not so much interested in the development of liberalization of regional trade (trade liberalization), as in the strengthening of its transparency and trade-economic interconnection (trade facilitation), the creation of a fair, stable and balanced trade and economic system, including in Eurasia and the Asia-Pacific region, which responds to the priorities and development level of the Russian economy, especially its export-oriented commodity-producing industries.

That is why Russia has taken a course in upholding the priorities of transparency and interrelatedness of trade and economic relations since this is what helps it become an active and interested participant in the discussion of new rules for regional and world trade.

Such a course is consistent with the long-term geo-economic and geopolitical interests of Russia, primarily in such a priority area as Eurasian integration and the development of the Eurasian Economic Union (EEU).

And here it is necessary to remember the lessons of the recent past connected with excessive politicization. The intensification of Russia’s and the EU policy towards the countries of the region of their “common neighborhood” led to the fact that some of them (Ukraine, Georgia, Moldova) were faced with a tough choice in favor of the priority development of relations with the EU or the Eurasian association. In a number of countries, this has greatly reduced the opportunities for the traditionally conducted by their governments maneuvering strategy between Moscow and Brussels and led to an internal political escalation.

In Moscow, this was well understood, and there were no contradictions between the processes of Eurasian integration and the development of relations with the European Union, if the EEU and the European Union began to base their interaction on the principles of free trade and compatible regulatory systems.

However, the European Union held the view that the obligations within the framework of the Customs Union exclude for its members the very possibility of introducing a free trade zone (FTA) with the European Union – in contrast to the CIS Multilateral Free Trade Zone (based on a treaty signed in October 2011 by Kazakhstan, Russia, Byelorussia, Kyrgyzstan, Tajikistan, Armenia, Moldova and Ukraine), which does not presuppose the work of supranational bodies. From Moscow’s point of view, such obstacles can be lifted if one follows the path of establishing an FTA between the EU and the EEU.

In the article published by the German newspaper  “Süddeutsche Zeitung” in November 2010, Vladimir Putin (at that time the Russian prime minister) put forward a long-term plan for the construction of a free trade zone between Russia and the EU (by the way, at that time the World political vocabulary acquired the term “conjugation”).

Unfortunately, this idea, dictated by absolutely economic logic, was coolly received in European political circles, and the reply from Brussels was, not without political arrogance, that the EU’s relations with the above countries do not require Russia’s participation. Show Europe then a little more foresight, many undesirable events in the post-Soviet space could have been avoided …

Russia is still trying to convince its partners to abandon the opposition of European and Eurasian integration in favor of conjugating both projects. So far, unfortunately, neither the post-Soviet integration, nor the EU is consistent with these aspirations.

However, the dynamic development of integration processes in the Asia-Pacific Region offers Europe and Eurasia a new challenge. Given the geographical situation of the post-Soviet countries between Europe and Asia, the development of infrastructure networks and cross-border transport projects with access to China and other countries, the APR would create conditions that would ensure a more favorable external environment for the conjugation of Eurasian and European integration and strengthen the competitiveness of these integration entities.

And here economic logic would help to gradually overcome political contradictions. The solution of the accumulated geopolitical problems could be the creation of a common free trade zone of the EU, the EEU, Ukraine and other Eastern Partnership countries associated with the EU. However, in addition to political will, it takes time to solve a large number of purely economic and technical issues. Effectively, such a project can be facilitated by the fact that all the countries involved are either WTO members or are planning to become them in the near future.

First published in our partner International Affairs

Ph.D. in Political Science, An active member of the Academy of Military Science, Chief Researcher, Institute of Far Eastern Studies of the Russian Academy of Sciences (IFES RAS)

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U.S. policy and the Turkish Economic Crisis: Lessons for Pakistan

M Waqas Jan

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Over the last week, the Turkish Lira has been dominating headlines the world over as the currency continues to plunge against the US dollar. Currently at the dead center of a series of verbal ripostes between Presidents Donald Trump and Recep Tayyip Erdogan, the rapidly depreciating Lira has taken center stage amidst deteriorating US-Turkey relations that are wreaking havoc across international financial markets. Considering Pakistan’s current economic predicament, the events unfolding in Turkey offer important lessons to the dangers of unsustainable and unrealistic economic policies, within a dramatically changing international scenario. This holds particular importance for Pak-US relations within the context of the impending IMF bailout.

In his most recent statements, Mr. Erdogan has attributed his economy’s dire state of affairs as an ‘Economic War’ being waged against it by the United States. President Trump too has made it evident that the latest rounds of US sanctions that have been placed on Turkey are directly linked to its dissatisfaction with Ankara for detaining American Pastor Andrew Brunson. Mr Bruson along with dozens of others has been charged with terrorism and espionage for his purported links to the 2016 attempted coup against President Erdogan and his government.  There is thus a modicum of truth to Mr. Erdogan’s claims that the US sanctions are in fact, being used as leverage against the weakening Lira and the Turkish economy as part of a broader US policy.

However, to say that the latest US sanctions alone are the sole cause of Turkey’s economic woes is a gross understatement. The Lira has for some time remained the worst performing currency in the world; losing half of its value in a year, and dropping by another 20% in just the last week. Just to put the scale of this loss in to perspective, the embattled currency was trading at about 2 Liras to the dollar in mid-2014. The day before yesterday, it was trading at about 7 Liras to the dollar.

While the Pakistani Rupee has also depreciated quite considerably over the last few months, its recent drop (-17% against the dollar over the past 12 months) pales in comparison to the sustained and exponential downfall of the Lira. Yet, both the Turkish and Pakistani economies are at a point where they are experiencing an alarming dearth of foreign exchange reserves that have in turn dramatically increased their international debt obligations.

The ongoing financial crises in both Turkey and Pakistan are similar to the extent that both countries have pursued unsustainable economic policies for the last few years. These have been centered on increased borrowing on the back of overvalued currencies. While this approach had allowed both governments to finance a series of government investments in various projects, the long term implications of this accumulating debt has now caught up with them dramatically. As a result, both countries may soon desperately require IMF assistance; assistance, that in recent times, has become even more overtly conditional on meeting certain US foreign policy requirements.

In the case of Pakistan, these objectives may coincide with recent US pressures to ‘do more’ regarding the Haqqani network; or a deeper examination of the scale and viability of the China- Pakistan Economic Corridor. With regards to the latter, US Secretary of State Mike Pompeo has clearly stated that American Dollars, in the form of IMF funds, to Pakistan should not be used to bailout Chinese investors. The rationale being that a cash-strapped Pakistan is more likely to adversely affect Chinese interests as opposed to US interests in the region at the present. The politics behind the ongoing US-China trade war add even further relevance to this argument.

In the case of Turkey however, which is a major NATO ally, an important emerging market, and a deeply integrated part of the European financial system, there is a lot more at stake in terms of US interests. Turkey’s main lenders comprise largely of Spanish, French and Italian banks whose exposure to the Lira has caused a drastic knock on effect on the Euro. The ensuing uncertainty and volatility that has arisen is likely to prove detrimental to the US’s allies in the EU as well as in key emerging markets across South America, Africa and Asia. This marks the latest example of the US’s departure from maintaining and ensuring the health of the global financial system, as a leading economic power.

Yet, what’s even more unsettling is the fact that while the US is wholly cognizant of these wide-ranging impacts, it remains unfazed in pursuing its unilateral objectives. This is perhaps most evident in the diminishing sanctity of the NATO alliance as a direct outcome of these actions.  After the US, Turkey is the second biggest contributor of troops within the NATO framework. As relations between both members continue to deteriorate, Turkey has been more inclined to gravitate towards expanding Russian influence. In effect, contributing to the very anti-thesis of the NATO alliance. The recent dialogues between Presidents Erdogan and Putin, in the wake of US sanctions point markedly towards this dramatic shift.

Based on the above, it has become increasingly evident that US actions have come to stand in direct contrast to the Post-Cold War status quo, which it had itself help set up and maintain over the last three decades. It is rather, the US’s unilateral interests that have now taken increasing precedence over its commitments and leadership of major multilateral frameworks such as the NATO, and the Bretton Woods institutions. This approach while allowing greater flexibility to the US has however come at the cost of ceding space to a fast rising China and an increasingly assertive Russia. The acceleration of both Pak-China and Russo-Turkish cooperation present poignant examples of these developments.

However, while it remains unclear as to how much international influence US policy-makers are willing to cede to the likes of China and Russia over the long-term, their actions have made it clear that US policy and the pursuit of its unilateral objectives would no longer be made hostage to the Geo-Politics of key regions. These include key states at the cross-roads of the world’s potential flash-points such as Turkey and Pakistan.

Therefore, both Turkey and Pakistan would be well advised to factor in these reasons behind the US’s disinterest in their economic and financial predicaments. Especially since both Russia and China are still quite a way from being able to completely supplant the US’s financial and military influence across the world; perhaps a greater modicum of self-sufficiency and sustainability is in order to weather through these shifting dynamics.

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Social Mobility and Stronger Private Sector Role are Keys to Growth in the Arab World

MD Staff

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In spite of unprecedented improvements in technological readiness, the Arab World continues to struggle to innovate and create broad-based opportunities for its youth. Government-led investment alone will not suffice to channel the energies of society toward more private sector initiative, better education and ultimately more productive jobs and increased social mobility. The Arab World Competitiveness Report 2018 published by the World Economic Forum and the World Bank Group outlines recommendations for the Arab countries to prepare for a new economic context.

The gap between the competitiveness of the Gulf Cooperation Council (GCC) and of the other economies of the region, especially the ones affected by conflict and violence, has further increased over the last decade. However, similarities exist as the drop in oil prices of the past few years has forced even the most affluent countries in the region to question their existing social and economic models. Across the entire region, education is currently not rewarded with better opportunities to the point where the more educated the Arab youth is, the more likely they are to remain unemployed. Financial resources, while available through banks, are rarely distributed out of a small circle of large and established companies; and a complex legal system limits access to resources locked in place and distorts private initiative.

At the same time, a number of countries in the region are trying out new solutions to previously existing barriers to competitiveness.

  • In ten years, Morocco has nearly halved its average import tariff from 18.9 to 10.5 percent, facilitated trade and investment and benefited from sustained growth.
  • The United Arab Emirates has increased equity investment in technology firms from 100 million to 1.7 billion USD in just two years.
  • Bahrain is piloting a new flexi-permit for foreign workers to go beyond the usual sponsorship system that has segmented and created inefficiencies in the labour market of most GCC countries.
  • Saudi Arabia has committed to significant changes to its economy and society as part of its Vision 2030 reform plan, and Algeria has tripled internet access among its population in just five years.

“We hope that the 2018 Arab World Competitiveness Report will stimulate discussions resulting in government reforms that could unlock the entrepreneurial potential of the region and its youth,” said Philippe Le Houérou, IFC’s CEO. “We must accelerate progress toward an innovation-driven economic model that creates productive jobs and widespread opportunities.”

“The world is adapting to unprecedented technological changes, shifts in income distribution and the need for more sustainable pathways to economic growth, “added Mirek Dusek, Deputy Head of Geopolitical and Regional Affairs at the World Economic Forum. “Diversification and entrepreneurship are important in generating opportunities for the Arab youth and preparing their countries for the Fourth Industrial Revolution.”

With a few exceptions, such as Jordan, Tunisia and Lebanon, most Arab countries have much less diversified economies than countries in other regions with a similar level of income. For all of them, the way toward less oil-dependent economies is through robust macroeconomic policies that facilitate investment and trade, promotion of exports, improvements in education and initiatives to increase innovation and technological adoption among firms.

Entrepreneurship and broad-based private sector initiative must be a key ingredient to any diversification recipe.

The Arab Competitiveness Report 2018 also features country profiles, available here: Algeria, Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, United Arab Emirates.

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The impact of labour market trainings on unemployment process in the global labour economy

Gunel Abdullayeva

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Since the 1990s, the persistence of high unemployment has been followed by two downturns, which affected an economic life over the world across the nation-states. The overt consequences cost unpleasantly social and economic outcomes for the states as well as societies. Henceforth, activation turn has observed once more shifting passive employment policies within the active policy actions of countries upon labour market at the beginning of a new millennium. It was supposed that the activation of jobless people through keeping employees occupied, job-search assistance, job creation and work experience programs, training and invest in up skilling, is an open way to fight against high unemployment and secure economic growth as well. Hereby, the idea of an active labour market policy (ALMP) became again pivotal tool in the domestic policy agendas of states in order to engage in new challenges of labour markets. Since the 1950s,it is an apparent fact that in Europe and the Nordic countries that the effectiveness of ALMPs engenders diminution in a structural and long-term unemployment and leads to increase net income together with the employment ratio of targeted groups in national economies.

With the XXI century’s new technological vicissitudes and industrialization, the active employment policies have been designed to support people with monetary (income) and non-monetary (education) incentives in order to reduce inequality, keep the balance of social inclusion, and stimulate market beyond to decrease unemployment. Consequently, labour market training grew into to become an important measure of ALMP strategies in the background of “welfare to workfare policy approach” to create better-skilled workforce as well as to surge adequate match between skilled manpower and needs of progressive demand in labour markets.

In fact, the scholarly studies state significant impacts of training and vocational programs in the activation of the workforce. For example, the 1950-1960s – Post War Era characterized with the rapid economic growth and labour supply shortage in the European industry. And as a solution, national employment policies started to focus on labour trainings. So that Sweden with its successful retraining system has been the pioneer of ALMP idea in the history. On the other hand, Germany with 1969`s Employment Promotion Act considered training as a principal component of active employment policies to upskill workforce in terms of new industrial needs by market demand.

The UN 2009 reports that education is considered one of the main indicators of poverty reduction: education and human resource investments contribute to an economic development of nation-states and societies. Higher educated people or up-skilled workforce boost up productivity and react the positively to technological changes. Some scholars and interlocutors claim that in long-term perspectives ALMPs should have to aim to develop an education and training system that enhances the productivity and employability of a labour force. Because of the fact that the skilled manpower is one of the cornerstones of the higher employment, developed economy, higher net income and well-being of the whole society.

Many types of research have been carried out to identify the prominence of labour market training, however, the Katz`s study (1993) shows the significant point of job market training as turning “unskilled labour” into “skilled labour”. Perceptibly, the unemployment problem is more common among less skilled individuals and new entrants to the market. Shifting in demand against unskilled labour force causes an unemployment among those people. In contrast to unskilled force reservation wage and labour demand is high for skilled manpower in the market. Here, the training policy helps turn out unskilled to a skilled workforce and to increase total employment in order to decrease unskilled unemployment. Research argues that training policy extends the skilled labour force and close the gap between the unskilled and skilled workers. Caruana and Theuma (2012) refer to Katz (1993) argue that in order to push jobless people towards work, some trainings improve the qualification of those workers who are already in the market. Hence, Katz (1993) emphasizes the importance of labour market training in reducing the unemployment rate of unskilled labour by transferring more workers to the skilled labour pool. They also underline the significant role of a training policy in improving the skills of employees and increasing, the supply of skilled manpower in the economy. The following figure “Development of Unskilled Labour Force” visualizes Katz`s statement andshows how training measure affects the job market in both ways. The points where demand curves intersect supply curves, which are given wages for skilled and unskilled labour respectively. As the author explains, the wages represent the remuneration of foregone opportunity costs that, logically, is higher for skilled labour than for unskilled one. Since labour demand for the skilled labour is stronger than that of unskilled labour, thus, the demand curve for the former one is more elastic. As the figure illustrates, after the implementation of training, part of unskilled labour is moving up to the skilled.

At the same time, scholar states that wage setting regulation, training, and education systems affect differently net income and employment perspectives. Consequently, education and labour training policies create an equal distribution of skills and able to reduce supply and demand shifting on wages and employment. Another study by Calmfors et al., (2001) argue that training programs increase the reservation wage of attendees. However, salary growth and employment perspectives are possible by time after long run participation in the program.

To sum up, the training policy is considered as a main supply-side policy tool of activation to tackle unemployment. Scholars argue that training programs are useful to prevent the long run unemployment and to keep unemployed active in the market via participation. However, ex-post evaluation of training programs is controversial. Country case studies show that training programs are more effective in the background of vocational education reforms and collaboration with demand-side active labour market policies.

Reference list:

  • , Forslund A., &Hemstrom M., (2001), Does Active Labour Market Policy Work? Lessons from Swedish experiences, Swedish Economy Policy Review, 85, 61-124
  • Caruana C. &Theuma M., (2012), The next leap – From Labour Market Programmes to Active Labour Market Policy.
  • Katz, F.L., (1993), Active Labor Market Policies to Expand Employment and Opportunity.
  • United Nations, (2009), Rethinking Poverty: Report on the World Social Situation 2010, Retrieved from http://www.un.org/esa/socdev/rwss/docs/2010/fullreport.pdf
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