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Is the Mercantilism back?

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”We reject the ideology of Globalization and embrace Patriotism,” Mr. Trump uttered when he took the podium of the UNGA.

An ideology which has mingled the whole world, through the exchange of products, thoughts, communication, researches, technology, and ideas among the nations; is now under the severe denigration of the president of the U.S. However, this statement by Trump surely wouldn’t have shocked the world, as the world has become accustomed to unusual happenings since Donald Trump assumed the power of the United States. From the immigration ban to threatening North Korea, entering the trade war with China to freezing aid to Pakistan, torpedoing JCPOA to leaving Paris Climate agreement; the world has witnessed a strange sort of trends, by the decisions he took.

A Republican President who succeeded the Barak Obama has entered the white house with resolute intentions of ”America First.” By fulfilling his maxim, he has even negated the trends and policies of his predecessors.

In the wake of World War 2, the renowned landmark deal ”Bretton Woods” among the Allied Powers of WW-II concluded with the idea of warding off the trade wars among the nations. In Bretton Woods deal two influential organizations – the IMF and the World Bank – conceived. The purpose of the formation of these two organizations was to get rid of mercantilism, which is a kind of economic nationalism. Mercantilism is an economic model of any state, which limits international trade. It is also the driving factor behind intensification of the Great Depression, which beset the U.S during the 1930’s. Mercantilism flourished in the 16th century and out-phased partially in the 19th century, not wholly. In the 1930’s when the Fascism was at its peak in Italy and Germany, both these countries adopted mercantilism. Countries began to impose tariffs on each other’s imports, which resulted in a fall in the world trade up to 65%. Owing to this trade among the countries crippled in their economy and thus international trade out-phased in between 1930-1940.

This trend injected fear among Allied Powers, and they witnessed mercantilism as the scourge to the trade among the world. Thus, they sailed on the idea to form the IMF and the World Bank to promote the world trade in a semblance of Globalization.

The maverick economist of 18th century Adam Smith also condemned the idea of mercantilism as he believed in mutual trade between the countries. The cerebral Adam Smith demonstrated in his book ‘’The Wealth,’’ of Nations that trade is mutually beneficial when countries specialize in producing the goods they are best at making.

Even the World Treaty Organization, which replaced the General Agreement on Tariffs and Trade in 1994, endorses the idea of liberalizing trade free from disputes.

But the trends of international trade and globalization endangered, particularly in the U.S, when Mr. Trump declared trade war with China with a claim that the influx of imports from China and other countries are making the population the redundant, thus posing threat to the U.S’ economy. For this reason, Trump has imposed heavy tariffs on the Chinese exports to the U.S. To say Trump’s is endorsing the very idea of mercantilism to which Adam Smith staunchly opposed. Enacting tariffs, primarily on manufactured goods, is the universal hallmark of mercantilism policy.

However, China is not only the country which has been affected by the tariffs; Europe, Mexico, and Canada as well, join the company of China in the trade war. The U.S has ignited the war by imposing tariffs on the steel and other imports coming from the countries mentioned above.

On the other hand retaliation from the side of China was also immediate. China slapped a tariff on the U.S exports to China like soybeans, planes, cars, and jeans etc. In the same vein, Canada seems unwilling to be bullied; it has retaliated with a 25% tariff on $12 billion of the U.S goods. Another feature that mercantilism exhibits, is the immigration since foreigners consume the jobs of indigenous people. Thus, Mr. Trump has promised to build a wall with the Mexican border to halt infiltration of people.

Trump since his election campaign had been the flag-bearer of reducing international trade. From the very beginning when he took the reins of the U.S, he seemed to be cursing the other nations by blaming them that they are liable for leaving many American people redundant. And in his recent speech, while being at the dais of the UNGA, he condemned the ideology of globalization. He accused China many times that the latter has created the imbalance in the trade with the influx of its imports to the U.S.

As of 2017, the trade deficit of the U.S with China was $315 billion. Trump has accused China of this budget deficit by taking on the twitter: “Tariffs are working big time. Every country on earth wants to take wealth out of the U.S, always to our detriment. I say, as they come, tax them. He also added: “If they don’t want to be taxed, let them make or build the product in the U.S. In either event, it means jobs and great wealth.

The course of history is witness to the fact that the trade wars have not achieved their desired results. Amidst days of the Great Depression, mercantilism policy adopted by the Congress of the U.S in the form of Smoot-Hawley Act deepened the effects of the Great Depression. Likewise, between 2002 and 2005 the U.S’ president George W. Bush imposed tariffs on the steel resulted in inflation, loss of 200,000 jobs and fall in the economy.

And right now the outmoded economic policy namely mercantilism that supported the regulation of imports in the past, has taken the flat coat. At this age of globalization when countries have interconnected links in trade, the concept of mercantilism seems peg in the square table. However, Trump with his pro-tariff policies to halt the surge in the U.S imports has substantiated his mercantilist approach.

Different camps of economists have their different opinions regarding contemporary trade war, yet it would be earlier to predict the consequences of this step that where it would lead the trading system of the world, which Donald Trump has initiated.

Economy

Egypt’s “Too Big to Fail” Theory Once Again at Test

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Authors: Reem Mansour & Mohamed A. Fouad

In the wake of 2022 FED’s hawkish monetary policy, the Arab world’s most populous nation, Egypt, saw an exodus of about USD20bn of foreign capital.  A feat that exerted pressure on the value of its pound against the dollar slashing it by almost half.  This led to USD12bn trade backlog accumulating in Egypt’s ports by December 2022.

Meanwhile, amidst foreign debt nearing USD170bn, inflation soaring to double digits, and a chronic balance of payment deficit, Egypt became structurally unfit to sustain global shocks; the country saw its foreign debt mounting to 35% of GDP, causing the financing gap to hover at USD20billion. 

While it may seem all gloom and doom, friends from the GCC rushed to inject funds in the “too big to fail” country, sparing it, an arguably, ill-fate that was well reflected in its Eurobond yields spreads and credit default swaps, a measure that assesses a sovereign default risk. 

For the same reason in early 2023, the IMF sealed a deal worth of USD3bn, with the government, which unlocked an extra USD14bn sources of financing from multilateral institutions, and GCC sovereign funds, to fill in a hefty portion of the annual foreign exchange gap, albeit  a considerable amount averaging USD6bn per annum is yet to be sourced from portfolio investments.  

With the IMF stepping in, the Egyptian government agreed on a structural reform program that requires a flexible exchange rate regime, where the Egyptian pound is set to trade within daily boundaries against the US dollar, rationalize government spending, especially in projects that require foreign currency; and most importantly the program entails stake-sales in publicly owned assets, paving the way for the private sector to play a bigger role in the economy.

In due course, through its sovereign fund, Egypt planned initial offerings for shares in companies worth about USD5-USD6bn, and expanded the sale of its shares in local banks and government holdings to Gulf investment funds. 

Through the limited period of execution of these reforms, the EGP hit a high of 32 against the greenback, and an inflow of portfolio investments amounting to USD1bn took place, according to the Central Bank of Egypt. 

Simultaneously, Citibank International, cited a possible near end of the devaluation of the Egyptian pound against the US dollar.  Also, in a report to investors, Standard Chartered recommended to buy Egyptian treasury bills, and pointed to the return of portfolio flows to the local debt market in the early days of January, 2023. Likewise, Fitch indicated the ability of the Egyptian banking sector to face the repercussions of the depreciation of the pound, and that the compulsory reserve ratios within Egyptian banks are able to withstand any declines in the value of the pound because they are supported by healthy internal flows of capital.

While things seem to be poised for a recovery, the long term prospects may lack sustainability.  The Egyptian government needs to accelerate its plans to shift gears towards a real operational economy capable of withstanding shocks and dealing with any global challenges. Egypt, however has implicitly held the narrative that the country is ‘too big to fail”. This is largely true to the country’s geopolitical relevance, but even this has its limitations when the price to bail far outweighs the price to fail.

Former President George W. Bush’s administration popularized the “too big to fail” (TBTF) doctrine notably during the 2008 financial crisis. The Bush administration often used the term to describe why it stepped in to bail out some financial companies to avert worldwide economic collapse.

In his book “The Myth of Too Big To Fail” Imad Moosa presented arguments against using public fund to bail out failing financial institutions. He ultimately argued that a failing financial institution should be allowed to fail without fearing an apocalyptic outcome. For countries, the TBTF theory comes under considerable challenge.

In August 1982, Mexico was not able to service its external debt obligations, marking the start of the debt crisis. After years of accumulating external debt, rising world interest rates, the worldwide recession and sudden devaluations of the peso caused the external debt bill to rise sharply, which ultimately caused a default. 

After six years of economic reform in Russia, privatization and macroeconomic stabilization had experienced some limited success. Yet in August 1998, after recording its first year of positive economic growth since the fall of the Soviet Union, Russia was forced to default on its sovereign debt, devalue the ruble, and declare a suspension of payments by commercial banks to foreign creditors.

In Egypt, although the country remains to face a number of challenges, signs remain relatively less worrying than 2022, as global sentiment suggests that leverage will be provided in the short-term at least. Egypt’s diversified economy, size and relative regional clout may very well spare the country the fate of Lebanon. However, if reforms do not happen fast enough, the TBTF shield may become completely depleted.

Hence, in order to avoid an economic fallout scenario a full fledged support to the private sector’s local manufacturing activity and tourism is a must.  Effective policies geared towards competitiveness are mandatory, and tax & export oriented concessions are required to unleash the private sector’s maximum potential and shift Egypt into gear.

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Sanctions and the Confiscation of Russian Property. The First Experience

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After the start of the special military operation in Ukraine, Western countries froze the assets of the Russian public and private sector entities which had been hit by blocking financial sanctions. At the same time, the possibility that these assets could be confiscated and liquidated so that the funds could be transferred to Ukraine was discussed. So far, only Canada has such a legal mechanism. It will also be the first country to implement the idea of confiscation in practice. How does the new mechanism work, what is the essence of the first confiscation, and what consequences can we expect from the new practice in the future?

Loss of control over assets in countries that impose sanctions against certain individuals has long been a common phenomenon. The mechanism of blocking sanctions has been widely used for several decades by US authorities. A similar methodology has been adopted by the EU, Switzerland, Canada, Australia, New Zealand, Japan and some other countries. Russia and China may also resort to these tactics, although Moscow and Beijing rarely use them. In the hands of Western countries, blocking sanctions, however, have become a frequent occurrence. Along with the ban on financial transactions with individuals and legal entities named in the lists of blocked persons, such sanctions also imply the freezing of the assets of persons in the jurisdiction of the initiating countries. In other words, having fallen under blocking sanctions, a person or organisation loses the ability to use their bank accounts, real estate and any other property. Since February 2022, Western countries have blocked more than 1,500 Russian individuals in this way. If you add subsidiary structures to them, their number will be even greater. The volume of the property of these persons frozen abroad is colossal. It includes at least 300 billion dollars in gold and foreign exchange reserves.

This is not counting the assets of high net worth Russian individuals worth $30 billion or more which have been blocked by the G7 countries. However, the freezing of property does not mean its confiscation. Although the blocked person cannot dispose of his assets, it formally remains his property. At some point, the sanctions may be lifted, and access to property restored. In practice, restrictive measures can be in place for years, but theoretically, the possibility of recovering assets still remains.

After the start of the special military operation (SMO), calls began to be heard in Western countries to confiscate frozen property and transfer it to Ukraine. Confiscation mechanisms have existed before. For example, property could be confiscated by a court order as part of the criminal prosecution of violators of the sanctions legislation. However, such mechanisms are clearly not suitable for the mass confiscation of property. Blocking sanctions are a political decision that do not require the level of proof of guilt that is required in the criminal process. To put it bluntly, the hundreds of Russian officials or entrepreneurs put on blocking lists for supporting the SMO did not commit criminal offenses for which their property could be subject to confiscation. The sanctions have spurred the search for such crimes in the form of money laundering or other illegal operations. But the amount of funds raised in this way would be a tiny fraction of the value of the frozen assets. To implement the idea of confiscation of the frozen assets of sanctioned persons and the subsequent transfer of the proceeds for them, Ukraine needed a different mechanism.

Canada was the first country to implement such a mechanism. The 2022 revision of the Special Economic Measures Act gives Canadian authorities the executive power to order the seizure of property located in Canada which is owned by a foreign government or any person or entity from that country, as well as any citizen of the given country who is not a resident of Canada (article 4 (1)). The reason for the application of such measures may be “a gross violation of international peace and security, which has caused or may cause a serious international crisis” (Article 4 (1.1.)). The final decision on confiscation must be made by a judge, to whom a relevant representative of the executive branch sends a corresponding petition (Article 5.3). Furthermore, the executive authorities, at their own discretion, may decide to transfer the proceeds from the confiscated property in favour of a foreign state that has suffered as a result of actions to violate peace and security, in favour of restoring peace and security, as well as in favour of victims of violations of peace and security, or victims of violations of human rights law or anti-corruption laws (art. 5.6).

The first target of the new legal mechanism will be the Canadian asset of Roman Abramovich’s Granite Capital Holding Ltd. The value of the asset, according to a statement by Canadian authorities, is $26 million.

Roman Abramovich is on the Canadian Blocked List, i. e. his property is already frozen, and transactions are prohibited. Now the property of the Russian businessman will be confiscated and, with a high degree of probability, ownership will be transferred to Ukraine. This is a relatively small asset (from the standpoint of state property), but the procedure itself can be worked out. Further confiscations may be more extensive.

The Canadian experience can be copied by other Western countries. In the US, work on such a mechanism was announced back in April 2022. although it has not yet been adopted at the legislative level. In the EU, such a mechanism is also not finally fixed in the regulatory legal acts of the Union, although Art. 15 of Regulation 269/2014 obliges Member States to develop, inter alia, rules on the confiscation of assets obtained as a result of violations of the sanctions regime. The very concept of violations can be interpreted broadly. So, for example, Art. 9 of the said Regulation obliges blocked Russian persons to report to the authorities of the EU countries within six weeks after blocking about their assets. Violation of this requirement can be regarded as a circumvention of blocking sanctions.

There are several consequences of the Canadian authorities’ initiative.

First, it becomes clear that the confiscation rule is not dormant. Its use is possible and is a risk. This is a serious signal to those Russians and Russian companies that have not yet come under sanctions, but own property in the West. It can be not only frozen, but also confiscated. This risk will inevitably be taken into account by investors and owners from other countries, which could potentially be the target of increased Western sanctions in the future. Among them are China, Saudi Arabia, Turkey, and others. It is unlikely that the confiscation of Russian property will lead to an outflow of assets of these countries and their citizens from Canada and other Western jurisdictions. But the signal itself will be taken into account.

Second, the Russian side is very likely to take retaliatory measures. Western companies are rapidly withdrawing their assets from Russia. The representation of Canadian business in the Russian Federation was small even before the start of the operation in Ukraine. If the practice of confiscation becomes widespread, then the Russian side can roll it out in relation against the remaining Western businesses. However, so far, Moscow has been extremely hesitant to freeze Western property. While the US, EU and other Western countries have actively blocked Russians and their assets, Russia has mainly responded with visa sanctions. The confiscation could overwhelm Moscow’s patience and make the retaliatory practice more proportionate.

Finally, the practice of confiscation modifies the very Western idea of sanctions. It currently implies, among other things, that the “behavioural change” of sanctioned persons would result in the lifting of sanctions and the return of property. The freezing mechanism was combined with this idea. However, the confiscation mechanism contradicts it. Sanctions now become exclusively a mechanism for causing damage.

From our partner RIAC

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Pakistan’s geo-economic policy and regional connectivity

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gwadar

Pakistan has moved its attention to geo-economics ever since the publication of its first National Security Policy. Following a current worldwide trend, this strategy shift from geopolitics to geoeconomics. Geoeconomics is an approach to economics that considers the world economy’s geography and geopolitics. In other words, it is a type of analysis that looks at the relationships between political and economic power that have an impact on global economic activity. In the context of the global economic system, geoeconomics focuses on the interactions between governments and other participants as well as the contribution of geography. With the expansion of global economic integration and the interconnectedness of global markets and trade, geoeconomics has gained importance. Geoeconomic analysis is necessary to comprehend how economic actions made in one country affect other ones. Geoeconomics is frequently used to examine the potential effects of trade agreements, tariff agreements, and other economic policies on the financial condition of various nations throughout the world. This is particularly crucial to take into account when it comes to trade agreements because they frequently involve numerous countries and a range of economic interests.

The Belt and Road Initiative (BRI) of China is a striking illustration of geoeconomics. Beijing’s premier BRI project is the CPEC. With the help of CPEC, China may avoid the trouble zones in the South China Sea and Strait of Malacca and gain dependable access to the Middle East and Africa. This offers China a wealth of energy resources and expanding economic markets. China’s BRI is rerouting economic routes from the West to the East and laying the groundwork for the emergence of a multipolar world order. Pakistan’s crucial contribution to this process makes it possible to view it as the foundation of Beijing’s long-term vision for the world. The China-Pakistan Economic Corridor (CPEC) is more than just a “highway” connecting Xinjiang and the Arabian Sea; it is a collection of regional infrastructure-building initiatives that will help Pakistan position itself as a leader in the fast evolving geopolitical landscape.

The foreign ministers of China, Pakistan, and Afghanistan met in September 2019 and decided that the three nations should improve their mutual connection and push for the CPEC to be extended to Afghanistan. However, Afghanistan’s stability is essential for the successful completion of CPEC and the bigger BRI. The security situation in Afghanistan has not been able to improve under the present administration. Afghanistan still needs to make sure that it won’t be used as a base by militants and that they are excited by China’s involvement in the growth and rehabilitation of Afghanistan. China might support the development of commercial ties between Afghanistan and Pakistan if it works cooperatively with the Taliban and the CPEC is expanded into Afghanistan. The success of such a transaction will probably depend on how stable Afghanistan’s domestic political situation is for international investment to proceed without safety worries. If the security situation in Afghanistan improves, a number of significant regional integration projects could be completed. China, Russia, Iran, and other regional and powerful nations surround Central Asia, which is situated in the centre of Eurasia. Due to their central location in South Asia, South-East Asia, the Middle East, and Europe, the five Central Asian States (CAS) have easy access to a variety of possible commercial partners. Because of its geographic location, the area might serve as a transport route for goods moving between Asia and Europe or the Middle East. Strategically speaking, China, Russia, and the United States all have vested geopolitical interests in Central Asia. Pakistan, which is in South Asia, can benefit from Central Asia’s geopolitical and economic advantages. The trilateral Pakistan-Afghanistan-Uzbekistan railway project, which was just approved, provides Pakistan with strong connections to the rest of the region. Greater regional integration and trade are projected to result from improved trade relations between Central and South Asia. Greater access to Pakistan’s three ports in Gwadar and Karachi would be available to landlocked Uzbekistan. Beyond expanding commercial opportunities with resource-rich Central Asia, Pakistan’s ultimate goal is more than just that. By enabling the flow of power between nations in the region, CASA 1000, a high-voltage electrical transmission line linking four nations in Central and South Asia, will help alleviate energy shortages and promote economic growth. Some Central Asian nations experience summertime electrical surpluses. Pakistan is establishing itself as the meeting place of the geoeconomic interests of the major countries in Central and South Asia through such relationships. In the event that CPEC extends to west Asia and Africa, Pakistan will have a once-in-a-lifetime chance to draw attention around the globe to its crucial geoeconomic policy. Uncertainty in Afghanistan, which serves as a gateway to Central Asia, is the main obstacle to Pakistan’s geoeconomic aspirations. In the near future, other militias will emerge and the nation may likely experience another civil war if the Taliban are unable to securely establish national control. Such a result poses a significant threat to the area. Projects like the TAPI pipeline and CASA 1000 with Central Asian countries, which have already been postponed because to instability in Afghanistan, will continue to be hindered.

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