Let’s Bet: Will the Phase One deal prove effective?
With oil prices soaring high with a geopolitical risk premium back in markets, the U.S.-China trade talks have taken a step back. However, as soon as this temporary spike settles down (as it seems to be), the question for crude markets and global economy will be how effective the Phase One agreement will prove. A study of past trade talks indicates that the prospects of getting an answer for this question might not be that easy. But meanwhile have “things changed”?
Consider the buildup to the current status: There have been more or less 13 meetings between the world economic juggernauts – China and the U.S. share a total of 40 percent of global GDP –to resolve their economic scrum. Trump has manifested his characteristic whimsical spells shifting from Panglossian optimism to Cynic pessimism. Chinese negotiators have reciprocated the fickleness but nevertheless have played along well. Recently, after the half-cooked “Phase One” (or mini deal), many observers and analysts are betting on a more comprehensive trade deal.
The 15th December tariffs of $160 bn have been delayed. Tariff rate on $120 bn of goods (imposed on September 01, 2019) have been reduced from 15 percent to 7 percent. Other tariffs of $250 bn with a rate of 25 percent still remain. China has promised, according to U.S. officials to purchase goods and services of about $200 bn over two years. However, this might not be that simple.
There are different variables here to consider. Clyde Russell in a trenchant piece for Reutersexplains in detail about these assumptions. An assumption that China would buy about $200 bn more goods from US is quite optimistic. Not to mention that the Phase One agreement has a snapback clause which means that upon quarterly reviews if the Chinese side isn’t holding true to their promises the agreement can become null and void.
Even if China fulfills its promise it won’t reduce U.S. deficit with China by any significant amount. U.S.’ trade deficit with China for the first 10 months of 2019 was $294 bn or 40 percent of the country’s total trade gap. However, for the same period, Chinese sold goods more than four times (of about $382 bn). China needs to half its current exports to the U.S. for a “meaningful” drop in the deficit- something that seems highly unlikely.
Also, the only room China has to ramp up its purchases is agricultural products. However, the recent outbreak of swine flu has led China to herd down its pig population therefore, low demand for soybeans. Also, Brazil, that has been a beneficiary of trade war, will not easily lose their market share and might reduce down prices, giving U.S. farmers a tough time.
Many observers are also pointing towards the language of the official statements. For one not much detail has been shared on the agreement; that consists of 86 pages according to U.S. officials. The U.S. administration is emphasizing Chinese promises of buying more from them while China isn’t that categorical. Chinese media said that the agreement was based on “principle of equality and mutual respect” and that as Chinese markets expands it will lead to “increasing imports of goods and services from abroad”.
Crude oil is another commodity where China can buy more volumes. However, much will then depend upon the price of oil which due to various factors, chief amongst a relatively slow demand, is expected to remain under pressure. China has already been importing record amounts of crude this year, 11.13mbpd in November 2019, with an average of 10.09 mbpd; 10 percentmore than the same time last year.Rex Preston Stoner, a security and geopolitical consultant based in Francenotes, “The Chinese and the U.S. are approaching this issue from diametrically opposed viewpoints. Without getting lost in the details, the Chinese negotiators systematically adhere to principles of strategic patience while grappling with foreign affairs while the current U.S. administration has no apparent systematic or strategic approach whatsoever.”
Most importantly, the Phase One agreement doesn’t address two very important changes in Chinese cyber laws. The first one is Multi-Level Protection 2.0 (implemented on December 1) and second is the Cryptography Law (that will go into effect by 1st January). Both of these rules will prohibit foreign companies from encrypting their data hence giving access to sensitive information to the Chinese. This can become a deal breaker!
As the element of human agency dominates the negotiation table and that the two people who will finally decide the fate of the trade talks cannot afford to look weak, the prospects of a final deal remain elusive. We may have aPhase One deal but it wouldn’t serve the purpose —we have been there before (Last November G20 meeting, both leaders ended the year on a very positive note). Read between the lines and we might have to reconsider our optimism regarding the end of trade war.
From Bullets to Development: Rethinking Military Expenditure in Favour of Official Development Assistance
International assistance has achieved remarkable accomplishments in reducing global poverty, supporting girls’ education, addressing hunger, ensuring safe childbirth, nearly eradicating polio, combating female genital mutilation (FGM), providing food rations for Syrian refugees, constructing schools and sanitation facilities in Kenya, and delivering crucial relief supplies to Afghan villagers affected by an earthquake.
However, despite the current combination of global crises, some of the wealthiest nations in the world are planning to significantly reduce their life-saving aid budgets in 2022-23. These decisions are made by political elites who are sheltered within the safety of their privileged positions, yet the consequences of these choices are acutely felt by the most vulnerable individuals across the globe.
Official Development Assistance (ODA) plays a vital role in supporting the development and welfare efforts of low- and middle-income nations. The United Nations has set a target for countries to allocate 0.7% of their Gross National Income (GNI) towards ODA. However, recent estimates indicate that a significant portion of foreign aid is being directed towards Ukraine, accounting for 7.8% of all ODA in 2022. Meanwhile, aid provided to least-developed countries and countries in sub-Saharan Africa has actually decreased. Donors continue to fall short of their targets to contribute at least 0.7% of their GNI to ODA. When considering a long-term perspective, it is evident that aid may still be experiencing a downward trend in comparison to what countries can reasonably afford.
.Despite its importance, the global levels of Official Development Assistance (ODA) have experienced minimal growth in the last ten years. This lack of progress in fulfilling the commitment to increase ODA to 0.7 percent of gross domestic product (GDP) places a burden on low- and middle-income countries. As a result, these nations are compelled to devise alternative development strategies that are less reliant on external aid. This situation presents them with difficult choices regarding the allocation of their scarce domestic resources undermining development in social sectors.
On the contrary, Military expenditure reached record level in the second year of the pandemic and world military spending continued to grow in 2021, reaching an all-time high of $2.1 trillion. This was the seventh consecutive year that spending increased, research published by the Stockholm International Peace Research Institute (SIPRI).
In light of the Monterrey Consensus on Financing for Development adopted in March 2002 and the 2015 Addis Ababa Action Agenda (AAAA), which outlines spending priorities, states are encouraged to set appropriate targets for essential public services like healthcare, education, electricity provision, and sanitation. However that might not be the case. The latest figures from the OECD will provide further support to the argument. Although there was substantial funding for Ukraine in 2022, Official Development Assistance (ODA) to some of the world’s poorest countries experienced a decline.
The data reveals a decrease of approximately 0.7% in bilateral flows to the group of nations categorized as the least developed countries, comprising 46 countries ranging from Afghanistan to Zambia. The total amount of aid provided to these countries amounted to $32 billion. In simpler terms, the data demonstrates that development aid to numerous developing countries actually contracted.
This leads to an abrupt reordering of budget priorities, where military expenditures, and humanitarian aid take precedence, while other critical needs like education and social services are likely to be deprioritized. Meanwhile, the convergence of droughts and conflicts causes immense human suffering and widespread hunger in several nations, and despite the urgent nature of these crises, UN humanitarian appeals for assistance consistently suffer from inadequate funding.
Assistance allocated to Ukraine, as well as any future major crises that require global attention, should be supplementary to the existing humanitarian and development budgets rather than compromising one for the sake of the other.
As we already knew, in 2021 the ODA budget was reduced to 0.5%, a drop of £3bn compared to 2020 to £11.4bn. The starkest impact of these cuts is on “least developed countries” (LDCs). The amount of bilateral ODA going to LDCs dropped by £961m in 2021, a cut of 40% taking it to a total of £1.4bn.
Yoke Ling, the Executive Director of Third World Network, commented that the increasing military expenditure will undoubtedly have a direct influence on various types of spending that developed countries have committed to providing for developing nations. This includes Official Development Assistance (ODA) and climate finance, which are legal obligations under climate treaties.
Furthermore, Yoke Ling highlighted that even prior to the Russian-Ukraine conflict, developed nations had already been reducing their financial support for development. Therefore, it is anticipated that this decline in development financing will further deteriorate in the future.
Given the climate-change-triggered floods in Nigeria and Pakistan, the severe food insecurity affecting millions in Nigeria, Ethiopia, South Sudan, Yemen, Afghanistan, and Somalia, the unfolding humanitarian crisis in Afghanistan resulting in widespread starvation and desperate measures such as selling body parts to provide for families, the ongoing refugee crisis in Syria where millions remain in displacement camps even a decade after the conflict started, and the devastating famine gripping Tigray, advocates concur that there is an urgent need to uphold and potentially enhance international aid more than ever before.
According to a UN report titled “2022 Financing for Sustainable Development Report: Bridging the Finance Divide,” the Official Development Assistance (ODA) experienced a remarkable growth, reaching its highest-ever level of $161.2 billion in 2020. However, despite this record growth, the report highlights that 13 countries reduced their ODA contributions, and the overall amount remains insufficient to meet the significant needs of developing countries.
The UN expresses concern that the crisis in Ukraine, coupled with increased spending on refugees in Europe, may result in reductions in aid provided to the poorest nations. The majority of developing countries require urgent and proactive support to get back on track towards achieving the Sustainable Development Goals (SDGs).
According to the report’s estimates, a 20 percent increase in spending will be necessary in key sectors within the poorest countries.
If certain developed nations allocate generous resources to military expenditures while simultaneously reducing funding for other aid programs, are they implying that security interests take precedence over long-term public needs? Without question, the rights and necessities of people in Ukraine, Asia, and the rest of the Global South should be prioritized over military spending. Moreover, apart from the conflict in Ukraine, developed countries have already failed to fulfil their commitment of providing $100 billion of climate finance by the year 2020.
By compromising development aid budgets and climate finance, the consequences of poverty, inequalities, adverse climate impacts, and exclusion in the global South will be exacerbated. Such a lack of ambition risks reinforcing the economic and political grievances that lie at the core of armed conflicts in various regions, including Asia.
In order to uphold solidarity and justice, there is a pressing need for synergized political will and ambition.
We should challenge developed countries to honour their existing aid commitments, which include allocating a minimum of 0.7% of their Gross National Income (GNI) as Official Development Assistance (ODA). Additionally, we also call upon them to provide new funding to address the needs of the people in Ukraine. It is imperative to identify new avenues for grants-based climate finance to compensate those most affected by climate change, including communities experiencing losses and damages.
The UN report on Financing for Sustainable Development also highlights the stark contrast between rich countries, which were able to support their pandemic recovery through substantial borrowing at very low interest rates, and the poorest nations that had to allocate billions of dollars to service their debts, hindering their ability to invest in sustainable development.
As we approach the midpoint of funding the Global Sustainable Development Goals, the discoveries are deeply concerning. We cannot afford to be inactive during this critical moment of shared responsibility, where our aim is to uplift hundreds of millions of individuals out of hunger and poverty. It is indispensable that we prioritize investments in equitable access to decent and environmentally friendly employment, social protection, healthcare, and education, leaving no one behind.
Meeting of BRICS Foreign Ministers in Cape Town: gauging the trends ahead of the summit
The meetings of BRICS foreign ministers in Cape Town on June 1-2 were awaited with notable impatience by the global community as several themes in BRICS development were very much in the spotlight throughout this year. One theme was the process of de-dollarization of BRICS economies and the possible creation of a BRICS common currency. Another theme was the discussion on the possible expansion in the BRICS core membership as nearly 20 developing economies have indicated their intention to join the block. Perhaps for the first time in more than a decade these issues made it into the Western mainstream media as the potential implications of BRICS decisions on the common currency and membership could have a major effect on the evolution of the global economic system.
As regards the issue of the creation of a new currency, the BRICS Foreign Ministers placed the emphasis on the use of national currencies in mutual settlements. The cautious approach of BRICS to the issue of the common currency thus far may be due to the need to consider all possible modalities of such a currency, including whether it is to be used as a means of mutual settlements, an accounting unit or as a reserve currency. At the same time, it does appear that the New Development Bank (NDB) was charged with producing a blueprint of how the common BRICS currency could be created and used in mutual transactions. Fundamentally, it appears that all BRICS economies see de-dollarization and the creation of alternative settlement instruments as expedient – the question is what are the common BRICS initiatives in this area that would be seen as optimal by all core members. There may be more substantive discussions on the BRICS common currency at the August summit, with further progress made in 2024 during Russia’s BRICS chairmanship.
With respect to the issue of the block’s expansion the BRICS Foreign Ministers have indicated that work is still ongoing on defining the criteria for new members. No concrete “priority candidates” were singled out. The gradualism in the expansion process is warranted as there may be risks associated with the expansion in the ranks of the BRICS core – the decision-making process is likely to get more complicated at a time when BRICS are set to make crucial decisions with sizeable long-term implications not only with respect to BRICS own future but also for the global economy. In the end BRICS members may come to the conclusion that expanding the BRICS core is problematic and that other formats such as the BRICS+/BRICS++ or a permanent “circle of friends” that participate in the BRICS summits may be preferable. In this respect, it is important to look at the modalities of BRICS meetings with the so-called “Friends of BRICS” that were held during the second day of meetings on June 2.
The meetings of the “Friends of BRICS” featured such economies as Iran, Saudi Arabia, the United Arab Emirates, Cuba, Democratic Republic of Congo, Comoros, Gabon, Kazakhstan as well as Egypt, Argentina, Bangladesh, Guinea-Bissau and Indonesia. Some of these countries were invited from within the group of those that had earlier applied to join the BRICS block, while others featured as representatives of the respective regions and regional associations of the Global South. To some degree the composition of the countries invited into the “Friends of BRICS” circle may offer insights into the format of the BRICS+ meetings at the summit in August later this year.
Overall, South Africa is sustaining the impulse towards greater BRICS openness after the BRICS+ meetings last year during China’s chairmanship. And while a full-fledged admission of new members into the BRICS core appears unlikely in the very near term, there may be further advancements made by BRICS in developing the BRICS+ format and setting the stage for a greater cooperation of BRICS with other developing economies and regional integration blocks. As regards de-dollarization and the creation of a new BRICS currency, the most important development is that these issues are now squarely part of the BRICS agenda, which raises the prospects of material changes on this front in the coming years.
Author’s note: first published in BRICS+ Analytics
Has Sri Lanka Recovered from the Economic Crisis?
Sri Lanka is navigating an unparalleled economic crisis, and according to the Asian Development Bank’s (ADB) annual report, the Asian Development Outlook (ADO) April 2023, the country’s GDP would continue to decline in 2023 before starting to slowly recover in 2024. In 2022, the economy shrank by 7.8%, and in 2023, it is expected to shrink by 3% as it continues to struggle with debt restructuring and balance of payments issues. The country’s efforts to stabilize its economy will be aided by reform measures including the rollback of the 2019 tax cuts and the recent acceptance of the Extended Fund Facility agreement with the International Monetary Fund (IMF). The speedy resolution of the debt issue and the unwavering execution of reforms are essential to Sri Lanka’s recovery from the crisis.
However, due to policy mistakes, global economic shocks, rivalries among the big powers, and pre-pandemic macroeconomic vulnerabilities, Sri Lanka was already in a precarious position when the crisis began. In 2022, a lack of foreign currency caused a shortage of goods that were necessary for survival, as well as an acute energy crisis that resulted in protracted power outages and traffic jams since Sri Lanka was running low on fuel. Many fell into poverty as a result of rising inflation and declining living conditions. The poor and vulnerable have suffered disproportionately from the economic crisis.
While different economic packages have been sanctioned for the island state and relatively sound political stability is on the eve, it can be perceived that an upward movement may be seen in the next year. This year is the year of policy reformations, then the reaping time will be 2024. Meanwhile, the Sri Lankan currency last appreciated versus the dollar by 4.5 percent on March 14. The writeup will therefore shed light on the prospects of economic upwardness.
Finally receiving approval from the IMF for a $3 billion rescue package for Sri Lanka, the island nation may now restructure its debt and expect economic growth in 2024. The IMF’s decision will enable for the prompt disbursement of a $333 million loan over four years to the South Asian nation, which is currently experiencing its worst financial crisis in decades. According to IMF director for Asia and the Pacific Krishna Srinivasan, Sri Lanka has been “hit hard by catastrophic economic and humanitarian crisis.” In an interview with CNBC’s Sri Jegarajah in Asia, he said, “This you can trace back to three factors: One is pre-existing vulnerabilities, policy mistakes, and shocks.”
However, Ranil Wickremesinghe, a six-time prime minister, was elected president by the nation’s lawmakers in July. Wickremesinghe congratulated the IMF in a tweet in response to the most recent IMF bailout and stated that his nation is dedicated to its “reform agenda,” adding that the IMF program is “critical to achieving this vision.”
Previously, as mentioned, the biggest economic crisis the island nation has seen since gaining independence began in early 2022, according to the Central Bank of Sri Lanka, and is projected to gradually cease in the second half of this year. According to Xinhua news agency, the central bank stated its monetary policies for 2023 on January 4 and noted that the sharp acceleration of inflation that started in early 2022 reversed in October. “The Sri Lankan economy, which is projected to register a real contraction of around 8.0 percent in 2022, is expected to record a gradual recovery in the second half of 2023 and sustain the growth momentum beyond,” the bank stated.
According to a recent study by the Central Bank of Sri Lanka, the GDP of the nation increased by 3.6% in the first quarter of 2023 compared to the same time in 2012. Compared to the previous quarter, when the GDP expanded by just 1.5%, this is a huge increase. This development has been attributed to a variety of factors, including increasing industrial production and greater demand for Sri Lankan exports. Particularly, the manufacturing industry has experienced rapid development, with production rising 6.9% in the first quarter of 2023. The agricultural industry has also done well, with considerable increases in tea and rubber exports. Additionally, there have been indications of a rebound in the tourism sector, as seen by a 29% rise in visitor arrivals in the first quarter of 2023 compared to the same period in 222. Given that the tourist sector has been one of the hardest hit by the COVID-19 pandemic and associated travel restrictions, this is particularly noteworthy.
However, since Sri Lanka’s governmental collapse and near-bankruptcy last summer, there appears to be a return to calm in the South Asian country. Fuel lines that once snaked for blocks have been removed, and a beachside area that had been the location of a protest camp for months was decorated for the holidays with Christmas lights and carnival rides. Moreover, the island’s economy still runs on a ventilator since the government has not found a solution to escape its crippling debt. Sri Lankans have come to terms with a depressing reality that includes fewer meals, smaller paychecks, and lower aspirations.
Meanwhile, instead of fixing the economy, a series of punitive tax hikes and subsidy reductions that further limited demand have brought about a semblance of stability. Although necessary, the actions are unpopular and provide fodder for the political opposition, increasing the likelihood that this administration or the one after it will back off from them. Therefore, the economy is still running on a thin line.
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