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Long trends and disruption: the anatomy of the “post world” of the COVID-19 crisis

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What will be the economic architecture of the world after the COVID-19 crisis? This question involves understanding the major trends at work for twenty years now.

The world that will emerge from this crisis will be marked by these major trends, which, for some, will be reinforced by this crisis. However, this crisis has created too specific disruptions, in particular in the field of transport and energy. It has also provoked an awareness of the centrality of sovereignty, and in particular of economic sovereignty. Finally, the economic and monetary policies that have been put in place to combat the economic effects of the epidemic and of containment will have long-term consequences on international financial balances.

An acceleration of the change of the world?

Since 2000, we have witnessed the rise of an “Asian bloc” to the detriment of what we might call the “Western bloc”, that is to say the United States, the European Union and the United States. Japan. This Asian bloc is heterogeneous, as is the Western bloc. In each of these bloc politics is the main factor of homogeneity. But, these blocs also correspond to an economic reality: that of the countries of old industrialization against the countries, which it is better to call new industrialization than emerging ones.

In 2000, the China-India-Russia combined represented only 15% of world GDP, while the United States, the European Union and Japan combined weighed more than 47%, or three times as much. In 2020, the two blocks are tied at around 31.5%. If we take into account the immediate effects of the COVID-19 crisis, this movement is even expected to grow. The IMF has made forecasts which indicate that China and emerging countries should recover much faster from the shock of this crisis than the so-called “advanced” countries, ie countries of former industrialization. The world should see the shift to Asia amplify in the coming years.

The death of oil has been greatly exaggerated… (bcc, Mark Twain)

The COVID-19 pandemic has had a profound influence on the energy market and on oil production. The persistence of the pandemic means that air transport, among other things, will not return to its 2019 level before, no doubt, 2024. This implies a weak demand for kerosene as estimated by the International Energy Agency Forecasts of global oil demand and post-crisis economic growth are determined by different assumptions. In the optimistic scenario, there is a rapid economic recovery in a more or less flattened “V” shape in the first half of 2021, but the demand for oil does not fully return to the pre-pandemic trend. In the more pessimistic scenario, oil demand will not reach 2019 levels until 2023, and its growth will remain well below the pre-pandemic trend. The current evolution of the pandemic suggests that we are closer to this pessimistic scenario. These two scenarios also assume that zero-emission vehicles will represent 60% of new vehicle sales by 2040, because investments are high in these technologies. Therefore, they both forecast a slowdown in demand for oil to peak in the mid-2030s at around 105-108 Mb / d. What will be the consequence?

In the medium term, OPEC will have to manage the probable return of part of the 5.7 Mb / d of unused production in OPEC countries (Venezuela, Iran and Libya) and non-OPEC countries (Syria and Yemen). OPEC will also have to deal with the resumption of US hydrocarbon production (particularly shale oil), a recovery that may be slow due to falling investment, as demand and the price of oil rise. US production of hydrocarbons has fallen by more than 2 million barrels / days, due to the closure of existing wells, reduced storage capacity and reduced demand.

The impact of COVID-19 on oil demand will therefore be profound, particularly in the event of a deep and long recession associated with a protracted pandemic. Without aggressive intervention by OPEC, the average crude oil price could thus remain below $ 50 / barrel until mid-2022. During the second half of this decade, supply and demand are expected to move closely towards equilibrium as non-OPEC production, especially from Russia, begins to decline and US hydrocarbon production reaches a low. tray. The price of oil is expected to rise to around $ 80-90 / barrel (optimistic scenario) or $ 70-80 / barrel (pessimistic scenario), even without OPEC intervention.

As we can see, however, despite all voluntarist proclamations one can hear here and there, oil will remain a major source of energy for at least the next thirty years.

The return of economic sovereignty

A more direct change brought about by the COVID-19 pandemic is the realization of the importance of economic sovereignty. Of course, a number of countries, China, Russia, but also the United States and India, were acutely aware of the importance of this sovereignty. The European Union, for its part, had adopted a very negligent attitude on this subject. The strong disruption of international trade caused by the pandemic caused a real shock on this point. Of course, there is no question of returning to more or less self-sufficient economies. But, the economic, social, and even strategic damage caused by free trade policies are globally more taken into account today.

This will accelerate the return of nations and the crisis of multilateralism that we could already observe. The economy is once again becoming a breeding ground for strategy. Through the policy of economic sanctions, which the United States has used and abused since well before the election of Donald Trump, we are witnessing an acceleration of the fragmentation of the world economic space. American pressure on Huawei, or on the Chinese social network “Tik-Tok” is an example. De-globalization had passed from the stage of possibility to that of concrete fact; with the effects of the pandemic it will pass from that of fact to that of major fact.

This return to economic sovereignty induces the great revenge of politics over “technology”, the triumph of decisions over the automaticity of standards. However, ” technology” is embodied today mainly in economics and finance. The pandemic heralds the return of sovereignty, and being sovereign is above all having the ability to decide. The countries will then be referred to logic of bilateral relations, or even to regional logic. It will then be necessary to seek allies.

The questioning of the “global” character of the companies linked to the INTERNET, the desire of several countries to build their “digital sovereignty” is an example of the struggle that is looming for economic sovereignty. This resurgence of politics does not mean that, in our societies, certain spaces are not governed by the technical order, and that there are spaces dominated by technical legitimacy. But, these dimensions will now become second in relation to the political, which will recover its rights. The economic and the financial will once again become instruments at the service of politics. What the political will do with it remains to be determined.

A Debt apotheosis or an end of debt?

A final point remains the explosion of both public and private debts due to the pandemic. In most countries, the COVID-19 crisis has resulted in the collapse of various barriers to the expansion of public debt.

The latter has therefore increased to finance the fall in tax revenues during the confinement period but also the considerable additional public expenditure generated by the crisis. In addition, there are liquidity facilities, consisting of guaranteed loans, equity investments and the like. The result of all this is that the indebtedness of states (especially in the Western bloc) and that of companies will increase considerably by 2021. This debt will not be covered by an increase in taxes because it would imply a deep recession. Reducing public spending beyond 2022 will hardly be a possible solution, for the same reason.

These debts will therefore be absorbed by central banks, in one form or another. The same will be true of a large part of corporate debt. What will then be the consequences for the currencies (mainly the US Dollar and the Euro) of these policies? What will also be the medium-term consequences on the equity and bond markets?

One of the most striking consequences will be the influx of liquidity as a result of central bank action, while production will remain relatively depressed and the outlook for investment will be uncertain for several years. Currencies should therefore experience significant fluctuations. The current downward trend in the share in central bank reserves and the US dollar and the euro in favour of the group of “other currencies” (Sterling, Yen, Australian and Canadian dollars, Renminbi) should therefore accelerate.

Its to be noted that the Euro share went down significantly under the level of older currencies included in the Euro and that the group of “other currencies” significantly increased their share since 2010.

The economy of the “world after” the COVID-19 epidemic will therefore present both the characteristics, in a more accentuated form, of that of the world before but also a certain number of ruptures linked to this epidemic. This combination of strong trends and ruptures will result in a “de-globalized” world which will reorganize itself on the basis of bilateral alliances or regional groupings.

From our partner International Affairs

Expert of the Valdai Discussion Club, Director of studies at École des Hautes Études en Sciences Sociales (EHESS) in Paris, and head of the Centre d'Étude des Modes d'Industrialisation (CEMI-EHESS)

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Economy

Role of WTO in Regularization of International Trade

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International trade is one of the main features of the globalized world and global economy. There it needs also a well-organized institutional mechanism to regulate it. World Trade Organization is an international organization established in 1995, whose main objective is to facilitate trade relations among its member countries for their mutual benefits. Currently 164 states are its members. The activities and works of WTO are performing by a Secretariate of about 700 staff located in Geneva, Switzerland, led by the Director General. English, Spanish and French are the official languages of World Trade Organization. The annual budget of WTO is about 180 million dollars.

Since its creation it is playing an important role in the regularization of international trade. It offers a forum and facilitation for negotiating trade agreements in order to reduce the barriers in the way of smooth international trade among member countries. Thus, the role of this organization is playing very important role in the regularization of international trade which is contributing to economic development and growth of member countries in this globalized world. The World Trade Organization also offers an institutional structure and legal framework for the execution and supervising of the international trade related agreements which are very helpful in regularization of international trade. It also settles disputes, disagreements and conflicts occurring during the interpretation and execution of the components of the international agreements related to international trade. During the past 60 years, the World Trade Organization and its predecessor organization the GATT (General Agreement on Tariffs and Trade) have assisted to establish a solid and flourishing global trade system, by this means helping to extraordinary international economic development.

The WTO is regularizing international trade more specifically through negotiating the decrease and finally elimination of barriers to trade among countries and try to make smoothly the working of the rules and principles governing the international trade e.g. tariffs, subsidies, product standards, and antidumping etc. It also administers and monitor the execution of the World Trade Organization’s determined guidelines for trade in services, goods as well as intellectual property rights related to international trade. It also monitors and review the member states international trade policies as well as make sure the transparency in bilateral and multilateral trade agreements. Likewise, it also solves disputes arising among members related to trade relations or related to the explanation of the provisions of the trade agreements. It also offers services to the governments of the developing states in the fields of capacity building of officers in matters related to international trade. WTO is also doing research on matters related to international trade and its related issues and collect data in order to find better solutions of the problems and obstacles in regularization of international trade. It is also trying to bring into the organization the 29 states who are yet not members of the organization aimed to assist and regulate their international trade according to the international standard.

One of the main barriers in way to international trade is disputes between the engaged parties. Since long this was a very critical issue limiting the trade among states. The WTO is playing very good and instrumental role in the solution of trade related disputes. Since the establishment of WTO in 1995 over 400 disputes related to trade have been brought by its member countries to WTO. The increasing number of bringing trade related disputes to WTO is showing the faith of member countries in the organization. Close trade relations have massive advantages but also create disputes and disagreements. With the increase of international trade, the possibility of its related disputes also increases. Previously, such problems and disagreements have caused in severe disputes. But at present, in the era of WTO the international trade related disputes are decreased because the member states have now dispute’s solution platform, and they are turning to the World Trade Organization to solve their trade related disagreements and disputes. Before the World War Second, there was not any such international organization or forum which could facilitate international trade and its related affairs, and there was also noany legal framework for solving trade related disputes among states of the word.

One of The World Trade Organization’s guiding principal is to continue the open boundaries for trade, ensure the Most Favoured Nation (MFN) status among member countries and stop discriminatory behaviour of members towards other member(s) and bring transparency in doing international trade. It is also assisting counties to open their indigenous markets to global trade, with justified exemptions or with suitable flexibilities, promote and support to durable growth, reduce trade deficit, decrease poverty, and promote economic stability. It is also working to integrate different international trade policies and principles. The member countries of WTO are also under the compulsion to bring their trade related disputes to this organization and avoid unilateral actions. WTO is the central pillar of the current international trade system.

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Russia and France to strengthen economic cooperation

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On April 29, Russian President Vladimir Putin held videoconference with leaders of several French companies-members of the Franco-Russian Chamber of Commerce and Industry (CCI France-Russia) to discuss some aspects of Russian-French trade, economic and investment cooperation, including the implementation of large joint projects as well as the prospects for collaborative work.

Putin noted that the Economic Council of the Franco-Russian Chamber of Commerce and Industry is still operational in spite of difficulties, and the late April meeting was the fourth time since 2016. From the historical records, France has been and remains a key economic partner for Russia, holding a high but not sufficiently high, 6th place among EU countries in the amount of accumulated investment in the Russian economy and 5th place in the volume of trade.

Despite a certain decline in mutual trade in 2020 (it went down by 14 percent compared to 2019) the ultimate figure is quite acceptable at $13 billion. French investment in Russia is hovering around $17 billion, while Russian investment in France is $3 billion.

Over 500 companies with French capital are operating in various sectors of the Russian economy. French business features especially prominently in the Russian fuel and energy complex, automobile manufacturing and, of course, the food industry. “It could have been more if the French regulatory and state authorities treated Russian businesses as Russia is treating French businesses. We appreciate that in a difficult economic environment, French companies operating in Russia have not reduced their activity,” Putin pointed out.

The Russian Government established the Foreign Investment Advisory Council, which includes six French companies. Further, there is an opportunity to discuss specific issues related to the economic and investment climate in Russia, and that opportunity is traditionally provided at the St Petersburg International Economic Forum, which will be held on June 2-5.

French companies are involved in the implementation of globally famous landmark projects, such as the construction of the Yamal LNG and Arctic LNG 2 facilities and the Nord Stream 2 gas pipeline project. This, Putin regrettably said “We are aware of and regret the amount of political speculation concerning the latter. I would like to point out once again that it is a purely economic project, it has nothing to do with present-day political considerations.”

Russia intends to increase assistance to the development of science and technology. Funds will be directed primarily to innovation sectors such as pharmaceuticals and biotechnology, nuclear and renewable energy, and the utilisation of carbon emissions.

“We are interested in involving foreign companies that would like to invest in Russia and in projects we consider high priority. In order to do this, we will continue to use preferential investment regimes and execute special investment contracts, as you know. A lot of French companies successfully use these tools on the Russian market. For example, more than one third of 45 special investment contracts have been signed with European, including French, partners,” he explained during the meeting.

He also mentioned continuous efforts to attract foreign companies to localise their production to state purchases and to implementing the National Development Projects, as well as existing opportunities for French businesses in special economic zones. Today there are 38 such zones created throughout the Russian Federation.

Russia pays particular attention to attracting high-quality foreign specialists. Their employment is being fast-tracked, and their families can now obtain indefinite residence permits. There is a plan to launch a special programme of ‘golden visas’ whereby to issue a residence permit in exchange for investment in the real economy, a practice is used in many other countries.

Taking his turn, Co-Chair of the CCI France-Russian Economic Council, Gennady Timchenko, noted that the pandemic has changed the world, people and business, and that French companies in Russia are responsible employers and socially responsible members of Russian society.

Despite the crisis and the geopolitical situation, a number of French companies have launched production in 2020–2021. Companies such as Saint-Gobain and Danone have renewed their investments. French companies have increased their export of products manufactured in Russia; they are investing in priority sectors of the Russian economy. For example, this year the French company Lidea is launching a plant called Tanais to produce seeds. Russia is dependent on the import of 30 to 60 percent of these seeds, according to various estimates.

Despite the current geopolitical conditions and information field, there are important signals for French business and the Russian side to strengthen economic cooperation, attract investment, and create partnerships on a new mutually beneficial basis.

Co-Chair of the CCI France-Russian Economic Council, Patrick Pouyanne, noted that the meeting has become an excellent tradition, the presence of 17 CEOs and deputy CEOs of French companies shows the importance of these joint meetings, and further reflect the deep interest of French business in Russia.

In addition, Patrick Pouyanne further offered some insights into Russia-French cooperation. By 2020, twenty members of the Economic Council invested a total of 1.65 trillion rubles, supporting 170,000 jobs. These companies have operated in Russia for decades and continue investing in the Russian economy despite the sanctions and the epidemic. These companies help France maintain its status as the second largest investor in Russia. In 2020, France invested over $1 billion in Russia despite the economic difficulties caused by the pandemic.

Concluding his remarks, Patrick Pouyanne stressed that the economic operators believe everyone will benefit if Russia, France and all of Europe are not divided or isolated. This is the challenge today. Indeed, diplomacy has to continue playing an important role in settling differences, and businesses are convinced that meetings like this create bridges between Russia and France to strengthen investment and economic cooperation.

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Iran’s Economic Diplomacy through CPEC

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U.S. sanctions against Iran are characterized by strategic flexibility and adaptability. They are designed to have maximum negative and deterrent effect on Iran’s military, economic and diplomatic growth.  Tehran is exploring ways to counter these sanctions most probably by economic engagements with the regional countries. Iran’s perception of CPEC lends some credit to this argument.

Since the initiation of CPEC, the regional perception has already started to change as many countries have begun to see the project within the domain of their national interests. Iran has expressed its long-standing interests to join the CPEC viewing the corridor as a cornerstone for the country economic prosperity and regional connectivity.

Iran solely focuses more on the economic aspect of CPEC. Regional connectivity through CPEC can boost Iran’s stake in the global output. In 2015, on the sidelines of the United Nation General Assembly (UNGA) address, Iran’s President Hassan Rouhani expressed a desire to be the part of CPEC. He emphasized the importance of connectivity projects for the region. Iran’s initial reluctance to CPEC was transformative in nature and heavily came down with the unfolding of new geoeconomic realities.

Iran’s inclination for the CPEC project even becomes the part of official discourse. Iran’s ambassador to Pakistan Mehdi Monardost showed keen interest to participate in the CPEC and named it as one of the greatest projects in the history of the region. He envisioned a great boost to bilateral trade between Pakistan and Iran under the framework of this regional connectivity corridor. In 2017, Iran’s economy minister Ali Tayyebnia participated in the New Silk Road summit. He praised the New Silk Road concept for regional connectivity.

Iran’s economy is already clutched due to the international sanctions invoked by the Trump administration after pulling back from the Iranian Nuclear Agreement formally known as the Joint Comprehensive Plan of Action (JCPOA) in May 2018.Downplaying the perception of geopolitical competition between Gwadar and Chabahar, Iran higher officials negated the impression of competition falsely exaggerated by International and India media and insisted on the complementary nature of two ports.

In 2016,Iran and India signed an agreement for the development of Chabahar port and it was view as the counterweight to Gwadar port. Without explicitly mentioning India by name, Iran’s ambassador to Pakistan Syed Mohammad Ali Hoseeni defended the decision of his country to drop out India from the project in Chabahar by stating “when some foreign governments found reluctant in their relations with Iran and need other’s permission for even their normal interactions, for sure they would not be capable of planning and implementing such long-term cooperation contracts”.

The same rhetoric appears in the views of Chinese leadership. Brushing aside the allegations of Iran’s perceived resistance to CPEC and Gwadar port, Iran’s foreign minister Jawad Zarif dismissed the allegations and supported growth and development anywhere in Pakistan.

Chabahar is often seen as a rival to Gwadar port. However, Indian discourse has got an altogether different lease of life in the media compared to the Iranian one. Iran’s ambassador to Pakistan Mehdi honardoost utterly disregarded the narrative of competition of two ports. He invited both Pakistan and China to closely work in Chabahar port.

China considers Iran as an important country for its energy security, BRI and in the larger context of global competition with USA. China dual role both in Gwadar and Chabahar, according to the analysts, will likely reduce the impression of competition between two ports. Chinese stance on the Chabahar port also complement the Iran’s position on Chabahar. Chinese premier Le Keqiang rejected the notion that Chabahar port is in competition with the Gwadar. He is convinced with the idea that both ports have the potential to complement each other.

Tehran global status goes upward with the emerging financial and diplomatic backing of China. Beijing openly backs Tehran in the face of U.S. might.  On March 26, 2021, China and Iran signed an agreement expressing a desire to increase cooperation and trade relations over the next 25 years. Wang Yi, Chinese foreign minister, said that USA should rescind the sanctions against Iran. The 25 years deal is considered as part of the Belt and Road Initiative (BRI). According to Tehran Times analysts Peyman Hassani and Ammar Hossein Arabpour, this deal is considered a relief to Iran’s gas and oil sector against USA sanctions.

USA sanctions forcefully bar the countries from purchasing oil from Iran. The US Department of Defense’s report notes that China Pakistan Economic Corridor (CPEC) focus on pipelines and port construction. Pakistan’s reluctance to follow the Iran-Pakistan gas pipeline which is stalled due to American pressure can be reviewed, too much sigh of relief for Tehran’s energy export.

Triangular relations of China, Pakistan and Iran will likely put Iran on the strong footing. Richard Caplan, a professor of international relations at the university of Oxford, notes, “The agreement which predates Biden, undercuts U.S. efforts to isolate Iran economically and, to some extent, diplomatically.

Diplomatic and economic isolation remain at the center of Iran’s foreign policy under the severe U.S. sanctions. Iran’s perceptions of CPEC revolves around the same fact that through regional engagements under CPEC and BRI, it can tackle its global problems to some extent.

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