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Belt and Road in Central and East Europe: Roads of opportunities

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The second decade of the 21st century put the geoeconomic emphasis and cooperation within the framework of China’s “One Belt, One Road” initiative into the China – East European states relations.

The Chinese initiative is dictated by the understanding of the importance of the CEE countries as an important component of a unified Europe. Thus, asserting itself in the role of one of the centers of a multipolar world order, Beijing began transforming the economic and political space that developed in CEE with the promotion of favorable economic proposals to the countries of the region, without raising questions of the difference of ideologies and ways of life.

For the first time, a joint project was announced in 2012 in Warsaw, where Premier Wen Jiabao launched an initiative called “12 measures” of China to encourage friendly cooperation with the countries of Central and Eastern Europe.

Starting in 2013, the main content of the programs of each 16 + 1 summit is the development of tools for this regional format. Naturally, the format of China’s cooperation with the CEE countries is closely connected with the implementation of the global concept of the “New Silk Road” proposed by the Chairman of the PRC Xi Jinping. The concept consists of two parts: the land “Economic belt of the Silk Road” and the “Maritime Silk Road of the 21st Century” and potentially involves cooperation of at least 60 countries in Europe and Asia.

By 2015, China has become one of the largest investors in Eastern and South – Eastern Europe. In November 2015, the Eastern Europe-China ( 16 + 1 ) summit was held in the Chinese city of Suzhou, in which the leaders of the PRC and 16 Eastern European member states and the Balkan countries took part. The meeting resulted in the strengthening of China’s economic presence in Eastern Europe. Also at the trade and economic forum in Hangzhou between China and the countries of CEE in 2015 it was agreed that China is ready to provide financial support for the re-industrialization of the countries of CEE, in the case that it will be conducted using Chinese technologies and equipment.

In 2015 – 2016, taking into account the opportunities and potentials, each country in the 16 + 1 format chose its own direction. For example, Bulgaria will supervise agriculture, Poland– investment and trade. The task of Latvia will be identification of links and projects, cooperation in the field of logistics, Romania will deal with energy projects, Lithuania is responsible for educational programs, and Hungary for the tourism sector.

The 16 + 1 format , in a certain sense, prepared the transition to a more focused and integrated strategy “One belt – One Road” and successfully “fits” into its main components – the projects “Economic belt of the Silk Road” and “Marine Silk Road of the XXI century”, aimed at developing new land and sea transport, logistics and trade and production systems linking China to Europe. In the first project, the countries of CEE play a key role, in the second – an important transit role in the development of “China – Europe” trade and investment ties, and in the long term – in the formation of a broad Eurasian “economic space” and “political stability belt”.

The basic design of the first project is the development on a new technological and organizational basis of the traditional direction of trade and transport “Sino – European” ties, complemented by their investment cooperation. This Northern road includes land international transit to Western Europe from China and other countries of the Asia – Pacific region (primarily, South Korea and Japan) through Russia and Kazakhstan along the Trans – Siberian Railway and the Kazakhstan railway with access to the European part of Russia in The Urals:

  • Chengdu ( Sichuan province ) – Dostyk – Moscow – Brest – Lodz ( Poland )
  • Suzhou ( Jiangsu province, Shanghai region ) – Warsaw ( Poland )
  • Chongqing ( Sichuan region ) – Duisburg ( Germany )
  • Zhengzhou ( Henan, North China ) – Hamburg ( Germany )
  • Wuhan ( Hubei province, Yangtze belt region ) – Pardubice ( Czech Republic )
  • Wuhan – Zabaikalsk – Hamburg
  • Shenyang ( Liaoning, Northeast China ) – Hamburg
  • Yiwu ( Zhejiang, Shanghai region ) – Madrid ( Spain )

Nevertheless, the transit and logistical potential of the other CEE countries is still used slightly. Almost not involved in the “European part” of the Northern road are the ports of Poland and the Baltic countries that gravitate towards it. On the contrary, the main transport and logistics centers for Chinese goods (primarily German Duisburg and Hamburg) are already overloaded, and the possibilities for expanding their capacities are limited.

Such uneven distribution of cargo flows combined with insufficient technological level of the transport and logistics infrastructure of the CEE countries hinders the further development of China – Europe ties. There are also serious organizational and economic limitations of this development. Most of the provinces ( especially the western ones, remote from the sea ) tend to establish regular communication with Europe for both economic and prestigious reasons. The export potential of only the western provinces of China is estimated at $ 40 billion. Therefore, the full utilization of trains and partial financing of transportation costs are provided by local authorities on the basis of public – private partnerships (especially since many Chinese companies retain great state involvement) (see Figure 1 below).

Figure 1.:China`s infrastucture investments in the 16 + 1

Source: CSIS; FT Research

The April 9th CEE– PRC summit 2019 in the Croatian city of Dubrovnik marked a new beginning in the development of relations between China and Eastern Europe. Although the Belt and Road initiative (BRI) usually focuses on Asian (whether Central Asian, South Asian, or South– East Asian) or African participants, post-Communist countries in Central and Eastern Europe have begun to play not less significant role. In fact, the CEE region was one of the most represented regions in the 2017– 2019 BRI Forums: of the 28 heads of state or government, four were from this region (representing the Czech Republic, Poland, Hungary, and Serbia), and Romania was represented by a delegation led by the country’s Deputy Prime Minister. This list of forum participants reflected the intensive development of cooperation between China and CEE under the auspices of the BRI.

Humanitarian influence is also increasing – the leadership of the PRC encourages interpersonal contacts with the CEE countries, especially through tourism, student and youth exchanges, etc. China’s credibility in the region is also growing, because now almost any project of cooperation on a bi – versatile basis is served under the brand “One Belt – One Road”, which allows China to demonstrate real ( albeit small ) successes literally every year. This is especially noticeable against the backdrop of crisis phenomena in the European Union and the weakening of the ties between the CEE region and Russia.

Underlining the main opportunities of BRI for CEE and EU, should be mentioned the following :

  1. Chinese public and private sector bodies were willing to take construction risk, and to act quickly. It was suggested that this could be a major opportunity when embarking on major construction projects. However, the experience of COVEC (the construction of a 49-kilometre Polish section of the motorway from Warsaw to Łódź. The construction contract was awarded to a consortium – formed by China Overseas Engineering Group – is a subsidiary of China Railway Engineering Corp (Hereinafter CREC – Auth.)) as a contractor in Poland shows that Chinese companies have not always been able to work well in the EU.
  2. One interviewee suggested that Chinese investment in rail infrastructure was leading to rail being a viable alternative to both sea and air for trade between the Far East and Europe.The European Bank for Reconstruction and Development (Hereinafter EBRD – Auth.) expressed the opinion that “the rail mode has a huge potential” but did not provide specific forecasts of what goods would transfer to rail, or over what timescale, or what routes they would use.

Other interviewees considered that rail services would attract demand mainly from shipping rather than from air. One of them, responsible for air cargo services, argued that rail would not abstract demand from air because it could not offer the very short transit times required by the most time-sensitive air cargoes. This interviewee also suggested that, to remain competitive, China and other parts of Asia with rail services introduced as a result of the BRI would still need air freight connections to Europe. In this context, ownership of the capacity of a cargo airline such as Cargolux can be seen as a key element of the infrastructure connecting China and the EU.

A representative of the Community of European Railway and Infrastructure Companies (Hereinafter CER– Auth.) agreed that rail would attract demand from shipping but would not be able to compete with air services. The European Commission also suggested that, from China’s perspective, the maritime elements of the BRI were more important and that overland rail was a distraction. In their view, 90-95% of traffic between China and the EU was maritime and would remain so. This is broadly consistent with the analysis of maritime and air traffic. It should also be stressed that the most common investments by Chinese parties in the EU appear to be ports, principally in the Mediterranean and the United Kingdom.

Russian Railways (Hereinafter RZD– Auth.) has long operated rail services along the Trans – Siberian Railway between Europe and the Sea of Japan. These could, in principle, be used to carry goods from Japan and South Korea to Europe, but these would first have to be shipped across the Sea of Japan to Russia. In contrast, from landlocked north east China, long overland journeys are needed to reach any port, but may also be needed to reach a suitable railhead.

Thus, the commercial objective of growing rail services appears not to be to put pressure on maritime operators, which are already efficient, but to offer a higher speed service. This also helps producers and consumers along the rail routes used.

  • In principle, commercially viable rail services between China and the EU are a major opportunity for operators, shippers and industry.

One interviewee in the logistics sector said that subsidies granted by the Chinese Government to rail services between China and the EU are “tremendous”. They also stated that Kazakhstan Railways (Hereinafter KTZ – Auth.) had reduced tariffs in 2012 but now agreed with RZD to keep tariffs high. KTZ indicated that the Chinese Government provided subsidies to support westbound container traffic, but envisaged that these would be withdrawn by 2020 as balancing eastbound traffic was attracted to the route. These comments illustrate a number of issues relating to the commercial viability of the services.Also trains between China and the EU will be charged transit tariffs by operators such as KTZ and RZD. There is no uniquely correct basis for setting such transit tariffs, although  the principal applied in the EU is that they should be based on marginal costs. From the perspective of these transit railways, however, transit traffic is an opportunity to profit from third parties (A similar issue emerges in the provision of air navigation services within the EU, where national air navigation service providers (Hereinafter ANSPs – Auth.) may have incentives to overcharge for en-route services provided to overflying, and typically foreign, aircraft to subsidise terminal services provided to aircraft taking off and landing). The incentives on the transit states are typically to maximise their profits, rather than to maximise the economic, social and environmental value of the railway operation as a whole. For both the EU and China, however, there is the potential risk that a growing and successful rail service will be seen as a potential source of profit by the transit railways.

  • Another opportunity is the rebalancing of freight flows.

Figure2 and Figure 3below summarise the volumes of loaded containers which are loaded and discharged on flows between ports in the Far East and ports in the EU, measured in TEU. However, the EU Member States in which containers are loaded and discharged may not be the final destination states(The country where custom controls are executed is the country of discharge. This is the reason why Czech Republic is included in Figure 5 below despite it has not access to the sea.)

Figure2 below illustrates the recent growth in loaded containers from the Far East to EU ports, from just over TEU one million in 1996 to about TEU eleven million in 2016. Other than China, no state loads more than one million containers to Europe.

Figure2.:Loaded containers from the Far East to Europe: country of loading

Source: MDST World Cargo Database

Figure 3shows the points at which loaded containers are discharged in the EU. A large proportion are discharged at ports in the United Kingdom, Germany, the Netherlands and Italy, before travelling onwards to the points at which they are stripped. Containers discharged in Rotterdam in the Netherlands, or Genoa (Genova) or Trieste in Italy, for example, may continue by river barge, train or truck to other EU Member States or to landlocked and non-EU Switzerland.

Figure 3.: Loaded containers from the Far East to Europe: country of discharge

Source: MDST World Cargo Database

Thus, the analysis of Figures 2 and 3 and 4show that westbound loaded container flows of 11 million TEU exceed the eastbound flows of 5 million TEU. This creates a need fora large number of containers to be returned empty in the eastbound direction. A representative of the CER said that this represented an opportunity for the EU to rebalance imports and exports.

Of the Member States shown, the largest imbalance in flows is for the United Kingdom, which exports only just over one quarter as many loaded TEUs as it imports. Even in Germany and Sweden, exports are less than two thirds of imports. This appears to confirm CER’s view that additional containers could be carried eastbound, in principle at little additional cost.

Figure 4.: Balance in loaded container flows for selected EU Member States

Source : MDST World Cargo Database

  1. Among other opportunities there should be metioned improved customs coordination. Thus, one interviewee saw opportunities to use through rail services between China and the EU to improve and streamline customs arrangements. However, they did not suggest either that specific initiatives were required or how these should be organised. As already discussed, a number of the MoUs supporting the BRI relate to the development of improved customs arrangements with a view to enhancing connectivity.
  2. Opportunity: EU companies working in CAREC states. The EBRD suggested that there were good opportunities for companies from the EU to build railways, roads and other transport infrastructure in the CAREC[1] states. They argued  that, in addition to construction, there would be opportunities in the areas of harmonisation of regulation, information technology systems, developing reliable and sustainable energy supplies, and logistics.
  3. Opportunity: complementary skills in the EU and China. Thus, one interviewee said that the EU had greater skills in regional issues and planning than Chinese bodies, and that there were opportunities for each country’s skills to complement each other. At first sight, it appears likely that each party may benefit from the other’s knowledge of local legislation, planning and procedures.

Table 1 below summarises a number of the opportunities and challenges which appear to emerge from the BRI. None of these may amount to a clearly-defined “problem”, as outlined in the EC’s Better Regulation Toolbox. Nonetheless, this section briefly discusses the extent to which it might be relevant to consider legislation to address them.

Table 1.: Opportunities, challenges, and the need for legislation

Opportunity or challengeIssue(s)
Chinese investors may not always meet EU standardsProcurement and enforcement
China may subsidise products and transport
Scope for improved customs coordination  Multilateral coordination
EU standards must be maintained and harmonised
Wasted and misdirected investment  Transparency and coordination
Chinese parties may take over existing projects
Chinese dominance of rail transportChinese may limit transit traffic
China may focus its trade elsewhere
Changes in relative advantage within the EURegional and cohesion policies
New investment in transit countriesCoordination between EU and Asian railways
Making Asia’s infrastructure meet EU needs
Bottlenecks may emerge on rail and on TEN-TConsider EU and Far East flows

Source: Steer Davies Gleave analysis

Thus, it can be noted that the participating countries of 16 + 1 mechanism understood the scale, prospects and synergies of this interaction. It should be emphasized that the “Old” EU countries are wary of Chinese activity in the Central European zone of their influence and insist that all members ( and candidate members ) coordinate  their cooperation with China, and that the EU should speak with the PRC “with one voice”. Nevertheless the strategic concepts of the development of these states reflect the importance and priority of both bilateral relations with China and cooperation in the China – EU format. That is why most of the foreign policy strategies of the CEE states are oriented toward expanding foreign economic activity and trade with the PRC. It is necessary to emphasize the consistency and planning of work in this direction, conducted by the states of the 16 + 1 format. As we can see, pragmatic economic diplomacy started to prevail in the newest foreign policy history of Europe.

The ninth summit of cooperation between China and CEE, based on the results, was the last for the 16 + 1 format. In April 2019, it became clear that Greece would be invited to be part of this initiative. This actually turns 16 + 1 into 17 + 1. This move confirms claims that the importance of the CEE countries to China is closely linked to COSCO’s acquisition of a controlling stake in the Greek port of Piraeus. With this strategy, Beijing is partly paving the way for a resolution of the dispute between Greece and Macedonia, aiming to connect the port of Piraeus via Macedonia to the proposed high-speed rail link between Belgrade and Budapest, and then direct it to the Western part of the continent.

The appearance of 17 + 1 has a direct bearing on the cooperation between China and CEE. Greece’s accession is likely to weaken some regional aspects of cooperation between partners and re-emphasize the bilateral nature of China’s relations with individual countries. This is a strategic step that will bear fruit for both Beijing and the CEE capitals, and will also aim to allay EU fears that China is trying to split the continent.

The potential development of the 17 + 1 initiative demonstrates that China has already become a full-fledged “European power”. The growing number of Chinese investments and relations on the continent suggests a much broader and more complex “deepening” into European Affairs than expected by Beijing or any European capital. This reality requires China to own its position as a “European power”. At the same time, Europe needs to engage in a mature and meaningful debate about the growing influence of China’s power, which goes beyond simplistic divisions between friend / foe, rival / ally, and so on. As the evolution of cooperation between China and CEE shows, that we live in a complex world and interlocutors can simultaneously perform several contradictory roles. Due to the BRI initiative, Europe has realized that it is impossible to sacrifice China, and ignoring the fact that this country has become the “new power of the European continent” can cause significant damage to the Union, primarily economic.


[1] The Central Asia Regional Economic Cooperation (Hereinafter CAREC – Auth.) Program is a partnership of 11 countries  (Afghanistan, Azerbaijan, China, Georgia, Kazakhstan, Kyrgyzstan, Mongolia, Pakistan, Tajikistan, Turkmenistan, and Uzbekistan) and 6 multilateral development partners (Asian Development Bank, European Bank for Reconstruction and Development, International Monetary Fund, Islamic Development Bank, UnitedNations Development Programme, and World Bank) working to promote development through cooperation, accelerate economic growth, and reduce poverty. ADB serves as the Secretariat .

Dr. Maria Smotrytska is a senior research sinologist and International Politics specialist of the Ukrainian Association of Sinologists. She is currently the Research Fellow at International Institute for Middle East and Balkan Studies (IFIMES), Department for Strategic Studies on Asia. PhD in International politics, Central China Normal University (Wuhan, Hubei province, PR China) Contact information : officer[at]ifimes.org SmotrM_S[at]mail.ru

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Digital Economy Development in China Shifts the Focus to the Production Side

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Just recently, China’s Central Commission for Comprehensively Deepening Reform reviewed various plans for data system, including a guideline on building the basic systems for data and making better use of data resources. The central government’s layout from the construction of the basic system of data is intended to lay a solid foundation for the further development of the digital economy, in addition to pushing for the development of the data-based data industry to further accumulate resources and driving force. These new changes in the digital economy signify that there is the establishment and improvement of rules in the digital economy of China.

Looking at the content of the guidelines and plans, there are two aspects worth noting, the first is to clarify the ownership and classification of data, and the second is to build a mechanism for data transactions. The clarification of the ownership and the rights and responsibilities is crucial in establishing the legal foundation for data transactions. Of course, the new plan has yet to clarify this, but it does present the hope to develop a system with clear ownership so that the corresponding data transactions can be carried out. Although Shanghai, Beijing, Hainan, and other places have begun the attempt of creating data exchanges and data transactions, in terms of scale and transaction frequency, this is still in the initial trial stage. Researchers at ANBOUND believe that the focus of data resource development and application of digitalization will shift from the consumer side to the production side.

While the new concept provides a framework for the establishment of the data system, it does not mean short-term boost for the development of the data industry or the digital economy can be formed. The future relies on digital technology to generate data, rather than monetize data, and the same is true in other fields. With this, the model of harvesting from online traffic flow by capital and market expansion will face higher and higher business costs and regulatory barriers. Judging from the development trend of the digital economy in China, after the rectification of internet platforms and the country’s domestic 5G network reaching the stage of large-scale popularization, the overall driving force for the development of the digital economy will be weakened.

Statistics reveal that in 2020, the scale of China’s digital economy has reached USD 5.4 trillion, accounting for 38.6% of GDP, maintaining a high growth rate of 9.7% and becoming the key driving force for stable economic growth. Yet, the growth rate still dropped by 5.9 percentage points from the previous year. The downward trend in the growth rate of the digital economy deserves attention. In 2021, the expected growth of the digital economy scale was RMB 42.4 trillion, accounting for 37.06%, a slight decline from the previous year. At the same time, the proportion of China’s digital economy in GDP was 21.4 percentage points lower than that of the United States, Germany, and the United Kingdom, and 5.1 percentage points lower than the global average.

Researchers at ANBOUND pointed out that the main problem that needs to be solved in the future development of China’s digital economy is the ownership of data resources. The main issue being disputed in the country’s traffic economy that is constraining internet platforms is precisely about the right to data usage. In the existing internet platform economy like online consumption, when the market expansion encounters boundaries and the cost of data acquisition is getting higher and higher, internet platforms that rely on their own accumulated customer data are seeking to realize cash in consumption and finance. This has brought a great impact on the current real economy and financial sectors, and is also an important cause of the authority’s rectification of internet platforms. As noted by ANBOUND, clarifying and resolving the matter in regard to the ownership of data resources is becoming a pragmatic issue. As far as data resources are concerned, although there is still some room for development in the medical and financial fields, under the background of the increasingly perfect anti-monopoly system and the continuous improvement of supervision, the traffic economy is now being constrained and restricted. This signifies that the space for the application and development of the existing large amount of data resources based on consumer data will be constrained on the consumer end.

From the overall trend, when the internet platform is constrained and the traffic economy encounters incremental bottlenecks, the development of digital industrialization dominated by terminal digital consumption will face difficulties in transformation after going through a stage of rapid growth. Looking at the data industry, on the one hand, strengthening supervision means that the Big Data resources, mainly consumer data, also face institutional obstacles to further development and “diversion”. The development of digital industrialization not only faces the obstacles of insufficient digital infrastructure, but also requires technological breakthroughs in its industrialization development itself. In addition, the production side also faces the basic hurdle of lack of a large amount of production data. Therefore, in the new growth space of the digital economy, the demand for large amounts of data on the production side will be the key driving force for building a basic data system and establishing a data transaction mechanism.

The central and western regions of China are building data centers to meet the current and future needs for large amounts of data storage. However, the application of these data and the development of data resources not only face basic systemic problems, but also lack the development of data application fields. In Guiyang, known for its development of the Big Data industry, the focus is chiefly on storage, and the Big Data investment projects there are mainly on the data centers. To mine data resources, it is not only necessary to realize the accumulation and mining of data, this also requires the support of technology and industry to realize the appreciation of data through digital technology. However, the weak real economy and lack of data development capabilities have become the biggest shortcoming of Guiyang’s development. This makes its data industry generally at the middle and low end of the value chain, and its core competitiveness is rather weak. If the Big Data industry in various places wishes to assume further roles, it still needs the upgrading and integrated development of basic industries. The future development of the data industry depends on the accumulation, application, and development of a large amount of production data. This also means that the future focus of the development of the digital economy begins to shift from the consumer side to the production side.

Final analysis conclusion:

The Central Commission for Comprehensively Deepening Reform’s conception of the construction of data infrastructure means that it will solve the fuzzy area of data ownership and further realize the tradability and transfer of data. This provides an institutional and market foundation for large-scale data development. The digital industrialization of the consumer side, as things stand, has come to an end, where the growth focus of the digital economy will shift to the production side.

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Economic Sanctions As An Act Of War

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The outbreak of the Russo-Ukraine war in 2022 saw the imposition of one of the most comprehensive international economic sanctions on any country in history. These sanctions were expressly aimed to damage the Russian economy, pressure its population and force its leaders to cease hostilities against Ukraine. These measures caused a run on banks, an economic recession and sky-high inflation in Russia. In response, Russia imposed retaliatory sanctions of its own and, described the Western sanctions as an ‘Act of War’. North Korea had raised a similar contention in 2017 in response to similar sanctions.  This author seeks to focus on and examine this claim on its merits and normative value in International Law.

I argue that, from an effects-based perspective, comprehensive and long-term economic sanctions should be regarded as an ‘Act of War’. In a globalised world, economic sanctions can have a disproportionate and indiscriminate effect on a nation’s populace, comparable to that of a direct military intervention in the form of a blockade. The decision to impose economic sanctions should thus ideally be regarded as such and be subjected to the same level of scrutiny and qualifications such as what the case for an armed intervention to be legitimate in modern International Law. A calibrated standard to determine a ‘legal’ economic sanction not amounting to an act of war, will allow for proportionate use of sanctions, to minimise their human costs and respect the rights of economically weaker states.

Economic Sanctions in International Law

The term ‘sanction’ in international law refers to a peaceful action, usually responding to a breach of an international law principle and aiming to economically constrain a target state, entity or individual , imposed by a state or authority with the legal capacity to do so.  Sanctions may be comprehensive, such as completely prohibiting commercial activity with an entire country, or they may be targeted, blocking specific types of transactions, with specific entities or individuals.

Sanctions act as tools of coercion aimed to cause popular dissatisfaction and create pressure on a country’s leadership to change its foreign policies. Importantly, sanctions imposed by major powers such as the US and EU, include ‘Secondary Sanctions’. Such sanctions extend similar trade restrictions to any other third country which continues to deal in the restricted trade with the target country. Secondary sanctions reduce the alternative trade partners for a target country and magnify the effects of sanctions.

The UN Charter itself, in Art. 41, mentions the use of economic sanctions as a measure by the Security Council to give effect to its decisions. It clearly treats it as a separate, less egregious measure then the use of armed force provided for in Art.42. ‘Blockades’ are also mentioned separately as within the scope of use of armed force by the Security Council.

The UN framework does not provide the only legal basis for states to impose economic sanctions, as states are relatively free in customary international law to adopt unilateral sanctions against states, entities and individuals. Various regional treaties also allow for use of collective economic sanctions.

It is also important to acknowledge a long-running movement in the UN to delegitimatize use of unilateral economic measures as a method of coercion, recognising that such measures significantly disadvantage developing countries in particular. This movement has manifested itself in form of various General Assembly resolutions such as Resolution 2131, ‘Declaration on the Inadmissibility of Intervention in the Domestic Affairs of States and the Protection of Their Independence and Sovereignty’, 1965; Resolution 2625 (XXV), ‘Declaration on Principles of International Law concerning Friendly Relations and Cooperation among States in Accordance with the Charter of the United Nations’, 1970;   

However, such resolutions are non-binding in nature. As it stands, a strict reading of the UN Charter and associated international legal instruments, does not per se allow for regarding economic sanctions as an act of war, as will be elaborated below.

Economic Sanctions as an ‘Act of War’

Defining ‘Act of War’

Art. 2(4) of the UN Charter prohibits all UN members from resorting to the threat or use of force, against the territorial integrity or political independence of any State. However, Art. 51 allows for use of force authorised by the UN Security Council, or in the exercise of the rights of individual or collective self-defence. The word “force” in this context was initially generally understood to refer only to military force. “Acts of War” are thus restricted by international law. General Assembly Resolution 3314, passed in 1974, also sought to define ‘acts of aggression’, but excluded ‘economic aggression’ from the ambit of the resolution.

Comparison to Blockade

The closest ‘act of war’ that may be ‘analogous’ to a comprehensive economic sanction may be the act of a ‘blockade’. A ‘blockade’ is an act of war which involves restricting ships or aircrafts of some or all nations from entering or existing specific ports or coastal areas of a target country, by the threat or use of armed force. Such an act aims to degrade a country’s economy and affect its populace by preventing trade and movement of essential goods. It is included as an act of aggression in Resolution 3314 and also mentioned in Art. 42 of the UN Charter as a type of armed force that may be used by the Security Council.

A sanctioning country uses legal barriers to restrict its trade with a target country and also usually uses its economic heft to dissuade other countries from trading with a target country, by threatening to sanction them too. The question that arises is that how is this situation, from an effects-based perspective, different from a comprehensive economic sanction?  If the net result is the same, that the country’s trade is restricted and its populace is deprived of essential goods, why should only a physical blockade be regarded as an act of war and be subject to stricter scrutiny. This similarity of effects can be proved empirically using historical instances of comprehensive sanctions.

Comprehensive economic sanctions cut off a country from the global financial system, block foreign investment and remittances, cause loss of employment in export industries, causes shortage of essential import goods and high-end technology, which has ripple effects on the economy and popular welfare. These effects are particular amplified for a smaller, developing country which is less likely to be self-sufficient in essential goods.

Various case studies by Prof. Joy Gordon of use of sanctions in Iran, Iraq, and Cuba, demonstrate the damaging effects of sanctions on a country’s economy and tangible loss of life and popular welfare, easily comparable to a devastating armed conflict. For instance, the sanctions regime in Iraq resulted in the deaths of an estimated 500,000 civilians, exceeding the casualties in the Gulf War that followed. The sanctions had included restrictions on import of food grains and import of essential ‘dual use’ goods such as fertilizers for agriculture and chlorine for water purification, which resulted in a famine, epidemic and rise in infant mortality.

Addressing Counter-Arguments

Exercise of State Sovereignty

The first probable argument against treating economic sanctions as an act of war, would be based on state sovereignty, namely the right of a state to dictate its own trade policy. This principle was affirmed in Republic of Nicaragua v. The United States of America, 1986 I.C.J. 14, with specific reference to trade relations— that in the absence of a treaty commitment or other specific legal obligation, a state is not bound to continue particular trade relations longer than it sees fit to do so. States may thus argue that they have the right to choose their trade partners and treating these decisions as an act of war, would make them contingent to UNSC approval and abrogate their economic independence. 

However, state sovereignty is not an absolute principle, especially when pitted against humanitarian interests and interests of other states. The above argument may be addressed by a more careful calibration of standards on what kind of sanctions may amount to an act of war. A probable standard could be considering only those comprehensive economic sanctions which are imposed on essential goods, a shortage of which endanger the basic human rights (such as those to food, clean water, medication etc) of the citizens of the recipient state. This would amount to a reasonable restriction on the right of a trade of a sovereign country, namely that it should not wilfully endanger the essential rights of civilians of another country.

It is also essential to note that the existing regime of economic sanctions can also be differently viewed as a restriction on state sovereignty, as countries with disproportionate economic power are able to use ‘secondary sanctions’ to force other states to comply with sanctions on a target country. This also derogates sovereignty of other states by limiting their trade with a target country.

Economic Sanctions as a ‘Soft Tool’

It may also be argued that treating economic sanctions may deprive countries of an essential ‘soft’ tool to influence ‘rogue’ states and uphold the international legal order, without crossing the threshold of armed conflict.

However, a calibrated standard, as described above, would not completely preclude the use of economic sanctions. Countries may continue to use targeted economic sanctions against the political and economic leadership of a rogue state such as restricting their movement, seizing their overseas assets and crippling their businesses to exert pressure. Military and non-essential goods may continue to be restricted completely. In fact, recent studies have demonstrated the comparative effectiveness of targeted sanctions to influence state policy, as compared to general sanctions, with reduced human cost on the powerless sections of the society of the target country.

Moreover, even in this proposed model, comprehensive economic sanctions may be employed, if necessary, with the approval of the UN Security Council, which still has the authority to exercise use of force, under the UN Charter.

Conclusion

In summary, it is clear from an effects-based perspective, that comprehensive economic sanctions are comparable to direct military intervention such as a blockade.  Economic sanctions should thus be brought into the ambit of an act of war, and international legal safeguards on use of force should be applied.

A calibrated standard to determine a ‘legal’ economic sanction not amounting to an act of war, would allow the use of sanctions in a regulated, proportionate manner, to minimise their human costs and respect the rights of economically weaker states.

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Yen Becomes the Next Eye of the Storm in the International Capital Market

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With the recent acceleration of interest rate hikes of the Federal Reserve, the yen is under increasing pressure while the U.S. dollar index remains high. This, in turn, causes the Japanese currency to show a trend of continuous depreciation. The exchange rate of the yen against the U.S. dollar broke through the key node of JPY 135, reaching a high of JPY 136 on June 21. On June 23, USD/JPY continued to hover around a 24-year high of 136. Earlier this week, at one point, the exchange rate of the dollar against the yen reached the highest since October 1998 to JPY 136.70.

Since the beginning of this year, the yen has depreciated by more than 18% against the dollar, and its depreciation rate ranks among the top among the G10 countries. The changes brought about by the devaluation of the yen have greatly changed its role as a traditional safe-haven currency, and it has increasingly become the center of focus for speculation.

With the continuous depreciation of the yen, Japanese government bonds have also shown a gradual downward trend, and have repeatedly exceeded the 0.25% yield ceiling of the Bank of Japan (BOJ)’s yield curve control (YCC). Although the BOJ has repeatedly increased its purchases to maintain the yield of the bonds, this is still insufficient to help the currency exchange rate at the same time. Consequently, the current speculative attack on the yen and Japanese government bonds has become an opportunity that hedge funds are keen on. Indeed, the market has been paying attention to such speculation on the BOJ in the bond market. Although the central bank has implemented the strategy of unlimited purchases of Japanese government bonds since March to drive down long-term interest rates, the market is still skeptical that it can hold the bottom line, hence the commencement of the so-called “widow-maker”.

The main reason for such a situation is the widening of the monetary policy gap between the United States and the BOJ. As the Fed began to tighten monetary policy, simultaneously raising interest rates and shrinking its balance sheet, the BOJ still adhered to the quantitative easing policy, which is one of the “three arrows” of Abenomics. On the one hand, it maintains negative interest rates, and on the other hand, it continues to inject yen liquidity into the market by purchasing yen assets. However, with the recent rise in global inflation, Japan’s inflation has achieved the 2% target that has been difficult to achieve for many years. In April this year, Japan’s inflation rate reached 2%, with the core inflation rate being 2.1%. Driven by the depreciation of the yen and rising international energy prices, the country’s inflation may reach 2.5% in May, and the core inflation will remain at the level of 2.1%. This is arguably the achievement of the BOJ’s policy goals for many years. However, the achievement of this target is largely dependent on the depreciation of the Japanese currency, rather than the increase in demand. Under the pressure of inflationary pressure brought about by the depreciation of the yen and the rising yield of Japanese government bonds, whether the BOJ can adjust its policy and whether it can maintain the strategy of yield curve control is the key concern for the market institutions. Some analysts believe that when other central banks abroad are making a choice between economic growth and controlling inflation, the BOJ has to face a choice between the yen and Japanese bonds.

Japanese Prime Minister Fumio Kishida and the BOJ Governor Haruhiko Kuroda have both stated that they do not want the sharp depreciation of the yen to continue and will pay attention to the trend of the foreign exchange market. That being said, there is no perceivable specific action to intervene in the market, and the market could very well let the yen depreciate. The depreciation of the yen has always been considered positive for the Japanese economy and its stock market, while Abenomics also saw it as a key means to boost inflation and stimulate the economy. Nonetheless, many institutions and scholars have repeatedly pointed out that the situation this year has been very different from the beginning of Abenomics. The damage to the Japanese economy caused by inflation and the depreciation of the yen is far greater than the gain. In the past two years, both the Japanese economy and the Nikkei have been “decoupling” from the trend of the yen. Economist Nouriel Roubini, touted as “Dr. Doom”, recently warned that if the yen exchange rate falls further to 140, it will bring serious inflation problems to the BOJ, and the central bank will be forced to make policy adjustments, abandoning aggressive monetary policies such as zero interest rates and YCC. This means that the BOJ’s policy shift has come under increasing pressure, and is being anticipated and bet on by more and more markets. This has turned the yen from a safe-haven currency to the eye of the storm, so to speak, in the current market game.

Yet, if the Japanese central bank abandons the quantitative easing policy that has been implemented for years, there will also be huge impact on the market. Some analysts opine that the YCC of the BOJ is the last anchor of the old global yield curve structure that utilizes arbitrage conditions, as well as the liquidity of the dollar and yen. If this is dismantled, the impact will be global, and it will place even more pressure on bond yields in the United States, Europe, and Asia. On the Asian side, the South Korean won, the Philippine peso, the Hong Kong dollar, and the Chinese yuan are also under pressure from rising bond yields and currency depreciation. If the BOJ’s policy changes, the consequences will be so terrifying that it may very well be the last straw to bringing down the global capital market.

Final analysis conclusion:

With the widening policy differences between the Federal Reserve and the Bank of Japan, as well as with the rising inflation in Japan, the yen continues to depreciate. This has turned it from a traditionally safe-haven currency into the eye of the storm within the international capital market. The game between the market and the BOJ has caused the Japanese central bank’s future policy choice to become a global focus. Regardless of what the outcome might be, it will certainly have a huge impact on the market.

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