In this article, we examine China's promotion of the renminbi (RMB) in international oil trade and explore its implications for the international currency system in the short and the long term. The article traces the rise of the RMB in international oil trade in recent years and provides an analysis of its impact on the internationalization of the Chinese currency. We argue that despite the increasing use of the yuan in oil trade in recent years, in the short term it is highly unlikely that a petro-RMB system will emerge to rival the petrodollar system. Unlike the petrodollar, which combines the qualities of a master currency, a top currency and a negotiated currency, China lacks the economic leadership and the political and geopolitical leverages to make the RMB a major petrocurrency. Although the emergence of the RMB-denominated Shanghai oil futures is an important development, the absence of highly developed financial markets and a strong legal system in China hinders its potential. In the long run, the RMB may take on a more prominent role in the international oil trade as China's weight as an oil importer rises. More importantly, the overuse of financial sanctions by the US government has begun to undermine the role of the dollar within and beyond the oil trade. In addition, the rise of alternative energy sources will diminish the centrality of oil in the world economy, thus reducing the significance of petrocurrencies—whether the dollar or the RMB—in shaping the international currency system.

In the past 12 months, a series of highly-anticipated elections throughout Latin America have demonstrated that deep political shifts are underway.  This has occurred at a time when economic growth across the region is slowing and a number of countries face growing social crises.  How will these political shifts and social challenges affect growth and foreign direct investment (FDI)?

Christopher Sabatini will outline how the shifting political dynamics across the region have, and will, continue to influence trade and investment in the coming months and years across the continent and what regional developments mean for the international community in light of Brexit, global trade tensions and the rise of China and other emerging powers. How can businesses and governments provide a platform to overcome mutual obstacles faced by Latin American investors? What impact have Chinese development projects had in Latin America? And are medium and small economies in Latin America vulnerable to a global trade war?

This event is only open to Major Corporate Member and Partner organizations of Chatham House. If you would like to register your interest, please RSVP to Linda Bedford. We will contact you to confirm your attendance.

To enable as open a debate as possible, this event will be held under the Chatham House Rule.

The Syrian currency depreciated by 11% between mid-August and the first week of September, to reach an unprecedented level of SYP692 to the US dollar. According to the government, the main reasons behind this collapse are the international sanctions imposed on Syria and currency speculation.

Accordingly, the government has forced speculators and local foreign exchange companies to sell the US dollar instead of holding it. Moreover, Syrian security agencies have pressured profiteers with close links to the regime to effectively participate in campaigns that support the local currency. Indeed, the Syrian pound appreciated in value in only a few days to reach an average of SYP615 for $1 in the second week of September.

This high volatility in currency prices results in monetary uncertainty among traders, and thus, increases the possibility of other depreciations in the near future.

Currency speculation could be the reason behind the high fluctuations. However, the fall in the exchange rate has been a continuous and steady trend ever since the beginning of the conflict. The Syrian currency is about 13 times less valuable than before conflict, and fell by 20% between January and September 2019. It is therefore more likely that the devaluation reflects a structural deterioration of the Syrian economy.

There are a number of interlinked reasons behind this trend:          

Economic collapse

The conflict in Syria has led to a drastic decline in economic activity. By 2018, the total accumulated economic loss was estimated at about $428 billion, which equaled 6 times Syria’s GDP in 2010. The country’s GDP lost about 65% of its value compared to its level before the war. The conflict has also caused a reallocation of resources to destructive and war-related activities. This drop in economic productivity weighs on the Syrian pound’s stability.       

Dramatic export decline

The total value of Syrian exports contracted from $12.2 billion in 2010 to less than $700 million in 2018, whereas imports declined from $19.7 billion to $4.4 billion during the same period. Thus, the coverage ratio of exports to imports dropped from 62% to 16% in this period, indicating that the government has become very dependent on external trade partners. Almost all import payments are made in foreign currencies, which increases the devaluation pressure on the Syrian pound.

Iran has provided the Syrian regime with credit lines estimated at about $6 billion to import oil and consumer goods from the Islamic Republic. These credit lines do not include all the Iranian financial support to the regime. Iranian oil exports to Syria are estimated at about 2 million barrels a month (a total of around $16 billion during the eight years of conflict). The increasing external debt to Iran, also due to military support, may contribute in stabilizing the Syrian pound for short period, yet it is bound to sustain the devaluation pressure in the long run.      

Damaging monetary policies

Since the beginning of the conflict, the Central Bank of Syria has issued a series of decisions that have contributed to the weakening of the Syrian pound. For instance, until 2015, the bank adopted a policy of selling hard currencies to local foreign exchange companies. This policy depleted their foreign currency reserves by about $1.2 billion, without halting the deterioration of the pound. The bank has also increased the money supply; there is three times the amount of currency in the local market as today compared to before the conflict, causing a surge in inflation and currency devaluation.

The absence of foreign direct investment

Between 2005 and 2010, Syria received an annual average of $1.5 billion as foreign direct investment (FDI); this amount has dropped almost to zero during the years of conflict. Russia and Iran have continued to invest in Syria, mainly in the mining sector, but the conditions of these investments have limited the inflows of foreign currency to Syria. FDI inflows were a major source of hard currency; their absence is an additional driver of currency depreciation.

International sanctions

Many countries have imposed sanctions on various sectors in Syria, including energy and financial transactions. During the last two years, the US has tightened its sanctions by introducing the Caesar law, which aims to isolate the Syrian regime. These sanctions have increased the cost of the Syrian imports and therefore raised demand for foreign currencies. Remittances, estimated at $4.5 million per day as well as foreign investments and exports were also negatively affected, and this has reduced the supply side of hard currencies inside Syria.

Currency speculation

The Syrian regime usually intervenes to manage currency speculation through government agencies and friendly business entities. But such speculations are very difficult to control in Syria given the poor economic conditions, the high level of business uncertainty and the lack of trust in institutions. This has driven the Syrian households, those who did not already lose their savings, to buy gold or hard currencies as safe investments.

The Syrian pound’s depreciation and its high fluctuations reflect the fragile political and economic situation in the country. The government’s improvised decisions have failed to stabilize it, causing a rise in the prices of basic goods. This has left more than 90% of Syria’s population under the poverty line. Long-term stability in exchange rates requires an inclusive and sustainable development strategy, one that would need to be based on an accountable and transparent political landscape. That seems a long way off.

At this event, which forms the second annual UK Trade Policy Observatory conference, there will be six presentations over the course of the day before concluding with a panel discussion and Q&A. This year’s conference will focus on the following legal areas of trade policy:

• Blockchain: Creating and Eliminating Trade in Services
• China's Role in the International Trading System
• Official Export Support: Compliance and Competition Concerns
• Strategic Litigation and Health Regulation: Implications for International Economic Law
• Development, Labour Standards and Sustainability in Trade Agreements
• Retaining Versus Reforming EU Food Safety Legislation: Selected Issues for a US-UK Trade Negotiation

To register for this event, please click here. 

Many studies have explored the importance of public opinion in British foreign policy decision-making, especially when it comes to the UK's relations with the United States and the European Union. Despite its importance, there is a dearth of research on public opinion about British foreign policy towards other major players in the international system, such as emerging powers like China. We have addressed this knowledge gap by conducting a public opinion survey in the UK after the Brexit referendum. Our research findings indicate that the British public at large finds China's rise disconcerting, but is also pragmatic in its understanding of how the ensuing bilateral relations should be managed. More importantly, our results show that views on China are clearly split between the two opposing Brexit identities. Those who subscribe strongly to the Leave identity, measured by their aversion to the EU and antipathy towards immigration, are also more likely to hold negative perceptions of Chinese global leadership and be more suspicious of China as a military threat. In contrast, those who espouse a Remain identity—that is, believe that Britain would be better served within the EU and with more immigrants—are more likely to prefer closer engagement with China and to have a more positive outlook overall on China's place within the global community.

Economic containment has garnered repeated attention in the discourse about the United States' response to China. Yet, the attributes of economic containment as a distinct strategy of Great Power competition remain unclear. Moreover, the conditions under which a leading power can employ economic containment against a challenging power remain theoretically unelaborated. This article first suggests that economic containment refers to the use of economic policies to weaken the targeted state's material capacity to start military aggression, rather than to influence the competitor's behaviour over a specific issue. Then, this article suggests that economic containment becomes a viable option when the leading power has the ability to inflict more losses on the challenging power through economic restrictions, and this ability is largely determined by the availability of alternative economic partners. When the leading power cannot effectively inflict more losses on the challenging power due to the presence of alternative economic partners, it is better off avoiding economic containment. The author substantiates these arguments through case-studies of the United States' responses to the Soviet Union during the Cold War. The article concludes by examining the nature of the United States' recent economic restrictions against China.

The upcoming UK general election is arguably a 'Brexit election', and as such, whoever wins the election will have little time to get their strategy for Brexit up and running to meet the new Brexit deadline of 31 January 2020. But what are the political parties’ policies for the UK's future trade? This event will present and discuss what the five main parties’ manifestos imply for future UK trade. Each manifesto will be presented and analysed by a fellow of the UK Trade Policy Observatory (UKTPO) and will be followed by a Q&A session. 

The entry into force of the African Continental Free Trade Area (AfCFTA) on 30 May, after only three years of negotiations, is an economic, political and diplomatic milestone for the African Union (AU) and its member states, crucial for economic growth, job creation, and making Africa a meaningful player in international trade. But the continent will have to work together to ensure that the potential benefits are fully realized.

A necessary innovation

With its advances in maintaining peace and security, abundant natural resources, high growth rates, improved linkages to global supply chains and a youthful population, Africa is emerging as a new global centre of economic growth, increasingly sought after as a partner by the world’s biggest economies. Governments from across Africa have been taking a more assertive role in international markets, including through proactive diversification of trading partners, and the continent remains a strong advocate for the multilateral trading system.

However, this is not yet reflected in outcomes. The African Union does not have observer status at the World Trade Organization, despite diplomatic efforts in the past decade. Africa has less than a three per cent share of global trade, and the growing trend towards protectionism across the global economy may only increase the vulnerability of a disunited Africa. Its fractured internal market means that trade within Africa is lower than for any other region on the globe, with intra-African trade just 18 per cent of overall exports, as compared to 70 per cent in Europe.

The AfCFTA is the continent’s tool to address the disparity between Africa’s growing economic significance and its peripheral place in the global trade system, to build a bridge between present fragmentation and future prosperity. It is an ambitious, comprehensive agreement covering trade in goods, services, investment, intellectual property rights and competition policy. It has been signed by all of Africa’s states with the exception of Eritrea.

It is the AU's Agenda 2063 flagship project, brought about by the decisions taken at the January 2012 African Union Summit to boost intra-African trade and to fast track the establishment of the Continental Free Trade Area. It builds upon ambitions enshrined in successive agreements including the Lagos Plan of Action and the Abuja Treaty. Access to new regional markets and reduced non-tariff barriers are intended to help companies scale up, driving job creation and poverty reduction, as well as attracting inward investment to even Africa’s smaller economies.

The signing in 2018 of the instruments governing the Single Air Transport Market and the Protocol on Free Movement of Persons, Right of Residence and Right of Establishment provided another step towards the gradual elimination of barriers to the movement of goods, services and people within the continent.

Tests to come

However, while progress is being made towards the ratification of the AfCFTA, much remains to be done before African countries can fully trade under its terms. The framework for implementation is still under development, and the creation of enabling infrastructure that is critical for connectivity will take time to develop and requires extensive investment.

So, the first test for the AfCFTA will be the level to which Africa’s leaders make it a domestic priority, and whether a consensus can be maintained across the AU’s member states as the costs of implementation become clear.

There is no guarantee that the gains of free trade will be evenly distributed. They will mainly depend on the extent to which countries embrace industrialization, liberalization of their markets and opening of their borders for free movement of goods and people – policies that some incumbent leaders may be reluctant to implement. Political will to maintain a unified negotiating position with diverse stakeholders, including the private sector, will come under increasing stress.  

A second challenge is how the AfCFTA relates to already existing trade arrangements, notably with the EU.  The AU has long preferred to pursue a continent-to-continent trading arrangement instead of the bilateral Economic Partnership Agreements being sought by the EU under the African, Caribbean and Pacific (ACP) framework to which, with the exception of Algeria, Egypt, Libya, Morocco, Tunisia and South Africa, all African states belong. The signing of the AfCFTA is one important step towards making this possible.

But there are currently negotiations under the ACP to replace the Cotonou Accord (the framework governing trade between ACP members and the EU, including Economic Partnership Agreements [EPAs], that is due to expire in 2020). Negotiations on the African pillar of the accord are due to take place after the AfCFTA has entered into force. So African states and the AU will face the challenge of balancing their commitment to the ACP bloc with pursuing their own interests.

And though the AfCFTA should supersede any other agreements, the EPAs or their successors, will continue to govern day-to-day trading, in parallel to the new pan-African market. It is not yet clear how these contradictions will be reconciled.

A new role for the AU?

The AU will need to play an active role as the main interlocutor with Africa´s international trading partners, with the AfCFTA secretariat being the arbiter of internal tensions and trade disputes. The AU´s engagement at continental level has to date revolved mainly around headline political diplomacy, security and peacekeeping. With the continental free market becoming a reality, an effective pivot to economic diplomacy will be critical for growth and development.

With the AfCFTA, the AU has endeavoured to address Africa’s unsustainable position in global trade, to stimulate growth, economic diversification and jobs for its growing population. Much will depend on the commitment of African leaders to maintaining a unified negotiating position to implement the agreement and the AU’s capacity to effectively move from political to economic diplomacy.

Global trade policy is not going back to the consensus that prevailed over the past few decades. Even if the growing cycle of tariffs and trade threats is tamed in 2020, the economic consensus that underpinned broad support for open trade is breaking down, and escalation in trade tensions is likely.

What next for the US and China?

The US and China are currently at the centre of these tensions. The equity and bond markets started 2020 off euphorically as news of a ‘phase one’ trade deal between the two dominated headlines. Such a deal involves the US reducing some previously imposed tariffs and tabling another round of threatened ones, while China agrees to buy more US goods, including agriculture. This represents a détente of sorts, but don’t expect it to last; trade between the two countries is not actually at the heart of their trade war.

The question instead is which country will have the biggest economy, based on excellence in industries such as artificial intelligence, machine learning and quantum computing. There is a national security component to this issue as well, given how much these high-tech industries feed into military and national security operations. This has increasingly become a concern for the United States as China has adopted a more aggressive regional stance, particularly in the South China Sea.

Tariffs have been used as a tool by both countries to try to prevent the other from dominating the global economy, and while they have dented both economies, they aren’t a particularly effective tool. In particular, tariffs do nothing to address US concerns about intellectual property rights in China, forced technology transfers and state subsidies for high tech industries. The phase one deal, therefore, is a superficial one that fails to get at the heart of the matter.

US–EU tensions

However, with a temporary US-China détente, the US may turn its attention to Europe. The EU and US are in the midst of negotiating a trade deal, but obstacles have been present from the start.

Last July, France adopted a 3% digital tax that applies to firms with global revenues over €750 million per annum generated from digital activities, of which €25 million are made in its territory. A US investigation determined that the digital tax discriminates against US companies such as Google, Amazon, Apple and Facebook, and so the US has threatened France with 100% tariffs on luxury exports, including wine.

The long-standing tensions between the US and EU over their aircraft manufacturing behemoths, Boeing and Airbus, make reaching a US–EU trade deal more complicated. They also risk undermining US–EU collaboration on some joint concerns regarding China’s trade policies and practices.

The United States recently threatened to increase its punitive measures against European goods as retaliation for Airbus subsidies. The World Trade Organization (WTO) gave the US the green light to impose tariffs of up to 100% on $7.5 billion of EU exports last October, but the US had limited them to 10% on aircraft and 25% on industrial and agricultural products. Now, the US is threatening to escalate.

Finally, the US has repeatedly threatened to impose tariffs on imported cars from the EU. This threat looms large for Germany in particular, which is a significant producer of automobiles and whose industry is still recovering from the diesel emissions scandal. Germany has for the past two decades been the powerhouse economy in the EU, but has more recently seen sclerotic growth.

US election implications

It is an election year in the United States, and while it is too early to call the election (or even guess who the Democratic candidate might be), the ballot could bring about change on trade. Protectionism has historically been more of a Democrat policy than a Republican one, so there won’t be a complete reversal of Trump’s trade policy if a Democrat were to win. But there might be some changes.

If a Democrat controlled the White House, the US would still want to pressure China, but it might adopt a more international approach in that effort. The US might also reverse the steel and aluminium tariffs that kicked off these heightened trade tensions.

Most importantly, the US might stop hindering the WTO by appointing judges to the appellate body (without which the WTO cannot address rulings that are being appealed) and would likely work with other countries to reform the WTO. The focus would shift from confrontation to negotiation. This, of course, depends on which Democrat is in the White House.

In the meantime, President Trump has a difficult balancing act. Being tough on China and bringing home American jobs were successful slogans in his first presidential bid. He will want to indicate he has delivered on both and will continue to do so. At the same time, tariffs have sparked dips in the markets that have caused the president to de-escalate trade tensions. As the 2020 election approaches, expect the administration to balance these two concerns.

Looking beyond the vote, there may be some changes to the US approach to trade over the next decade, depending on which party is in government. The most pernicious aspect of the trade tensions on the global economy has been the uncertainty they have caused; businesses have deferred and delayed investment as they wait to see what the new rules of the global order are. They know the old consensus on trade won’t come back, but don’t yet know what the new consensus is.

As long as the limbo persists, and it probably will for at least a few more years, trade issues will remain a risk for the global economy.

This article is the first in a series of publications and roundtable discussions, part of the Chatham House Global Trade Policy Forum.

Read all our analysis on the Coronavirus Response

The coronavirus outbreak comes at a difficult time for China’s ruling party. A tumultuous 2019 saw the country fighting an economic slowdown coupled with an increasingly hostile international environment. As authorities take assertive steps to contain the virus, the emergency has - at least temporarily - disrupted global trade and supply chains, depressed asset prices and forced multinational businesses to make consequential decisions with limited information. 

Against this backdrop, panellists reflect on the country’s nascent economic transition from 2020 onward. What has been China’s progress towards a sustainable innovation-led economy so far? To what extent is the ruling party addressing growing concerns over job losses, wealth inequality and a lack of social mobility? And how are foreign investors responding to these developments in China?

As the COVID-19 crisis roars on, so have debates about China’s role in it. Based on what is known, it is clear that some Chinese officials made a major error in late December and early January, when they tried to prevent disclosures of the coronavirus outbreak in Wuhan, even silencing healthcare workers who tried to sound the alarm.

China’s leaders will have to live with these mistakes, even if they succeed in resolving the crisis and adopting adequate measures to prevent a future outbreak. What is less clear is why other countries think it is in their interest to keep referring to China’s initial errors, rather than working toward solutions.

For many governments, naming and shaming China appears to be a ploy to divert attention from their own lack of preparedness. Equally concerning is the growing criticism of the World Health Organization (WHO), not least by Donald Trump who has attacked the organization - and threatens to withdraw US funding - for supposedly failing to hold the Chinese government to account.

Unhelpful and dangerous

At a time when the top global priority should be to organize a comprehensive coordinated response to the dual health and economic crises unleashed by the coronavirus, this blame game is not just unhelpful but dangerous.

Globally and at the country level, we all desperately need to do everything possible to accelerate the development of a safe and effective vaccine, while in the meantime stepping up collective efforts to deploy the diagnostic and therapeutic tools necessary to keep the health crisis under control.

Given there is no other global health organization with the capacity to confront the pandemic, the WHO will remain at the center of the response, whether certain political leaders like it or not.

Having dealt with the WHO to a modest degree during my time as chairman of the UK’s independent Review on Antimicrobial Resistance (AMR), I can say that it is similar to most large, bureaucratic international organizations.

Like the International Monetary Fund (IMF), the World Bank, and the United Nations, it is not especially dynamic or inclined to think outside the box. But rather than sniping at these organizations from the sidelines, we should be working to improve them.

In the current crisis, we all should be doing everything we can to help both the WHO and the IMF to play an effective, leading role in the global response. As I have argued before, the IMF should expand the scope of its annual Article IV assessments to include national public-health systems, given that these are critical determinants in a country’s ability to prevent or at least manage a crisis like the one we are now experiencing.

I have even raised this idea with IMF officials themselves, only to be told that such reporting falls outside their remit because they lack the relevant expertise. That answer was not good enough then, and it definitely isn’t good enough now.

If the IMF lacks the expertise to assess public health systems, it should acquire it. As the COVID-19 crisis makes abundantly clear, there is no useful distinction to be made between health and finance. The two policy domains are deeply interconnected, and should be treated as such.

In thinking about an international response to today’s health and economic emergency, the obvious analogy is the 2008 global financial crisis which started with an unsustainable US housing bubble, fed by foreign savings owing to the lack of domestic savings in the United States.

When the bubble finally burst, many other countries sustained more harm than the US did, just as the COVID-19 pandemic has hit some countries much harder than it hit China.

And yet not many countries around the world sought to single out the US for presiding over a massively destructive housing bubble, even though the scars from that previous crisis are still visible. On the contrary, many welcomed the US economy’s return to sustained growth in recent years, because a strong US economy benefits the rest of the world.

So, rather than applying a double standard and fixating on China’s undoubtedly large errors, we would do better to consider what China can teach us. Specifically, we should be focused on better understanding the technologies and diagnostic techniques that China used to keep its - apparent - death toll so low compared to other countries, and to restart parts of its economy within weeks of the height of the outbreak.

And for our own sakes, we also should be considering what policies China could adopt to put itself back on a path toward 6% annual growth, because the Chinese economy inevitably will play a significant role in the global recovery.

If China’s post-pandemic growth model makes good on its leaders’ efforts in recent years to boost domestic consumption and imports from the rest of the world, we will all be better off.

This article was originally published in Project Syndicate