The renminbi seems to be back in business as a Chinese tool of retaliation against US tariffs. A 1.5 per cent fall in the currency early this month in response to proposed new US tariffs was only a start. Since the middle of August the renminbi has weakened further, and the exchange rate is now 4 per cent weaker than at the start of the month. We may well see more of a ‘weaponized’ renminbi, but there are four good reasons why Beijing might be wise to think before shooting.

The first has to do with how China seeks to promote its place in the world. China has been at pains to manage the collapse of its relations with the US in a way that allows it to present itself as an alternative pillar of global order, and as a source of stability in the international system, not to mention moral authority. This has deep roots.

Anyone investigating the history of Chinese statecraft will quickly come across an enduring distinction in Chinese thought: between wang dao, the kingly, or righteous way, and ba dao, the way of the hegemon. Since Chinese thinkers and officials routinely describe US behaviour since the Second World War as hegemonic, it behoves Chinese policymakers to do as much as possible to stay on moral high-ground in their behaviour towards Washington. Only in that way would President Xi be able properly to assert China’s claim to leadership.

Indeed, China has a notable track record of using exchange rate stability to enhance its reputation as a force for global stability. Both in the aftermath of the Asian crisis in 1997, and of the Global Financial Crisis in 2008, Chinese exchange rate stability was offered as a way of demonstrating China’s trustworthiness and its commitment to multilateral order.

Devaluing the renminbi in a meaningful way now might have a different rationale, but the cost to China’s claim to virtue, and its bid to offer itself as a guardian of global stability, might be considerable.

That’s particularly true because of the second problem China has in thinking about a weaker renminbi: it may not be all that effective in sustaining Chinese trade. One reason for this is the increasing co-movement with the renminbi of currencies in countries with whom China competes.

As the renminbi changes against the dollar, so do the Taiwan dollar, the Korean won, the Singapore dollar and the Indian rupee. In addition, the short-run impact of a weaker renminbi is more likely to curb imports than to expand exports, and so its effects might be contractionary. 

An ineffective devaluation of the renminbi would be particularly useless because of the third risk China needs to consider, namely the risk of retaliation by the US administration. Of this there is already plenty of evidence, of course.

The US Treasury’s declaration of China as a ‘currency manipulator’ on 5 August bears little relationship to the actual formal criteria that the Treasury uses to define that term, but equally the US had warned the Chinese back in May that these criteria don’t bind its hand. By abandoning a rules-based approach to the definition of currency manipulation, the US has opened wide the door to further antagonism, and Beijing should have no doubt that Washington will walk through that door if it wants to.

The fourth, and possibly most self-destructive, risk that China has to consider is that a weaker renminbi might destabilize China’s capital account, fuelling capital outflows that would leave China’s policymakers feeling very uncomfortable.

Indeed, there is already evidence that Chinese residents feel less confident that the renminbi is a reliable store of value, now that there is no longer a sense that the currency is destined to appreciate against the dollar. The best illustration of this comes from the ‘errors and omissions’, or unaccounted-for outflows, in China’s balance of payments.

The past few years have seen these outflows rise a lot, averaging some $200 billion per year during the past four calendar years, or almost 2 per cent GDP; and around $90 billion in the first three months of 2019 alone. These are scarily large numbers.

The risk here is that Chinese expectations about the renminbi are ‘adaptive’: the more the exchange rate weakens, the more Chinese residents expect it to weaken, and so the demand for dollars goes up. In principle, the only way to deal with this risk would be for the People's Bank of China (PBOC) to implement a large, one-off devaluation of the renminbi to a level at which dollars are expensive enough that no one wants to buy them anymore.

This would be very dangerous, though: it presupposes that the PBOC could know in advance the ‘equilibrium’ value of the renminbi. It would take an unusually brave central banker to claim such foresight, especially since that equilibrium value could itself be altered by the mere fact of such a dramatic change in policy.

No one really knows precisely by what mechanism capital outflows from China have accelerated in recent years, but a very good candidate is tourism. The expenditure of outbound Chinese tourists abroad has risen a lot in recent years, and that increase very closely mirrors the rise in ‘errors and omissions’. So the suspicion must be that the increasing flow of Chinese tourists – nearly one half of whom last year simply travelled to capital-controls-free Hong Kong and Macao – is just creating opportunities for unrecorded capital flight.

This raises a disturbing possibility: that the most effective way for China to devalue the renminbi without the backfire of capital outflows would be simultaneously to stem the outflow of Chinese tourists. China has form in this regard, albeit for differing reasons: this month it suspended a programme that allowed individual tourists from 47 Chinese cities to travel to Taiwan.

A more global restriction on Chinese tourism might make a devaluation of the renminbi ‘safer’, and it would have the collateral benefit of helping to increase China’s current account surplus, the evaporation of which in recent years owes a lot to rising tourism expenditure and which is almost certainly a source of unhappiness in Beijing, where mercantilism remains popular.

But a world where China could impose such draconian measures would be one where nationalism has reached heights we haven’t yet seen. Let’s hope we don’t go there.

This article was originally published in the Financial Times.

COVID-19 is a sharp reminder of why trade and climate policy matters. How can governments maintain access to critical goods and services, and ensure global supply chains function in times of crisis?

The timing of many trade negotiations is now increasingly uncertain, as are the UK’s plans to host COP26 in November. Policy work continues, however, and the EU has released its draft negotiating text for the new UK-EU trade deal, which includes a sub-chapter specifically devoted to climate. 

This is a timely reminder both of the pressing need for the UK to integrate its trade and climate policymaking and to use the current crisis-induced breathing space in international negotiations - however limited - to catch up on both strategy and priorities on this critical policy intersection.

The UK government has moved fast to reset its external trade relations post-Brexit. In the past month it formally launched bilateral negotiations with the EU and took up a seat at the World Trade Organization (WTO) as an independent member. Until the COVID-19 crisis hit, negotiations were also poised to start with the US.

The UK is also in the climate spotlight as host of COP26, the most important international climate negotiation since Paris in 2015, which presents a vital opportunity for the government to show leadership by aligning its trade agenda with its climate and sustainability commitments in bold new ways.

Not just an empty aspiration

This would send a signal that ‘Global Britain’ is not just an empty aspiration, but a concrete commitment to lead.

Not only is concerted action on the climate crisis a central priority for UK citizens, a growing and increasingly vocal group of UK businesses committed to decarbonization are calling on the government to secure a more transparent and predictable international market place that supports climate action by business.

With COP26, the UK has a unique responsibility to push governments to ratchet up ambition in the national contributions to climate action – and to promote coherence between climate ambition and wider economic policymaking, including on trade. If Britain really wants to lead, here are some concrete actions it should take.

At the national level, the UK can pioneer new ways to put environmental sustainability – and climate action in particular - at the heart of its trade agenda. Achieving the government’s ambitious Clean Growth Strategy - which seeks to make the UK the global leader in a range of industries including electric cars and offshore wind – should be a central objective of UK trade policy.

The UK should re-orient trade policy frameworks to incentivize the shift toward a more circular and net zero global economy. And all elements of UK trade policy could be assessed against environmental objectives - for example, their contribution to phasing out fossil fuels, helping to reverse overexploitation of natural resources, and support for sustainable agriculture and biodiversity.

In its bilateral and regional trade negotiations, the UK can and should advance its environment, climate and trade goals in tandem, and implementation of the Paris Agreement must be a core objective of the UK trade strategy.

A core issue for the UK is how to ensure that efforts to decarbonise the economy are not undercut by imports from high-carbon producers. Here, a ‘border carbon adjustment (BCA)’ - effectively a tax on the climate pollution of imports - would support UK climate goals. The EU draft negotiating text released yesterday put the issue of BCAs front and centre, making crystal clear that the intersection of climate, environment and trade policy goals will be a central issue for UK-EU trade negotiations.

Even with the United States, a trade deal can and should still be seized as a way to incentivize the shift toward a net zero and more circular economy. At the multilateral level, as a new independent WTO member, the UK has an opportunity to help build a forward-looking climate and trade agenda.

The UK could help foster dialogue, research and action on a cluster of ‘climate and trade’ issues that warrant more focused attention at the WTO. These include the design of carbon pricing policies at the border that are transparent, fair and support a just transition; proposals for a climate waiver for WTO rules; and identification of ways multilateral trade cooperation could promote a zero carbon and more circular global economy.  

To help nudge multilateral discussion along, the UK could also ask to join a critical ‘path finder’ effort by six governments, led by New Zealand, to pursue an agreement on climate change, trade and sustainability (ACCTS). This group aims to find ways forward on three central trade and climate issues: removing fossil fuel subsidies, climate-related labelling, and promoting trade in climate-friendly goods and services.

At present, the complex challenges at the intersection of climate, trade and development policy are too often used to defer or side-step issues deemed ‘too hard’ or ‘too sensitive’ to tackle. The UK could help here by working to ensure multilateral climate and trade initiatives share adjustment burdens, recognise the historical responsibility of developed countries, and do not unfairly disadvantage developing countries - especially the least developed.

Many developing countries are keen to promote climate-friendly exports as part of wider export diversification strategies  and want to reap greater returns from greener global value chains. Further, small island states and least-developed countries – many of which are Commonwealth members – that are especially vulnerable to the impacts of climate change and natural disasters, need support to adapt in the face of trade shocks and to build climate-resilient, trade-related infrastructure and export sectors.

As an immediate next step, the UK should actively support the growing number of WTO members in favour of a WTO Ministerial Statement on environmental sustainability and trade. It should work with its key trading partners in the Commonwealth and beyond to ensure the agenda is inclusive, supports achievement of the UN Sustainable Development Goals (SDGs) and helps developing countries benefit from a more environmentally sustainable global economy.

As the UK prepares to host COP26, negotiates deals with the EU and US, and prepares for its first WTO Ministerial meeting as an independent member, it must show it can lead the way nationally, bilaterally, and multilaterally. And to ensure the government acts, greater engagement from the UK’s business, civil society and research sectors is critical – we need all hands on deck to forge and promote concrete proposals for aligning UK trade policy with the climate ambition our world needs.

This webinar, part of the MENA Programme Webinar Series, will examine the trajectory of political and security dynamics in the Gulf in view of the ongoing rift within the Gulf Cooperation Council (GCC), the death of Sultan Qaboos in Oman, the escalation of tensions between Iran and the United States, and the COVID-19 crisis.

Speakers will explore the orientation of the GCC under a new Secretary-General and the prospects for mediation between Qatar and its neighbours, the future of Omani domestic and foreign policy under Sultan Haitham bin Tariq Al Said, eventual transitions to new leadership in Bahrain and Kuwait, and whether the impact of COVID-19 may help replace the confrontation within the GCC with closer coordination among its six member states.

The webinar will be livestreamed on the MENA Programme Facebook page.

Summary

• Egypt and the Gulf Arab region have long been important poles of political, military economic and cultural power and influence in the Middle East. Under the presidency of Gamal Abdel-Nasser, Egypt was the dominant force in the region, but the balance of power shifted towards the Gulf in the 1970s, as Egypt’s economy faltered and the Gulf Arab states reaped the benefits of resurgent oil prices in the wake of the 1973 OPEC embargo. The popular uprising against President Hosni Mubarak’s regime in 2011 elicited divergent reactions in the Gulf. The leaders of Saudi Arabia and the United Arab Emirates (UAE) were concerned about the risks of a movement for revolutionary change spreading to their own region, while Qatar saw an opportunity to strengthen its regional role through supporting the Muslim Brotherhood.
• The forcible removal of Egypt’s elected president, Mohammed Morsi of the Muslim Brotherhood, in July 2013 by the army commander, Abdel-Fattah el-Sisi, ushered in a new era in Egypt–Gulf relations. The UAE, Saudi Arabia and Kuwait quickly mobilized financial support for the new administration. Abu Dhabi’s crown prince, Mohammed bin Zayed, known for his intense opposition to the Muslim Brotherhood, signalled his strong support for the new regime by visiting Cairo only weeks after hundreds of Morsi’s supporters were killed.
• Between July 2013 and August 2016, the UAE, Saudi Arabia and Kuwait provided about $30 billion in aid to the Sisi regime through placing deposits with the Central Bank of Egypt and supplying petroleum products as grants. The UAE sought to link its aid to a programme of economic reforms, but the Egyptian government finally decided in mid-2016 to negotiate a loan agreement with the International Monetary Fund (IMF). Since the signing of the $12 billion loan with the IMF in November 2016, Egypt has no longer been reliant on Gulf Arab financial support, although some of the deposits placed previously have been rolled over on reaching maturity.
• During the Sisi era, Egypt has benefited from its economic links to the Gulf over a wide spectrum of activities. The UAE and Saudi Arabia in particular are increasingly important export markets for Egyptian companies, as well as major sources of foreign direct investment. The financial aid provided by Sisi’s Gulf allies in 2013–16 has also helped to underpin the surge in Egypt’s arms procurement. Another critical element in the economic relationship is the presence of millions of expatriate Egyptian workers in the Gulf, who are responsible for a large share of the annual inflow of about $25 billion in remittances.
• Egypt’s most important political relationships in the Gulf have been with Saudi Arabia and the UAE. Ties with Saudi Arabia were affected by the death of King Abdullah at the start of 2015 and by the subsequent emergence of Mohammed bin Salman as the most influential figure in the kingdom. During a visit by King Abdullah’s successor, King Salman, to Cairo in April 2016, Egypt announced a decision to cede sovereignty over two Red Sea islands, Tiran and Sanafir, to Saudi Arabia. Relations soured after this decision was challenged in the Egyptian courts, but the issue was resolved in favour of the deal. Egypt played no active role in the Saudi- and UAE-led intervention in Yemen, but joined its two principal Gulf allies and Bahrain in imposing sanctions on Qatar in mid-2017. 
• Relations between Sisi and Crown Prince Mohammed bin Zayed have remained close throughout the past seven years. The UAE and Egypt have been among the most important external supporters of the Libyan National Army, commanded by Field Marshal Khalifa Haftar, although they have not created an overt alliance in this arena. Egypt has adopted a more prominent diplomatic profile in relation to Libya, while the UAE has been more deeply engaged militarily, to judge from assessments by the panel of experts tasked to monitor adherence to the UN embargo on the supply of weapons to Libya. The relationship between the Egyptian and Emirati leaders is underpinned by a strong shared ideological antipathy to the Muslim Brotherhood.
• Following the completion of the IMF programme in 2019, the Egyptian economy is in a much stronger position than it was in the early period of Sisi’s rule, even though this has exacted a harsh toll on the 60 per cent of the population classified by the World Bank as poor or vulnerable. There is no pressing need for direct financial support from the Gulf, but Egypt still depends on economic linkages through trade, investment, tourism and remittances. In this respect, the balance of power has tilted marginally back towards Egypt. However, Egypt is still beset by deep internal political contradictions, as reflected in the regime’s heavy reliance on coercion and repression, and the economy remains vulnerable to external shocks – of which the coronavirus pandemic is a prime example.

The webinar will be livestreamed on the MENA Programme Facebook page.

Egypt and the Gulf Arab region have long been important poles of political, military, economic and cultural power and influence in the Middle East. A recently published Chatham House paper examines the strategic and economic relationship between Egypt and the Gulf, focusing in particular on the period since Abdel-Fattah el-Sisi came to power in Egypt. Author David Butter offers a detailed evaluation of these economic relationships, in the broader context of a strategic alliance that, since 2013, has been informed by a common commitment between Egypt and the UAE in particular to keep in check the Muslim Brotherhood and its regional state supporters, primarily Turkey and Qatar.

In this webinar, the author will discuss the paper’s main argument, namely, that the degree of Egypt’s dependence on Gulf countries has fluctuated, and that by 2019, Egypt’s direct financial dependence on the Gulf was significantly reduced by comparison with the initial three years of the Sisi era, although other economic linkages such as investment, trade, remittances and tourism remained strong, with potential for growth. The speaker will also discuss the impact of the global crisis caused by the COVID-19 pandemic on Egypt’s and Gulf countries’ economies and will explore the implications for the relationship between Egypt and the Gulf.

This webinar is part of the Chatham House Middle East and North Africa Programme's Online Event Series. The event will be held on the record.

Nigeria’s booming informal trade is costly for society, business and government, yet a critical opportunity exists to formalize such trade and drive more sustainable and less volatile growth, argues a new report from Chatham House.

According to one estimate, informal activity accounts for up to 64 per cent of Nigeria’s GDP. Nigeria's Booming Borders: The Drivers and Consequences of Unrecorded Trade finds that this is a result of obstacles that impede trading through formal channels. These drivers include bureaucratic burdens and other factors, such as:

• The need for Nigerian businesses to produce at least nine documents in order to send an export shipment and at least 13 in order to bring in an import consignment.
• Rigid and dysfunctional foreign-exchange regulations that push most smaller traders into the incompletely regulated parallel exchange market.
• Corruption and unofficial ‘taxation’, especially on major border highways, which delegitimize formal channels and encourage the use of smuggling routes.

As a result, the state loses direct tax revenues that would be generated by formal cross-border trade. This is not just siphoned into the informal economy; some is lost entirely. For example, many shippers opt to dock in neighbouring countries rather than deal with the expense and difficulty of using Nigeria’s ports.

Informal trade also undermines the social contract between the private sector and government. The state lacks tax revenues to pay its officials, improve infrastructure or implement reforms, while traders feel the government provides no services in return for any taxes they might pay.

‘Every day tens of thousands of unofficial payments are made, none destined for the government. Policy-makers need to create an environment that encourages trade to flow through formal channels and capture lost revenue’, says co-author Leena Koni Hoffmann.

‘Formalization would assist Nigeria to pursue more high-quality, high-tech economic activity at a time when rising labour costs in Asia are creating scope for Nigerian manufacturers to compete’, she adds.

The report makes a number of recommendations for how Nigeria could encourage more formal trade, including:

• Strengthening the resources and capacity of the Federal Ministry of Industry, Trade and Investment to coordinate action across key government ministries, departments and agencies, as well as public and private stakeholders.
• Prioritizing engagement in the development of Economic Community of West African States (ECOWAS) trade policies and fully implementing the ECOWAS Protocol on Free Movement of Persons to reduce harassment at borders.
• Allowing banks to operate simple services for small and medium-sized businesses to make trade payments directly from Nigerian naira to CFA francs and vice versa.
• Improving basic facilities that support traders, including improving the efficiency of border posts, installing truck parks and all-weather surfacing on market access roads, and introducing online booking for trucks to enter ports.
• Separating responsibilities for assessing duty and tariff liabilities from revenue collection in order to reduce opportunities for corruption, an approach already tested with success by the Lagos State Internal Revenue Service.
• Increasing funding and technical support for the National Bureau of Statistics, which has a significant role to play in measuring and capturing more of Nigeria’s external trade.

Interviews conducted for the report reveal that business people would welcome the opportunity to pay taxes, but only if they received assurance that these payments would represent a contract with government guaranteeing that conditions for business would be improved.

‘As Africa’s largest economy, formalizing external trade would allow Nigeria to fulfil its potential as the trading engine of the West and Central African economy and shape the business landscape across the region,’ says co-author Paul Melly.

The Chatham House Prize is presented annually to the person, persons or organization deemed by members of the Royal Institute of International Affairs to have made the most significant contribution to the improvement of international relations in the previous year.

This year, members voted for John Kerry and Mohammad Javad Zarif in recognition of their crucial roles, throughout 2015, in successfully negotiating the historic nuclear deal between Iran and the P5+1 – considered to be one of the most intractable diplomatic stand-offs in international affairs in the 21st century.

The deal was one that many thought impossible. Overcoming enormous technical complexity, entrenched domestic opposition in the United States and Iran and three decades of intense hostility between their two countries, Kerry and Zarif’s leadership and commitment, in particular, were imperative to sustaining and driving the negotiations to their successful conclusion. With the vital participation of officials from other permanent members of the UN Security Council, Germany and the EU, they secured a deal, endorsed by the UN Security Council and more than 90 countries, which was a victory for diplomacy as well as against nuclear proliferation.

Events

John Kerry at Chatham House: Chatham House Prize Presentation
31 October 2016

Mohammad Javad Zarif at Chatham House: Overcoming Regional Challenges in the Middle East
4 February 2016

Nominees

The nominees for the Chatham House Prize 2016 were:

• Laurent Fabius, Minister of Foreign Affairs, France (2012–16) and Christiana Figueres, Executive Secretary, UN Framework Convention 
• Attahiru Muhammadu Jega, Chairman, Independent National Electoral Commission, Nigeria (2010–15)
• John Kerry, US Secretary of State and Dr Mohammad Javad Zarif, Iran’s Minister of Foreign Affairs

About the Chatham House Prize

The Chatham House Prize is presented to the person, persons or organization deemed by members of Chatham House to have made the most significant contribution to the improvement of international relations in the previous year.

The selection process is independent, democratic and draws on the deep knowledge of Chatham House's research teams, making the Prize a distinctive and unique award in the field of international affairs.

A short-list of nominees is selected by the institute's three presidents from a longer list submitted by the research programmes and departments in their areas of expertise. The recipient is then determined by Chatham House's broad membership base on a one-member, one-vote basis. The award is presented on behalf of the institute's patron, Her Majesty the Queen, representing the non-partisan and authoritative character of the Prize.

The Chatham House Prize was launched in 2005. Previous recipients of the Prize include Burmese democracy campaigner Aung San Suu Kyi, Médecins Sans Frontières, former US Secretary of State Hillary Clinton, and Melinda Gates, co-founder of the Bill and Melinda Gates Foundation.

For more information, please contact:
Jenny Williams, Media Relations Manager
Email: jwilliams@chathamhouse.org
Phone: +44 (0) 7921 867 626 

The situation in Ukraine remains in flux and despite Europe and the US toughening sanctions on Russia, President Putin continues to increase the scope of Russia’s involvement in the conflict between the Ukrainian government and the separatists. It remains unclear how far Putin is willing to go, what his broader regional ambitions are, and what he will do if forced further into a corner by Western actions. In this time of uncertainty and instability it is therefore vital to assess how the transatlantic partners should respond to this increasingly precarious situation. 

At this all-day event, the group will discuss how US policy towards Russia is changing, what this means for Europe and, subsequently, how Europe should respond. 

Attencance at this event is by invitation only.

The event is part of the Transatlantic Strategy Group on the Future of US Global Leadership run jointly with the German Marshall Fund of the United States. Over the course of a year, this group will come together to discuss how US policy is changing on key issues and the implications for Europe. This project is supported by the Fritz Thyssen Stiftung.

The NATO Summit, held in September in Newport, Wales, was a way point in the larger strategic vision for NATO over the coming decade. The deliverables that the leaders laid out must now been acted upon. NATO and its member states must find ways to more effectively harness their significant resources to meet the challenges ahead, from the ongoing conflicts in Ukraine and the Middle East, to the longer term threats posed by cyber-attack and energy insecurity.

The event will bring together senior representatives from a number of the NATO member states, NATO partners and external experts from industry, the media and the think-tank and academic communities, to discuss how best to move the deliverables forward, and how to most effectively work together in so doing.

This is the first of two workshops being held in collaboration with SWP-Berlin.