But when it comes to assessing Meloni, the transatlantic community would be well advised to do its homework and embrace her leadership. Her actions have clearly demonstrated a pragmatic and unambiguous values-based commitment to the transatlantic relationship. It is what she does that matters, not what others say about her.

On July 27, Meloni will travel to the White House to meet with US President Joe Biden. Her visit comes as Italy prepares to take up the presidency of the Group of Seven (G7) next year, a critically important role given today’s geopolitical events. So what can Biden expect from the Italian leader on the important issues of the day?

Italy backs Ukraine’s fight for freedom and democracy

Meloni has kept Italy clearly committed to the pillars of the EU and the transatlantic community. She has been unambiguous in her stance against autocracies. Even more notable, she has been vocally supportive of Ukraine and clearly holds Russia accountable for its unprovoked aggression. The clarity of her position contrasts with the sometimes more ambiguous positions of other Italian coalition parties.

Under Meloni’s leadership, the Italian government has continued to back Ukraine against Russia with military aid. Indifferent to low public support for military aid for the effort—just 39 percent of the Italian public voices support for increased military aid for Ukraine—she has underscored the just cause. During a speech in the Italian Senate in March, she said, “The Ukrainian people are defending the values of freedom and democracy on which our civilization is based, and the very foundations of international law.” She added, “military aid was needed to help a nation under attack.” Meloni’s Fratelli d’Italia party, along with center-right coalition parties Lega and Forza Italia, have voted consistently in support for Ukraine, even when in opposition during the government of former Prime Minister Mario Draghi.

Will China’s Belt and Road continue to lead to Rome?

Another important area of Italy’s strategic dialogue with the United States will be the issue of transatlantic coordination on China. Italy became the first and only G7 member of the Belt and Road Initiative (BRI) in 2019, when it signed a Memorandum of Understanding with China. The populist coalition government promised new trade and investment, a well-received message at the time, but the economic benefits have not come to fruition. 

Calling Italy’s membership in the BRI “a big mistake,” Meloni has indicated that she may not extend the agreement in 2024. With 51 percent of Italians holding a negative feeling about China, it may be easier for Meloni to join in a coordinated transatlantic decision on BRI.

The 2008 global financial crisis created massive opportunities for Chinese investors targeting stressed companies in search of technologies, innovation, and markets. In 2022, Italy was the second-largest import partner in Europe (behind Germany) for importing Chinese products, to the tune of more than fifty billion dollars. On the flip side, Italian exports to China make up less than 3 percent, or only eighteen billion dollars. Clearly, Italy’s optimistic vision for the BRI didn’t deliver.

Moreover, Meloni has been a strong voice in defending democratic values and criticizing China’s authoritarian crackdowns from Xinjiang to Hong Kong. She has criticized China’s mismanagement of the COVID-19 pandemic and dismissed the idea that China supported Italy during the depths of the crisis. Amid criticism of Chinese military exercises in the Taiwan Strait, she said last year that “the EU is an important market for China, that risks to be closed if Beijing decides to attack Taiwan.”

The importance of US-Italian economic relations

Beyond geopolitics, economic issues will also likely be on the agenda in the Biden-Meloni meeting. Here they have a strong base to build on. Trade between the United States and Italy has almost doubled from $52 billion to $100 billion in the last decade. Unlike with China, Italy’s trade balance with the United States has always been positive. Last year, for example, Italian exports to the United States reached $73 billion. The United States is the second-largest export market for Italy, making up 11 percent of all exports and more than 20 percent of non-EU exports. Similarly, Italy is the third-largest market in the EU and the eighth largest in the world by nominal gross domestic product; with a population of about sixty million it is the sixteenth largest export market for the United States, with significant trade and investment opportunities concentrated in high-value sectors.

Italian stock of investment in the United States has totaled more than $41 billion, supporting almost one hundred thousand American jobs. To put this it into perspective, Italian foreign direct investment in the United States is almost four times its investment in China. On the horizon, as part of the EU’s post-COVID recovery program, Italy will be the recipient of a more than $200 billion National Recovery and Resilience Plan focusing on three strategic axes: digitalization and innovation, ecological transition, and social resilience aimed at fixing structural economic challenges and inefficient infrastructure to invite serious investment from the United States. Italy ranked ninth among EU destinations for US foreign direct investment in 2022, with a stock of around $26 billion.

When Biden and Meloni meet at the White House, they will share a strong commitment to transatlantic cooperation on major geopolitical issues. The big areas of discussion will likely focus on cooperation to face global challenges, from economic growth to common security, where Italy has a very important role in North Africa and the Sahel that meets Biden’s strategy to create new diplomatic alliances in Africa and a Western alternative to China’s BRI. Strengthening economic cooperation should also be a priority, going beyond the traditional sectors in which US investments are mostly concentrated, such as manufacturing, electronics, telecommunications, and services. Washington and Rome should, for example, help facilitate new collaboration in industries working on artificial intelligence, the energy transition, and defense.

Meloni and Biden are more aligned than many observers may think. Biden should take this chance to build on her promising start.

Valbona Zeneli is a nonresident senior fellow at the Atlantic Council’s Europe Center and chair of strategic engagements at the George C. Marshall European Center for Security Studies.

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The trip builds on Erdoğan’s previous visit to the UAE more than a year ago, which had opened a new chapter to bolster the two countries’ political and economic ties ahead of Turkey’s May 2023 elections.

After his re-election, Erdoğan reinstated Mehmet Şimşek as minister of finance, putting the former investment banker back in charge of the state coffers. Şimşek’s appointment signaled the return to economic orthodoxy and prioritization of market stability that provided confidence to Gulf investors about the investment climate in Turkey. This raised hopes for the Turkish economy, which faces runaway inflation, chronic current account deficits, the devaluation of the lira, and the depletion of much-needed foreign currency reserves.

Erdoğan’s re-election and his appointment of Şimşek also signaled building momentum for normalization with the Gulf region—momentum that began with reciprocal official visits in 2021. This June, Şimşek has already held high-level meetings in Saudi Arabia, Qatar, and the UAE to lay the groundwork for Erdoğan’s most recent visits and help promote bilateral economic partnerships.

Turkey’s developing relations with these three Gulf countries show a convergence of interests and agreement on many issues. These include agreement on their complementary comparative advantages, their eagerness to diversify trade partnerships, and their desire for strategic autonomy from the West. Reflecting their growing cooperation, Turkey announced that it had struck framework agreements for bilateral investment with the UAE that reached over $50 billion—it also announced agreements with Saudi Arabia and Qatar (the values of which are still undisclosed). Deepening partnerships in key sectors such as defense, energy, and transport indicate an interest among Turkey and Gulf countries to leverage financial capital, know-how, and geographic advantages for economic growth; they also indicate a realignment to share political risks in a volatile region and reduce dependence on the United States.

A solid foundation

The main rationale behind Turkey’s renewed interest in strengthening ties with the Gulf countries is to attract capital inflows and sustain Erdoğan’s legacy as a leader who delivered economic growth over the past two decades. After a brief slowdown during political upheavals between 2013 and 2020, the volume of Turkey’s trade with the Gulf has reached $22 billion, according to the Turkish government. Turkey has ambitious plans to almost triple this figure in the next five years.

The Gulf countries are also keen to scale up their footprint in Turkey. The Gulf Cooperation Council (GCC) countries account for 7.1 percent of foreign direct investment in Turkey since 2020, with $15.8 billion in stock as of 2022. Qatar provided Turkey with the most foreign direct investment of the GCC countries, investing $9.9 billion. The UAE comes in second with $3.4 billion, and Saudi Arabia is the third highest, with $500 million. This amount is likely to increase two-fold to $30 billion over the next few years through investments prioritizing the energy, defense, finance, retail, and transport sectors. Previously, the UAE and Qatar provided Turkey with $20 billion in currency-swap agreements and Saudi Arabia deposited $5 billion into the central bank to support dollar liquidity.

But the new package of agreements signed during Erdoğan’s trip focus on capital investments in productive assets such as land, factory plants, and infrastructure. Abu Dhabi Developmental Holding sovereign wealth fund (ADQ) alone signed a memorandum of understanding to finance up to $8.5 billion of Turkey earthquake relief bonds and to provide $3 billion in credit facilities to support Turkish exports. Collectively, these are evidence of a longer-term vision for closer coordination between the GCC and Turkey at a strategic level.

Economic cooperation also draws Turkish investment to the Gulf, primarily toward construction and services sectors such as information technology, telecommunications, and agricultural technology. Possible joint manufacturing in the defense industry between Turkey and Gulf states, such as manufacturing of Baykar’s Akıncı and TB2 unmanned aerial vehicles, carries the potential to upgrade this relationship beyond the economic realm. Even for Saudi Arabia, which has a domestic plant to produce Turkish Vestel Karayel drones primarily for reconnaissance missions, Akıncı could upgrade drone warfare doctrine to a new level.

Mutual advantages

This evolving partnership is a clear win-win situation. Turkey and the GCC countries’ combined geography connects three lucrative subregions—the Gulf, Eastern Mediterranean, and the Black Sea—that can help the countries build their connections and enhance their interdependence, when beneficial, in a volatile world. Saudi Arabia, Qatar, and the UAE, which boast a combined gross domestic product (GDP) of $1.8 trillion, have plentiful resources and tremendous comparative advantages, not only in the oil and gas sector but also in their solid legal framework, world-class infrastructure, and relative ease of doing business.

The UAE, for instance, implements social and business reforms to attract foreign investment. They also have a young, tech-savvy, and talented population open to learning and determined to make an impact on emerging fields such as artificial intelligence and robotics. Turkey, meanwhile, has comparative advantages in the defense, hospitality, and construction sectors. Turkey had traditionally been a capital-scarce, labor-intensive country that faced declining terms of trade, especially after joining the European Customs Union in 1995. But gradually, through upskilling in technology and investment in capital-intensive sectors, Turkey repositioned itself as an alternative industrial hub for the emerging markets of the Middle East. It has become a diversified, technologically advanced, and sophisticated economy as a member of the Group of Twenty.

Turkey is now more eager to expand its bilateral Comprehensive Economic Partnership Agreements into a multilateral agreement with the GCC. Moreover, the earthquakes in February 2023 are estimated to have cost Turkey $104 billion in infrastructural damage and economic loss—equivalent to 12 percent of its GDP—so Turkey needs to diversify and deepen its trade partnerships to recover quickly.

Nonaligned, interconnected

A major driving factor behind this rising economic cooperation is the quest to gain strategic autonomy from the West and distribute risks by hedging against changes in US policy toward Turkey and the Gulf’s neighborhood after the next US presidential elections and beyond. Turkey and the Gulf countries have emerged as nonaligned middle powers, adapting to a multipolar world as the global economy’s center of gravity shifts toward the Indo-Pacific region.

The war in Ukraine heightened Turkey’s geopolitical significance and provided it with leverage in negotiations with the United States and NATO, as witnessed at the Vilnius summit last week. Russia’s ongoing attack and consequential Western sanctions also turned countries’ eyes toward the Gulf countries in search of an alternative supplier of hydrocarbons. Windfall profits from oil and gas sales strengthened the war chests of Gulf sovereign wealth funds that are now looking to increase non-oil trade and diversify their portfolios into sustainable, long-term investments such as renewable energy, advanced technology, healthcare, tourism, and leisure.

A few major deals exemplify these diversification efforts. The Arab-China Business Conference—held in Riyadh this June—concluded with $10 billion worth of investment deals struck between Arab countries and China. Iraq is developing a $17-billion-dollar railroad, which is planned to run through Turkey to Europe, a project in which the GCC countries have also shown interest. Abu Dhabi Developmental Holding Company and the Turkey Wealth Fund launched a $300-million-dollar partnership to invest in Turkish technology startups. The UAE is also eager to invest in Istanbul’s metro and its high-speed railway to Ankara. The two countries aim to increase their trade volume from $18 billion to $40 billion in the next five years.

Ultimately, this flurry of new investments shows that the Gulf countries and Turkey view each other as mutually advantageous partners. Erdoğan’s visit to the Gulf this week further reaffirms their deepening partnership in the economic realm—with potential implications for the strategic realm in the long term.

Serhat S. Çubukçuoğlu is a senior fellow in strategic studies at TRENDS Research & Advisory in Abu Dhabi.

Mouza Hasan Almarzooqi is a researcher in economic studies at TRENDS Research & Advisory in Abu Dhabi.

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While exact numbers are difficult to come by, the bulk of recent missile strikes on Ukrainian targets such as Odesa have originated in the Black Sea. One estimate put the Russian amphibious assault ship increase at the start of the full-scale invasion as equivalent of an additional one-and-a-half battalion tactical groups. Earlier this week, Russia carried out a live fire “exercise” against potential maritime targets in the northwestern part of the sea.

Russia’s daily strikes on Ukrainian targets along the Black Sea coast represent an extraordinary escalation. They mark a shift in Russian strategy toward leveraging missile batteries in occupied Crimea with Kh-22 and P-800 Oniks anti-ship cruise missiles, which typically fly at extremely high speed and, as they reach their targets, can descend to low altitude (as low as thirty-two feet) along the water or land, making them difficult to intercept.

While it’s doubtful Russia plans to decimate Odesa to the extent that it laid waste to Mariupol, the force with which it is pounding the southern port region has folks here worrying. After all, in one night alone, Russian forces launched at least thirty cruise missiles, primarily from ships in the Black Sea, according to the Ukrainian Air Force. One strike came dangerously close to the Chinese consulate and damaged a wall of the building. Some residents here in Odesa have responded by heading to safer ground in the countryside or overseas, but for the most part I’m detecting the same irrepressible resilience that was on display in the earlier months of the war. 

The Kremlin has significantly escalated tensions after torpedoing the Black Sea Grain Initiative on Monday, attacking Odesa port infrastructure and then issuing a unilateral declaration from the Russian Ministry of Defense that all Black Sea vessels sailing to Ukrainian ports will be considered potential carriers of military cargo. The statement added that no matter which flags the vessels carry, they would be considered on Kyiv’s side. 

If there are any lingering doubts about the lengths Russia will go to choke off Ukraine’s agricultural exports, just read the words of RT editor-in-chief and Kremlin propagandist Margarita Simonyan: “All our hope is in a famine… The famine will start now, and they will lift the sanctions and be friends with us, because they will realize it is necessary.”

The Ukrainian Defense Ministry said in a Telegram post on Thursday that the move “deliberately creates a military threat on trade routes, and the Kremlin has turned the Black Sea into a danger zone.”

In a savvy retaliatory move, Ukraine’s defense ministry shot back with its own announcement that, starting July 21, it, too, will begin to consider all Russia-bound vessels as carrying military cargo. Kyiv also declared the northeastern part of the Black Sea a closed military area. That could potentially make it more expensive—if not impossible—for commercial ships bound for Russian ports, such as major oil exporting harbor Novorossiysk, to obtain insurance. 

A wild card in all of this is Turkish President Recep Tayyip Erdoğan, one of the few NATO leaders able to speed dial both Russian President Vladimir Putin and Ukrainian President Volodymyr Zelenskyy. While Erdoğan was unable to salvage the grain deal, he does have the ability to turn up the heat on Putin by, for example, insisting that ships sailing to and from Russia have sufficient insurance coverage. A few weeks back, Turkey made life difficult for Russian and Belarusian airlines by suspending the provision of refueling and servicing of their Boeing and Airbus aircraft at Turkish airports. Erdoğan and Putin are reportedly scheduled to meet in person in August.

Russian friends in the Middle East and Africa, such as Egypt, which relies heavily on Ukrainian grain imports, need to further step up pressure on Moscow to reopen commercial shipping lanes across the Black Sea. Ethiopia, the host country to the African Union, received almost 300,000 tons of food from Ukraine under the grain initiative—and another 90,000 tons of grain as part of a separate initiative, Zelenskyy said. Ethiopia is one of seven countries in East Africa experiencing unprecedented levels of food insecurity, according to the World Food Program. South Africa and the African Union can help stave off further hunger on the continent with sanctions against Russia should Moscow continue to blockade food exports from Ukraine. 

Meanwhile, on land, at the northern end of a 620-mile front line, Russia has been quietly amassing 100,000 soldiers at the Lyman-Kupiansk axis, according to Serhii Cherevatyi, spokesman for the Eastern Group of Ukraine’s armed forces. Cherevatyi said that the manpower buildup is almost equal to the 120,000 troops Moscow had deployed to Afghanistan during the height of Soviet invasion in 1979-1989. The Russian soldiers are reportedly being backed up with 900 tanks, 555 artillery systems and 370 multiple launch rocket systems. 

With two of Odesa’s main industries seriously hampered—the port and the tourism and hospitality sector—it is unclear how much longer Ukraine’s jewel on the Black Sea coast can endure Russia’s onslaught without stronger support from Western allies. Now that Russia has crossed yet another red line with the targeting of infrastructure crucial to the global food supply chain, Western capitals need to counter Russian aggression with fresh responses—including the deployment of armed flotillas to escort commercial ships carrying agriculture products from Ukrainian ports or providing significantly more Patriot missile batteries that can intercept incoming Russian cruise missiles. 

At the end of the day the question needs to be asked: Why is it that a small group of men in the Kremlin get to decide the fate of hundreds of millions of people around the world and whether they have food on their plates?

Michael Bociurkiw is a nonresident senior fellow at the Atlantic Council’s Eurasia Center.

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Below, Atlantic Council experts answer the most pressing questions about Germany’s new China strategy and what it will mean for relations between Europe and Asia’s largest economies. 

1. Much has been made of the Zeitenwende prompted by Russia. Are we seeing a similar shift in German thinking on China?

Those expecting a Zeitenwende in Germany’s China policy from the country’s first-ever comprehensive China strategy will be disappointed. For China hawks in Washington, Germany’s new strategy will offer too much evolution and not enough revolution in Berlin’s approach to Beijing. The product of a contentious interagency process and partisan divergences in a complex three-way coalition, the new strategy starts with a familiar balancing act between calling out a more aggressive China and keeping Germany’s options open to continue its economic relationship with Beijing. It still tries to square the triangle of China as a partner, competitor, and systemic rival. The strategy acknowledges that “China has changed” and, along with it, German policy toward China must change, but fails to translate this into sufficiently specific or ambitious policy proposals. The document picks up European Commission President Ursula von der Leyen’s “de-risking” approach but also rules out decoupling. Throughout, it touts a coordinated approach at the European Union (EU) level—something China hawks among fellow member states might throw back at Berlin, which is seen by some as slow-walking a tougher approach to China in Brussels.

At the same time, a closer look reveals some important progress. Berlin’s China strategy avoids some of the biggest mistakes of its recently released national security counterpart. Most notably, it makes a more explicit assessment of the strengths and assets Germany can bring to bear in a more contentious Sino-German relationship. These are inevitably intertwined with EU competences, from the leverage the European single market affords Germany, to a proposed anti-coercion instrument and the new foreign subsidies regulation, to competition policy tools, tech regulation, and raw materials initiatives. Reflecting a recent government drive toward greater diversification, the document dedicates a separate chapter to “global partnerships”—from Africa and Central Asia to Latin America—and a proactive EU trade policy. In contrast to the national security strategy, it also makes explicit efforts to improve whole-of-government coordination, installs a regular (if somewhat vague) reporting mechanism on the strategy’s implementation, and highlights the need to strengthen expertise on China in the government and policy community more broadly.                

—Jӧrn Fleck is the senior director of the Atlantic Council’s Europe Center.

With this strategy, Germany has put the Merkel-era naiveté toward China to rest. It highlights the need for Germany to become more resilient, invest in greater China competence, defend the global order, and engage with like-minded partners in order to outcompete China. The strategy also has a particular European component and takes a whole-of-government approach by increasing intergovernmental coordination on China. Not everybody in government, business, or academia will agree with the strategy, but it cements the slow shift that has taken place in German strategic thinking, which hopefully will continue.

—Roderick Kefferpütz is a nonresident senior fellow in the Europe Center and the director of the Heinrich-Böll-Stiftung European Union office in Brussels.

The document confirms Germany’s adoption of a tougher approach toward a “changed” China under Xi Jinping. It underscores that Berlin will reduce dependencies and better protect its interests in the bilateral relationship even as Germany values continued engagement with Beijing to tackle global challenges. The question is whether this unvarnished take on the need for a transformed German approach to China will be matched with actionable government policies.  

Notable elements include the conclusion that Beijing seeks to leverage economic and technological dependence on China to achieve political ends and that Berlin, in coordination with its EU partners, must commit to a “de-risking” strategy to reduce vulnerabilities across critical sectors and supply chains. Beijing has made clear its distaste for the “de-risking” terminology first employed by von der Leyen in March and which US and European leaders have since adopted, viewing it as just another version of “decoupling” that US allies may find more palatable to the ear. Indeed, the Chinese embassy in Berlin responded today that “forcibly ‘de-risking’ based on ideological prejudice and competition anxiety will only be counterproductive.” 

—David O. Shullman is the senior director of the Atlantic Council’s Global China Hub and a former US deputy national intelligence officer for East Asia.

2. How involved militarily is Germany in the Indo-Pacific now, and what does this strategy tell us about how that will change?

The strategy takes an incredible leap forward! This is a welcome change from the national security strategy, which hardly mentioned the Indo-Pacific at all. In the China strategy, Germany is starting to take a “one-theater” approach to China, linking the Euro-Atlantic and Indo-Pacific regions. On several occasions, the strategy notes the challenge posed by the Sino-Russian relationship and explicitly mentions that “developments in the Indo-Pacific can have a direct impact on Euro-Atlantic security.” In this context, Germany wants to increase its presence as a security actor, aiming to expand military cooperation and arms exports in the Indo-Pacific.

—Roderick Kefferpütz 

3. How does Germany’s China approach compare with that of its European neighbors and the United States?

One notable aspect of Berlin’s new strategy is how extensively and explicitly it’s tied into the EU’s overall approach to China, signaling to Chinese leaders that they may be facing a less favorable environment—at least in Berlin—for trying to create divisions within the EU and undermine a stronger and more unified approach toward China. Germany’s strategy uses multiple sections to lay out how its approach is embedded within a broader EU strategy and articulate a vision for strengthening the EU’s capacity for contending with China. 

Many of the elements of Germany’s strategy for dealing with China as a “partner, competitor, and systemic rival” echo the recommendations that von der Leyen laid out earlier this year, such as enhancing domestic economic competitiveness and resilience and strengthening coordination with like-minded partners.

—Colleen Cottle is the deputy director of the Global China Hub and a former Central Intelligence Agency official.

The released strategy suggests divisions within the government over what role the transatlantic relationship plays when it comes to China. Earlier versions of the strategy mentioned the transatlantic relationship roughly twice as much and stated that the transatlantic partnership “plays a decisive role in a successful China policy.” This has been artificially toned down and reworded to “coordination with Germany’s closest partners is fundamental to our foreign policy; this also applies to our policy-making with and vis-à-vis China. Both the transatlantic alliance and the close partnership built on trust with the United States, including in the G7, is of tremendous importance for the EU and for Germany.”

The earlier leak also highlighted that “Germany, the EU and our valued partners are in a global systemic competition with China,” while the published version says “China has entered a geopolitical rivalry with the United States,” indirectly suggesting that Germany is standing on the sidelines. But this is not the case, as the strategy makes clear.

Germany takes a leadership role in this strategy by taking a networked, allies-based perspective. The strategy notes that its China policy is part of a joint EU policy on China, aims to Europeanize Germany’s approach to China, and even highlights that countries wishing to join the EU should align their approach to China with the bloc’s. Germany defines the China challenge in the context of different regions of the world and at the level of global institutions, regularly identifying valuable partners in this regard.

—Roderick Kefferpütz 

4. What do we expect the reaction to be in Beijing?

Chinese leaders will note the call for German companies to “internalize” risk calculations as they consider current and future investments in China—indicating that the government may not bail them out in the event of geopolitical events, such as a crisis over Taiwan. The strategy includes language on the role that export controls and investment screening play in ensuring economic engagement with China does not bolster its military capabilities—highlighting concerns around Beijing’s military-civil fusion strategy—or “encourage systematic human rights violations in China.”

Beijing will also take note of the strategy’s call for stepped up engagement with Taiwan and welcoming of its greater participation in international fora, albeit while still reaffirming Germany’s one-China policy. The strategy mentions Germany’s growing security role in the Indo-Pacific, along with the need for differences over Taiwan to be settled peacefully. Importantly, the document also highlights that China is a “systemic rival” that seeks to upend the rules-based international order.

Chinese leaders, however, will remain hopeful that the strategy’s tough rhetoric will not be matched by government action. The lack of specifics on binding requirements to curtail German economic dependence on China, restrict outbound investment, or adopt tougher export control measures will bolster such hopes. Beijing will view the document’s reiteration of the need for continued economic engagement, combined with the fact that China remains Germany’s top trading partner and companies like BASF and Volkswagen have pledged to expand investment in China, as indicators that it retains leverage to prevent Berlin from aligning with Washington’s more hardline China policies. Beijing will also be attentive to the apparent daylight between those in government advocating for a tougher China policy and Scholz himself, who visited Beijing in November accompanied by a sizable business delegation and recently expressed the view that the government has a limited role in any de-risking policy.  

Beijing is betting that, despite the strong rhetoric here, government inaction and economic realities in Germany will offer opportunities to steer Berlin back toward the more pro-China position of years past. 

—David Shullman

Beijing will be watching closely to see how this strategy translates into concrete action. It will also be looking for opportunities to try to soften or slow roll any disadvantageous measures by leveraging German companies’ continued strong reliance on the Chinese market—a shortcoming identified in this strategy—and Berlin’s desire for continued cooperation with China in areas like climate change, sustainable development, global health, and broadly defined “economic and trade relations,” as laid out in the strategy. 

—Colleen Cottle

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First, while criticizing China’s unfair economic practices, Yellen also encouraged economic engagement, as well as cooperation in addressing global problems such as climate change and low-income countries’ debt burdens. Yellen’s attempts to compartmentalize areas of cooperation between the two countries will fall flat, as Chinese policymakers do not bracket off China’s economic relationship with the United States from their political disputes with Washington.

Second, Yellen defended measures to restrict China’s access to US advanced technology as necessary for national security. She said the United States aimed to de-risk but not decouple from China and did not intend to constrain China’s growth. This framing will not assuage Beijing’s concerns, as Chinese officials see both de-risking and decoupling as efforts to hinder China’s economic growth. Thus, Yellen’s Beijing visit will not meaningfully improve US-Chinese relations, as the two nations’ core interests remain at odds with each other.

Can compartmentalization work?

The United States has recently enacted measures to control the supply to China of high-tech products and know-how in advanced semiconductors, artificial intelligence, and quantum computing to safeguard US national security. Yellen suggested that China should not let this stop the two countries from engaging in trade and investment “based on fair rules” for mutual benefit or from collaborating on other global cooperative initiatives. Yellen has employed the compartmentalization approach: trying to promote an economic relationship with China on a separate track from the countries’ rivalries in the political sphere.

Compartmentalization reflects more wishful thinking than realism when it comes to dealing with China, which, since the twentieth National Congress of the Chinese Communist Party in October 2022, has emphasized a holistic approach to national security. That approach encompasses perceived threats to military, diplomatic, political, social, economic, and development interests, which necessitate “all of government” and “all of society” efforts to respond. In fact, China has long used economic coercion to achieve its political goals—demonstrating that Chinese policymakers view trade and politics as linked rather than compartmentalized.

In this context, the more the United States and China engage in tit-for-tat measures in the name of national security, the more those steps will deepen mutual mistrust, coloring relationships in other areas and making compromises more difficult to reach. Appeals to focus on areas of cooperation for mutual benefit sound reasonable, but will ultimately be futile in changing the nature of the US-China rivalry as a whole.

De-risking vs. decoupling

Yellen also adopted the terminology introduced by European Commission President Ursula von der Leyen, stressing that the United States aims to de-risk but not to decouple from the Chinese economy. Yellen was emphatic: Decoupling from China “would be disastrous for both countries and destabilizing for the world… and virtually impossible to undertake.” By contrast, de-risking means “diversification of critical supply chains or taking targeted national security actions.”

The distinction between de-risking and decoupling seems to have some basis in fact. US-China economic interactions in areas under sanctions—either via tariffs or controls over trade and investment—have declined, while those not being sanctioned continue to grow. For example, according to Chad Brown of the Peterson Institute for International Economics, US imports of Chinese goods under increased tariffs fell by 25 percent from 2017 to 2022 while imports of non-taxed goods increased by 42 percent—pushing the bilateral trade volume to a new record high of $690 billion in 2022. Yet, while Yellen mentioned the record trade volume with China as proof that there has been no decoupling, she did not report that the United States recorded a trade deficit of $382 billion with China in that year, compared to a deficit of $375 billion in 2017, at the beginning of then President Donald Trump’s trade war with China. In this context, continued growth in trade volume and deficit with China may not be something to look forward to—without adopting effective measures to safeguard US manufacturing capability.

The deeper problem is that the rhetoric of “de-risking, not decoupling” has been rejected by the Chinese, who see no difference between the two concepts—believing that both are about constraining China’s growth, especially in high-tech sectors crucial for future economic and military development. In particular, China views US “de-risking” measures in certain high-tech sectors as offensive actions meant to delay China’s progress and strengthen US leadership positions in those important areas.

It is also important to keep in mind that China has for a long time attempted both de-risking against US sanctions (mainly by trading more with the Global South and developing alternative settlement mechanisms for cross-border economic transactions) and decoupling by promoting self-sufficiency in advanced tech and military developments.

Talk isn’t cheap, but…

Yellen concluded that her visit represents a step forward in maintaining frequent, high-level communications between the two countries, setting their relationship on “a surer footing,” but recognized that significant differences remain between the two. In fact, China hasn’t changed its positions, insisting that the United States has to take the next steps, dropping all sanctions. Given this reality, it is important for the United States to be clear-eyed about what it can expect from meetings with Chinese officials. While maintaining regular contact is better than having no contact, simply repeating to each other their respective well-known core interests is not going to solve any problems.

Meanwhile, the most important communication between the United States and China is not happening: that between the two militaries, which is critical to avoid an unwanted war in the western Pacific that could be triggered by accidents, mistakes, miscommunications, or misunderstandings. This lack of US-China military communication is particularly worrisome, and its resumption would be much more beneficial than statements about de-risking or decoupling during choreographed diplomatic visits.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance, and a former deputy director at the International Monetary Fund.

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In 2022, US imports of goods utilizing AGOA (or GSP) benefits was valued at $10.2 billion.  Like overall US imports from Africa, imports from AGOA beneficiaries have changed over time, driven mostly by the value of oil imports from countries like Nigeria and Angola.

Since 2000, the cornerstone of US trade policy for Africa has been the African Growth and Opportunity Act also known as AGOA.

Past work by the Atlantic Council suggests that Africa sits at the nexus of current development, climate, and security challenges. With global competition over resources, technology and influence growing, the strategic importance of establishing a new kind of relationship with Africa has become clear to the United States. With an African market of over 1.3 billion people and a combined Gross Domestic Product (GDP) of over $3.4 trillion, expanding US-Africa trade and investment is now a clear strategic priority for both the United States and African countries.

The Atlantic Council’s Africa Center is examining trade between the US and Africa to date and the impact of AGOA, and analyzing the future of AGOA after its potential expiration in 2025.  Our work draws on a survey and interviews conducted with leaders in government, business, international organizations, and civil society. The report identifies key constraints limiting trade expansion and examines emerging challenges and opportunities that will shape its future. Drawing on this analysis, the report provides actionable recommendations for policymakers and other key stakeholders on the future of AGOA.

AGOA has come to define much of United States’ commercial relationship with Africa. With AGOA set to expire in 2025 and the shifting world economy providing new challenges and opportunities, now is the time to decide the future of US-Africa trade. The analysis in this report, as well as the findings from survey responses and interviews, suggest recommendations covering three areas:

1. AGOA itself
2. the future of US-Africa trade more broadly, and
3. the even broader future of US-Africa relations.

How to seize the moment

AGOA has symbolized the shift in US perceptions of Africa, augmenting aid with trade and commercial opportunity. Recognizing that the next ten years will shape economic trajectories for decades to come, the US must build on its narrative investment by embedding greater certainty for US and African investors.

1. AGOA should be renewed by the US Congress for at least a ten-year period as soon as possible. Doing so could allow African economies to capitalize on efforts to diversify supply chains away from China, supporting US strategic interests and a more resilient global economy. 
2. AGOA’s extension should be combined with greater certainty about AGOA eligibility, with fewer short-term eligibility decisions wherever possible. Eligibility is necessary for a country to access AGOA benefits. Doing so will boost investor confidence and support long-term economic development, which is the best way for the US to achieve its broader commercial and political goals. Greater stability in AGOA eligibility will also enhance the United States’ support for African economic integration through the AfCFTA.
3. Existing US efforts, through USAID, USTR and other agencies, should continue and ensure that support through continental level initiatives is sufficiently attuned to local contexts and barriers. Support to countries and firms in Africa is needed to ensure that the benefits of AGOA in fueling long-term development are achieved. There is a need for stronger capacity building to translate AGOA eligibility into utilization and real export capacity. Investing in re-establishing regional trade hubs could do this, while also supporting regional trade integration and direct links between AGOA and Africa’s Regional Economic Communities. USAID should ensure all regions, including Francophone Central Africa, are supported in this work.
4. To realize the benefits of AGOA for long-term development, African governments should rapidly develop and regularly update realistic national AGOA strategies and embed them in their economic planning and public investment.The US Congress should ensure sufficient funding for US agencies to support this process, including dedicated staff to work with African governments to draft the plans, if necessary. Support for these strategies could help set the United States’ interaction with Africa apart from other countries like China and India.Selecting a few countries to support early could make a big difference.  This could include eligible countries that are finding it difficult to meet the criteria such as the Central African Republic, Liberia, or the Democratic Republic of Congo. 
5. To support greater investment in export-oriented sectors within African countries, the US DFC, Millennium Challenge Corporation, and the Prosper Africa initiative should align their financing and commercial facilitation with these AGOA strategies too. The future of US-Africa trade should be situated within a broader reorientation of the US-Africa relationship that builds true partnerships that not only yield economic opportunities and expanded trade but also serve longer-term social and political goals. New forms and arenas for collaboration between US and African actors could drive unique solutions in a multipolar world.  Such strategies could also include countries that are important to US-Africa trade but face eligibility constraints such as Cameroon, Ethiopia, and Somalia.

With so much written about the future of AGOA itself, the future of US-Africa trade more broadly, and the even broader future of US-Africa relations, a thorough examination of AGOA eligibility in 2023 is an opportunity to begin a longer conversation about the future of AGOA and US-Africa trade and investment.

As the United States reorients its international economic policy and African countries build new approaches to economic integration and collaboration, the future of US-Africa trade is ready to be defined. While setting the course for a renewed AGOA is important for maintaining business confidence, many of the challenges that African countries, firms, and individuals face will require deeper structural responses. In the push to achieve inclusive growth across the continent, capacity and investment constraints are particularly clear.

There are also immense opportunities. The rise of digital, financial, and creative products and services will shape African economies going forward. The expansion of economic and political links across the continent will provide more unified markets and supply chains, with greater economies of scale. The resources, ideas, and human capital needed to deliver global public goods and the green energy transition are already making Africa central to the future economy. Taking steps to broaden and deepen US-Africa trade and collaboration in these directions will provide the basis for more inclusive, sustainable growth and serve strategic economic and political goals for both sides.

Like what you read? Check back for our full report, coming soon.

Fellow

Frannie Léautier

Nonresident Senior Fellow

Africa Center

Africa Economy & Business

The Africa Center works to promote dynamic geopolitical partnerships with African states and to redirect US and European policy priorities toward strengthening security and bolstering economic growth and prosperity on the continent.

Learn more

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On June 13, the Atlantic Council’s Iran Strategy Project hosted a virtual event, “The Mechanisms of Corruption in Iran” to discuss the nature of corruption and sanctions in Iran as well as the social, economic, and political implications of these issues.

The Atlantic Council’s Scowcroft Middle East Security Initiative Director, Jonathan Panikoff conducted opening remarks, stating that discussions of Iran’s current economic situation must also address the corruption that exists within the country given its rampant nature. This was emphasized by Atlantic Council nonresident senior fellow Nadereh Chamlou who served as the moderator for the session.

In order to discuss the complexities of corruption within Iran, it is first important to define corruption. Associate Professor of Finance at the University of Dallas, Ali Dadpay, explained that corruption is the use of a public position for personal gain. Dadpay shared how this phenomenon manifests in situations such as the importation of luxury vehicles into the Islamic Republic. He recalled how foreign made vehicles were banned from Iran, however, members of Parliament were able to import foreign made luxury vehicles due to their positions of power.

Causes of Sanctions and Corruption

The beginning of the conversation included a review of the causes of corruption in Iran and specifically analyzed the role that sanctions play in its prevalence. To initiate the discussion, Chamlou mentioned a study by one of Iran’s top economists that found only 20% of corruption can be traced back to sanctions, whereas 80% is attributed to other factors. This begs the question, what could that something else be?

Entrepreneur Majid Zamani claimed that while sanctions are not the only cause of this corruption, they have created a plethora of opportunities for rent-seeking, which only those who are ideologically connected to the regime have access to.

Within Iran specifically, Zamani discussed the existence of a theocratic system, stating that because people are selected for leadership based on their loyalty to ideology, rather than merit, the political system is poorly organized and thus more susceptible to corruption. Furthermore, Dadpay argued that because Iran has a nationalized economy with extensive regulations, as opposed to a globalized economy, the government benefits from corruption and monopolization. Zamani added that the banking system epitomizes this vulnerability to corruption due to the interest rates, corrupting all loans.

Impact of Corruption & Sanctions

The panel then moved to the discussion of how corruption and sanctions have manifested in Iranian society. Given the US Government’s prioritization of US interests, as opposed to those of the Iranian community, Atlantic Council’s nonresident senior fellow Brian O’Toole and Dadpay both recognized that even though these sanctions are targeted, they will ultimately influence all Iranians, by creating a demand for sanctions evasion and a market that avoids financial responsibility. When asked whether Iranians could avoid corruption in the private sector and still succeed, Zamani claimed that the entire private sector in Iran is impacted by its relationship to the government. However, there is a spectrum of involvement, with one end including those who are loyal to the government and comfortable with the corruption and the other end comprising of individuals trying to avoid engaging in corrupt behaviors but ultimately having to comply at times in order to survive. He also clarified that although they do not make up the majority of the GPD, the Iranian private sector includes small market owners and medical professionals, occupations that comprise the bulk of society.

How to address it

After discussing the causes and effects of corruption in Iranian society, the panelists moved to their recommendations as to how to address it. O’Toole said that it takes time, so patience and persistence are crucial, and tackling corruption begins by addressing root problems. While pursuing flashy cases of corruption may be more alluring, it often only targets a single perpetrator rather than the source. To tackle the wider system would require transparency at every stage, even the more mundane. Dadpay agreed with O’Toole, advocating for a clear and transparent legal framework and stating that accountability in corruption cannot be achieved without an explicit and independent judiciary branch. In order to achieve transparency and accountability, according to Zamani, civil society must demand it from the government, through civil disobedience and outward refusal to engage in a corrupt system of governance. Lastly, moderator Chamlou included her own belief that tackling corruption in Iran would require dismantling networks of patronage and government insiders.

Masoud Mostajabi is a Deputy Director at the Atlantic Council’s Middle East Programs.

Britt Gronemeyer is a Young Global Professional with the Middle East Programs at the Atlantic Council. 

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The USMCA has certainly been successful in increasing the volume of Mexico’s trade with the United States and Canada. According to the US Census Bureau, in April 2023, the United States imported more goods from Mexico than from any other country; in 2022, Mexico-US trade was almost 27 percent higher than in 2019, and Mexico-Canada trade grew 21.8 percent in these same years. Between 2020 and 2023, Mexico received fifty billion dollars in US and ten billion dollars in Canadian investments.

This increase in trade and investment flows is explained not only by the USMCA’s implementation, but also by the Biden administration’s decision to diversify supply chains, relocate production to North America, and “de-risk” from China. By seeking to reduce the vulnerability of supply chains in North America, the integration facilitated by the USMCA acquired greater relevance for companies, workers, governments, and societies.

Even though the agreement has spurred dynamism in trade and investment, its implementation has not gone without serious challenges and confrontations, which Mexico will need to address before the 2026 joint review. These include differences in the way the three countries have chosen to comply with the USMCA, heightened scrutiny on labor and environmental issues, and incomplete implementation of the agreement’s provisions.

Unsettled disputes

First, Mexico has faced difficulties on both sides of the USMCA’s dispute settlement mechanism, established in Chapter 31. Mexico’s use of this mechanism signals that it considers the agreement an effective instrument to defend its commercial and investment interests. Together with Canada, Mexico requested the establishment of a panel to settle its differences with the United States regarding the interpretation of the methodology to determine the regional value content of essential auto parts in cars manufactured in North America. The panel ruled in favor of Mexico, but there seems to be no interest in enforcing the ruling.

Mexico has also been the target of Chapter 31. Both the United States and Canada requested consultations regarding Mexico’s energy policy in July 2022 and restrictions on trade in genetically modified corn in June 2023. While both consultation processes could still lead to requests for the establishment of panels, the parties have been in conversation regarding the substance of their concerns.

Chapter 31 is of great value to the private sector in North America because it offers a legal tool to solve differences. The USMCA offers a dispute settlement mechanism that works, unlike the World Trade Organization Dispute Settlement Body, which is paralyzed. The USMCA’s panel reports are binding, and panel decisions are not affected by domestic political pressures.

However, it is the three governments’ responsibility to comply with the panels’ decisions, even if they are unfavorable, and to make sure that rulings are fully enforced. Not doing so undermines the value of the USMCA dispute settlement mechanism and the agreement itself.

High standards, heightened scrutiny

Second, Mexico has been subject to scrutiny on labor and environmental matters, reflecting US and Canadian national priorities and their need to respond to political pressure from their own domestic constituencies. Regarding labor, under the Rapid Response Labor Mechanism, the United States has initiated eleven cases against Mexico, and Canada has initiated one. Mexico’s labor authority has sought to address the concerns raised in each case, avoiding sanctions and prohibitions on exports.

On environmental matters, Mexico has faced questioning from its partners regarding compliance with its environmental legislation and its USMCA obligations. For example, in February 2022, the United States requested consultations with Mexico on the protection of the vaquita porpoise, which is associated with totoaba illegal fishing. In May 2023, the US Fish and Wildlife Service determined that Mexico has not done enough to prevent the illegal trafficking of totoaba, so later this month, US President Joe Biden could decide to impose an embargo on the trade of wildlife products from Mexico, in line with Mexico’s Convention on International Trade in Endangered Species of Wild Fauna and Flora obligations, which are also recognized in the USMCA. In labor and environmental affairs, the United States and Canada have used and may continue to use the USMCA mechanisms to pressure Mexico to comply with its obligations, since these issues are key to their own domestic political agendas.

Unfinished business

Third, Mexico has yet to fully implement several USMCA provisions. These include the Asia-Pacific Economic Cooperation Cross-Border Privacy Rules Framework, established in Chapter 19, which is already overdue. In addition, Mexico will have to become a signatory to the 1991 agreement of the International Union for the Protection of New Varieties of Plants as provided in Chapter 20. Likewise, the USMCA has a built-in agenda of future negotiations, such as the inclusion at the sub-federal level of provisions on state-owned companies and designated monopolies (Chapter 22), which should have been concluded in June 2023. Mexico needs to make sure that these provisions are enforced according to its USMCA commitments, since this will align its regulations and policies with those of its North American partners.

At the halfway point between USMCA’s entry into force and its first joint review, Mexico has seen a substantial increase in its trade and investment flows, which are key engines for its economic growth. However, Mexico still faces serious challenges in the full implementation of its commitments and in making sure that the United States also complies with a panel report favorable to Mexico. It is in Mexico’s interest to fully comply with the agreement while also requesting compliance from the United States, since that will provide certainty and predictability to investors in the region. This will facilitate the agreement’s extension at the six-year review in 2026 and will allow Mexico to promote opportunities for North American productive integration and the relocation of supply chains.

Luz María de la Mora is a nonresident senior fellow with the Atlantic Council’s Adrienne Arsht Latin America Center, where she supports the Center’s Mexico work. From December 2018 to October 2022, she served as undersecretary of foreign trade in the Mexican Secretariat of Economy, during which she helped implement the USMCA.

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Read insights below from Atlantic Council experts on what’s in the strategy and what it reveals about Europe’s economic and geopolitical future.

Click to jump to an expert analysis:

Jörn Fleck and James Batchik: Europe is taking a hard look at itself

Barbara C. Matthews: The EU is acting to decrease points of vulnerability for renewable energy

Charles Lichfield: While not mentioned, China is the central focus of the strategy

Sarah Bauerle Danzman: The road to an EU outbound investment mechanism will be rocky

Elmar Hellendoorn: The strategy seeks to be adaptable but also comprehensive

Europe is taking a hard look at itself

The European economic security strategy represents a welcome development not just for its contents but in how the European Commission is thinking about economic security—and itself.

Under a framework of “promote, protect, and partner,” the strategy sheds light on the commission’s approach to de-risking, the phrase du jour of today’s geopolitics. It proposes new assessments of vulnerabilities, strengthened rules on key areas like foreign direct investment and export controls, and new rules on outbound investment. It also recycles existing proposals—the Critical Raw Materials Act, Net-Zero Industry Act, and Cyber Resilience Act, for example. By themselves, these are not groundbreaking. But it would be a mistake to stop there. Taken together, the strategy is a welcome document that outlines how the commission sees its policies become larger than the sum of their parts. 

The contents of the strategy notwithstanding, there are three takeaways about how Europe sees its economic future. First, it starts with knowing oneself. The strategy opens with a frank acknowledgement that Europe was “insufficiently prepared” for many of the challenges that the COVID-19 pandemic, Russia’s war in Ukraine, and challenges from unnamed—read: China—players posed to Europe. Second, the strategy acknowledges that the European market, its regulations, and cohesion is by itself a European strength that can “keep global supply chains open and shape standards.” Third, that there is a direct reference that the economic risks identified could threaten Europe’s national security is a small but notable addition. It shows a recognition of the convergence of the geopolitical and the economic. 

However, the strategy also shows both the potential and the limitations of the commission. First, as much as the Berlaymont may be thinking geopolitically, the commission still relies on capitals across the continent to approve and implement new rules. Throughout the strategy, there are polite reminders for member states to implement or enforce existing or future rules. Second, and perhaps more crucially, it’s clear that the commission is increasingly out ahead of member states on issues of security, defense, and now economics. Many member states will have reservations, if not objections to some of the conclusions and proposals in the strategy. There is no shared consensus among member states about how to adequately defend themselves against China.

It’s important to remember that, as the strategy’s sentences, conjunctions, and punctuation will now be parsed and debated across the continent and the European Parliament, the strategy is not a roadmap that will solve all of Europe’s woes but an opening salvo.

—Jörn Fleck is the senior director of the Europe Center at the Atlantic Council.

—James Batchik is an assistant director at the Atlantic Council’s Europe Center. 

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The EU is acting to decrease points of vulnerability for renewable energy

The newly announced European economic security strategy constitutes a shift beyond the EU’s previous “strategic autonomy” security priorities. It will likely generate friction with both China and the United States in the near term regarding key renewable energy resources.

Until this year, the EU’s main focus was to ensure that its capacity to pursue its strategic interests remain unconstrained. It sought to ensure that policy conflicts and tensions between the United States and other countries (such as China and Russia) did not adversely impact its own interests.  

Now, the EU seeks actively to minimize “the risks arising from economic linkages that in past decades we viewed as benign.” Those past linkages include Russia (natural gas), China (automobile component and other industrial manufactured exports) and the United States (a deeply integrated, multidimensional trade relationship that includes a deep reliance on retail technology giants that dominate the twenty-first century). Following Russia’s illegal invasion of Ukraine in 2022, the EU effectively replaced Russia with the United States as the key external supplier of energy resources, even as it made great strides toward delivering an energy mix that, for the first time, is generated more from renewable sources (specifically, wind and solar) than from gas. 

The new EU “de-risking” strategy now views none of these economic linkages as benign. It views concentrated economic relationships as a source of risk that must be managed through a diversification strategy that places alignment on key norms (such as democracy, decarbonization, and commitment to open economies) as the foundation for future engagement.

Europe’s successful shift in the last year toward renewable energy implies a sharp increase in demand by Europe for a range of energy inputs that are, at present, predominantly controlled by China. Not only does China “dominate all steps of solar panel production,” it also has long served as the “dominant or near-monopoly producer” of most critical minerals needed to produce modern technology and renewable energy components such as wind turbine parts. Europe’s demand for hydrogen and lithium are set to skyrocket in the next decade, increasing the importance of the forthcoming Critical Minerals Agreement negotiations with the United States. The EU is acting now to decrease these points of vulnerability by mobilizing significant financial resources to promote renewables developments across Africa, the Middle East, and Latin America, even as it prepares to implement its carbon tax later this year.

The European policy shift to “de-risking” holds the promise of aligned transatlantic policy priorities in which EU and US initiatives complement each other to provide an effective counterbalance to Chinese economic pressure globally across the resource-rich Global South. It also holds the risk that misalignment with the United States regarding resource access and digital policy will generate frictions that can be exploited by other countries. Successful execution of this policy will require more than checkbook diplomacy. It will require Washington and Brussels to focus on the larger strategic picture to avoid individual technical issues from derailing their strategic relationship.   

—Barbara C. Matthews is a nonresident senior fellow at the Atlantic Council. She was the first US Treasury attaché to the EU with the Senate-confirmed diplomatic rank of minister-counselor.

While not mentioned, China is the central focus of the strategy

The seventeen-page long “communication” on a European economic security strategy does not mention China once. It does refer to Russia, but only in its scene-setting introduction. For the rest of the paper, economic risks stem only from phenomena, not countries. Third countries are the focus of the section following these risks, but this puts them in an exclusively positive light: to confront challenges to its economic security, Europe needs the broadest possible partnerships. 

Can there be any purpose to a strategy that dares not mention which countries are causing the risks it is supposed to tackle? The answer is still yes. 

The robust discussions that took place between European Commission President Ursula von der Leyen’s team and the European Council—representing the views of all twenty-seven member states—are well publicized. A critical mass of national capitals, though concerned about the consequences of Chinese economic practices, are keen to avoid falling into a ratchet of policies and partnerships leading to an anti-China coalition. This includes members who have long been calling for the EU to take a more hands-on approach on economic statecraft, such as France.

And yet, even under such constraints, the strategy gets many things right. Alongside the traditional calls for cooperation, it pushes for more structured dialogue with the private sector—something that has been lacking on economic security strategy so far. We should also remember that von der Leyen did get to set out her views on EU-China relations not too long ago. So even if China isn’t mentioned, we can be pretty sure it remains the central focus of the EU’s fledgling strategy.

—Charles Lichfield is the deputy director and C. Boyden Gray senior fellow, of the Atlantic Council’s GeoEconomics Center.

The road to an EU outbound investment mechanism will be rocky

This strategy makes clear that the commission is going to bat for outbound investment controls, likely tightly connected to the three emerging technologies most poised to transform war making capabilities—advanced semiconductors, quantum computing, and artificial intelligence. This position reflects a rapid evolution in the commission’s thinking; just last year it was less enthusiastic toward outbound controls when the United States first announced its intention to develop a tool to regulate such investments. Then it only agreed to “study the issue.” Despite the commission’s commitment to propose an outbound initiative by the end of 2023, the debate between the EU, member states, and the business community is likely to be fierce.

In the near term, the inclusion of outbound investment in the strategy has two important implications. First, it substantially increases the likelihood that the United States will move forward with its own mechanism—through an executive order—in the next couple of months. The Biden administration can now point to the document as evidence of a growing consensus among partners and allies to place narrow restrictions on outbound investments into key strategic technologies. Second, and in line with the recent Group of Seven (G7) communiqué on economic resiliency, it frames the issue of outbound regulation squarely around technology security and technology leakage rather than around broader policy objectives such as supply-chain diversification.

The road to an EU outbound investment mechanism will be rocky. The economic security strategy identifies technology security as an element of “economic security,” but the proliferation of dual-use technology has traditionally been viewed as a matter of national security—an area over which member states, rather than the commission, have competence. Moreover, the EU has traditionally—through both export control and inward screening policies—sought to develop tools that do not discriminate between foreign countries. If the EU maintains this policy principle, its outbound mechanism will likely look quite different from the United States’ plan to only focus on investments into entities operating in or owned by “countries of concern” such as China.

—Sarah Bauerle Danzman is a nonresident senior fellow with the GeoEconomics Center’s Economic Statecraft Initiative and associate professor of international studies at the Hamilton Lugar School for Global and International Studies, Indiana University Bloomington.

The strategy seeks to be adaptable but also comprehensive

The most important element of the document can be read between the lines: it is not so much about what the commission is going to do about economic security but how. Three key principles seem to be guiding the commission’s economic security strategy.

The first principle is strategic adaptability. The commission announces that it will constantly work toward a vision on economic security that will help to tie the different policy instruments together. As geopolitical circumstances are changing in unforeseeable and complex ways, the commission has wisely refrained from setting its economic security policy approach in stone. Adaptability and flexibility appear to be baked into the commission’s thinking on this issue. 

The second principle is comprehensiveness. In the strategy, the commission clearly expresses the ambition to break through different policy silos. While it does sum up the different policy instruments the EU has to strengthen its economic security—ranging from foreign direct investment screening to cybersecurity—the underlying question is how it is going to coordinate the use of its economic statecraft toolkit to achieve a maximum result. 

The third principle is cooperation. The commission also shows a certain humility in pointing out all the work ahead on economic security. Clearly, it needs the support of its member states, not only in terms of policy execution, but also in helping to fully understand the challenge. Also, the EU is going to align its diplomacy and economic security policy more, thus targeting countries that the EU can work with to achieve greater economic security. Lastly, in terms of further conceptualization of its strategic approach to economic security, the commission also seems to be reaching out to the wider private sector.

—Elmar Hellendoorn is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center.

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Table of contents

Executive summary

I. Introduction

II. The role of economic statecraft in a Taiwan crisis

Goals of economic countermeasures

Current economic statecraft tools

Tools in a future crisis

III. Sanctions scenarios and their costs

Economic countermeasures aimed at China’s financial system

Economic countermeasures aimed at individuals and entities associated with CCP and PLA leadership

Economic countermeasures aimed at China’s industrial sectors

IV. Practical challenges in sanctions development

Conclusions and recommendations

Executive summary

In recent months, growing tensions in the Taiwan Strait as well as the rapid and coordinated Group of Seven (G7) economic response to Russia’s invasion of Ukraine have raised questions—in G7 capitals and in Beijing alike—over whether similar measures could be imposed on China in a Taiwan crisis. This report examines the range of plausible economic countermeasures on the table for G7 leaders in the event of a major escalation in the Taiwan Strait short of war. The study explores potential economic impacts of such measures on China, the G7, and other countries around the world, as well as coordination challenges in a crisis.

The key findings of this paper:

1. In the case of a major crisis, the G7 would likely implement sanctions and other economic countermeasures targeting China across at least three main channels: China’s financial sector; individuals and entities associated with China’s political and military leadership; and Chinese industrial sectors linked to the military. Past sanctions programs aimed at Russia and other economies revealed a broad toolkit that G7 countries could bring to bear on China in the event of a Taiwan crisis. Some of these tools are already being used to target Chinese officials and industries, though at a very limited scale.
2. Large-scale sanctions on China would entail massive global costs. As the world’s second-biggest economy—ten times the size of Russia—and the world’s largest trader, China has deep global economic ties that make full-scale sanctions highly costly for all parties. In a maximalist scenario involving sanctions on the largest institutions in China’s banking system, we estimate that at least $3 trillion in trade and financial flows, not including foreign reserve assets, would be put at immediate risk of disruption. This is nearly equivalent to the gross domestic product of the United Kingdom in 2022. Impacts of this scale make them politically difficult outside of an invasion of Taiwan or wartime scenario.
3. G7 responses would likely seek to reduce the collateral damage of a sanctions package by targeting Chinese industries and entities that rely heavily and asymmetrically on G7 inputs, markets, or technologies. Targeted sanctions would still have substantial impacts on China as well as sanctioning countries, their partners, and financial markets. Our study shows economic countermeasures aimed at China’s aerospace industry, for example, could directly affect at least $2.2 billion in G7 exports to China, and disrupt the supply of inputs to the G7’s own aerospace industries. Should China impose retaliatory measures, another $33 billion in G7 exports of aircrafts and parts could be impacted.
4. Achieving coordination among sanctioning countries in a Taiwan crisis presents a unique challenge. While policymakers have begun discussing the potential for economic countermeasures in a Taiwan crisis, consultations are still in the early stages. Coordination is key to successful sanctions programs, but high costs and uncertainty about Beijing’s ultimate intentions will make stakeholder alignment a challenge. Finding alignment with Taiwan in particular on the use of economic countermeasures will be central to any successful effort. G7 differences on Taiwan’s legal status may also prove a hurdle when seeking rapid alignment on sanctions.
5. Deterrence through economic statecraft cannot do the job alone. Economic countermeasures are complementary to, rather than a replacement for, military and diplomatic tools to maintain peace and stability in the Taiwan Strait. Overreliance on economic countermeasures or overconfidence in their short-term impact could lead to policy missteps. Such tools also run the risk of becoming gradually less effective over time as China scales up alternative currency and financial settlement systems.

I. Introduction

For decades, Taiwan’s deepening economic ties with China and the rest of the world have helped maintain peace and stability in the Taiwan Strait. Mutual trade and investment have spurred rapid economic growth and—at least until recently— appeared to diminish the likelihood of military conflict.

The long-standing guardrails around the China-Taiwan status quo have weakened. Intensifying US-China geopolitical tensions, China’s increased use of military and economic tools to put pressure on Taiwan, Beijing’s draconian handling of Hong Kong, and evolving Taiwanese perspectives on their national identity and relationship with the mainland have all contributed to rising tensions. Taiwan’s presidential elections set for early 2024 increase the risk of escalation, as do both a rancorous US debate on China and political anxiety in Beijing in the face of a deteriorating economic outlook.

As concerns grow, so does awareness of the global economic stakes of a Taiwan crisis. Prior Rhodium Group research estimates that more than $2 trillion of global economic activity would be at risk of direct disruption from a blockade of Taiwan annually.¹ This is a likely underestimate of the short- and long-term economic fallout of a full-blown crisis. In all cases, the scale of these likely global impacts—ranging from widespread goods shortages, mass unemployment, and a possible financial crisis—underscores the need for clear-eyed analysis about the costs of a conflict. 

In this context, policymakers and business leaders around the world have begun discussing the potential role of sanctions and other economic countermeasures in a military crisis. The G7’s coordinated use of sanctions against Russia in the wake of its invasion of Ukraine have highlighted the range of tools on the table. In Washington and other G7 capitals, as well as in Beijing, leaders are now considering the potential for, and implications of, sanctioning China. Yet G7 coordination in a Taiwan crisis would involve a different set of challenges. China’s economy is ten times larger and more globally interconnected than Russia’s, raising questions about the viability of joint economic countermeasures.

Given these open questions, the purpose of this report is to provide a data-driven and objective first look at the potential for a coordinated G7 response to a Taiwan crisis. It evaluates different economic statecraft tools and considers the global economic repercussions from their use. Based on an extensive series of in-person roundtable discussions in the United States, the European Union, and the United Kingdom, interviews held with G7 policymakers and experts, and our own independent economic analysis, the report sets out the order of magnitude of what is at stake and the coordination that would be required for sanctions options to be effective.

While few US, European, and Chinese officials want to see tensions escalate in the Taiwan Strait, the past year has shown that situations previously regarded as highly unlikely can quickly materialize into a devastating reality. Understanding the scenarios and risks of using the tools of economic statecraft is not only a useful exercise, but also a critical step in ensuring all sides understand the full impact of actions that may be undertaken in a crisis.

II. The role of economic statecraft in a Taiwan crisis

A sense of heightened risk in the Taiwan Strait and the use of sanctions against Russia has led decision-makers around the world to reflect on the potential use of economic countermeasures against China in a Taiwan crisis. US lawmakers have already proposed legislation mandating sanctions on China in the event of an invasion of Taiwan.² Surveys of European countries underline an increasing—if still minority—willingness to sanction China if it were to take military action against Taiwan.³ Officials in Beijing are asking these questions as well, with China’s State Council reportedly considering the potential for Western sanctions in a Taiwan crisis.⁴ The economic fallout from sanctions on Russia have also led business leaders and major banks to conduct contingency planning exercises exploring their exposures to a cross-strait crisis, including sanctions on China.

In defining what sanctions to use—if any—policymakers are likely to take a series of factors into consideration: what goals they are looking to achieve, what options are on the table to achieve those goals, and their relative impacts, costs, and limitations. This section reviews these factors and lays out the most likely options on the table.

Goals of economic countermeasures

Economic countermeasures—defined broadly here to include financial sanctions, export controls, and other restrictions on economic activity—can have a variety of objectives. They may aim to deter aggression, either by promising punitive economic actions in response to a transgression (deterrence by punishment) or by denying an adversary the technology or resources to engage in aggressive activity in the future (deterrence by denial). They may also aim to degrade an adversary’s ability or willingness to sustain aggression after it has begun.

The aim of economic countermeasures may evolve over time. The United States had long imposed export controls to limit the flow of military and dual-use technology to Russia. Immediately prior to Russia’s full-scale invasion, the United States and allies threatened sanctions on Russia in a bid to deter military action. After the invasion, the focus of sanctions shifted to degrading Russia’s ability and willingness to continue the war. Sanctions may also have had a signaling effect that G7 countries were aligned and willing to bear prolonged costs in support of Ukraine.

As in the case of Russia, the United States and allies have limited the flow of arms and military technology to China in part to blunt its ability to engage in aggression against Taiwan long before a potential crisis. The proper design of these long-term restrictions is a matter of contentious debate in the field of export controls and technology policy, but is not the focus of this paper.

Some G7 partners are already communicating to China that actions short of an invasion could trigger economic countermeasures

Economic countermeasures might also be considered after a full-scale invasion of Taiwan to degrade China’s ability to sustain the conflict. In fact, interviews and roundtables highlighted near consensus about the fact that sanctions would be imposed on China were it to use military power to seize Taiwan. However, if the case of Russia is any guide, these sanctions take time to have an effect. Recent studies suggest that absent military intervention from the United States and allies, Taiwan is unlikely to withstand a full-scale invasion for the length of time necessary for sanctions alone to meaningfully degrade China’s military capacity.⁵

Some level of sanctioning might therefore also be contemplated in a crisis below the level of invasion, to deter further aggression. Some G7 partners are already communicating to China that actions short of an invasion could trigger economic countermeasures. These actions are the core focus of this report. While we do not identify specific triggers for economic action below invasion—because these are still intensely debated—they might include a military quarantine scenario, where the PRC restricts the free movement of ships or planes to Taiwan; acts of overt economic coercion such as wide-ranging punitive restrictions on cross-strait trade; and major cyberattacks or other disruptions to telecommunications networks on the island. Taiwanese officials have described some of these below-invasion scenarios as the most likely and pressing military risks to Taiwan’s sovereignty.⁶ Some of these “gray zone” actions, besides, come with high global economic costs that could warrant efforts by G7 nations to deter Chinese actions.⁷

Current economic statecraft tools

In looking to achieve these goals, G7 leaders have a range of tools available. Many economic countermeasures have been deployed in the context of previous crises (Table 1), including Russia’s 2014 annexation of Crimea and 2022 full-scale invasion of Ukraine, making them useful starting points to assess potential future action.

In understanding whether these tools could also be deployed in a major cross-strait crisis, it is important to remember that some tools are already being used against China today, both by the United States and other members of the G7. Actions include, among others:

• Export controls including product-based and end-user-based controls on certain strategic technologies, such as semiconductors, integrated circuits, and supercomputing technology.⁸
• Restrictions on the trading of debt and equity instruments in certain military-related companies under the Non-SDN Chinese Military Industrial Complex Companies List.⁹
• Sanctions imposed on persons involved in the repression of minorities in Xinjiang, as well as small Chinese banks aiding Iran and North Korea in sanctions evasion.¹⁰
• US and EU coordination of sanctions against Chinese firms involved in supporting Russia’s war on Ukraine.

While these measures are applied at a much smaller scale than they would be in a Taiwan Strait crisis, they illustrate the fact that G7 nations have already shown willingness to use economic measures against China when Chinese actions or policies were considered problematic. Importantly, these measures have been selective. From manufactured goods to inputs for electric vehicles, to machine tools, and pharmaceuticals, China is deeply embedded in global supply chains in a way wholly more complicated than Russia’s energy exports. At the same time, China’s reserves, capital controls, the state-owned banking sector, and abundant fiscal space provide the Chinese economy with critical buffers and economic defense mechanisms.

Tools in a future crisis

In imposing sanctions in a Taiwan crisis, G7 partners would seek to amplify existing measures taken against China and focus on asymmetric dependencies. Policymakers will likely look to the same types of targets described in Table 1, with varying intensity depending on the level of escalation, namely:

1. Sanctions on China’s financial sector
2. Sanctions on individuals associated with the leadership of the Chinese Communist Party (CCP) and People’s Liberation Army (PLA)
3. Restrictions on industrial companies in sectors relevant to China’s defense industrial base

We take these three types of tools as our baseline for likely G7 countermeasures in a Taiwan crisis and analyze each in depth.

While these are the most likely sets of tools identified by experts based on past actions, future crises may bring new tools to the table too. Conversations with US and European officials made clear that Russia’s invasion of Ukraine reshaped the contours of what was possible in the realm of economic statecraft. Just as blocking Russia’s central bank reserves and implementing an oil price cap were initially considered unrealistic, crises may spur discussions around new tools. Roundtable discussants raised options ranging from targeting casinos in Macau, which are regarded as havens of capital flight for China’s elite as well as illicit finance and money laundering; to imposing controls on China’s digital industries and firms, which power much of the country’s urban and consumer economy; to limiting access to International Monetary Fund (IMF) Special Drawing Rights, and stopping repayments of dollar-denominated Belt and Road Initiative (BRI) debt. We do not explore these potential countermeasures in this study. However, some of the ideas discussed by stakeholders illustrate the range of additional tools that could be brought to bear in a crisis.

III. Sanctions scenarios and their costs

In this section we examine three likely channels of G7 sanctions—on China’s financial system, on certain individuals and entities, and on industrial sectors. We provide an assessment of China-G7 economic value at stake through use of each type of tool, and evaluate implementation challenges, possible effectiveness, and risks.

Economic countermeasures aimed at China’s financial system

In a Taiwan crisis, G7 leaders could consider deploying economic countermeasures targeted at China’s financial system. Financial sector sanctions are a central pillar of the G7’s recent sanctions program aimed at the Kremlin. These measures include actions to block transactions with major Russian banks, freeze their assets, and deny them access to the global dollar payments infrastructure.

This section explores the economic implications of sanctions on China’s financial system, considering two primary options: a targeted sanctions program to limit dollar financing to small banks involved in funding military-related activities, and a comprehensive sanctions program targeting China’s four largest banks and its central bank with the aim of cutting China off from global financial markets.

Global economic links: Finance

For an economy of its size, China has relatively limited external financial sector ties. China is the world’s second-largest economy and has the largest volume of international goods trade, yet it ranks eighth and ninth in the world in terms of total external assets and liabilities.¹¹ Nonetheless, these ties have critical global importance. As of the end of 2022, China held 95 percent of its $3.3 trillion in reserves in foreign currency (with the remaining held in gold).¹² China does not report the exact composition of its foreign exchange reserves, but it is known to hold at least $1.1 trillion in US government bonds through US custodians, and more routed through custodians in Belgium,¹³ as well as about $300 billion in corporate debt and equity.¹⁴ The remainder of China’s foreign currency reserves are held predominantly in euros, Japanese yen, and pounds sterling.¹⁵ In addition to China’s official reserves, China’s banking sector holds $1.5 trillion in cross-border assets according to State Administration of Foreign Exchange statistics, most of which is held in G7 currencies.¹⁶ 

Global bank holdings of assets within China’s banking system are much lower. On average, only 3 percent of global central bank reserve holdings are in RMB-denominated assets.¹⁷ G7 banks hold $112 billion in claims on Chinese banking institutions such as loans, deposits, and debt instruments, which is only 1 percent of total cross-border bank claims.¹⁸ While this means that global banks, on average, are not heavily exposed to China in terms of explicit bank assets, it also means that Chinese banks primarily borrow from Chinese domestic savers and do not depend heavily on foreign borrowing to maintain their balance sheets.

Global exposures to China’s banking system are much greater when considering China’s role facilitating cross-border financial flows, particularly trade. When Chinese importers and exporters do business abroad, they typically do so in foreign currencies: 77 percent of China’s total $6.8 trillion in goods and services trade is settled in currencies other than the RMB, primarily US dollars and euros.¹⁹ To facilitate these cross-border payments, Chinese banks maintain correspondent accounts at global banks, which debit or credit dollar and euro payments to the Chinese correspondent accounts on behalf of the foreign customer or supplier. Maintaining these correspondent accounts is a key part of the financial infrastructure underpinning global trade.

Chinese banks also finance other important cross-border flows, including $384 billion in repatriated income from foreign businesses and investments, $330 billion in inbound and outbound direct investment, and $381 billion in cross-border portfolio investment.²⁰

Scenarios

With these financial sector linkages in mind, we consider two potential sanctions scenarios: one in which G7 countries would impose limited sanctions on a small bank with linkages to China’s military or technology sector, and another where they would deploy full-scale sanctions on China’s central bank and China’s Big Four banking institutions.

Limited sanctions scenario

One potential scenario would involve imposing blocking sanctions on a small Chinese bank with limited financial ties to the global financial system and with links to China’s military or dual-use technology sectors. The nominal purpose of these sanctions would be to constrain the flow of foreign financing to military-relevant economic activities.

Actions of this kind have been imposed by the United States before. In 2012, the US Treasury Department sanctioned China’s Bank of Kunlun for providing financial services to six Iranian banks sanctioned by the United States for involvement with Iran’s weapons program and international terrorism.²¹ In 2017, the United States issued a final rule under Section 311 of the USA PATRIOT Act severing China’s Bank of Dandong from the international dollar financing system for its role in helping the Democratic People’s Republic of Korea (DPRK) evade sanctions.²²

The Bank of Kunlun and Bank of Dandong were relatively small and had limited ties to the global financial system. The financial impact from these actions on the global financial system was minimal. In the case of the Bank of Dandong, for instance, the bank processed $844 million in cross-border transactions in 2016 just prior to being identified as an institution of “primary money laundering concern,” a modest sum in the broader picture of global financial flows.²³ While these banks were cut off from the global dollar financing system, they remain connected to the rest of China’s banking sector. As raised in our roundtables, this enables them to continue providing financial services for US sanctioned entities, including Iran and the DPRK.

In a Taiwan crisis scenario, policymakers would face a similar challenge. G7 countries could impose blocking sanctions on small banks, freezing any foreign assets held in G7 jurisdictions and prohibiting domestic individuals and entities from transacting with those banks. However, even if the sanctioned banks lost direct access to correspondent banks in the United States and Europe, they would still have access to financing channels from other Chinese banks, and China’s military-industrial enterprises could still easily access dollar financing, if needed, from other channels in China’s state-run banking system. Rather than make a substantial impact on China’s financing flows, the primary impact of these types of sanctions would be limited to conveying an intent to escalate financial sanctions further, potentially on larger, more systemically important institutions.

Full-scale financial sector sanctions scenario

At the other extreme, the United States and allies could take much more drastic measures against China’s financial system by, for example, imposing blocking sanctions and denying SWIFT access to China’s central bank, its finance ministry, and China’s Big Four banks, which collectively hold one-third of China’s total banking assets.²⁴

The economic impact of such moves would be dramatic, both for China and for the world. This would effectively freeze China’s foreign exchange reserves held in overseas custodial accounts, making them unusable for the defense of China’s currency or to meet short-term obligations to finance China’s imports or external debt repayments. The bulk of overseas assets of the Big Four banks —amounting to around $586 billion—would be frozen.²⁵ This represents a floor, not the ceiling, of the global economic disruption from these actions, which are many magnitudes higher.

G7 assets in China would also be at risk. It is likely that China would freeze the (relatively small) renminbi-denominated holdings of G7 banks. Chinese banks, facing a sudden shortage of foreign exchange due to asset freezes, would likely fall into technical default on G7 bank-issued debt, totaling around $126 billion.

Sanctioned banks would also be cut off from the international dollar payments system. Chinese banks do not systematically report the scale of their cross-border transaction settlements, so we are left to estimate the scale of disruption if China’s Big Four banks were sanctioned. Starting from China’s balance of payments statistics on cross-border trade and investment, we estimate what share of that activity is attributable to the Big Four. We assume that the Big Four banks’ role in facilitating cross-border trade and investment is proportional to their share of foreign asset ownership in China’s whole banking sector, indicating approximately $3 trillion in trade and investment flows could be put at risk, primarily from disruptions to trade settlement. This is only a rough estimate and is likely an undercount, but it illustrates the scale of economic activity at risk from full-scale sanctions on China’s largest banks.

Over the long term, Chinese importers and exporters could move to other, unsanctioned banks for trade settlement and finance, but the immediate disruption to global trade would be substantial and smaller banks would likely struggle to backfill the enormous demand for trade-facilitating financial services in the short term. Eventually, Chinese importers and exporters would adapt to financial-sector sanctions by turning to a different set of banks and potentially engaging in more renminbi-denominated transactions (see Box 1 on China’s international payments alternatives). But the vast majority of China’s exports would be impacted in the short term, as it would be extremely difficult for Chinese companies to receive US dollar- or euro-denominated payments for goods.

$3 trillion in trade and investment flows could be put at risk, primarily from disruptions to trade settlement.

Freezing China’s official foreign exchange assets would also have substantial global spillovers. An asset freeze of China’s dollar reserves would suddenly make dollars in China scarce, driving down the value of the renminbi relative to the dollar. Beijing could fight this depreciation pressure in the short term through strict capital controls and exchange rate interventions, but ultimately would need to allow the renminbi to depreciate to ease outflow pressures and stabilize China’s balance of payments.

A weaker exchange rate would make goods imports more expensive and reduce China’s global economic throw weight. Disruptions to China’s export trade would also entail substantial economic hardship and financial stress for Chinese companies and suppliers to global markets. However, assuming that Chinese exporters and importers eventually found other non-sanctioned banks to legally conduct trade with foreign counterparties, China would still avoid a balance of payments crisis. China presently runs a large current account surplus, providing a consistent flow of dollars into its financial system. In fact, devaluation of the renminbi would ultimately make Chinese exports more competitive relative to other countries, which would push some of the impact of sanctions on to exporters in those countries. Other emerging market currencies, including those of US allies, would be likely to depreciate sharply against the US dollar as well. Countries that depended upon exports to China, such as Angola and Brazil, would see those export markets contract sharply.

The imposition of broad-based financial sanctions on Chinese banks would create significant dislocations within the global financial system and would likely require a coordinated policy response among developed market central banks in order to manage the fallout. Global supply chains would be upended while exporters and importers routed activities to unsanctioned banks. Countries that rely on dollar financing— to finance trade with the United States and Europe, for instance—would face a surge in financing costs, requiring the Federal Reserve to pump dollars back into the global economy through central bank swap lines. But even if swap lines with China were prohibited, these dollars would find their way back into China’s economy due to its trade surplus with the rest of the world.

Takeaways

While it is likely that a financial sanctions package would be on the table in the case of a major Taiwan crisis, avenues for sanctioning China’s financial system face limitations. A lower-scale response that targeted small banks involved with financing military activities would limit the negative impact on the global economy, but it would have little effect on Chinese behavior or military activities because other financing channels would remain open. On the other extreme, a full-scale sanctions response targeting China’s central bank and most of the country’s major commercial banks would have massive economic spillovers—for China’s economy, but also for the global financial system and the global economy. Second-order consequences could include a tightening of global trade financing conditions; weakness in emerging market currencies and balance of payments problems in emerging markets; major supply chain disruptions and interruptions to global manufacturing of consumer goods; and inflationary short-term impacts from interrupted China-world trade.

Sanctions on China’s financial sector could end up falling somewhere between these two extremes, with sanctions placed on midsize banks, for instance. Impacts from these sanctions on trade and financial markets would be more moderate than in the case of a maximal sanctions scenario, but these face many of the same limitations as more comprehensive sanctions.

Fundamentally, the long-term strategic benefit of financial-sector sanctions is unclear. Imposed on small banks, they would have minimal impact on China’s ability to finance military activities. At a large scale, sanctions would disrupt trade with China in the short run, but they would not fundamentally change China’s position within global manufacturing supply chains. Over time, China’s terms of trade would probably improve along with a weaker exchange rate. The symmetrical impact of such sanctions on China and the rest of the world reduces the credibility of such broad-based financial sanctions as a deterrent.

Box 1: How Well-Developed Are China’s International Payments Alternatives? 

Over the past five years, China’s Ministry of Finance and the People’s Bank of China (PBOC) have established several platforms to facilitate cross-border transactions and reduce reliance on dollar-based payment systems. Given the increased interest from across the Global South in alternative payment systems to the dollar in the wake of G7 sanctions on Russia, it is likely that in the next five years more of the Chinese systems could be used as a means of sanctions evasion.

In 2015, China launched its Cross-border Interbank Payment System (CIPS) to function as a settlement and clearance mechanism for renminbi transactions. An alternative to the dollar-based Clearing House Interbank Payment System (CHIPS), CIPS is supervised by the PBOC, and participants have the opportunity to message each other through the CIPS messaging system.

Data on CIPS usage suggest that transaction volumes have more than doubled in that period, growing by 113 percent.²⁶ However, while China is making significant progress in developing international payment alternatives, it lags behind the established global payment ecosystem.²⁷ Research indicates that CHIPS has ten times more participants and settles forty times more transactions compared to CIPS.²⁸ These incumbents have well-established networks, widespread acceptance, and trust among global users.

Perhaps the most significant payment alternative is China’s development of its Central Bank Digital Currency (CBDC), the e-CNY, which began in 2017. The retail CBDC project focuses on enabling individuals and businesses to use the e-CNY for everyday transactions. Interestingly, the PBOC has over 300 staff working on their CBDC project, and only about one hundred working on CIPS.²⁹ However, this retail CBDC project may have limited ability to help internationalize the yuan and facilitate its use as a means of sanctions evasion given its domestic focus and the lack of infrastructure for cross-border use.

The same cannot be said, however, of China’s wholesale CBDC ambitions. China’s wholesale project aims to streamline interbank transactions and improve its cross-border financial system efficiency. Project mBridge is a joint experiment with the Hong Kong Monetary Authority, Bank of Thailand, Central Bank of the United Arab Emirates, and Bank for International Settlements to create common infrastructure that enables real-time cross-border transactions using CBDCs. In October 2022, the project successfully conducted 164 transactions in collaboration with twenty banks across four countries, settling a total of $22 million, with almost half of all transactions in the e-CNY.

This initiative demonstrates China’s active involvement in exploring innovative solutions for international payments, particularly in the context of cross-border transactions which do not use dollars or euros. This system, though not yet ready for full launch, could help countries bypass dollar-denominated systems like SWIFT or CHIPS and develop an alternative financial architecture.

The biggest challenge for new China-based cross-border payments architecture is liquidity. China maintains capital controls on yuan and offshore clearing, and settlement of yuan is severely limited in comparison to the dollar, euro, pound, and yen. Removing these capital controls to provide liquidity pools for offshore clearing and settlement in yuan will come with some financial instability in Chinese markets, which is undesirable to leadership in the short term.

However, even if certain transactions will be more costly to execute, the recent history of sanctions evasions shows actors are willing to pay a premium to have specific transactions avoid dollars and US enforcement. China is investing significant resources in scaling up these capabilities.

Economic countermeasures aimed at individuals and entities associated with CCP and PLA leadership

Sanctioning the leadership and key associates of adversarial governments, criminal organizations, and terrorist groups is a well-established mechanism deployed by G7 nations and international organizations, including the United Nations. These measures are meant to pressure the targeted individuals, organizations, and governments to change their behavior or policies, while freezing their assets and restricting their ability to raise, use, and move funds.³⁰. In the event of a Taiwan crisis, G7 countries could impose targeted financial sanctions on Chinese government and military officials as well as other politically connected elites to attempt to deter further escalation and increase economic pressure on General Secretary Xi Jinping and his close allies.

Sanctions targeting Russian government and military officials and elites have been a central part of the G7 and allies’ sanctions strategy to counter Russia’s aggression toward Ukraine. Since the 2014 invasion of Crimea, G7 allies have collectively sanctioned more than 9,600 Russian-linked individuals, with a specific focus on government and military officials, oligarchs, and others with links to the regime as well as their family members and close associates who received asset transfers before a sanctions designation.³¹ As of March 2023, members of the Russian Elites, Proxies and Oligarchs (REPO) Task Force—a coalition of G7 nations, Australia, and the European Commission—have blocked Russian assets valued at more than $58 billion, including both financial accounts and assets such as real estate and luxury goods.³²

Separately, some G7 nations have imposed unilateral sanctions on PRC officials in response to human rights abuses and PRC actions in Hong Kong. As of May 2023, the United States had designated forty-two government officials, including former Chief Executive of the Hong Kong Special Administrative Region Carrie Lam and other PRC government officials, in response to actions undermining Hong Kong’s autonomy.³³ In March 2021, the EU also made a rare use of its Global Human Rights Sanctions Regime to sanction four high-ranking Chinese officials for their involvement in human rights abuses against ethnic minorities in the Xinjiang Uyghur Autonomous Region, with sanctions including travel bans and asset freezes³⁴—a move complemented by economic countermeasures taken the same day by the United States, the United Kingdom, and Canada.³⁵

It is highly likely that G7 nations would consider multilateral targeted designations against Chinese government and PLA officials and their associates in a major Taiwan crisis, given their relative success coordinating multilateral sanctions to counter Russia’s invasion of Ukraine.³⁶ The following section explores economic ties at stake and potential sanctions scenarios.

Global economic links: Individuals abroad

Assessing the scale of overseas assets covered by a potential sanctions regime on Chinese government, party, and military officials is extremely complex. There is limited available public information on the wealth of Chinese officials, in large part because that wealth is concealed via layers of personal networks and investment vehicles, and is often managed by third parties. These third parties invest on behalf of officials in domestic and overseas properties, publicly listed companies, and other investments—often in offshore jurisdictions such as the British Virgin Islands (BVI), the Cayman Islands, and Samoa. These offshore company structures often open bank or brokerage accounts in other jurisdictions, thereby further obscuring the relationship to the ultimate beneficiary.

For the purpose of this study, the authors used data derived from investigative reports and leaks of financial information such as the Panama Papers, which combined give a broad sense of the scale of assets connected to some of the highest-ranking figures of China’s leadership. In 2012, Bloomberg reported that Xi’s extended family held more than $400 million in business holdings and real estate.³⁷ The same year, reporting by the New York Times identified $2.7 billion in assets linked to former Premier Wen Jiabao and his close network.³⁸ Leaks of financial information including the offshore accounts analyzed by the International Consortium of Investigative Journalists in 2014 confirmed the existence of shell companies incorporated in the British Virgin Islands that are linked to the relatives of Wen and Xi, although the value of assets linked to these companies is unknown.³⁹ The leaked information also contained evidence of BVI-incorporated companies held by relatives of former Premier Li Peng and former President Hu Jintao, among others. Despite the opacity surrounding the overseas assets of the elite of the CCP, these single cases are potential indications that relevant, sanctionable assets likely represent tens of billions of dollars in aggregate.

This figure could grow quickly if the targets of financial sanctions were extended beyond high-level CCP and PLA leadership to include politically linked private business leaders. The estimated net worth of the top 200 wealthiest people in China is around $1.8 trillion.⁴⁰ Twenty-nine of those business leaders are current members of the National People’s Congress (NPC) or the Chinese People’s Political Consultative Conference (CPPCC), with a combined net worth of $278 billion. Much of this net worth is, however, linked to business activities taking place in China, rather than within G7 jurisdictions.

Twenty-nine of those business leaders are current members of the National People’s Congress (NPC) or the Chinese People’s Political Consultative Conference (CPPCC), with a combined net worth of $278 billion

Scenarios

A scenario involving sanctions on Chinese officials could proceed in several stages, with a first set of actions targeting a narrow and lower-level set of party, government, and military officials with direct links to a Taiwan crisis. Further actions could expand these sanctions to close associates of designated individuals, a longer list of officials, or ultimately to a broader set of politically connected business elites. Under the most extreme of scenarios, these sanctions could be widened to include China’s highest-level leaders in response to major developments in the Taiwan Strait.

Sanctions on a narrow set of CCP, government, and military officials 

One likely scenario would involve sanctions—asset freezes and travel bans—imposed on a narrow group of CCP, government, and military officials with clear responsibilities over actions taking place in the strait. China’s current minister of defense, Li Shangfu, is already under US sanctions⁴¹—but designations could be extended to cover select members of the Central Military Commission or high-ranking PLA commanders. These could also include close advisers to these officials or to China’s high-level leaders on Taiwan-related issues.

The nominal purpose of these sanctions would be largely symbolic, and a means to condemn Beijing’s actions. Their effectiveness in changing behavior is likely to be extremely limited and could contribute to a hardening of positions. Most of this group of designated officials would likely be highly aligned with Xi’s decisions on Taiwan. Narrowly crafted sanctions on officials might also generate limited financial outcomes, given that these individuals are already under tight political scrutiny in China and unlikely to be allowed major overseas holdings. The scope of sanctionable assets might grow marginally larger, however, if close associates and family members are included, especially children of government officials studying in G7 countries, as well as close aides and the third parties handling their investments. Similar to the Russian case, these individuals may become a focus for the G7 if asset transfers occur ahead of designations.

Sanctions on a wider range of CCP, government, and military officials as well as business elites 

In response to an escalation in the Taiwan Strait, G7 countries could decide to progressively expand sanctions to cover a longer list of government, CCP, and PLA officials. The list could also include certain business elites with known links to China’s leadership, who lend their public or financial support to China’s actions, or those who are active in sectors linked to China’s military-industrial base. The United States has already designated several Chinese executives and companies for breaking US law by providing support to North Korea, among other violations.⁴²  

In addition to asset freezes and travel bans, G7 governments might impose restrictions on professional and financial services provided to these elites, including wealth management or business advisory services.⁴³ While Chinese clients overwhelmingly rely on the expertise of wealth managers based in Hong Kong, a small percentage of other managers are located in Switzerland (1.6 percent), the UK (1.6 percent), and the United States (1.1 percent).⁴⁴ 

The purpose of this second round of sanctions would be to attempt to pressure these officials to push internally for a change in policy. Assuming intelligence about their overseas assets were available to G7 implementing authorities, these broader sanctions could end up covering tens of billions of dollars in overseas assets. The costs to designated officials could be high: besides the financial implications of an asset freeze, even the public revelation of foreign assets could be politically damaging.

Our roundtable participants noted that sanctions on individuals amid a Taiwan crisis could potentially produce a stronger response than has occurred with recent designations of Russians. Whereas many Russian officials have been under sanction since 2014 and have had time to adapt, such sanctions on China would be mostly new and immediately impactful to those designated.

Still, it remains unclear whether sanctions on China’s business elites would compel a change in policy. Business leaders arguably have the most to lose from Chinese aggression against Taiwan to begin with, since disruptions in trade and investment with Taiwan and G7 partners will affect businesses first and foremost. The waning influence of the private sector in governance due to crackdowns on the technology and financial sectors under Xi raises further questions about business elites’ ability to influence policy outcomes toward Taiwan.

Sanctions on China’s high-level leaders

In an extreme escalation in the Taiwan Strait, sanctions could end up targeting China’s highest-ranking officials including most members of the Political Bureau of the CCP’s Central Committee and Xi himself. If Russia sanctions are any indication, this third circle of sanctions could also include China’s ministers of foreign affairs, science, and technology or finance, the PBOC governor, or high-level members of China’s legislative bodies (the NPC and CPPCC). These sanctions would similarly be largely symbolic.

Takeaways

The G7’s response to Russia’s invasion of Ukraine demonstrates that coordinated multilateral financial sanctions on political and business elites are now a central tool in G7 economic statecraft. By design, these sanctions have the benefit of having relatively low immediate economic impacts on G7 economies, concentrating costs on a small number of targeted officials. In principle, these sanctions also have the benefit of avoiding indiscriminately targeting China’s broader populace.⁴⁵ Though in practice they often end up inadvertently affecting the broader population or the national economy, as foreign banks and private-sector entities reduce exposure to a broader range of individuals or entities than the ones directly sanctioned.

Their effectiveness as deterrence tools in a Taiwan crisis is in question, too. Narrow sanctions on CCP, government, and PLA officials would probably end up targeting political leaders already aligned with Xi’s decisions on Taiwan. Chinese officials may conceal their offshore assets through complex personal networks and corporate structures that are potentially painful and costly to unravel. They also require tight coordination and information sharing among sanctioning parties, in order to locate and act against sanctioned individuals’ assets across jurisdictions. (The foundation for this cooperation does exist, however, as a result of recent sanctions on Russia).

Broader sanctions on business elites could freeze greater overseas wealth, but this may have limited impact on policy outcomes. Private business leaders are already incentivized to disfavor Chinese aggression toward Taiwan and have diminishing political sway after years of power centralization under Xi. Yet because they are an important signaling tool, sanctions on Chinese officials would very likely be considered in a major Taiwan crisis.

Economic countermeasures aimed at China’s industrial sectors

Finally, G7 leaders may consider deploying export controls and other economic statecraft tools against Chinese companies or industries linked to China’s military or defense industrial base.

These actions featured prominently in the G7 sanctions program on Russia, with a variety of trade and investment-related measures imposed on companies and industries linked to mining, electronics, aviation, and other sectors. The United States implemented stronger sector-wide export controls on certain industrial and electrical equipment, added military-linked companies to the US Commerce Department’s (export-control) Entity List, and designated numerous companies on the SDN list.

Currently, Chinese firms with ties to the PLA and specific companies utilizing dual-use technologies already face sanctions and export controls. This signals additional businesses operating in these sectors as likely targets in a Taiwan crisis. In a crisis scenario, a number of economic countermeasures could be used to limit the flow of potential dual-use goods to China’s military and restrict the operation of sectors critical to China’s defense industrial base.

This section describes the economic linkages between potentially targeted sectors and the global economy, as well as the economic assets and flows that could be implicated under an economic statecraft program. To bring more granularity to our analysis, we use a case study approach that explores the potential for restrictions on China’s aerospace sector.

Our findings point to significant economic risks from a broad sanctions package, as well as deep interdependencies between China and G7 economies in potentially targeted sectors. This suggests that, if deployed, countermeasures would likely target narrower industries—or single firms within industries—where China depends on imported G7 technology and where global dependence on Chinese exports is small. Even then, sanctions could come with substantial costs to G7 technology exporters in the sanctioned industries.

Global economic links: Industries and supply chains

A number of Chinese industries could become the target of G7 countermeasures in the context of a major Taiwan crisis, due to their linkages to China’s defense sectors. Among them, chemicals, metals, electronics, aviation, and shipbuilding already feature prominently in US lists of Chinese military-industrial companies, including the Non-SDN Chinese Military-Industrial Complex Companies list and the Department of Defense’s Chinese Military Companies list—making them likely potential targets for future action.⁴⁶  

Collectively, these five industries already comprise over ten percent of Chinese gross domestic product, produce over $6.7 trillion in annual revenue, and employ over 45 million people.⁴⁷ They also are deeply linked to the global economy: in 2018, Chinese companies in these industries imported goods valued at $686 billion, and exported goods valued at nearly $1.1 trillion.

These sectors are also linked to the global economy through investment. Collectively they have been the destination for $107 billion in direct investment from the United States, United Kingdom, and European Union since 2000, and Chinese companies in these sectors have invested at least $179 billion abroad, either through acquisitions or greenfield investment, according to Rhodium cross-border FDI monitoring. Bloomberg data and Chinese official data suggest that foreign holdings of listed Chinese companies and their subsidiaries in these sectors amount to about $120 billion, and these firms have at least $76.9 billion in dollar-denominated debt instruments currently outstanding.⁴⁸

Scenarios

G7 countries have a range of economic countermeasures that could be brought to bear against select Chinese industries in the event of a Taiwan crisis. Here we consider two potential scenarios, a maximalist export controls scenario targeting major industries with comprehensive export controls, and a targeted sanctions scenario using China’s aerospace industry as a case study.

Maximalist export controls scenario

In an extreme scenario, G7 countries could impose strict export restrictions on trade with China on a range of major industrial sectors, such as chemicals, metals, electronics, and transportation equipment. These sanctions, though highly costly, would not be entirely unprecedented. In the case of Russia, the United States and other G7 countries imposed restrictions on exports in the oil and gas, metals and mining, defense, and technology sectors through a combination of tightened export controls and property blocking rules.

The disruptions to China from such sanctions would be substantial: G7 exporters are the source of 18 percent of the imported content these industries in China consume, totaling $153 billion based on trade in value-added data that estimates the origin and value of production activity along supply chains. G7 countries also account for 43 percent of China’s export market in these industries, putting $225 billion in Chinese manufacturing activity at risk. Altogether, over fifteen million jobs in China are estimated to depend on exports in these sectors. Many more jobs would be put at risk from the loss of imported inputs into Chinese production processes.

These dependencies run both ways, however, and impacts on the sanctioning countries would also be extremely high. The $153 billion in goods that G7 countries export to these industries in China support approximately 1.3 million jobs across the G7; and China itself is the source of 25 percent of G7 imports in these industries.

Even these substantial figures far underestimate the total economic impact from a total ban on trade between G7 economies and these industries in China. The value-added approach provides a useful estimate of the value that different countries contribute to well-functioning global value chains. But disruptions from a sudden stop of trade in these industries—in particular in hard-to-replace critical components—would result in massively greater economic disruption until alternative sources were fully brought up to speed.

Exports from China to the G7 would be disrupted as well. Trade restrictions on foreign inputs to these industries would affect Chinese production and exports. China could also take retaliatory action banning exports from these and other sectors to the G7.

In some cases, alternatives to disrupted trade flows might be found quickly, putting the efficacy of trade restrictions in doubt. A ban on G7 exports of iron ore to China, for instance, would disrupt only a small volume of trade unless other partners such as Australia, which exported $72 billion of iron ore exports in 2022, were also to join. Even so, these supplies could in large part be replaced by exports from other countries such as South Africa and Brazil.⁴⁹ Additionally, the G7’s challenges in halting the export of high-end Western technology to Russia following its invasion of Ukraine demonstrate that such regimes can be porous.⁵⁰

The deep interlinkages between Chinese and global industries mean potential economic disruptions from targeting certain sectors could be significant. Altogether, a conservative accounting of the trade flows disrupted by export controls in these sectors amounts to at least $378 billion in disrupted trade.⁵¹  

Except under extreme circumstances, it is unlikely that G7 leaders would be able to agree to trade restrictions on this scale. Germany, for instance, is deeply invested in and dependent on China in the chemicals industry. The French, UK, and US aviation industries have huge sales to China (see case study below), and Japan and non-G7 members South Korea and Taiwan are deeply connected with mainland China in electronics. These linkages would make agreeing on a broad package extremely difficult. Broad trade restrictions would also be indiscriminate in their impact on China’s citizenry, a fact with serious ethical implications and potentially political ones, as a broadbased export-control regime could in fact strengthen popular support for the government rather than undermine it.⁵²

Finally, a broad export-control package would have major spillovers to the global economy due to global value chains that depend on imports of Chinese intermediate goods (electronics, for instance) that would be disrupted by strict controls. These considerations make measures of this scale highly unlikely, except under the most extreme circumstances.

Targeted sanctions scenario

Due to the costs of a maximalist approach, economic countermeasures against China’s industrial sectors are more likely to be narrower in scope, targeting specific companies or subsectors with high technological dependencies on G7 countries and relatively low global dependency on Chinese exports. The key feature of these countermeasures would be asymmetry: imposing restrictions that disproportionately affect China’s economy. Importantly, asymmetry does not imply costlessness. Any effective trade restriction inevitably results in costs to the sanctioning economy and the global economy as a whole.

China’s aerospace industry, which depends on foreign-sourced engines and parts, provides a case in point. In a potential sanctions scenario, the United States and G7 partners could impose blocking sanctions and export restrictions on China’s two largest aerospace companies, the Commercial Aircraft Corporation of China (COMAC) and the Aviation Industry Corporation of China (AVIC). These companies depend heavily on inputs from overseas suppliers. Of the eighty-two primary suppliers to China’s first narrow-body jet, the COMAC C919, only fourteen are from China (and seven of those are Chinese-foreign joint ventures).⁵³ China’s most critical vulnerability is engines: all three of its domestically manufactured commercial aircraft rely on foreign-produced engines, and China’s domestic jet engine manufacturers are widely believed to be far behind Western competitors in terms of technological sophistication.⁵⁴

In a scenario in which blocking sanctions and export restrictions were placed on AVIC and COMAC, all exports of aerospace goods to these firms could be prohibited, amounting to approximately $2.2 billion in aerospace parts trade at risk.⁵⁵ However, the ultimate impact of such measures on China’s aerospace ambitions would be much greater. China has begun mass production of its ARJ21 regional airliner–which depends on GE engines–and exported its first model to Indonesia last year. COMAC’s flagship C919 narrow-body jet marked its first commercial flight in May 2023, and the country has aspirations to sell over 1,200 over coming years. Restricting the sale of aviation parts to COMAC and AVIC would substantially disrupt China’s civil aviation ambitions.  

$33 billion of G7 aerospace exports to China could be disrupted through retaliatory measures.

While the impact of these measures would be particularly acute for China, the costs on foreign aerospace companies would also be substantial. China could respond to restrictions by halting aerospace exports to G7 countries. China exported $1.2 billion in aircraft parts to G7 countries in 2018, including inputs to for eign airliners. While most are low-tech inputs, they can be difficult to replace in the short run: a shortage of wire connectors that coincided with widespread lockdowns in China in 2022 led to US production delays for the Boeing 737.⁵⁶ China could also respond by delaying purchases of Airbus and Boeing planes. In total, approximately $33 billion of G7 aerospace exports to China could be disrupted through retaliatory measures.

Foreign aerospace companies also have substantial tie-ups with AVIC and COMAC. Since 2000, US and British companies and those based in EU member states have invested an estimated $3.7 billion in China’s aerospace sector, according to Rhodium’s cross-border FDI tracking. A substantial number of these projects are connected to AVIC and COMAC, including Airbus’s A320 final assembly line in Tianjin, which produces six aircraft per month, about 10 percent of Airbus’s average monthly production.⁵⁷

AVIC and COMAC also have invested in global aerospace companies. AVIC, for instance, acquired Austrian FACC AG, which produces aerostructures and other components for Airbus, Boeing, and other global firms. In a scenario where COMAC and AVIC were put under blocking sanctions, these operations would likely be forced to wind down or divest

Finally, foreign investors would be exposed to losses in equity and debt in AVIC. Foreign equity holdings in twenty-four listed subsidiaries of AVIC companies totaled $1.4 billion, or 1.4 percent of their combined market capitalization as of April 2023.⁵⁸ Dollar-denominated debt issued by AVIC and subsidiaries amounted to $3.8 billion, approximately 21 percent of its total debt issuance.⁵⁹  

Sanctions on China’s leading aerospace companies and export controls on the components they import would be a heavy blow to its civil aerospace ambitions, making them a plausible economic countermeasure in a Taiwan crisis. However, the impacts on foreign aerospace companies would be significant given the high degree of trade and investment ties to China, making these countermeasures costly and potentially difficult to coordinate in a crisis. Targeted sanctions on other sectors where G7 countries hold asymmetrical technological advantages could also be considered, but these all come with non-negligible costs to the sanctioning economies as well.

Takeaways

China is deeply connected to the global economy in sectors that would potentially be targeted for economic countermeasures in a Taiwan crisis. The expansive nature of these ties would make broad export controls and trade restrictions extremely costly and likely hard to justify except in the most extreme circumstances.

Targeted sanctions on specific firms and technology choke points are more plausible, but they come with substantial costs to foreign companies. Our case study, with export controls placed on China and full blocking sanctions imposed on China’s leading aerospace manufacturers, shows that tens of billions of dollars in aerospace goods trade, inbound and outbound direct investment, and portfolio holdings in China’s aerospace sector would be put at risk. While China would face substantial challenges in achieving its goal of developing a strong domestic commercial aviation industry, foreign aerospace companies would lose out on billions of dollars in exports and sales to China and risk seeing billions of dollars in direct investment lost.

IV. Practical challenges in sanctions development

Beyond identifying specific tools and appropriate targets for economic countermeasures, policymakers will confront a range of complex coordination issues around implementing sanctions in a Taiwan crisis. Discussions with participants in our roundtables highlighted areas of consideration in developing economic countermeasures to deter aggression against Taiwan.

Understanding Taiwan’s perspective. A crucial factor in designing G7 economic responses to possible aggression against Taiwan should be the policy preferences of Taiwan itself. Depending on the nature of the crisis and political conditions in Taiwan, Taiwanese officials might not support economic countermeasures against China and opt for a de-escalatory response. Given the depth of economic ties between China and Taiwan, certain economic countermeasures against China could be highly costly for the Taiwanese economy. Public opinion would likely be divided on the question of how to respond. With only mixed Taiwanese support, G7 coordination on economic countermeasures could be difficult to achieve. Strong Taiwanese support on the other hand would make coordination easier, so long as Taiwanese actions were not seen to have precipitated the crisis.

Defining clear redlines and triggers across the G7. A key barrier to coordinating sanctions among G7 partners and with Taiwan arises from the difficulties in agreeing on what Chinese acts of aggression should trigger economic countermeasures. While some actions might be seen by all parties to have crossed redlines–such as a military quarantine of Taiwan—Chinese coercion against Taiwan often takes the form of “gray zone” measures that are more ambiguous and brush up against but do not clearly cross redlines.⁶⁰ Getting G7 nations to agree to impose economic countermeasures against China in response to such actions will be more challenging. The roundtables highlighted different levels of tolerance for escalatory action measures among G7 partners.

The specific drivers of a crisis would matter as well: European experts note that a crisis that was seen to be provoked by the United States or Taiwan would make G7 alignment more difficult, especially given divergent views among EU member states about how to respond to a cross-strait crisis.

Coordinated signaling in order to deter. The challenges involved with identifying redlines and agreeing on responses in advance also complicate efforts to signal resolve to China. Successful deterrence depends on the would-be aggressor knowing what actions would provoke a response and believing that the defender’s threats of retaliation are credible.⁶¹ The ambiguous nature of Chinese escalatory actions and the potential for disagreements among partners over how to respond in the moment of crisis make establishing deterrence through the threat of economic countermeasures a significant challenge.

Participants in roundtables disagreed about the best signaling approach, with some arguing that clarity about redlines and consequences is essential, and others arguing that providing too much specificity could instead encourage aggressive behavior and focus China’s countersanctions and sanction-proofing work. Providing clarity on what Chinese actions would elicit a punitive response could encourage Beijing to take actions just below such thresholds.

Building out necessary tools. Our roundtables highlighted the fact that G7 countries joining a sanctioning coalition may need additional legal tools to carry out effective countermeasures on China. In the wake of enhanced export controls on Russia, for instance, the EU faced challenges restricting reexports of export-controlled products through third countries to Russia, as doing so would require additional legal authorities.⁶² And differences in UK, EU, and US regulations have complicated the efforts of multinational companies to wind down their operations in Russia.⁶³ For effective action and deterrence, such authorities would need to be shored up.

Scoping a cost mitigation strategy. Even limited economic countermeasures against China would have global economic spillovers. This means any sanctions program would likely need to be paired with measures to support industries at home as well as third countries affected by lost trade and investment with China. Sanctions triggering a devaluation of the renminbi would negatively affect countries dependent on commodity exports to China. A stronger dollar resulting from global investors seeking liquidity and safe assets in a crisis would put additional stress on countries with substantial dollar-denominated debt. G7 countries would need to manage the global spillovers of sanctions with additional dollar liquidity, loan extensions and forgiveness, and other tools to support the global economy in a period of economic stress.

Factoring in the market reaction. Any G7 economic statecraft response would have to contend with additional disruptions to global supply chains from Chinese aggression against Taiwan and the resulting market impacts. Russia’s 2022 invasion of Ukraine caused market gauges like the S&P 500 to fall by around 4 percent, and the initial market impact of a Taiwan crisis could be significantly larger due to the size and importance of the economies involved. US officials have estimated a disruption to the exports of Taiwan Semiconductor Manufacturing Company alone could cost the global economy between $600 billion to $1 trillion a year.⁶⁴ Roundtable participants stressed that G7 actions would have to avoid aggressively compounding the inevitable supply chain and market effects of a crisis. The initial shock could undermine domestic political support for sanctions that would incur additional economic costs.

Conclusions and recommendations 

Policymakers in G7 capitals are increasingly discussing Taiwan crisis scenarios, and starting to explore the range of options available to them in responding to Chinese actions against Taiwan, both beyond and below the level of invasion. While our work shows that maximalist countermeasures would be highly costly and therefore unlikely except in the most extreme circumstances, G7 countries may consider a set of more limited tools that target areas of asymmetric Chinese dependence on foreign technology and critical inputs. 

That options are available, and that G7 leaders are discussing them, does not mean that deploying them in an aligned fashion would be easy. Coordination on economic countermeasures will be critical to effective deterrence, but could be hard to achieve given the difficulty to define red lines in a conflict that is likely to be marked by ambiguity and uncertainty. Given these limitations, economic countermeasures can only be one part of a broader deterrence effort and toolbox that also includes diplomatic and military channels.

From our research, roundtables, and interviews, a set of recommendations emerged for policymakers considering the use of economic countermeasures in a Taiwan crisis:

• G7 partners and Taiwan should scale up private coordination and signaling. G7 discussions about the role of economic countermeasures in a Taiwan crisis are still in the early stages. Given the challenges involved in agreeing upon red lines and appropriate countermeasures, pragmatic discussions around contingencies must be a priority. This includes creating effective private channels of communication among G7 partners and key stakeholders on emerging trends, financial ties, and shared vulnerabilities. Meanwhile, G7 partners should privately message to China the extent they are willing to go in using economic tools to counter Chinese aggression toward Taiwan. Coordination with Taiwanese officials is also crucial.
• The G7 should coordinate beyond its membership. This report assumes that most or all of the current coalition that has imposed sanctions against Russia would align on measures in a Taiwan Strait crisis. Roundtables and consultations with like-minded capitals in the Asia-Pacific region have suggested this is a reasonable assumption. However, even more so than in the case of Russia, exchanges outside the G7, including the rest of the G20, will be necessary given the scale of economic disruption at stake.
• Economic asymmetries need to be better understood. Policymakers argued that the most likely economic countermeasures would focus on areas where China is asymmetrically dependent on foreign goods, technology, and finance. Further research is needed to identify these areas and the potential costs, vulnerabilities, and limitations of targeting them in a crisis.
• Take practical legal steps now to boost the credibility of G7 deterrence. Discussants noted that successful deterrence requires making clear that G7 nations are ready to act decisively in a crisis. This may require legal steps, including: shoring up of the EU’s framework for export controls; advance preparation of US executive orders specifying and granting sanctions authorities to the Office of Foreign Assets Control; preliminary analysis on the potential impact and spillovers of proposed packages; and the construction of communication channels among US government stakeholders such as the Federal Reserve, Commodity Futures Trading Commission, Securities and Exchange Commission, Office of the Comptroller of the Currency, Financial Crimes Enforcement Network, and appropriate bilateral, plurilateral, and multilateral counterparts. This may include preparing the legal and regulatory landscape across G7 jurisdictions to ensure appropriate authorities are in place to deter or respond to a crisis.
• Invest in other forms of deterrence. Economic countermeasures should be considered as part of a whole-of-government and multilateral strategy as they have costs and limitations that can make them less effective on their own. These tools will be more effective when paired with traditional tools of deterrence in both the military and diplomatic realms.
• Keep lines of communication open. Bilateral and plurilateral communication is the best tool to de-escalate in a crisis. Recent breakdowns in military-to-military communication channels between the United States and China are of serious concern given elevated tensions in the region. Maintaining open communication lines and regular exchanges with Chinese counterparts is a key element in any risk-mitigation strategy.
• Balance credible threats with credible assurances. Effective deterrence requires credible threats to be matched with credible assurances. The G7 should make clear to Beijing it has no desire to change the status quo in the Taiwan Strait. Efforts to maintain the status quo and shore up traditional diplomatic, military, and economic tools to ensure peace and stability in the Taiwan Strait should be the priority. 

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About the authors

Charlie Vest is an associate director on Rhodium Group’s corporate advisory team. He manages research and advisory work for Rhodium clients and contributes to the firm’s research on US economic policy toward China. Vest holds a master’s degree in Chinese economic and political affairs from UC San Diego and a bachelor’s degree in international affairs from Colorado State University. Prior to joining Rhodium, he worked in Beijing as research manager for the China Energy Storage Alliance, a clean energy trade association.

Agatha Kratz is a director at Rhodium Group. She heads Rhodium’s China corporate advisory team, as well as Rhodium’s research on European Union-China relations and China’s economic statecraft. She also contributes to Rhodium work on China’s global investment, industrial policy and technology aspirations. Kratz holds a Ph.D. from King’s College London, having studied China’s railway diplomacy. Her previous positions include associate policy fellow at the European Council on Foreign Relations and editor-in-chief of its quarterly journal China Analysis, assistant editor for Gavekal-Dragonomics’ China Economic Quarterly, and junior fellow at the Asia Centre in Paris.

Acknowledgements

This report was written by Charlie Vest and Agatha Kratz with support from Juliana Bouchaud in collaboration with the Atlantic Council GeoEconomics Center. The principal contributors from the Atlantic Council GeoEconomics Center were Josh Lipsky, Kimberly Donovan, Charles Lichfield, and Niels Graham.

The GeoEconomics Center and Rhodium Group wish to acknowledge a superb set of colleagues, fellow analysts, and current and former officials who shared their ideas and perspectives with us during the roundtables and helped us strengthen the study in review sessions and individual consultations. These individuals took the time, in their private capacity, to critique the analysis in draft form; offer suggestions, warnings, and advice; and help us to ensure that this report makes a meaningful contribution to public debate. Our gratitude goes to Dave Shullman, Jörn Fleck, Logan Wright, Daleep Singh, Jeremy Mark, Richard Aboulafia, Annie Froehlich, Julia Friedlander, David Barboza, Chris Skaluba, the Centre for Financial Crime and Security Studies at the Royal United Services Institute (RUSI), and Atlantik-Brücke.

This report is written and published in accordance with the Atlantic Council Policy on Intellectual Independence. The authors are solely responsible for its analysis and recommendations.

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How are these growing economic ties impacting Moscow’s ability to withstand G7 sanctions and maintain its invasion of Ukraine—and where do Beijing’s interests diverge from Moscow’s? 

Below we outline six trends that have defined the two countries’ relations since the invasion of Ukraine. Russia’s access to the yuan has bolstered its wartime economy. However, when it comes to trade and financial support, Beijing has been less accommodating. 

Chinese yuan is Russia’s friendliest currency.

China is mitigating the impact of sanctions on Russia by providing Moscow an alternative currency for transactions. Chinese yuan supplanted the dollar as Russia’s most traded currency in early 2023. The switch came after the United States imposed sanctions on a few banks in Russia that were still allowed to make cross-border transactions in dollars. As the Group of Seven (G7) sanctions constrain Russian financial institutions’ ability to transact in the world’s leading reserve currencies, like dollars, euros, and yen, the yuan is arguably the only relatively stable, widely traded currency issued by a non-sanctioning authority that enables Russia to make international transactions.

Central bank currency swap lines play a major role in increasing the circulation of the yuan in the Russian economy. Although China’s capital controls make it difficult for foreigners to obtain yuan, Beijing has supported Russia’s growing yuan marketplace by backing currency swap facilities. Through these swaps, Russia and China’s central banks exchange rubles for yuan. Major Russian commercial banks then tap into their central bank’s accounts to introduce the yuan into the Russian economy. Furthermore, as China’s banks have accumulated Russian assets, they have also likely increased the amount of yuan in local circulation.

Russia’s linkages to the Chinese financial system also allow it to mobilize its currency reserves. G7 countries froze most Russian reserves held by sanctioning jurisdictions. However, Russia has been able to access its central bank reserves held in China (nearly 18 percent before the conflict), which are largely denominated in yuan. As a result, Russia has been able to use yuan-denominated reserves to conduct foreign exchange transactions to manage the value of the ruble. Moreover, Russia increased the permitted share of yuan in its National Welfare Fund up to 60 percent last year and plans on selling more yuan from the wealth fund to make up for the lost energy revenues and cover budget deficit. 

Vital trade links

Russia has compensated for lost market share in the West by exporting more energy to China. Beijing has increased spending on Russian energy from $57 billion in the year prior to the invasion to $88 billion in the year after and allowed Moscow to make up for the lost revenues in the EU market. Russian crude oil exports to China could increase even further in 2023, as China’s state-run refiners have been increasing purchases of Russian oil, and Beijing has signaled that it may allow a further ramp-up. However, China maintains informal quotas on crude oil imports to limit exposure to any individual energy exporter. These sit at 15 percent of overall imports or around two million barrels a day per country. Another component of China’s energy imports from Russia is natural gas. Natural gas is more dependent on existing infrastructure and is thus harder to rapidly increase in imports. Russia is expected to deliver 22 billion cubic meters of natural gas to China through the Power of Siberia pipeline in 2023, eventually increasing to full capacity of 38 billion cubic meters in 2027. However, even though Russia has pushed for the construction of the Power of Siberia 2 pipeline, Beijing has shown hesitation and has, in fact, negotiated a new pipeline through Central Asia. Whether Russia keeps exporting more oil or natural gas to China will depend on Beijing’s decisions on quotas or new pipelines, making Russia asymmetrically dependent on its economic partnership with China.

Russia has imported electronic equipment from China to offset the effects of export controls but is struggling with obtaining advanced technology—even from Beijing. Integrated circuit imports from China have increased from $67 billion in 2021 to $170 billion in 2022, but most electronics exports from China to Russia are made up of basic computers and transport equipment. Notably, Beijing has banned the export of advanced Loongson microprocessors. The West’s imposition of export controls on advanced semiconductors against China in October 2022 signals that Beijing will become even more protective of advanced technology and less likely to transfer them to Russia. 

China is not the only country whose trade with Russia has increased. Although Beijing has provided a lifeline to the Russian economy, countries such as India and Turkey have also expanded trade with Russia. In fact, India has become the second largest destination of Russian crude oil exports after China. Meanwhile, Central Asian and Caucasus countries’ exports of electronic equipment to Russia ballooned in 2022 and Serbia, Turkey, and Kazakhstan have provided semiconductors to Russia throughout the last year. China might be the largest economy supporting Russia but other countries’ trade relations with Russia should be as closely monitored as Beijing’s. 

Limits in the ‘no-limits’ partnership

China has generally avoided steps that could trigger secondary sanctions or that greatly increase its own strategic dependence or risk exposure to Russia. For example, Chinese banks have not become creditors to the Russian government. Likewise, China has hedged against dependence on Russian energy imports and has restricted the flow of advanced technology to Russia. The notion of a “no limits” partnership remains rhetorical for now.

Maia Nikoladze is the assistant director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @Mai_Nikoladze.

Phillip Meng is a young global professional at the Atlantic Council’s GeoEconomics Center.

Jessie Yin is a young global professional at the Atlantic Council’s GeoEconomics Center.

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This is the 1st installment of the Unlocking Economic Development in Latin America and the Caribbean report, which explores five vital opportunities for the private sector to drive socioeconomic progress in LAC, with sixteen corresponding recommendations private firms can consider as they take steps to support the region.

How does the private sector perceive Latin America and the Caribbean (LAC)? What opportunities do firms find most exciting? And what precisely can companies do to seize on these opportunities and support the region’s journey toward recovery and sustainable development? To answer these questions, the Atlantic Council collaborated with the Inter-American Development Bank (IDB) to glean insights from its robust network of private-sector partners. Through surveys and in-depth interviews, this report identified five vital opportunities for the private sector to drive socioeconomic progress in LAC, with sixteen corresponding recommendations private firms can consider as they take steps to support the region.

Enhancing market size, scalability, and regional integration

Latin America and the Caribbean’s market size and scalability make it an attractive environment for businesses, but the public and private sectors have an opportunity to strengthen its appeal further through deeper regional integration. Private-sector leadership and participation will be crucial for efficiently improving hard and soft infrastructure for trade, energy, and other forms of integration. Together with public sector efforts, these improvements will help pull more nearshoring and reshoring investment to the region.

Recommendations for the private sector

The private sector, in coordination with the public sector, has a key role to play in scaling regional potential and furthering regional integration in trade, climate, digitalization, and other areas. Three promising opportunities for private sector action in this space include:

1. Financing and managing hard infrastructure: Competitive construction, services, and other firms can help boost the cost and operational efficiencies of physical infrastructure underpinning LAC integration (achieved through intraregional trade, energy, etc.)
2. Improving “soft” infrastructure: Private-sector expertise and actions can inform and spur regulatory modernization and harmonization in LAC and internationally, which helps attract investment conducive to regional integration.
3. Prioritizing nearshoring and reshoring efforts: Firms across a wide range of sector may contribute to, and benefit from, better integrated regional supply chains and subsequent export gains.

About the author

Staff

Pepe Zhang

Senior Fellow

Adrienne Arsht Latin America Center

China Coronavirus

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By Pepe Zhang

To sustain the ongoing recovery against short-term headwinds and boost inclusive, productive, and sustainable development in the long term, governments cannot, and should not, act alone. Private firms can help advance the green agenda by working to create green jobs, taking measures to promote a transition to a circular-economy model, and partaking in green finance.

Americas Climate Change & Climate Action

Online Event Thu, February 17, 2022 • 9:00 am ET

#ProactiveLAC: A digital future for regional prosperity

A virtual conversation on the role of public-private partnerships and policy actions in increasing digital connectivity across Latin America and the Caribbean.

Coronavirus Digital Policy Inclusive Growth Latin America

The Adrienne Arsht Latin America Center broadens understanding of regional transformations and delivers constructive, results-oriented solutions to inform how the public and private sectors can advance hemispheric prosperity.

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On May 29, IPSI Nonresident Senior Fellow Dexter Tiff Roberts was quoted in DW regarding export control measures on semiconductor trade with China and whether such measures could backfire. Roberts explains that “US companies can apply for special licenses and if their applications are approved, they can continue to sell semiconductors or presumably semiconductor manufacturing equipment [to China.]”

Fellow

Dexter Tiff Roberts

Nonresident Senior Fellow

Global China Hub Indo-Pacific Security Initiative

China Chinese

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Nevertheless, Russian Central Bank Governor Elvira Nabiullina and other financial elites have been pushing for making even more data available. Specifically, they are asking for data classified shortly after Russia’s full-scale invasion of Ukraine to be released again. This includes data on firms’ financial health and international trade. In part, the financial elites are defending their own technocratic power against backroom deals. More transparency may reassure investors and financial counterparties, be they financial institutions or governments that are not wielding sanctions against Russia.

There was some evidence that Nabiullina and her allies were beginning to win this battle in early March, with the release of very partial customs data and an up-to-date time series on the central bank’s foreign currency reserves—in addition to total reserves including gold, which had remained available and up to date. 

By late March, the European Union had also contributed to this spirit of glasnost. Its self-reporting deadline forced member states to finalize their search for immobilized Russian assets, with the bulk of the much-publicized $300 billion thought to be found in the Belgium-based financial company Euroclear. The Russian central bank had been using safe government bonds as a store of value. As maturities were paid, up to 191 billion euros ($205 billion) accumulated there. There is no suggestion of any wrongdoing by Euroclear.

After these very small steps toward transparency—chosen by or imposed on Russia—it is now clear that the Kremlin is stopping this short-lived data glasnost experiment.

Brought in after the invasion, the “period of non-disclosure of corporate reporting” is meant to lapse on July 1. The usual suspects have been pushing for a return to transparency, arguing that—in addition to the positive signal it would send to investors—it would prevent healthy firms from securing tax breaks and subsidies. But Russian Finance Minister Anton Siluanov ruled out a return to pre-invasion practices on May 11, arguing specifically that this would put firms at risk of falling under Western sanctions merely for fulfilling government contracts.

Siluanov’s argument is somewhat puzzling. Most of the thirty-seven firms listed on the Moscow Exchange (including most metals producers) have published at least some of their 2022 accounts precisely to show that they are not supplying the Russian army—and thus to protect themselves from sanctions. In any case, it is a good reason for Western authorities to pay special attention to the thirteen listed firms that have taken full advantage of the non-disclosure period so far. As seen in data obtained from the Atlantic Council’s Russia Sanctions Database, most of the listed firms are sanctioned by only one or two sanctioning authorities, and some are not at all.

The Kremlin and the technocrats are perhaps readier to agree that Russia is not yet ready for capital controls to be lifted. This year’s much smaller trade surplus means a larger deficit in net investment and transfers would pull the current account into a deficit too. And there are already signs that Russia is worried about its access to currencies it can use to trade. In India this month, Foreign Minister Sergey Lavrov complained that rupees were accumulating in the Indian accounts of Russian exporters and that Moscow was struggling to put them to good use. In March, Nabiullina announced that all restrictions on withdrawing cash currency from bank accounts, money transfers abroad, and restrictions on withdrawals by non-residents from “unfriendly” countries would be extended.

Available data show sanctions are having an impact

Russia’s deficit is already well above the trajectory assumed in the 2023 budget. Figures released on May 10 by the Ministry of Finance show that the deficit from early January to early May has been over 3.4 trillion rubles ($42 billion)—already 17 percent above the deficit planned for the whole year. Lower oil and gas income over the first four months of the year (down 50 percent year-on-year) is partly to blame, but bloated spending and a sluggish 5 percent recovery of income from sources other than oil and gas are also factors.

The two most obvious resources to tap into—national welfare fund holdings and domestic borrowing—have been used sparingly so far. 

The chart below shows that the ruble value of the fund—which is made up almost exclusively of yuan and gold for its liquid part—has in fact increased since the beginning of the year. The yuan withdrawals from the fund have been more than offset by the appreciation of the yuan and gold prices against the ruble. What has been withdrawn has been added to the central bank’s reserves in exchange for just 450 billion rubles ($5.6 billion), plugging only 13 percent of this year’s deficit so far.

Meanwhile, the finance ministry has issued just under one trillion rubles ($12.5 billion) in new OFZ bonds to the domestic market. Auctions for these remain popular as sanctions prevent Russian banks from investing in reliable assets abroad. On the other hand, this year’s auctions have not been as oversubscribed as the first large auctions late last year. Moreover, creditors are demanding a very high yield—more than 10 percent in annualized rates compared to a key interest rate at 7.5 percent—suggesting that they perceive significant risks ahead.

The remaining two trillion rubles ($25 billion) in the deficit so far have been covered out of the Russian treasury’s current account, which was claimed to be at 4.5 trillion rubles ($56 billion) in late February. The likely reason the government is running the risk of spending this down rather than borrowing or using the national welfare fund more is that it expects its fiscal returns to improve throughout the year. If this is indeed the case, it will have avoided causing an even faster expansion of money balances and sending another signal that inflation will pick up again.

The above chart shows that the shock to prices brought on by the invasion is now out of year-on-year inflation data. But the government and the central bank remain concerned that the weaker ruble and a loose fiscal stance could quickly bring inflation back above the 4 percent target. Also on May 11, Nabiullina commented that rates may have to be hiked again from their current 7.5 percent. Further cuts are now off the table.

Why might revenue improve? The quarterly tax on “extra oil income” introduced in 2019 is a crucial factor. This allows the government to track how exporters are selling into new markets and adjusting to the oil price cap rolled out by the Group of Seven (G7) nations in December and claim its share of the profit with a lag. This already helped recover some of the January and February losses in March. As for April, the government is also using a new formula for oil taxation. Based on the Brent crude index with a discount (which will shrink every month), the new formula shows that the government believes the index for Russian-made Urals crude is underestimating how much exporters are making, either by convincing buyers to disregard the price cap or by using a “shadow fleet” of shipping and insurance providers that are not affected.

It is now clear that this year’s budget deficit will be well above the planned 2 percent. The Russian government has several levers at its disposal to keep it from going out of control. It should be a key goal for Western policy to make sure these levers fail. In short, this means enforcing the oil price cap to exacerbate the deficit and allowing net transfers to keep leaving Russia in order to erode the current account surplus, keep the ruble weak, and exacerbate inflation.

Alongside capital controls, the end of the technocrats’ short-lived attempt at data glasnost is a clear sign that Russia will continue to run a wartime economy. Attractiveness to investors and the commitment to balanced budgets are no longer a priority. This means we could still see the Russian government breaking further economic taboos to keep financing its war. Pensions and other social payments were increased by 10 percent in June 2022 to account for high inflation but, with a growing deficit, even this key plank of Putinism appears to be at risk this year. Economists certainly expect the inflation-adjusted increase to be much more modest. Once the liquid part of the national welfare fund is depleted, the government might also start raiding the central bank’s accessible reserves, removing what remains of that institution’s ability to control inflation at all. At that point, the Russian economy could be in for much worse than a down year or two.

Charles Lichfield is the deputy director and C. Boyden Gray senior fellow of the Atlantic Council’s GeoEconomics Center.

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Central Asia is literally at the center of what Halford Mackinder called the “World-Island,” the vast continental expanse from the Atlantic Ocean off Europe’s west coast to the Pacific Ocean off East Asia’s east coast. It is abutted by two great, revisionist powers: China and Russia, which aim to overturn the international liberal order that has incubated the seventy-five most peaceful and prosperous years in the history of humankind. The two powers have historically pushed hard to ensure their influence in, if not direct political control over, the region. To the south, things are not much better, as the region’s neighbors include Iran and Afghanistan.

Only thirty years independent of Russia-led Soviet domination, the Central Asian states have done well to reduce still-substantial Russian influence and establish peaceful and increasingly cooperative relations among themselves. In other words, they have largely managed intraregional squabbles that would allow outsiders to gain advantage. To decrease dependency on Russia, for nearly two decades they have worked with China on oil and gas pipelines to avoid a Kremlin stranglehold on their hydrocarbon exports. This was less problematic in the first decade of the century, when China’s foreign policy was characterized as “peaceful rise,” and more problematic in recent years as Chinese leader Xi Jinping turned to “wolf warrior” diplomacy.

China poses an interesting set of issues for the Central Asian states. Yes, it’s useful as an offset to Russia, but dangerous as a potential hegemon. For many years Chinese intellectuals have laid claim to all or part of Kazakhstan and Tajikistan, whose governments duly took issue with such revanchist rhetoric. More recently, China’s ambassador to France, Lu Shaye, suggested publicly in April that China does not respect the sovereignty of former Soviet states because, according to him, they do not have “effective status in international law.” Beijing eventually walked back the comments, but to Central Asian leaders it may have looked like Lu was being punished for saying the quiet part out loud.

Even so, China is attractive to Central Asian states because it offers economic growth and, unlike Russia, has a diversified and strong economy with which to fund foreign direct investment—though the economic benefits of those projects often go back to China. The Central Asian states see their security in having as many contacts as possible with strong outside actors, which beyond China and Russia includes the United States, the European Union (EU), Japan, South Korea, and India.

Xi has likely initiated this C5+C Summit because he has watched the lower-energy C5+1 forum, started in 2015 by then US Secretary of State John Kerry. The May 18-19 summit in Xi’an sought not only to enhance Chinese influence in the region, but also to one-up the United States by raising the summit to the executive, rather than secretariat, level. Central Asian leaders went to Xi’an with two somewhat contradictory truths in mind: the possibility of economic gain through increased partnership with Beijing and the dangers of potentially overwhelming Chinese influence in the region.

Given the possible economic advantages, there is a good chance that some Central Asian states may agree to a project or two with China. The long-discussed China-Kyrgyzstan-Uzbekistan rail project may soon move ahead, though readouts from the summit do not directly mention the project. Turkmenistan has rare leverage over China in discussing a new natural gas pipeline—Turkmen gas today accounts for 40 percent of all of China’s gas imports. But Turkmenistan and China failed to produce a bilateral statement after the summit, as each of the other four Central Asian states did. The Xi’an summit yielded eighty-two agreements between China and the five Central Asian states, but many of these pledges were long on rhetoric and short on discrete projects.

A more robust US role

All of this provides an opportunity to the United States and other Western countries. It would be naive for Washington and its allies and partners—which rightly see China as the greatest long-term threat to their security—to cede the Central Asian steppe to Beijing. The Central Asian states have been pleased with the C5+1, but they may feel slightly disappointed that the platform has not yet yielded significant benefits.

Washington should seek ways to energize economic cooperation but also help find clearly defined security solutions in Central Asian countries. At the same time, the United States should work with the EU, South Korea, and Japan to enhance opportunities for Central Asia to work with the democratic world.

Washington clearly has its work cut out to boost US economic engagement with Central Asia, but there are significant opportunities to diversify and deepen trade and investment ties. US trade with the region was just below $3.5 billion in 2022, roughly one tenth the amount for both Russia and China. While geography will prevent the United States from overtaking Russia and China, developing the Middle Corridor trade route along and across the Caspian Sea will open the region to Western markets. Central Asia also has the potential to become the next global information technology hub and dramatically increase service exports to the United States, Europe, and East Asia.

US foreign direct investment (FDI) in Central Asia topped $40 billion in 2021, though it went almost entirely to hydrocarbon development in Kazakhstan. China’s FDI in the region reached $70 billion in 2022, though with the Belt and Road Initiative slowing down, that figure may fall over the next few years. Russia, its economy throttled by war and sanctions, managed just $3.6 billion in FDI in 2022. Western capital and expertise can play a major role in diversifying investment in the region to balance existing resource extraction and physical infrastructure projects.

Kazakhstan has the world’s largest uranium reserves but mainly exports the raw materials to Russia. US investment in moderate uranium enrichment in Kazakhstan would push the country’s exports up the value chain and provide ready-made products as the West’s green transition places more emphasis on nuclear power. Both Kazakhstan and Uzbekistan would like to increase their light manufacturing and food processing capacity, but they need capital, expertise, and efficient management in order to make meaningful inroads. More diversified national economies will increase economic growth in the region. They will also make the Central Asian states more resilient to external shocks and less reliant on powerful, potentially hegemonic neighbors.

The influence of China and Russia in Central Asia cannot be denied—it’s why the region’s leaders flew to Moscow for Victory Day and to Xi’an for Xi’s summit. But each of the Central Asian states has reason to be wary of its great power neighbors. Central Asian leaders will look to gain economic benefits from China, while being careful not to mortgage their sovereignty to Beijing.

A more robust US policy in the region, in coordination with its Western partners, can offer additional economic benefit to Central Asia with none of the downside risk of extraterritorial ambition. The US government should look to support US investment in the region and demonstrate that Washington can be the reliable, peaceful partner that the Central Asian states desire but cannot count on in China.

John E. Herbst is senior director of the Atlantic Council’s Eurasia Center and former US ambassador to Uzbekistan.

Andrew D’Anieri is assistant director of the Eurasia Center.

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Event transcript

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JOHN F.W. ROGERS: I’m delighted to be with all of you tonight as we salute the recipients of the Atlantic Council’s Distinguished Leadership Awards. Each year, we recognize a select few who represent the best pillars of our transatlantic relationship, whether as political or policy leaders, business executives, military officers, or artistic and humanitarian champions. What they have in common is that each honoree has made an indelible impact on our world, both in their personal and professional accomplishments, and in their vision for creating a better future with our friends and allies.

Tonight, as chairman of the Atlantic Council, it’s a privilege to be able to say that, for the first time in the Council’s history, we are recognizing a group of all women honorees. And we’re calling attention to the rising role of women’s leadership in shaping a better world.

Now of course, as we gather to celebrate, we do so at a time when such leadership has seldom, if ever, been as crucial as it is today. And while just last week the director-general of the World Health Organization declared that COVID-19 was over as a global public health emergency, new challenges continue to emerge.

A year to the day since we awarded the people of Ukraine a special Distinguished Leadership Award, the war in the Ukraine rages on, shaping a new era of global competition, exposing fragility in international trade ties, and furthering geopolitical uncertainty. It is innocent people who pay the price for war. Their suffering must not be forgotten. What’s more what’s more, with the souring of the US-China relationship, increased tensions and potential systemic threat to world order, the post-World War II sense of stability has never been more threatened.

The task now before the Atlantic Council is not just to diagnose the geopolitical moment in which we find ourselves, but also to inspire the United States and its partners to enhance their collective efforts to shape a better, more prosperous world. As an Atlantic Council community, we can be encouraged by how our organization is rising to the moment. We have provided action-oriented solutions for protecting Ukraine’s sovereignty and freedom, and we have made clear why this war and the US-China rivalry are struggles over what forces, principles, and practice will determine our global future.

As we recognize each honoree at this evening’s historic all-female lineup, we do so in [an] era increasingly in search of role models for women and girls. So tonight, we celebrate not just what each of these extraordinary women have done individually to shape our global future, but what they have done collectively for other women to ensure a better future.

So in considering my remarks this evening and where words can sometimes fall short of the physical and the visual expression in terms of rising to the moment, I was transported to an exhibit that was unveiled a few years ago at the Venice Biennale by a Nigerian artist, Peju Alatise. She is a Nigerian artist, poet, and writer. You’ll see her exhibition here.

Now in her cultural and sculptural installation, “Flying Girls,” she has called for a more just future for girls and imbued the girls with an immense transformative ethos and power in her moving exhibit. We see a striking collection of eight life-size figures of girls united in a circle, adorned with wings, and surrounded by birds and butterflies shaping a pattern that appears to be a murmuration. That’s a large group of birds that all fly together, and then they change direction together. You’ve seen this when you look up at the skies as birds switch their line and move.

Notably, the butterflies are seen surrounding the figures on the ground, suggesting a metamorphosis as they emerge from their cocoons and prepare to take their first flight. And we seem to be witnessing a powerful collective transformation of sorts coming from within these girls and future women, preparing them for their first flight with a momentum from the ground up. Using this artistic expression to guide the future, the artist—she transports us to a future where identity is shaped rather than predetermined.

This is the same transformation that we are witnessing here tonight, a movement embracing and driven by women and girls globally. In “Flying Girls,” the murmuration is a winding upward spiral, not only enveloping the girls but also empowering them. The shape is especially significant as the paths of women in leadership roles itself, because those have never been linear—a befitting segue to the personal and professional stories of our honorees this evening.

So for tonight’s distinguished leaders, it’s not just how far they have traveled but the way they have traveled along their past, not weighted down by obstacles or cynicism about what’s possible; instead, buoyed by a single-minded resolve in their vision for what the future can be.

One of our honorees, the honorable Avril Haines, whom we are awarding the Distinguished International Leadership Award, is the US Director of National Intelligence. She is the first woman in our nation’s history to lead the US intelligence community. And given Director Haines’ and given Director Haines’ significant national-security experience obtained through her service in all three branches of government, a commitment to building a more resilient, inclusive nation through innovative intelligence, few are more deserving of our recognition.

Avril grew up in an apartment in Manhattan’s Upper West Side; her father, a biochemist. Her mother was a painter. And her mother became seriously ill when she was twelve years old. And still a child herself, she spent four years as her mother’s principal caregiver, up until the moment of her passing.

Left without her own mother as a role model, a young Avril did not let her grief defeat her. She gathered her strength. She changed directions and she deferred college for a gap year. She went to study Japanese, martial art, judo, at Tokyo’s Kodokan Institute, where she achieved an incredible feat, rising to a brown belt in just one year.

Later, as a student of theoretical physics, Avril pursued a dream project of restoring a second-hand plane and flying it into Europe. With her flight instructor, she found a 1961 Cessna and she rebuilt the navigation, communication and other electronic systems. Not long into their flight, however, they had an emergency landing. But one upside to the failed adventure at that point was that Avril found a lifelong travel companion in her flight instructor, whom she is married to today.

Our next honoree, Dr. Ngozi Okonjo-Iweala, whom we are awarding the Distinguished International Leadership Award, is the director general of the World Trade Organization. She is the first woman to serve in that capacity, the first African in history to serve in that role. Her more than thirty years of public service includes a remarkable career at the World Bank and serving as finance minister of Nigeria, where she navigated intense personal institutional challenges to implement far-reaching economic reforms.

I can say, on a personal note, when we started at Goldman Sachs our 10,000 Women program, it was Ngozi who herself said to us that we don’t have a program; we have a movement. And for the last fifteen years, her idea has impacted our work on behalf of women and girls across the world.

She was born in the Delta state in Nigeria, where her father was the obi, or king, of the Obahai royal family, which makes her a princess. Now, our cultures often assign a narrative that portrays women waiting for a prince to bring some kind of glass slipper to decide if they are fit. Well, she rewrote this, if not demolished that narrative for herself and future girls. She did not wait for a glass slipper. Instead she shattered the glass ceiling. And along the way, she made sure to create the same opportunities for all girls, especially those who do not come from a royal background, to have this path of economic empowerment.

Our third honoree, Adena Friedman, whom we are awarding the Distinguished Business Leadership Award, she’s the chair and CEO of Nasdaq. Adena went from working as an intern at Nasdaq to making history as the first woman to lead a global exchange. However, this path this path from intern to CEO was not a straight line. And after eighteen years of working at Nasdaq, she left to join the distinguished Carlyle Group. She became the chief financial officer and managing director, and played an integral role in taking the company public during her time there. She returned to Nasdaq three years later, served as its president and chief operating officer, and then she was named the CEO in 2017. And now she serves as chair and chief executive.

And as a student, Adena, she was educated at an all-girls private school. And given the stereotypes at the time, she didn’t see herself on a path to finance. After watching Sally Ride become her first American woman to go into space, she dreamt of flying high into space and becoming an astronaut. But closer to home, she found a role model in her own mother. Originally a stay-at-home mom, her mother later followed her own calling, and went to get her law degree, and became the first woman named at her law firm. Later in life, as a mother herself, Adena had a similar moment of awakening. And after years of taking her two sons and husband to martial arts classes, she decided to follow her interest and pursue classes herself. And similar to all our other panelists but particularly to Avril, Adena rose to a black belt in Korea taekwondo which she now credits for helping her become more fearless in business. And fearless she is. And I can tell you firsthand she’s quite fearless.

And tonight’s fourth honoree, General Laura Richardson, whom we are awarding the Distinguished Military Leadership Award.  She’s the commander of the US Southern Command.  And General Richardson became the first woman Army officer to officially hold the position of deputy commanding general of Forces Command and the only second time that a woman four-star has led a combat command. With a more than thirty-year storied career in the United States Army, her command is the largest in the US Army, responsible for training and preparing active, Reserve, and National Guard troops to meet the requirement of commanders around the globe.

And as a student, Laura was an all-American swimmer. Her path in life has seen her thrive on land and on sea and in the air, because when we talk about flying girls, General Richardson got her pilot’s license at the young age of sixteen—a literally flying girl, joining, I suppose, her copilot here tonight, Avril Haines. So between the martial arts and the air travel, we see some common central themes emerging, if not symbolic of the empowerment and the uplifting of all women and girls.

And then, finally, ladies and gentlemen, tonight we pay special tribute to the women and the girls of Iran.

We are awarding the Distinguished Humanitarian Leadership Award by honoring a delegation of Iranian female activists. The tragic death of a twenty-two-year-old, Mahsa Jina Amini, in the custody of Iran’s so-called morality police has brought the Islamic Republic of Iran’s gender discriminatory laws into clear focus, and the subsequent women-led uprising has stirred the international community.

It’s a privilege to recognize the vast efforts of the activists who will accept this award this evening: Dr. Mahnaz Afkhami, the former Iranian minister of women’s affairs and president and CEO of the Women’s Learning Partnership, who unfortunately herself fell ill and couldn’t be with us tonight; Azam Jangravi, one of the Girls of the Revolutionary Street who was arrested for protesting against Iran’s laws requiring women to wear a hijab in public; Dr. Mehrangiz Kar, Iran’s women’s rights lawyer and writer; and Nazanin Nour, Iranian actress, writer, and activist.

The bravery of Iranian women and girls in risking their safety to achieve change is unquestionable. And together, this delegation’s advocacy, utilization of their public platforms to raise awareness of the circumstances in Iran has been crucial to accountability efforts. In their honor, I wanted to offer just a closing piece, a closing art piece—intentionally using a double entendre on the word “piece” as the artistic expression is meant as a global peace offering.

The picture that you see here is by an Iranian artist, Shirin Neshat as part of a collection of black-and-white photographs of women symbolizing Iranian women’s involvement in efforts to improve women’s education, increase representation in government, securing new legal rights, and expanding their economic opportunities. In this particular detail, the women’s hand, its gesture suggests prayer. And the handwritten calligraphy on the edge of her white veil translates from Farsi: “Give a hand so I can hold a hand.”

Now, this message—“give a hand so I can hold a hand”—conveys a peaceful and powerful message of unity that symbolizes tonight’s event, its theme, and all of our women honorees. It calls out to our global community, especially poignant in this pandemic-recovery era, to reconnect our hands literally and figuratively.

So, ladies and gentlemen, thank you for all being here to celebrate these remarkable women. On behalf of the Atlantic Council, our co-chairs for this evening, I just want to take this moment to offer our hands in celebration of their honors. Thank you.

Watch the remarks

STEPHEN J. HADLEY: Avril Haines, deputy—director of national intelligence, assistant to the president and principal deputy national security adviser, deputy director of the Central Intelligence Agency. The first woman to hold each of these positions. Two decades of service in all three branches of the federal government. This is the official record of Avril Haines’ life as a public servant and her enormous contribution to the safety, security, and prosperity of our nation.

But there is another story here of a truly remarkable person. For this story, we must turn to the unofficial record of her life as contained in a Newsweek article dated June 26, 2013. The picture here is of a person with a flair for adventure, an appetite for risk-taking, and an ability to overcome adversity.

Some examples. From age twelve through fifteen, caring for a critically ill parent. After high school, as John mentioned, taking a year off to earn a brown belt at an elite judo school in Tokyo, Japan. Studying theoretical physics at the male-dominated and unwelcoming Physics Department of the University of Chicago. While in college, working as an auto mechanic helping to rebuild Subaru internal combustion engines. Fighting her way back from a serious biking accident between her sophomore and junior years of college. The following summer, taking flying lessons in Princeton, New Jersey. Rebuilding the avionics of a 1961 twin-engine Cessna 310 aircraft and outfitting it with extended-range fuel tanks. Taking off in that rebuilt airplane from Bangor, Maine, to cross the Atlantic Ocean; losing one engine, then the other to North Atlantic ice; and through fog making an emergency landing at a small airport in Newfoundland. After graduating from college, moving to Baltimore, Maryland; buying at auction an old bar in a then-transitional neighborhood; and turning it into an independent bookstore and café. Becoming a community activist and pursuing a law degree at Georgetown Law School. Graduating, clerking for a federal appellate judge, and then working in the State Department’s Legal Advisor’s Office. A two-year stint working for the Senate Foreign Relations Committee under then-chair Joe Biden. And in 2011, becoming deputy legal counsel to the president for national security affairs. And, as they say, the rest is history.

An unusual route to the top, but then Avril Haines is an unusual and extraordinary person. All of this by someone described as having a sweet personality, humility bordering on shyness, and a deep empathy for others. Or, as Denis McDonough, President Obama’s then-White House chief of staff, is quoted as saying, “She is as caring and decent a person as I’ve ever had the blessing to work with, full stop.” A person of humility, intellect, integrity, judgment, and a strong work ethic.

Tonight, it is a privilege for the Atlantic Council to be able to honor the director of national intelligence, Avril Haines. Please join me on the stage.

DIRECTOR AVRIL HAINES: All right. That was utterly terrifying. I am just—Steve, it is genuinely overwhelming to be honored alongside, first of all, such an extraordinary group of female leaders by an institution that I have so much respect for and whose leadership, in the form of all of you and the many remarkable board members who are here tonight in particular, embodies the best of what I aspire to in public service. It does not feel quite real, to be honest.

I also realize that this award is really more of a testament to the work of the intelligence community that I have the privilege to represent and the many thousands of officers who, day and night around the world, relentlessly work to advance our and our allies’ national security, of which there are many, many women who are just, I think, looking out today at the extraordinary awardees who I am put up against, which I have no business to be, but nevertheless, and are inspired by them.

To the Council and the board, thank you so much for this honor. But even more so, thank you for the years of extraordinary service that all of you have engaged in, based on our common conviction that healthy transatlantic relationship is fundamental to the strength and quality of an international system that is capable of addressing today’s challenges in a way that is consistent with our values.

And Fred, you recently noted in testimony that we’re living in an inflection point in our history where US leadership alongside allies and partners will have global and generational consequences. And I quite agree with that perspective. In our annual threat assessment, we talk about two sets of strategic challenges that are intersecting with each other and existing trends to intensify their national-security implications in today’s world.

First, great powers, rising regional powers, and an evolving array of non-state actors are vying for influence and impact in the international system, including over the standards and rules that will shape the global order for decades to come; and second, challenges that transcend borders, including such issues as climate change and global health security and transnational criminal activity, are intensifying as the planet emerges from the COVID-19 pandemic.

And further compounding this dynamic is the impact that rapidly emerging technologies such as generative AI are having on governance, economies, and communities around the world. And the intersection of these challenges [underscores] the importance of working together with partners and allies, private industry, organizations like the Atlantic Council, which bring us together and raise the standard of our work on a nonpartisan basis with the belief that through civil discourse we can advance our common cause.

And much like you, we in the intelligence community are trying to understand and reflect on the world around us and to provide policymakers and operators with insights that will help them make better decisions. But we know the interactions with those outside our community, who will test our hypotheses, provide alternative perspectives, identify our biases and challenge our underlying assumptions, are absolutely critical to our success.

We know that the success of our mission depends on our ability to work with others across a range of fields and disciplines, and it requires us to engage with diverse voices and perspectives from all backgrounds and walks of life—voices and perspectives that are here tonight—as a hallmark of what the Atlantic Council represents, demonstrating the degree to which you can and do enrich our daily work.

In short, thank you for your tremendous dedication to global cooperation and for bringing together the right people to solve some of the world’s most pressing problems. And thank you again for this incredible honor. And congratulations to the other recipients, all of whom really outclass me. Thank you.

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ADRIENNE ARSHT: It’s really such a pleasure to be here to present this next award to someone whose life and career have been dedicated to the protection and prosperity of each of us here tonight.

Now let me provide a bit of context for you. How and when did I meet General Richardson? I attended the change of command at SOUTHCOM in October of 2021 to celebrate the retirement of the SOUTHCOM commander, Admiral Craig Faller. And thus I met the incoming chairman—commander, Laura Richardson. And as a footnote, Craig Faller has become a distinguished fellow at the Adrienne Arsht Latin America Center and the Scowcroft Center for Strategy and Security here at the Atlantic Council.

General Richardson has served in the United States Army for the past thirty-seven years. She leads by example, showing others—in particular, men—that it’s possible to forge a path many would deem impossible.

From an early age, General Richardson set goals that few would think achievable. She earned her private pilot’s license by the age of—I was told fifteen; John said sixteen—but you get it. Don’t you love it that two honorees were pilots before they could vote?

And if you think she spent all of her time in the air, think again. She was also an accomplished competitive swimmer, and I might say, like Christine Lagarde, who was equally a synchronized swimmer in France.

It’s easy to see why the Army was eager to recruit a person with such gumption, and it certainly makes sense that her accomplishments wouldn’t have stopped there. From commanding an assault helicopter battalion in combat in the 101st Airborne Division, to serving as the chief of Army Legislative Liaison to the US Congress, and now, as a decorated four-star general, she has consistently earned accolades for her contributions.

Obviously, it’s particularly special to me that General Richardson has had such extraordinary accomplishments across South and Central America, and the Caribbean. As you know, that’s my wheelhouse.

In addition to strengthening military relationships with our neighbors to the south, General Richardson has maintained a steadfast US presence in Latin America and the Caribbean by providing COVID-19, climate, and humanitarian crisis relief, focusing on how to impede the illicit drug trade, and prioritizing twenty-first century security challenges.

Now more than ever, General Richardson’s role in working with regional partners across the Americas will be pivotal in building a more secure, equitable, and prosperous future for the region. Simply put, she is a beacon of leadership for women and girls who wonder if a career in the military in a cockpit or in a room often filled only with men is a career worth pursuing. She is an undeniable example of leadership, integrity, and determination.

And now it is my great honor to present the Atlantic Council Distinguished Military Leadership Award to my friend, badass General Laura Richardson.

GENERAL LAURA J. RICHARDSON: Well, good evening and thank you. I’m deeply humbled to be here this evening. And I’m honored to serve this great nation in uniform and to represent the men and women of America’s armed forces.

Adrienne, thank you for introducing me tonight. I, like many others, are so grateful for your example and your life’s work in giving back. Everything you do through the Atlantic Council’s Adrienne Arsht Latin America Center [makes] this world a better place. Thank you for your leadership and your friendship.

To the Atlantic Council, I am enormously grateful to receive this award this evening. A special thank you to Chairman John Rogers and CEO Fred Kempe for your exemplary leadership and the amazing work the Council does day in and day out to provide in-depth analysis on overwhelming, complex issues across our globe.

As the thirty-second commander of the United States Southern Command, I can tell you that we have benefitted immensely from the in-depth analysis for six decades that the Atlantic Council provides. I’m proud to say that US SOUTHCOM will celebrate its sixtieth anniversary on the eleventh of June this year.

Latin America and the Caribbean is a vast region of thirty-one countries with twenty-eight likeminded democracies, and US Southern Command works very closely with their military and public security forces on security cooperation initiatives. All of this is based in human rights, the rule of law, and the professionalization of their forces.

But now this region requires a call to action. All of our partners are struggling to deliver for their people. There is suffering from the devastating impacts from COVID and the 170 million people that were thrown into poverty. This is a vicious cycle of insecurity and instability that transnational criminal organizations create. They are more powerful, they’re violent, and they have diversified their portfolio. They not only traffic drugs; they traffic humans. They conduct illegal mining, illegal logging, deforestation, and illegal fishing. This, combined with climate change, severe droughts, extreme storms, and seven million Venezuelans who have fled into an already-desperate Western Hemisphere, is causing people and families to leave their homes for a better life in historic numbers of irregular migration.

If that weren’t enough, this desperate situation allows the Chinese Communist Party to step in with its Belt and Road Initiative under the disguise of investment, but really to extract the country’s critical infrastructure. With its debt traps of loans, shoddy work, cost overruns, and bribery of senior officials, countries have no other choice other than to turn to the CCP to try and show some sort of progress for their people. And Russia, with its prolific disinformation campaign delivered through Russia Today Español, Sputnik Mundo, teleSUR, with over thirty-one million followers in Latin America, it only further exacerbates the situation, and especially during presidential elections.

But there is a solution to these complex challenges, and it starts with the United States because team USA is committed to democracies across the globe, bringing together all of the elements of national power in a strategic-focused effort at the same time to form team democracy and assist struggling democracies to overcome these challenges and so they don’t have to rely on a communist government such as the CCP for help. It’s diplomatic by having our US ambassadors confirmed and in the seat; economic through our private-sector investment, which we need to bring to bear and showcase; military, which I represent with US Southern Command; and informational by flooding the information space and capturing the narrative with what team democracy is doing for partner democracies in the region.

As you can tell, I’m very passionate about this topic and about this hemisphere. President Biden says that this—that in his National Security Strategy that no region impacts the United States more than the Western Hemisphere. I agree. And this region is our shared neighborhood, and good neighbors take care of each other.

I’m honored to accept this award on behalf of United States Southern Command, and on behalf of the twenty-eight democratic Western Hemisphere military and public security forces who are working overtime every day on the stopwatch to deliver safety and security for their people.

And what a privilege to be recognized tonight alongside such amazing women who have accomplished so much. This group is a representation of how far we have come, but also a reminder of how much more work there is to be done.

Tonight I stand in awe of the courage and the resilience of all Iranian women and girls.

Women, peace, and security is a critical component of successful democracies, and it’s a key part of all the engagements that I do in the hemisphere. We must be intentional about recruitment, retention, training, and advancement of women, because if we take our eye off the ball we risk losing an entire generation.

As we set out to shape the global future together, none of us can do it alone. We need a community like the Atlantic Council and everyone here tonight. I’ve been fortunate to have a great community of support made up of family, friends, and colleagues. I’d like to thank my husband, Jim, who served in the Army for forty years and spent thirty-five of it married to me—our daughter Lauren, and my granddaughter Anna who are here with me tonight for all the love and support they provide.

Thank you, Atlantic Council. And, ladies and gentlemen, I just want to thank everyone and really appreciate everything that the Atlantic Council does, Adrienne Arsht and all of you here this evening. Thank you very much.

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DAVID M. RUBENSTEIN: Over the years I’ve made a number of personnel decisions at Carlyle. I hired a young man out of Harvard Business School, Glenn Youngkin, and he was OK. I don’t know what he did. He decided to leave. I hired another person out of government, Jay Powell. He decided to leave also. I don’t know what he’s doing either. But in some of my personnel decisions, I’ve made some pretty good decisions and some pretty bad decisions. I’ll let you judge whether those decisions were good.

But there was one person I interviewed once who was simultaneously the best personnel decision I made and the worst personnel decision I made, and that was Adena Friedman. And let me explain.

Carlyle was looking for a chief financial officer. And we interviewed a number of people, weren’t happy with any of the people we saw. And then I interviewed Adena Friedman, and in 10 minutes I said excuse me, I called my partners, and said: Stop all the interviewing. I’ve just spent 10 minutes with a person. This is the perfect person. She’s smart, experienced, hardworking, and she really knows finance. And perfect. And so we immediately hired her and she served as our chief financial officer at a period of great growth for our firm, and she helped us go public in 2012.

At that time, I thought she would—you know, if she stayed she would wind up probably running the company someday, and she was extremely talented. But she told me that she had an offer not too long after to go back to the place she’d previously been, Nasdaq, where once she did some interim job she would wind up most likely as the CEO, which she did in 2017. And the worst personnel decision was we let her go, in the sense that we should have said: Become the CEO of Carlyle now. The founders, get rid of us. Put her in. If we put her in, the company would be much more valuable today than it is and would be doing much more successfully than it is.

That was my worst personnel decision, is letting her go back to Nasdaq, because let me tell you what she’s done at Nasdaq. When she took over at Nasdaq, the market capitalization was roughly $11 billion. Now it’s roughly about $28 billion, so it’s up about 146 percent. Their stock is up about 144 percent, or 15 percent a year. And honestly, Carlyle has not gone up 15 percent a year. So many times at night I think about what a mistake I made to not let her be the CEO right away, but she’s done better things and she’s done a terrific job and she has a great future.

I thought she should be the secretary of treasury in the beginning of this administration. I thought and I told a number of people we should finally have a woman be secretary of the treasury.  Finally time. They found another woman who was available. And Adena was not really interested in leaving, and she was really interested in continuing to run Nasdaq. And she’s done a great job there but there are other great things in her future, there’s no doubt, because she’s so smart, talented, knows how to get along with people. And what she’s done for Nasdaq has not only increased its market value, but she’s made it more than an exchange.

Many of you who are not in the business world may think it’s like the New York Stock Exchange. It’s not. It does have an exchange element to it, but it provides enormous amounts of technology to exchanges around the world and it has technology relating to cyber technology and cybersecurity that is really second to none. So she’s really modernized the exchange, she’s made it global, and she made it one of the most-admired companies in the financial service world.

So, as I’ve said to some of you before—perhaps you’ve heard me say this—it is a strange situation that in our country, when we only had—we only had—we had about 3 million people in this country we produced George Washington, Thomas Jefferson, James Madison, John Jay, Alexander Hamilton. Now we have 330 million people in the country. Where are the George Washingtons and the Thomas Jeffersons and the James Madisons? Well, I’ve often thought they were in private equity. But actually, there is one person who is not in private equity who is as good as the people that I just mentioned, and that is Adena Friedman.

Now, wouldn’t it be wonderful if we had a president of the United States someday who would be, you know, a great financial executive, somebody who’s run a company, knows how to get along with people, very smart, respected all around the world? And so someday I think that Adena Friedman will be the first female to be president of the United States, which would be a good thing.

Now, the principal problem with that is she’s about four decades too young. You need to be about seventy-five to eighty to be taken seriously as president. So she’s got a long way to go. But mark my words. At some point we will have a female president, and I think her first name is going to be Adena.

Adena, thank you for everything you’ve done for Carlyle, and thank you for what you’ve done for our financial-service system around the world. Could you please come up and accept the award?

ADENA T. FRIEDMAN: Well, that was unexpected. Good evening, everyone. What a great honor it is to be recognized tonight as a recipient of the Distinguished Leadership Award. I am truly humbled to be among this amazing and incredible group of accomplished and groundbreaking leaders receiving this award tonight.

It’s also an honor to be recognized by the Atlantic Council, an organization that recognizes a fundamental truth about the moment that we’re living in, when, faced with global challenges, we must find global solutions. And this is, in fact, the ethos at Nasdaq. We know that markets are foundational to strong economies and to vibrant entrepreneurial ecosystems. And that’s why we’re committed to using our expertise and our technology to help build trusted market infrastructure all over the world.

In addition to serving our own markets, both in the United States, and we also own many of the markets in the Nordics, with our technology and expertise, our technology powers mission-critical operations at more than 2,300 financial institutions and 130 marketplaces worldwide. Our marketplace clients rely upon us to help them build vibrant capital markets within their countries, which then serve as the underpinning of their economies.

Additionally, our bank clients turn to us to help them eradicate criminal activity within their banking networks with our world-class anti-financial-crime technology solutions. While our technology serves many economies in the established market, such as Switzerland, Japan, Singapore, to name a few, we are very proud in the emerging markets as well. We serve markets in places like Indonesia, Thailand, Chile, just to name a few as well. We have many markets in the emerging world.

And there we can support their efforts to bring in more foreign investment through well-functioning, high-integrity and vibrant capital markets. And that kind of reach and that kind of responsibility is what makes our team at Nasdaq really excited to get up every single day, come to work, and to power markets for the future. It’s also what drives our commitment to becoming the trusted fabric to the global financial system.

So I want to thank all of you here. I want to thank John Rogers. You have been such a supporter and a friend over many years. I also want to thank my husband, Mike. And my best friend Nancy is here tonight. It’s so nice of them to join me for this. And I want to thank all of you for this great recognition.

Thank you very much.

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FREDERICK KEMPE: How exciting it is to be here yet again. Avril Haines, you know, what you represent—thank you so much for mentioning my own testimony to the House Intelligence Committee. It is a historic inflection point. Our leadership as a community is absolutely to how this turns out, but thank you for your leadership.

General Richardson, we heard about a lot of your firsts from Adrienne Arsht, but I want to mention another first, which is this is the first time we’ve had an awardee who has come here with three generations of family: her daughter Lauren, her six-year-old granddaughter Anna. I met them both before we began this evening. You may be very respected—impressed by military leadership, and her leadership, but a six-year-old girl at a dinner like this, any of you who have had children, that is real leadership.

Adena Friedman and David, this is the first time we’ve had a presidential nomination at the Atlantic Council dinner.

I really want to salute our chairman, John Rogers, for his inspiration at the beginning of the evening putting all of this in context, and thank you, as well, for your leadership as chairman of the Atlantic Council.

As John said at the outset of this evening, we provided our greatest honor last year—for the first time ever collectively—to an entire people: the people of Ukraine. President Zelenskyy accepted the award by video, telling the stories—harrowing stories of several individual heroes.

Said Zelenskyy, and I quote, “Behind the courage and wisdom of our people, there are thousands of real stories, names and heroic feats.” Fifteen months later, that Ukrainian courage and historical unity of its democratic allies has held thus far. As we brace for a potentially decisive spring counteroffensive, the response to Russian aggression has been remarkable thus far. But it has thus far also remained insufficient to turn the tide.

At this historic inflection point, we stand with Ukraine.  We are resolute in our commitment to this generational fight for freedom, democracy, national sovereignty, and a global system based on the principles, institutions, and values that the Atlantic Council has defended for more than sixty years.

As we affirm our commitment to Ukraine tonight, and as we head into the dinner break, I am honored that we are joined by a remarkable Ukraine pianist, Myroslav Mykhailenko, who will perform for us as we prepare for our break. He was born in Kyiv and began studying piano at the age of six. In 2017, at age thirteen, he and his family moved to the United States to continue his studies.

In the years since, Myroslav has gone on to receive high honors and critical global acclaim. He will perform Melody, the greatest piece by the Ukrainian composer, Myroslav Skoryk. It was scored for a heavily censored Soviet war film in 1982, and the very piece of music was meant to find a way—and a better way—toward freedom.

So with that, Myroslav, it’s our honor to hear you play this remarkable piece of music.

Watch the performance

FREDERICK KEMPE: We’re about to have a special message regarding the reporter Evan Gershkovich of the Wall Street Journal, who was arrested in Russia just doing his job.

And we have here to give you that message Almar Latour, the CEO of Dow Jones, the publisher of the Wall Street Journal. I’ll say a little bit more about him in a second.

The famed American basketball coach John Wooden, who as you know is a very famous transatlanticist—that’s actually not true, but he is a famous basketball coach—but the famous basketball coach John Wooden once said, quote, “The true test of a man’s character is what he does when no one is watching.” Perhaps it is Almar Latour’s character that I most admire about him. His personal decency, his integrity, his humility, his consistency of devotion to the First Amendment and to our journalistic craft has been unflinching, whether as a young reporter or as one of global journalism’s most influential executives at Dow Jones and the Wall Street Journal.

Oh, yes, I think I should reveal my bias. Almar in 1995 was my intern. He worked as my intern in Brussels when I was the managing editor of the Wall Street Journal Europe.

A prime case study of Almar’s character is how he is now championing the ongoing global response to the imprisonment last month of Evan, the Wall Street Journal reporter in Europe. Almar’s been on the front lines as a reporter. I’ve been on the front lines in various warzones as a reporter. If you’ve done that, you feel even more deeply that you would otherwise about what it takes to defend the First Amendment and then what it takes of all of us to respond in a moment like this.

With great pleasure, and great affection, ladies and gentlemen, welcome to the stage my friend—and also an Atlantic Council Board director—Almar Latour.

ALMAR LATOUR: Well, Fred—I believe Fred made clear one thing: always be nice to the intern. So thank you, Fred, and thank you, Atlantic Council, and thank you, everybody here for your brief attention. And congratulations amazing honorees.

There’s probably no group gathered in one room together that’s as committed to freedom as all of you are. You have dedicated your professional lives to that, and I know many of you have put your actual lives on the line for freedom, so thank you.

Tonight I come to you to talk about a shared commitment to freedom. As Fred mentioned, six weeks ago, our colleague, Wall Street Journal reporter, Evan Gershkovich, was unjustly arrested in Russia. He remains today incarcerated in a Russian prison on false charges of espionage.

Ever since, we are so grateful for the outpouring of support from colleagues and partners around the world; from the US administration, including the White House and State; and from all of you here today. And just today, actually here in Washington, we saw more bipartisan support for Evan as seventy members of Congress wrote a letter to Evan directly condemning the time that was stolen from his life and vowed to continue fighting for his release.

As all of you know, there was no espionage. He was merely doing his job. Evan is an accredited reporter dedicated to explaining the evolving story of Russia to the world. Not only did Russia take away one man’s freedom, but his arrest is also an assault on a broader freedom, and that’s the freedom of the press. And as we all know in this room, there is no free society without free press.

Sadly, Evan’s case is the latest in a long and very disturbing trend. Reporter Austin Tice was kidnapped in Syria almost eleven years ago and remains missing today. More recently, publisher Jimmy Lai remains in prison today in Hong Kong, and just last week, Nicaraguan journalist, Hazel Zamora, was arrested and charged with spreading false news. She now faces up to ten years in prison.

All in all, a record number of journalists—363 of them—were imprisoned in 2022 alone, and that figure has nearly doubled since 2015. So we all know this: journalism is under attack. Like Vladimir Putin, dictators around the world are determined to stamp out independent reporting, and we cannot allow them to succeed.

Evan’s arrest is a symbolic reminder of the fight that we find ourselves in today. It’s autocrats versus the power of the pen; disinformation versus reliable information as the bedrock of free society.

The world is watching. It’s watching how the US and democracies everywhere respond to this assault on the press. The world is watching how we, in this room, are responding.

As defenders of freedom in this room, we have to form a united front. We cannot rest until press freedom is secured. We will not rest until Evan’s freedom is secured. He and others like him need to come home now.

The fight for their freedom ultimately is a fight for all of ours. So please keep Evan at the forefront of your conversations and do what you can in your position of responsibility to make sure that the strongmen the world over know that this room will not let freedom whimper away.

Thank you again for all that you are doing every single day, and God bless.

MR. KEMPE: Thank you for that, Almar. It’s an incredibly important message. There’s so much we have to do on the front lines of freedom now. I know it surprised a lot of you who know me well that Almar was my intern since we look pretty much the same age.

But thank you all for a remarkable first half of the evening. As always, thank you to Luke Frazier and the American Pops Orchestra. Big round of applause, please.  And also to the remarkable Robert Pullen and Nouveau Productions for the staging, and to the breathtaking Atlantic Council team that put all this together.

Thanks as well to Markus Dohle of Penguin Random House for the books you will see in your gift bags as you leave; Markus Dohle, a member of our International Advisory Board. He always gets a big round of applause from the crowd here.  Don’t forget to take your bags. The books are always one of the highlights here.

Most of all, thank you for gathering tonight as a community of common cause—550 of you from more than forty countries, including former heads of state, cabinet ministers, members of Congress, CEOs and business executives, civil society, media leaders, artists, and previous Atlantic Council honorees, including Adrienne Arsht, Lord George Robertson and Luis Alberto Moreno, who are all here this evening.

Thank you for being here.

It was nearly forty-three years ago this summer that I arrived in Poland at the beginning of the Solidarity strikes as a young correspondent, as a very young correspondent, covering a story that would change Europe and I believe would also change the world for the better.

I was sent to Poland by my employer at the time, Newsweek Magazine, to cover rapidly spreading national labor unrest of the Solidarity movement that united not only ten million members, but all of that country of thirty-nine million, and then millions more across the entire Soviet bloc that were looking for sparks of freedom and hope to change a long period of oppression.

I only came to appreciate the freedoms that were my American birthright, as the son of German immigrants, when I witnessed close up an entire country that was risking everything—their freedom, their jobs, their safety—to attain the freedoms that I had taken for granted. It was a time for me, at a very young age, of dark foreboding, fear of Soviet invasion and even worse oppression, but also it was a time of opportunity and ultimately would bring about the collapse of one of the most oppressive systems history has seen.

I feel that same sense of foreboding and opportunity today as we watch Putin’s war, Russia’s war, in Ukraine. I also feel a similar sense of gratitude that I felt then to the Polish people to the Ukrainian people to remind me once again of what it takes to defend freedoms we take for granted.

Yet, in Poland the trick was stopping an invasion and then ultimately attaining freedom that was not theirs. In Ukraine, it’s defeating the invader that is trying to rob the freedom that has been spreading and to reverse a period of hope that was set off by the triumph at the end of the Cold War. It is a historic inflection point of breathtaking significance.

Putin’s war in Ukraine has shone a bright light on the fragility of the post-World War II order that has sustained peace and stability on the global stage for nearly eight decades. Against that backdrop, China’s rise as a global superpower poses an even more significant challenge to that world order, which has guided our community for decades. It’s a time for common cause—not for war, not for violence; for common cause to reestablish our belief in our values and what it takes to defend them, and then to adjust to a new period of time.

Some people say we have to separate the war in Ukraine from China and China’s challenge. I think the challenges are inseparable. This is not a time for half-measures. The future of the global order is at stake. Its institutions, its principles, its values, as imperfect as they are, are worth defending.

And that is what motivates the Atlantic Council and our mission and our purpose of, quote, “shaping the global future together with our partners and allies.” And I hope that’s why many of you are here tonight.

These headwinds have produced a stronger, more relevant, and more global Atlantic Council, as our chairman, John Rogers, said earlier this evening. So, first and foremost—and this is the time of the night where we get to salute all of you who are participating in this community.

I would like to ask the following groups to stand. Atlantic Council board members, please stand. Atlantic Council international board members, please stand, and International Advisory Board members, please stand. And Atlantic Council staff, please stand. Please join me in applauding this remarkable group.  God, I’m so lucky to have my job.

As is our tradition, I also want to salute tonight’s co-chairs who are in attendance and whose generosity allows us to do our work. Please stand as I call your names, but I also ask the audience to hold its applause until I conclude.

Adrienne Arsht; John F.W. Rogers; Airbus, represented by Jeff Knittel; Blackstone Charitable Foundation; Bradley, represented by Jon Skeeters and Karl Hopkins; Georgetown Entertainment, represented by Franco Nuschese; Chevron, represented by Colin Parfitt…; Ahmed Charai; Edelman, represented by Gurpreet Brar…; FedEx, represented by Gina Adams; Hunt Consolidated, represented by Paul Schulze; Kirkland & Ellis; John and Susan Klein; KNDS, makers of the Leopard, represented by Bob Schultz and Ron Phillips; Krull+, represented by Alexander Mirtchev; Leonardo DRS, represented by William Lynn; Mapa…; William Marron; Nasdaq, represented by Adena Friedman; OneAmerica Bank, represented by George Lund; Ahmet Oren; Penguin Random House, represented by Markus Dohle; Charles O. Rossotti; SAIC, represented by Nazzic Keene and John Bonsell; Thales, represented by Alan Pellegrini; a round of applause, please, to everyone.

And finally, please applaud yourselves, 550 people from forty-one countries, for being here at this historic time to salute these remarkable honorees and to support our work. Thank you so much to all of you.

With that, ladies and gentlemen, please turn to your screens again for the next element of our program, our Distinguished International Leadership Award.

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SYLVIA MATHEWS BURWELL: Thank you. It’s an honor to be here. I am particularly proud to celebrate the first all-women slate of Atlantic Council Distinguished Leadership Awardees.

I have had the honor of knowing Dr. Ngozi Okonjo-Iweala for over two decades. We first crossed paths when she was the finance minister of Nigeria and I was working at the Bill and Melinda Gates Foundation, and we collaborated to improve health and increase economic well-being on the continent of Africa and beyond. And since then, we’ve had the opportunity to work together on many other economic and health issues. And over the course of our friendship, I have been lucky to bear witness to her dedication to service, her incredible range of abilities and talents, and her warmth as a human being.

Ngozi and I recently sat down together for a discussion at AU School of International Service, and during our conversation she reflected on her childhood growing up in Nigeria raised in her early years by a grandmother who taught her that our worth in life is defined by how we serve our community. She shared how this belief has always led her to ask this one simple question before taking on a new task: How will this help others?

Ngozi has carried that commitment to community through her time when she first came to the United States as a teenager to go to school through to her work as a two-time finance minister in Nigeria and foreign minister—the first female in both positions.

Her twenty-five years of impact and record-breaking at the World Bank included the $49-billion International Development Association replenishment of concessional resources to assist poor countries, her contributions to United Nations and Group of Twenty commissions as chair of the Board of Gavi, her many academic achievements, and her role as a mother and grandmother, and now as the director general of the World Trade Organization.

As the leader of the WTO, she is committed to ensuring that the preeminent global trade organization works to enhance living standards, to help create employment, and support sustainable development. She is a global visionary who believes that trade can help women and other marginalized populations beat inequality and that the WTO has an important role in increasing economic wellbeing for all.

It is truly my honor to present my friend, Dr. Ngozi Okonjo-Iweala, with the Atlantic Council’s 2023 Distinguished International Leadership Award. Welcome.

NGOZI OKONJO-IWEALA: Well, good evening, everyone. And thank you, Sylvia. That was really beautiful. You yourself, you are a prime example of the kind of leader that women and girls look up to.

I want to start by thanking my family, because I wouldn’t be here today without their love and support. And I have today my sister Dr. Njide Udochi, my son Uchechi Iweala, and my indefatigable adviser Nicole Mensa. Thank you for being here with me today.

Chairman Rogers, President Kempe, dear Fred, thank you so much for this recognition by the Atlantic Council. Thank you for the work you do to make the world a better place. And thank you in particular for the work you are doing in Africa with Rama Yade, trying to look at the glass half full rather than the glass half empty, at the innovation, the creativity and the wellspring of knowledge in the continent.

Excellencies, ladies and gentlemen, it’s wonderful to be here tonight. And when I see familiar faces like Luis Alberto, like Melanne, it really makes me feel at home. Thank you for this immense honor. I’m humbled to share this podium with the sterling cast of women that we’re seeing today.

I don’t know if Avril Haines remembers, but when I was competing for the job of WTO, I had the occasion to ask her for advice. I was introduced to her by someone. And she was absolutely supportive and helpful. Thank you.

We live in what feels like an era of unending crises. When I talk to young people, they’re on edge. Instead of hope, there is fear—fear for a future of uncertain jobs, climate crisis and geopolitical tensions that could escalate into catastrophe.

In this kind of world, we all need to sit up and take action. We must believe that there is still reason and room for hope, that there’s a more prosperous, more sustainable future for people everywhere. In a world of doom and gloom, we must remember the positives.

So my message to you this evening is that, in an uncertain world, we need multilateralism more than ever. We need places where nations can come together and truly interact, even when they disagree—in fact, especially when they disagree. The World Trade Organization is one such arena, a platform where nations, including the United States and China, are able to engage on the trading relationships that deliver benefits to and connect the lives of billions of people each day.

We need to shore up the multilateral institutions we have instead of taking for granted the services they provide. Yes, of course, these multilateral institutions, WTO included, need to be reformed, to be fit for purpose for the twenty-first century. But we must bear in mind the good they’ve done for three-quarters of a century. This cannot be wished away.

The WTO and its predecessor, the General Agreement on Tariffs and Trade, GATT, helped deliver seventy-five years of what, by historic standards, has been an era of peace and unprecedented prosperity. Over a billion people were lifted out of poverty, not only in China but elsewhere. Trade helped deliver decades of disinflation for central banks and brought a wider selection of more affordable goods to consumers in the US and around the world.

Yes, there were job losses, but not all were due to trade. Technology played a large part, as did the failure in some countries to deploy active labor-market and social policies on the necessary scale to deal with dislocation.

At the WTO, some of our biggest successes go almost unnoticed. For instance, our Information Technology Agreement, which is very popular with the business community, especially the semiconductor industry, has eliminated tariffs on what in 2021 was close to three-trillion-dollars worth of trade in products like service, manufacturing equipment, computers and mobile phones. The physical goods and capital investment that power the digital economy would be significantly more expensive without it.

So if we let multilateral fora wither, if we fail to preserve what they are doing well and improve what needs improving, the costs will be high. From our trade perspective, some of these costs are quantifiable. For instance, WTO economists estimate that if the world economy decouples into two isolated trading blocs, it would reduce long-term global GDP by at least 5 percent from the current trend. That’s a much bigger hit to output than what advanced economies sustained after the global financial crisis. And we know how that played out. Poor countries and their development aspirations would be hit hardest.

So my message to you today is to support multilateralism. Support strategic interdependence, not overdependence. Back the WTO to complete the reforms it’s now undertaken to be fit for the twenty-first century. And the multilateral trading system, underpinned by a reformed WTO, can continue to deliver for the world. I want to thank the members of the WTO for their work, my staff in Geneva, and all of you, for making this possible today. Thank you. Thank you so much from the heart.

Watch the remarks

MELANNE VERVEER: What a glorious celebration this is this evening of women’s leadership. Thank you, Atlantic Council. And congratulations to all of the honorees.

I also want to thank the Atlantic Council for the impactful work the Council does every single day and the difference it makes around the world. And one of the many places in the world our focus needs to be is on Iran.

Last September a young Iranian Kurdish woman, Mahsa Jina Amini, died after being held by the brutal morality police for, in their eyes, wearing the mandatory hijab improperly. Her death sparked an unprecedented protest movement across Iran that continues to this day. Young women were on the front lines of the massive peaceful demonstrations, and they were quickly joined by students and university communities, by men and women of all ages from all walks of life. They joined together for an end to the repressive regime and its dictatorial rule.

They have been willing to risk their lives for a cause bigger than themselves. Thousands of protestors have been detained. School girls have been poisoned for their activism. Many others have been assaulted, imprisoned and killed, and executions are increasing.

The women of Iran continue to be catalysts for change. In fact, they have been on the front lines for decades. Their demand for woman, life, and freedom cannot be extinguished and has challenged the very foundation of the regime.

We stand in solidarity with these brave and resilient women, and many around the globe have been doing what they can to raise their voices. Some, for example, have recently joined the call to remove Iran from the UN Commission on the Status of Women given the regime’s draconian restrictions on women’s rights and imposing egregious limits on their freedom and human rights. Thanks to a worldwide effort, the UN vote was successful.

And tonight we stand together with the women and girls of Iran. And to accept this award on their behalf are courageous women leaders in their own right.

Azam Jangravi is a human rights advocate and former political prisoner. She is primarily known for being one of the so-called Girls of the Revolution Street during the 2017 Iranian protests against the compulsory hijab.

Dr. Mehrangiz Kar is recognized globally for her defense of women’s rights and human rights in Iran. She is truly a giant in her field, a lawyer, widely published author, scholar, and activist. And she, too, has been persecuted by the Iranian regime for her efforts to promote equality and to end discrimination against women.

And Nazanin Nour, an Iranian American who has used her platform as an actor and writer to advocate for—advocate for human rights in Iran. And she has been a champion for women and girls there, active on social media as well. And in a recent post, she wrote: I know there is an absurd and depressing amount of terrible things happening in the world at any given moment, but please don’t leave the Iranian people to fight this regime alone. And you will hear from her shortly.

May I ask the women to please come up on the stage?

NAZANIN NOUR: Good evening. Dr. Afkhami was not able to join us this evening, as she is a bit under the weather. However, I would like to read to you her acceptance remarks on our collective behalf.

Thank you to the Atlantic Council for the tremendous honor of this Leadership Award representing the women and girls of Iran who are fighting for freedom and equality. Distinguished guests, it is a privilege for me to accept this award on behalf of the millions of mothers, sisters, and daughters in Iran who, at great personal risk, are pressing for a brighter future.

The seeds of Iranian women’s liberation were planted over a hundred years ago. In 1906, Iranian women took an active part in shaping the constitutional revolution that transformed governance and political participation in the country and in the region. Over the next seven decades, Iranian women helped move Iran to a democratic, participatory system that was inclusive of religious, political, socioeconomic, and other minorities.

In 1963, Iranian women—many of whom were choosing to delay marriage, enter a profession, even attend college—were granted the right to vote. In 1966, Iranian women successfully launched one of the most influential and powerful national women’s organizations in the world. The Women’s Organization of Iran would influence Iran’s leadership at the 1968 UN International Human Rights Conference and the establishment of INSTRAW, the UN’s Research and Training Institute for the Advancement of Women.

In 1975, Iran passed the Family Protection Law, which remains to this day one of the most progressive and comprehensive in the Middle East and in much of the world. Among its reforms were women’s rights to divorce, guardianship of their children, and childcare for working women, among others.

In 1979, exactly two weeks after Khomeini came to power, his very first decree was to nullify the Family Protection Law. He then also banned women from many jobs and from obtaining college degrees in over forty disciplines. He banned contraceptives and brought back polygamy, forced veiling, and segregation of women and men.

To this day, the clerical leadership of the Islamic Republic has hinged on the repression of women. Time and again, the regime’s response to women’s calls for greater freedom has been swift and brutal. But the extraordinary women of Iran have persevered. From the One Million Signatures campaign in 2006, where activists went door to door gathering signatures in favor of women’s equality, to later pushes for employment opportunities and fair elections, women have been in the vanguard demanding change.

Sparked this time by the senseless death of Mahsa Jina Amini, calls for women, life, freedom are still blazing across the nation. Today, women and men are marching side by side in support of a revolution that was launched by women and girls.

And I’m going to pause right here for a second. I’m going to go off-script because of a recent development yesterday, and I would like to inform the room of this, that the Islamic Republic was appointed chair of the United Nations Human Rights Council Social Forum. This year’s theme is technology and the promotion of human rights.

This comes in the midst of the United Nations Human Rights Council fact-finding mission where they’re investigating human rights abuses and atrocities committed by the Islamic Republic against their own people from September of 2022, when this revolution began. It comes amongst internet shutdowns and throttling of internet so that the world cannot see the atrocities that are being committed by the Islamic Republic. It comes as the Islamic Republic uses technology to surveil women using facial recognition technology, to send fines to anybody that is seen wearing improper hijab. This comes among two young men, Yousef Mehrad and Sadrollah Fazeli Zare, who were executed on charges of blasphemy and apostasy for using technology and a social media app to discuss religion and atheism.

I respectfully implore everybody in this room to use platforms that you have to publicly condemn the UN’s position in appointing the Islamic Republic to this Social Forum. The Islamic Republic and human rights is an oxymoron. And it’s a slap in the face to the people of Iran that have been brutalized, oppressed, and tortured for them to sit on this forum.

This is the first revolution in history to be initiated by women and supported by men. It is the result of the work of the thoughtful, dedicated women who a century ago were open to learning from each other and from the rest of the world about rights and freedoms and how to achieve them. Their history shows a worldview that is worthy of the fact that women are half of the world’s population, and that they train and raise the children of both genders. Their unique success is based on a holistic approach that reflects the reality of the lives of the majority of the people of the world, and that allows for dialogue and interactive decision-making. The success of this revolution, which is modern in its goal and in its language, slogans, and approach, promises that with the expansion of communications technology Iranian women’s latest struggle finally brings the promise of a truly global movement, which at this moment is in dire need of collective action. And we can all agree on that.

As the protests in Iran continue, from a distance one day’s events can be hard to distinguish from those of the next. It is easy for the sacrifices of the protesters to disappear from the headlines. On their behalf and on behalf of individuals fighting for freedom everywhere, including here in the United States, I implore you to continue your solidarity. I implore you to support democracy. I implore you to stay the course on equal rights for all. In doing so, you fuel the memory of Mahsa Jina Amini and the continued dream of freedom and equality for Iranian women and girls. Thank you.

Watch the remarks

FREDERICK KEMPE: Thank you, Melanne, for that introduction. Thank you, Azam; thank you, Dr. Kar; thank you, Nazanin, for that wonderful message.

A couple of you have come up to me tonight and said: So, why did the Atlantic Council decide to do an all-women honoree cast for the first time in its history? We have a wide-ranging nomination process—many of you are involved in it. We have a selection committee that’s very discerning. The simple answer is it just turned out that way. These were the best leaders we could possibly identify.

Thank you for the honorees for inspiring us. Thank you for all of you for supporting us.

Now the breathtaking Nova Payton, internationally acclaimed recording artist, Broadway star, will bring us home. Please listen to her every note.

Watch the performance

The post Full transcript: 2023 Distinguished Leadership Awards celebrate the game-changing role of women in the world appeared first on Atlantic Council.

On May 9, Markus Garlauskas, Emma Verges, and Global Energy Center Fellow Joseph Webster were featured in RealClear Defense for their New Atlanticist piece on PRC support vital to Putin’s war in Ukraine. 

Staff

Markus Garlauskas

Director

Indo-Pacific Security Initiative Scowcroft Center for Strategy and Security

Crisis Management Indo-Pacific

Staff

Joseph Webster

Senior Fellow

Global Energy Center

Central Asia China

Staff

Emma C. Verges

Program Assistant

Indo-Pacific Security Initiative Scowcroft Center for Strategy and Security

China Chinese

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It will not be easy. After 15 months of conflict, the G7 have implemented nearly all the economic measures against Russia that garnered consensus within the group. The options they have left will be increasingly contentious and will impose higher costs on the G7 countries’ domestic economies. To understand how the debate over a total export ban will play out, it’s important to start with an analysis of what G7 economies still export to Russia.

The G7’s remaining exports to Russia

Since Russia’s invasion of Ukraine last year, the G7 has implemented the largest sanctions and export controls regime ever imposed on a major economy. Exports from the G7 to Russia have fallen by around $5.7 billion a month from the pre-invasion average, resulting in a 57 percent decline in overall exports. This has led to a substantial slowdown in trade of critical goods such as machinery and mechanical appliances (64.6 percent decline in exports), cars and trucks (77.4 percent decline in exports) and electrical machinery (78.7 percent decline in exports). Aircraft exports have been especially impacted following sweeping sanctions and controls placed on products used by the aviation and space industry with G7 exports declining some 98.6 percent and cutting off an estimated $4.03B in exports. 

However, G7 members, led by the EU, continue to export around $4.7 billion a month to Russia. The biggest export categories since March 2022 are pharmaceuticals, machinery, food, and chemicals. 

The economic impact of an export ban

From March 2022 to Dec 2022, G7 goods exports totaled around $46.8 billion. US officials hope to change this. Frustrated with the existing regime, which Washington views as too porous and which allows Moscow to continue to import western technology, the US has proposed a total export ban with exemptions primarily for food and medical products. If implemented as proposed, such a restriction could further reduce G7 exports to Russia by roughly 67 percent to just $1.5B a month.

For the US, the trade-offs of an export ban are minimal. The $80 million in monthly goods exports it continues to provide Russia are a rounding error for Washington. However, for the EU and Japan, which respectively account for 89 percent and 7 percent of remaining G7 exports to Russia, such an ask may be a step too far. Both government have already signaled such a proposal “may not be realistic.”  

For Japan, pushback stems from fears that Moscow may retaliate by cutting it off from energy imports. Despite an initial drop in Russian liquified natural gas (LNG) imports in the immediate aftermath of the invasion, Japanese imports have recovered with Russian LNG making up an average of 7.8 percent of overall imports—only a slight drop from the pre-invasion average of 9.1 percent. 

This is not the first time Japan’s reliance on Russian LNG exports have thwarted the full implementation of a G7 policy measure. Towards the end of last year, Tokyo was able to secure an exemption from the G7’s oil price cap to ensure Russia could still transport a small quantity of crude oil which is extracted alongside the natural gas it exports to Japan. Japanese resistance to G7 measures is not without reason. The resource-poor nation has the most vulnerable energy security environment of any G7 nation. Japan’s primary energy self-sufficiency rate is just 11 percent, far lower than the US (106 percent), Canada (179 percent), the UK (75 percent), France (55 percent), and even Germany (35 percent). LNG, which provided around 36 percent of the country’s electricity in 2021, is crucial in ensuring its businesses and consumers have the energy they need. However, Japan’s high external energy reliance cannot fully excuse its continued reliance on Russian LNG. Germany, for example, entered the conflict with a significantly higher reliance on Russian LNG but was able to rapidly scale back its imports, dropping them to zero by September 2022.

How the US can respond to hesitance from the G7   

In response to EU and Japanese hesitation, the US may need to scale back its ambitions or offer support that would help minimize the impact of an export ban on the EU and Japanese economies. One option would be to activate the US Export-Import Bank to open access to a line of export credit insurance to impacted European businesses. The insurance line would compensate for the costs European businesses face to find alternative buyers. The US has previously employed similar measures to help Lithuania after it faced sudden export disruptions. 

That still may not be enough—especially for Japan, which is more concerned over retaliation. Instead, Tokyo may agree in name to such a ban conditional on Japan receiving broad exemptions, similar to its approach to the G7 oil price cap.  

The consideration of an export ban speaks to the broader challenge G7 leaders will face in Hiroshima. Leaders have already implemented nearly all the consensus economic measures designed to reduce the Russian military’s fighting capabilities. There is a reason the options left haven’t been undertaken; they are problematic and will strain the G7’s fragile consensus on Russia.

Niels Graham is an Assistant Director with the Atlantic Council GeoEconomics Center focusing on US trade policy and the Chinese economy.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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At the same time, the African continent faces a wide infrastructure investment gap, estimated at more than one hundred billion dollars annually, according to the African Development Bank.

This gap affects both the continent’s global competitiveness and many Africans’ poor living conditions. Yet Africa has great potential, with an economic-growth rate that is expected to be surpass the global average in 2023 and 2024; high renewable-energy potential; and young, dynamic, and innovative populations.

To turn Africa’s potential into reality, investing billions—from African governments, the international community, and the private sector—in infrastructure will be crucial.

Global Gateway, the European Union’s (EU) answer to China’s Belt and Road Initiative, plans to mobilize up to 300 billion euros (about $331 billion) in public and private investments by 2027, with half designated for African countries. Even though Global Gateway is providing the billions that Africa needs to harness its potential and close its infrastructure gap, success is not guaranteed. For it to be a success, several conditions must be met.

A priority partnership

Global Gateway’s prioritization of Africa is quite plain to see, even beyond the fact that half of the planned funds are going toward the continent. Global Gateway is embedded in the renewed EU-Africa relationship. In February 2022, European Commission President Ursula von der Leyen and Senegalese President Macky Sall, who was then the African Union (AU) president, announced that the Africa-Europe program would be the very first regional plan under Global Gateway.

This announcement took place a few days before the EU-AU summit that set out to establish a renewed EU-Africa relationship based on a balanced and well-defined appreciation of interests and responsibilities of both partners. Going into the summit, the parties expected a “renewed, modernized, and more action-oriented partnership.” Global Gateway, as a partnership itself, checks those boxes.

For the EU, it is crucial to be perceived by African partners as delivering on promises made at the EU-AU summit. With Global Gateway, it seems as though the EU is making another effort to be a reliable partner that makes commitments that have concrete effects on the ground. That will be important for the EU as China and Russia continue to present competing narratives and models of international order, political organization, and values.

Aligning with Africa’s 2063 vision

For Global Gateway’s projects to have an impact and to live up to the promises of the renewed EU-AU partnership, they have to align with the goals and priorities of the AU’s Agenda 2063. The agenda, adopted in 2015, aims to develop infrastructure, improve energy access, build an integrated network of transport infrastructure, and connect the African continent to the rest of the world.

So far, Global Gateway’s initial projects seem in line with the Agenda. The EU intends to invest in particular in energy, digital, and transportation infrastructure—doing so is a real emergency in Africa. The bloc also intends to accelerate the green transition, bolster health systems, and support education and training. Projects that tackle these issues include the construction of a EurAfrica Gateway Cable, a submarine fiber-optic cable connecting Africa with the EU; a Strategic Transport Corridor between Cabo Verde, Senegal, and the Ivory Coast; and solar power plants in Niger. Global Gateway also aims to boost youth entrepreneurship by financing the launch of high-potential startups and to more generally create jobs for Africa’s growing youth population. The VaMoz Digital program, for example, plans to invest in digital literacy and skills for youth in Mozambique.

How China compares

Chinese investment always looms large, especially considering that China has mobilized over two trillion dollars for almost four thousand investment and construction projects abroad since 2005. Overall, China is far ahead of the EU in overseas investments.

But looking only at Africa, and more especially at Sub-Saharan Africa, the picture is not so clear. China signed over $303 billion in investments and construction contracts between 2006 to 2020. From this perspective, the EU’s 150 billion euros ($165 billion) over the course of only five years is certainly significant, especially considering that the investments made by EU member states outside of the Global Gateway initiative should also be added to this amount in totaling the EU’s contributions.

To reach its ambitious spending goals, the EU will need to rely on a range of financial instruments such as grants, capital investments, and guarantees; it will need to mobilize, among other tools, the European Fund for Sustainable Development+ (which is overseen by a financial tool called Global Europe: Neighbourhood, Development and International Cooperation Instrument) as well as the European Investment Bank.

While China gets called out for its predatory loan practices—and especially its controversial resource-backed lending model—and for neglecting environmental health or human rights in its investments, Global Gateway aims to comply with the highest environmental and social standards and to respect the EU’s democratic values. The program is rooted in EU values, and especially transparency, sustainability, and good governance.

While the program is rooted in EU values, it is not just a one-sided European idea or an investment project; it is an investment in a relationship. In this regard, Global Gateway differs from traditional development policies by placing a greater focus on embedding the project in a political and strategic relationship built on partnership principles. The initiative aims to help African partners build quality and sustainable infrastructure to strengthen their resilience and their strategic autonomy in the energy, technological, health and economic fields; in doing so, it could be the foundation of long-term African growth.

Conditions for success

Critics of Global Gateway argue that the initiative has overly long timelines, that the EU communicates poorly about it, and that the goals are difficult to discern; some critics also say that some of the funding was already mobilized for existing projects and that, in the end, the initiative amounts to no more than rebranding.

It is partly true that the EU often has difficulties in explaining its programs and initiatives, often opting for administrative jargon. It is also indeed the case that Global Gateway serves as an umbrella for some existing projects—which is understandable given that it takes more than a year to launch such infrastructure projects. However, Global Gateway scales up existing major infrastructure projects, speeds up their implementation, and provides a much-needed political impetus to unlock greater funding. African partners should take advantage of this to close the infrastructure gap in a sustainable way.

For Global Gateway to succeed, European and African partners must do the following:

• The EU must deliver on making the Global Gateway a renewed, and action-oriented partnership in line with the AU-EU summit’s objectives. The EU should nurture its relationship with African countries by delivering concrete and ambitious projects that contribute to Africa’s long-term economic growth. Both sides should recognize that this is not just a business issue: It is a political one.
• African partners must seize Global Gateway to close the continent’s infrastructure gap. But as it will be important to mobilize all investment needed—and to not come up short on funds—African partners should be more proactive in identifying their needs and on broadcasting successes to maintain the political momentum for the initiative.
• European and African partners should ensure that each project is compliant with the highest environmental and social-norms standards so that they contribute to green and resilient growth in Africa. Robust reporting will be crucial. Global Gateway projects have to be seen as an opportunity to reconcile economic development with climate-change mitigation and adaptation.
• Since Global Gateway is designed to leverage private fundings, African partners should build on this opportunity—in which the private sector is already investing in Africa—to unlock even more private-sector financing, beyond the initiative. African partners should use these investments to supplement the financing of green-growth and resilience projects.

Emilie Bel is a nonresident fellow with the Atlantic Council’s Africa Center and deputy to the director of public affairs and head of international affairs at the French Insurance Federation.

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China reopened its borders in the first quarter of 2023 and rolled out the rhetorical welcome mat for foreign investors. This included pledges to promote foreign investment and imports, restoration of suspended long-term visas, and high-level visits by Chinese leaders abroad and foreign leaders in China. But an aggressive public campaign to allay concerns about the direction of China’s economy has not been underpinned by a convincing shift in policy. The restructuring plan that emerged from the “Two Sessions” meetings in March did not reassure the private sector, nor did it suggest that Beijing is poised to tackle the root causes of its macroeconomic malaise.

Meanwhile, pressure on foreign companies (Bain & Company, Mintz Group, Deloitte, Micron and others) further dampens business confidence. Heightened geopolitical tensions with the US also cloud the picture. Turning a cold shoulder to perceived American hostility, Beijing sought to warm relations with Europe: it had success with French President Macron, but faced setbacks at the European Commission, including a universally condemned comment by China’s ambassador to France that some European nations aren’t sovereign.

The bottom-line assessment for Q1 2023 finds that Chinese authorities were active in three of the six economic clusters that make up the China Pathfinder analytical framework: financial system development, competition policy, and portfolio investment. There were fewer developments in the innovation, trade, and direct investment clusters. In assessing whether China’s economic system moved toward or away from market economy norms in Q1, our analysis shows a negative picture. 

At the 2023 Two Sessions, the government released a major restructuring plan, involving the establishment of new departments, consolidation of responsibilities, and an overhaul of the financial system. While the extensive nature of this restructuring may suggest the government is focused on maximizing efficiency in the economy to boost growth, the reality is more complex and less positive. Rather than implementing policies that address systemic problems in the country’s economy—such as the fragile property sector, the loss of consumer and business confidence following destabilizing zero-COVID measures and unpredictable government intervention in different sectors, and high levels of local government debt—the restructuring plan overall does not enhance transparency and only increases Party control within the bureaucratic system.  

Restructuring plan centralizes authority and consolidates party power in China’s bureaucratic system

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Take two

February’s Windsor Framework breakthrough to reform customs arrangements for Northern Ireland has created an opening to put the EU-UK relationship on a much-improved footing. With fresh seriousness from Prime Minister Rishi Sunak and a willingness from EU negotiators to agree to significant concessions, rhetorical mudpies slung across the Channel were replaced by beaming photo ops and tea with the king when European Commission President Ursula von der Leyen visited London to finalize the framework and mark a new chapter in UK-EU relations.

The agreement has already led to progress in the relationship. In March, London and Brussels restarted talks on the United Kingdom’s reentry into the Horizon Europe program, which dishes out billions for research and innovation projects (although difficulties in negotiations remain).

Even before the Windsor Framework was finalized, there were hints of what a productive relationship could look like. The EU granted the United Kingdom access to the Permanent Structured Cooperation project on military mobility in November, and Britain was represented at the first meeting of the still ambiguously defined European Political Community (EPC) in October. (The United Kingdom’s refreshed Integrated Review of national security and international policy in March also endorsed the EPC and pledged that the country will host an EPC meeting next year.) The United Kingdom also strengthened ties to EU members such as Poland and the Baltic states through security assistance and announced a partnership with Italy (and Japan) on a fighter jet project. Most notably, Sunak and French President Emmanuel Macron found bonhomie and agreed to cooperate on migration in the English Channel. Now with Brexit on the road to resolution, the focus should be turning this collaboration into a real partnership.

Friendship by necessity

The United Kingdom may no longer be a member of the EU, but it is still a part of Europe. And the urgency is great. Policymakers in Brussels should see in London a partner that largely shares its outlook and embrace the United Kingdom’s role in Europe’s security. Strategists in London should see their EU neighbor not just as a powerful trading bloc but an actor growing its geopolitical stature.

Put simply, London and Brussels need each other. By the House of Commons’ estimate, 42 percent of total UK exports went to the EU and 48 percent of imports came from the EU in 2022. For the EU, the United Kingdom is still one of the largest economies in Europe and a financial hub with deep access to capital markets despite its deep crisis in confidence. On defense, the United Kingdom is Ukraine’s single largest military supporter in Europe, second only to the United States worldwide. London has also promised increased defense spending in contrast to improving but struggling defense efforts elsewhere in Europe.

Beyond Ukraine lies China. Both London and Brussels are focused on the Indo-Pacific and working on how to manage the relationship with Beijing as competition moves closer to confrontation—especially between Washington and Beijing. The United Kingdom has the lead with its Indo-Pacific tilt, and Europe is grappling with—but inching forward on—a new strategy and approach toward China and Taiwan.

Russia’s war in Ukraine, growing confrontation with China, and a rewiring of the global economy all serve as important reminders that the United Kingdom’s relation to the EU almost seems like a footnote when you take a step back. The affronts, challenges, and challengers to the world system do not seem to differentiate much between the two. A stasis of skepticism—or, at worst, estrangement—carries costly penalties for both sides of the Channel. As neighbors, global powers, and proponents of liberal governance in an increasingly geopolitical world, a productive relationship between London and Brussels becomes a necessity, not a luxury.

Areas of partnership

This is not to suggest that UK-EU policies will immediately fully align. There remain very real policy differences, and a reentry into the EU Single Market or Customs Union, let alone the bloc itself, is not in the cards. That should not stop policymakers from aspiring to a relationship based on shared interests. In practice, that means identifying areas of cooperation that are ambitious yet realistic across two priority areas: Defense and economics.

The EU has been bootstrapping its defense and security policies since the Russian invasion of Ukraine but is woefully underprepared for the geopolitical climate in which it finds itself. The United Kingdom can help. Options include:

1. Joint patrols in the Indo-Pacific: Building on EU foreign policy chief Josep Borrell’s call for European fleets to patrol the Taiwan Strait, policymakers could coordinate or launch joint patrols in the Indo-Pacific. Borrell’s goal is to show Europe’s seriousness, yet there are only a handful of EU members equipped to do what Borrell proposes. Coordinating with the United Kingdom would show that Britain and the EU remain united in their resolve. Such a move would build on the United Kingdom’s leadership on the Indo-Pacific, provide greater credibility to Europe’s own Indo-Pacific plans, and show that European unity indeed extends beyond the continent.
2. Britain in defense projects: If European sovereignty purists can hold their noses, the United Kingdom would be an asset in European defense projects starting with the EU’s recent ammunition procurement project. It would make practical sense as the EU struggles to build homegrown ammunition supplies and as the United Kingdom is one of the world’s largest arms exporters. The United Kingdom’s participation would be difficult politically as the current negotiations hinge specifically on the role of non-EU countries’ inclusion, but it would be a win for all sides: The United Kingdom would get access to lucrative contracts, the EU would get a secure source of ammunition and build out its credibility on defense initiatives, and Ukraine would receive much-needed ammunition.
3. British observer status at EU foreign ministers’ meetings: Immediately after the Russian invasion, then UK foreign secretary Liz Truss joined a Foreign Affairs Council (FAC) meeting of EU foreign ministers as a statement of unity, alongside the US secretary of state, Canadian foreign minister, and NATO secretary general. The FAC could go farther by welcoming a British representative at meetings where common security, sanctions, support to Ukraine, and other issues of joint concern are discussed. It would be a symbolic move to show that EU and British leaders can work together. This could, if ties improve, be turned into a standing invitation to all FAC meetings.

On economics, the US Inflation Reduction Act and the EU Green Deal Industrial Plan are rewiring how traditional free traders do business. While slow in response, the United Kingdom still has a role to play. Policymakers could consider:

1. Industrial policy coordination: The United Kingdom has so far signaled that it will not challenge Washington’s or Brussels’ spending sprees, but London risks being caught in the middle. To avoid clashes or subsidy races, the EU and United Kingdom could open a dialogue similar to the US-EU Clean Energy Incentives Dialogue announced at the meeting between US President Joe Biden and von der Leyen.
2. British membership in the critical raw materials club: Von der Leyen has called for a critical raw materials club in the scramble for the materials that power the economy. The UK strategy for critical minerals draws much of the same conclusions that led to the EU’s Critical Raw Materials Act, namely the threat that dependencies on countries such as China pose to supply chains. Britain is already exploring collaboration with the United States, Canada, South Africa, and Australia and is looking into its own extraction efforts. Both London and Brussels stand to gain from efforts to deconflict and coordinate on the search for secure supplies of minerals.
3. UK-EU tech dialogue: The EU is a leader on digital policy, but Britain has been active on its own digital and tech policies. The United Kingdom itself is a leader on research and development for semiconductors and on artificial intelligence (AI), for example. The EU and United Kingdom would benefit from greater alignment on tech following the model of the US-EU Trade and Technology Council. Greater dialogue on issues such as semiconductors, AI, cybersecurity standards, and more could help standardize digital policy not just across the Channel but across the Atlantic. Recognizing the strategic imperative of digital and tech policy for both the United Kingdom and EU, negotiators should also accelerate negotiations on Britain’s reentry into Horizon Europe.

A bucolic weekend getaway on the coast won’t bridge the cross-Channel divide. Real change will require buy-in from leadership at the highest levels in Brussels, capitals across Europe, and of course London. But the meeting does show that the European Union is thinking about its post-Brexit relationship with the United Kingdom. That is a start.

Jörn Fleck is the senior director of the Atlantic Council’s Europe Center.

Ben Judah is the director of the Transform Europe Initiative in the Europe Center.

The post How the EU and UK can start to collaborate in a post-Brexit world appeared first on Atlantic Council.

Commentators have urged major countries to clearly identify the high-tech areas which require heightened government control to safeguard national security, and to ensure that, as Wolf writes, “security-oriented interventionism should be as precise and non-protectionist as possible, with a view to continuing to gain from the economies of scale granted by cross-border trade.”

Those concerns and proposals are well intended but will likely remain aspirational until policymakers can come up with economically credible and politically acceptable policies to deal with the root causes of fragmentation. The two most important are the resentment and resistance of the people left behind by globalization and the crisis of trust between major countries.

Globalization won’t work until we assist those left behind

Globalization has significantly lifted overall economic growth and helped many emerging market countries develop, bringing hundreds of millions of people out of poverty, but it has had a mixed impact in developed countries.

In developed economies, globalization has greatly benefitted consumers, owners of capital, and technologically skilled workers while depressing wage growth, exacerbating income inequality, and displacing low-skilled workers. It has hollowed out manufacturing sectors and communities which used to be the bedrock of the middle class and social stability. The numerous so-called losers have become the springboard for populist political movements that are pushing back against globalization. Some of the ire against globalization mistakes the true cause of job loss—technology has played a bigger role than trade—but that doesn’t change what needs to be done.

It is wrong-headed to blame the dismal outcome in developed countries on globalization. Instead, the blame should be put on the failure of national efforts to educate, train, and generally prepare workers to be able to compete internationally in a technologically driven world. In particular, many developed countries have implemented trade adjustment assistance (TAA) programs when they concluded free trade agreements to mitigate labor displacement impacts. In the US, the TAA program was launched in 1962. However, TAA programs, especially in the US, have been grossly inadequate, not well conceived and poorly executed, difficult for intended beneficiaries to access, and generally ineffective.

The US TAA program focused in its earlier years on workers able to document their displacement by trade with countries that had a free trade agreement with the US. It was later expanded to cover the impact of outsourcing—but it was always inadequate relative to the scale of the problem. In the US, 8 million manufacturing jobs were lost from a peak of 19.5 million in 1979 to a trough in 2010.

Only about a third of manufacturing workers who were displaced between 2001 and 2008 were eligible to apply for TAA benefits (including income assistance to extend unemployment benefits for up to 130 weeks and training for up to one year). Of those who applied, about one third actually received benefits.

Inadequate as it was, the US TAA program was better than nothing. Sadly, it was terminated in July 2022. By contrast, the European equivalent program has been expanded into the European Globalization Adjustment Fund to deal with all displacement effects of globalization. Active labor market adjustment programs in Europe have been much better funded than in the US—for example Germany spends 0.66% of GDP and France spends 0.99 percent, while the US spends only 0.11 percent. While Europe has done better than the US, it has not done nearly enough either. And its programs have been criticized as “narrow, piecemeal… hard to access at scale” and “reactive”.

Until there are credible efforts in developed countries to enable the people left behind by globalization and technological changes to participate in the benefits of inclusive growth, popular resentment and resistance to open and free trade will persist, especially in the US—leading to more protectionism, not less.

How to deal with the crisis of trust

The world is also suffering from a crisis of trust. As ably demonstrated by the NYT’s Thomas Friedman, that is especially true between the US and China and it is pushing them further apart. This collapse of trust has several dimensions. As China and several other emerging market countries have developed their economies, they want to reshape the rules facilitating international relations, including trade, which were established decades ago by developed countries. Today, those developed countries account for less than half of the global economy. The US as an incumbent leading power has viewed these developments with an increasing sense of national insecurity and has tried to protect its position.

Furthermore, international trade in goods has progressed from benign “shallow goods” like textile and garments, footwear, and similar consumer items to high-tech “deep goods” like electronics/IT and telecom enabled by semiconductors which have dual uses—civilian and military. Naturally cross-border trade and investment in such high-tech dual use goods have become areas of competition and conflict between the two superpowers.

Fundamentally, the problem is the absence of a mutually agreed framework allowing for the peaceful coexistence between two different and largely incompatible political and economic systems—represented by the US and China. Clearly the postwar institutions, especially the World Trade Organization, have shown signs of fractures and dysfunction, and need to be changed. Until the issues causing the crisis of trust are addressed, it is futile to simply call for international cooperation to restore the practices of global open free trade.

As the world becomes more fragmented politically and economically, the costs will mount and the risk of military conflict will rise. There will be calls to reverse such a dangerous trend. The way to do that is to address domestic challenges and build more inclusive economies in order to create the necessary internal political support for international cooperation. This will allow countries to figure out how to reconcile their different political and economic systems. The fact that these two challenges are interrelated makes their solutions much more difficult to conceive and implement. But there is no alternative but to try.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Accra is hardly alone in its enthusiasm for gold. Since 2008, emerging-market and developing countries have more than doubled their central bank gold reserves, led by Russia, China, Turkey, and India.

The end of gold demonetization?

Developing and emerging-market countries’ growing gold purchases have reversed a selloff in gold reserves—led by advanced economies—since the 1990s.

Starting in the mid-1940s, the Bretton Woods system linked most advanced economies’ currencies to gold, so treasuries and central banks accumulated large reserves to back them. But the system’s collapse in 1971 eliminated gold’s direct monetary purpose as a guarantor of currency value. Meanwhile, central banks’ success in controlling inflation in the late 1980s suggested that gold was no longer needed to rapidly raise capital for currency market interventions. And as interventions became less frequent, it became harder for central banks to justify large reserves in the 1990s.

Consequently, advanced-economy governments (which held 85% of all government-held gold in 1990) offloaded nearly one-fifth of their gold reserves from 1990 to 2007. Some, like the United Kingdom, swapped gold for foreign currencies. Others tried to get more creative: the Swiss government proposed establishing a foundation for Nazi-era victims with sale proceeds, although they eventually filled state coffers after voters rejected the idea. Apart from additional revenue, the sales offered practical benefits like reduced holding costs and lower exposure to gold’s notoriously high price volatility.

Emerging-market and developing economies largely followed advanced economies in demonetizing gold, though they had less of it to sell. Their gold reserves grew less than 10% during this period, even as their non-gold reserves expanded 25-fold.

Emerging markets’ new gold rush

What explains emerging-market and developing countries’ increased enthusiasm for gold since then?

First, the Global Financial Crisis weakened their confidence in the dollar-backed financial system’s stability—catalyzing a trajectory shift in gold purchases. In 2009, for example, China’s State Council announced that it had quietly expanded its gold stockpile by over 70% in previous years. Although China times its disclosures strategically—sometimes years apart—the announcement signaled an accelerated purchase program that persists today.

Second, the logic of returns may explain some diversification into gold. Years of rock-bottom interest rates on advanced-economy bonds increased the attractiveness of assets like gold, which can generate meaningful long-term returns. More recently, some central banks have reasoned that gold’s scarcity preserves its value as elevated inflation erodes Dollar- and Euro-denominated assets—although past returns suggest that gold is not an effective inflation hedge over shorter horizons.

Third, some countries have sought to reduce sanctions risk with gold reserves. Transacting with gold offers key advantages for sanctions evasion: anonymity, low traceability (especially if gold is mixed into alloys), and alternatives to Western financial centers where the US and its allies can more easily restrict trade flows. For example, Russia embarked on a major gold purchase program after US and EU sanctions for its annexation of Crimea in 2014. Since then, Russian entities have conducted gold-denominated transactions through hubs like Dubai to evade sanctions. Although gold’s bulkiness makes it an imperfect medium of exchange, several heavily-sanctioned countries have followed Russia’s lead in increasing gold’s share of foreign reserves.

Greater ambitions for gold

More broadly, countries with fractious US relations trust the dollar-backed financial system less, so it is unsurprising that gold purchases increase with geopolitical distance. Grouping countries by their degree of alignment with the US (represented by votes at the UN General Assembly, where “most aligned” states are in the top quarter of countries by voting alignment, “more aligned” are the next quarter, and so forth) shows that all but the “most aligned” countries have grown their gold reserves since 2008.

An important question is whether China and Russia will employ gold in their efforts to foster alternatives to the dollar—for example, by aiding the internationalization of the Chinese yuan. Outside of China, use of the yuan is hampered by Beijing’s capital account controls; foreign investors are reluctant to hold or trade yuan-denominated contracts without firmer guarantees of its convertibility. However, gold-backed yuan contracts could promise greater convertibility without requiring China to loosen capital controls. The Chinese government has already moved to promote the gold trade, establishing a yuan-denominated gold benchmark index in 2016 that makes it easier for Chinese market participants to exchange gold and influence prices, although further steps have been limited.

For now, emerging markets’ growing interest in gold is more a feature of the existing monetary system than a seismic shift away from it. Gold reserves still make up only 7% of emerging and developing countries’ reserves, and central banks may eventually decide that its clunkiness and price volatility are not worth the trouble. Diversifiers into gold believe that they can reduce their risks, improve their returns, or both. Whether these countries keep buying after inflation subsides will offer a clue into the staying power of gold’s appeal.

Phillip Meng is a Young Global Professional with the GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post Why emerging markets are stocking up on gold appeared first on Atlantic Council.

The emergence of this important, new supply chain linking both economies has implications for economic interdependence and national security. However, despite the increase and the tone of recent rhetoric around the US-China pharmaceutical trade, China does not have a stranglehold on the US medicine supply chain. Still, the US ought to prioritize a regular supply-chain mapping exercise in order to provide policymakers ample breathing room to act well before dependence on China becomes a material risk to the US healthcare system.

What’s behind the rise of US-China trade in pharmaceuticals? 

The import growth is largely explained by the importance Beijing has placed on biotech as a part of an effort to advance China’s manufacturing sector up the value-added chain by targeting high-tech fields, such as the pharmaceutical industry. Simultaneously, Chinese regulators have implemented policy changes reducing the cost of domestic drug development while also bringing their regulatory framework in line with global standards, allowing Chinese producers to competitively participate in the global pharmaceutical trade. These goals were recently reaffirmed with nine PRC agencies jointly issuing the “14th Five-year Plan for the Development of the Pharmaceuticals Industry” which called for increased innovation and expanded Chinese participation in global regulatory developments. 

China is prioritizing a domestic pharmaceutical industry partly in preparation for its own population’s burgeoning public health issues. As China’s population has grown wealthier and its median age increases, the prevalence of diseases such as cancer, diabetes, and heart disease have also grown. As a result, many of Beijing’s pharmaceutical ventures focus on innovative, novel treatments for chronic diseases and cancers. 

US exports of pharmaceuticals to China have also been increasing. This growth is overwhelmingly driven by US shipments of immunological products, such as steroids used to treat or manage Asthma, dosed and packaged for use in Chinese hospitals and by consumers. Since 2017, Chinese imports have increased by nearly 2700%, meaning US companies now control more than 65% of this $7.9B import market. US export growth to China has coincided with a general increase in export capacity for immunological products. Since 2017, US global exports of immunological products have more than doubled in response to the increasing importance of this drug class as well as the proliferation of USG policies designed to increase onshore manufacturing capacity of critical drugs.

Trade in pharmaceutical ingredients has been steady

In 2021 the Biden Administration identified pharmaceuticals as a supply chain of critical importance, implying the White House views them in the same light as semiconductors, batteries, and critical minerals. Congress is also increasingly focused on them. Representative Mike Gallagher—who is also chairman of a new Select House Committee on US-China competition—and Senator Tom Cotton have repeatedly called attention to the issue and have even introduced legislation aimed at reducing possible risks. What concerns them the most, however, are not imports of Chinese finished pharmaceuticals such as those discussed above. Rather, they are focused on the precursor ingredients that give drugs their desired effects. Commonly known as active pharmaceutical ingredient (API), these chemicals are the most important component to any pharmaceutical manufacturer’s supply chain. Disruptions to the delivery of APIs could seriously impede production of finished pharmaceutical goods. 

US policymakers’ concerns are not without reason. Chinese commentators have long suggested leveraging the market share of Chinese API producers in service of Beijing’s policy goals. For example, in 2019 a former central bank adviser suggested that Beijing should leverage its exports of antibiotics as a retaliatory tool in the US-China trade war. More recently in a March 2020 editorial in state media outlet, Xinhua, made a similar suggestion saying China could assume “strategic control” over supplies and limit exports. 

While it is important to be aware of such risks, it is also crucial not to overstate them. Although China may dominate the import supply chains of certain chemicals—for example the US relies on China for more than 75 percent of its vitamin B6, B12, B1, C and nearly 70 percent of its vitamin E imports—it makes up a much smaller portion of overall API imports. Even if US imports of Chinese APIs have grown by around 24 percent since 2020 in absolute terms, Chinese imports as a portion of all imports of APIs have stayed relatively flat over the past four years and are even down by over 10 percent from a spike in 2018. Over the past decade the US has gotten, on average, around 17 percent of its API imports from China. While still considerable, this number is far short of the often cited but erroneous statistic that 80 percent of APIs the US uses come from China (which was the result of a misinterpretations of an FDA study). 

Towards a stronger US pharmaceutical supply chain

The surge in US-China pharmaceutical trade has resulted in Chinese producers achieving a considerable share of US imports in both benign areas such as fever reducers and laxatives and some critical drugs like antibiotics. While still a relatively small share of trade, Chinese shipments of cardiovascular medicine as well as cancer treatments are notable to watch given their importance to US healthcare infrastructure and because they are some of the fastest growing trade flows, increasing some 1147 and 401 percent respectively since 2017. However, these are the exception, not the rule. China still only makes up around 6% of overall US pharmaceutical imports and 17% of API imports.

In the areas where China has considerable market share, the US should pursue a de-risking strategy centered around identifying alternative sources of supply. More broadly, the US should prioritize regular supply chain mapping exercises. These efforts could serve as an early-warning mechanism in the long run. And supply-chain mapping should consider indirect US exposure through other trading partners. Although US direct reliance may be manageable, China is a major supplier to many other countries in the global pharmaceutical value chain. For example, by some estimates, China supplies India—the US’ fifth largest source of pharmaceutical imports—with nearly 70% of its APIs. A mapping effort that traces the full supply chain of critical pharmaceuticals could reveal other areas of indirect risk that China could effectively leverage if the bilateral relationship substantially deteriorates. 

As Beijing continues to prioritize pharmaceuticals, its manufacturing capacity and relevance to global supply chains will only grow. If recent import growth around cardiovascular medicine and cancer treatments continue, for example, in a few short years China could control concerning portions of the US supply chain. A regular mapping exercise would help policymakers assess how supply-chain risk is changing over time.

Niels Graham is an Assistant Director with the Atlantic Council GeoEconomics Center focusing on US trade policy and the Chinese economy.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post The US is relying more on China for pharmaceuticals — and vice versa  appeared first on Atlantic Council.

Pressing foreign policy matters remain top of mind—the war in Ukraine, the looming climate crisis, a global economic slowdown and possible recession. At the same time, the Biden administration and Congress must find opportunities for economic growth and job creation.

Following the Global Financial Crisis and economic recession, the Obama administration looked to trade as a path to economic growth and prosperity, as well as shoring up alliances with key allies—particularly in the Indo-Pacific. The famous “Pivot to Asia” was grounded in negotiating a regional free trade agreement (FTA) in the Pacific, the Trans-Pacific Partnership (TPP). TPP would have been the largest FTA, encompassing 40 percent of world trade. However, since the United States formally withdrew, the China-led Regional Comprehensive Economic Partnership (RCEP) is now the world’s largest FTA, covering 30 percent of world trade.

The Biden administration has stated its intention to reimagine trade—moving away from traditional market access and tariffs, to cooperation, transparency, and inclusivity. The strategy includes labor rights and new areas such as supply chain resiliency and decarbonization. These new ideas are the hallmark of IPEF, which commenced negotiations last December in Brisbae.

Unlike a traditional trade negotiation, it’s not clear whether the four pillars (trade, supply chains, clean energy and decarbonization, and tax and anticorruption) of IPEF will include binding commitments. New areas such as supply chain and clean economy are especially murky, as well as trickier areas such as anticorruption. However, very much like a traditional trade negotiation, the first few rounds of negotiations included formal discussions on the four pillars. There were exchanges of text and white papers, and engagement from key stakeholders including business, labor, and civil society.

The overall sentiment in Bali was positive and constructive, with many of the IPEF member countries excited to see the United States engaged in the region again. However, it left many wondering—why not just rejoin the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which evolved from TPP and retained much of its structure?

Follow the data

China’s total trade with ten of its neighbors in Southeast Asia, including Indonesia, Malaysia, Singapore, and Vietnam, has grown significantly. It has increased 71 percent since July 2018, when the United States first placed tariffs on a range of Chinese goods, to $979 billion in November 2022. Chinese trade with India grew 49 percent over the same period. Total trade exports between the United States and the same ten countries reached $450 billion in the twelve months through October 2022, compared with $262 billion in mid-2018. The gap between China’s trade with the region and the United States’ trade with the region can be explained as simple as this: China has a trade agreement with the region and the United States does not. RCEP lowered trade tariffs, but more importantly, its changes to rules of origin will likely forge stronger regional supply chain networks among the fifteen Indo-Pacific countries.

The Biden administration has stated it is giving countries a choice between the United States and China. However, without incentives such as tariff liberalization or market access, many IPEF countries will find it difficult take on new commitments the United States is pursuing, namely on labor and the environment. The United States could offer a real alternative—a renegotiated CPTPP with new areas in IPEF including supply chain resiliency, clean energy, and inclusivity.

FOMO of CPTPP

The fear of missing out—or FOMO. Allies want the United States back in CPTPP. China wants in, but the United States remains out. Now with the accession of the United Kingdom to CPTPP, the orientation of the trade pact transforms from regional to global.

While China’s CPTPP application will face serious scrutiny and substantive procedural hurdles, it nonetheless magnifies the serious risk the United States faces of being left behind. Without joining, the United States loses the chance to spread American democratic values and rules for the modern economy.

Amidst regional trade integration, the United States has largely been left on the outside looking in. The United Nations Conference on Trade and Development found that RCEP will shrink US exports by over $5 billion as trade is diverted away from US firms and toward foreign competitors subject to lower tariff rates under the agreement. It has been six years since President Trump withdrew from TPP, and US losses have been both economic and geopolitical. At a time when industrial policy and national security dictate how and where supply chains should develop, US and Asian firms are looking for alternatives that offer stability, predictably, security, and commercial viability.

Time is running out for the United States to seriously reconsider rejoining CPTPP—while allies, partners, and competitors including China, South Korea, and Taiwan are lining up to join CPTPP. Importantly, CPTPP addresses many of the administration’s highest priorities, including moving supply chains away from China. The best way to incentivize the shift in supply chains is to have a tariff preference from other countries. Whether there is bipartisan support for trade and rejoining CPTPP remains to be seen, but the effort to reexamine the options must begin now.

Sahra English is a contributor to the Atlantic Council GeoEconomics Center. She serves as a member of the U.S. Government’s Industry Trade Advisory Committee (ITAC).  

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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1. What does Lula come away with from Beijing?

In addition to the fifteen agreements signed between Brazil and China, Lula also leaves Beijing with a path toward greater cooperation even beyond trade. Given that China is Brazil’s number one trading partner, this visit was an important seal for Lula, wrapping up his first hundred days in office having visited Brazil’s top three economic partners: Argentina, the United States, and now China.

Recent comments by Brazilian Finance Minister Fernando Haddad reflect Brazil’s intent to deepen economic relations with both China and the United States. “Brazil has the size to make bilateral agreements,” Haddad told journalists during the China trip.

—Valentina Sader is an associate director and Brazil lead at the Atlantic Council’s Adrienne Arsht Latin America Center.

2. During the trip, Lula called for BRICS countries to trade in their own currencies and end the dollar’s trade dominance. How real is this threat?

In calling for an end to the dollar’s dominance in world trade during his China visit, Lula was singing to a choir whose theme song is renminbi (RMB) internationalization. His advocacy of a “BRICS currency” to replace the dollar in settling trade transactions among leading emerging-market countries (Brazil, Russia, India, China, and South Africa make up the informal BRICS group) likely won’t come to much—at least in the foreseeable future. Nonetheless, it does underline the opportunities for Beijing to increase the international use of the Chinese currency. As Brazil’s trade with China hit a record $150 billion last year, the RMB emerged as the country’s second-largest reserve currency (representing 5.37 percent of foreign-exchange holdings). That’s an indication of a trend of increasing RMB-real transactions, which likely will continue in the future as the two countries have signed several agreements aimed at expanding trade. However, Brazilian imports and exports continue to be settled overwhelmingly in dollars, and the US currency still occupies over three-quarters of Brazilian reserves.

At the end of March, a Brazilian bank (controlled by a Chinese parent) became the first financial institution in Latin America to join China’s Cross-Border Interbank Payment System, which settles trade deals in the Chinese currency. But most Brazilian companies continue to use the dollar-based SWIFT messaging system. Even as the RMB’s global share of trade transactions doubled to 4.5 percent in 2022, the dollar remained the currency of choice in 84 percent of all trade deals worldwide.

—Jeremy Mark is a nonresident senior fellow with the GeoEconomics Center. He previously worked for the IMF and the Asian Wall Street Journal.

3. What did China gain from this visit?

From what we have seen thus far, Lula and Xi gained crucial “wins” from their bilateral meeting. The two signed fifteen bilateral agreements in everything from agriculture to technology, demonstrating further development of the China-Brazil comprehensive strategic partnership. Lula even visited a Huawei technology development center and received a presentation about how 5G can revolutionize telemedicine and education; this suggests Lula’s willingness to accelerate China’s 5G expansion in Brazil, despite US efforts to slow China’s 5G advance in the region due to espionage concerns.

Both leaders also successfully projected themselves as champions of the Global South, professing their desire to “balance world geopolitics,” advocating for their countries as mediators in Ukraine, and upholding the BRICS mechanism as a counterweight to the US-dominated international system. However, Lula’s most inflammatory statement that BRICS countries ditch the US dollar and trade in their own currencies was likely bluster, especially given the fact that the US dollar still accounts for 60 percent of global central bank reserves.

—Leland Lazarus is a nonresident fellow at the Global China Hub and associate director for national security at Florida International University’s Jack Gordon Institute of Public Policy. He formerly served as special assistant and speechwriter to the commander of US Southern Command and as a US State Department foreign service officer in China and the Caribbean.

4. What do Lula’s visits to both Washington and Beijing reveal about his foreign policy approach?

Differently from the trip to Washington in February, Lula’s visit to Beijing had a more clear and concrete purpose. The trip to Washington was aimed at reestablishing relations and discussing cooperation on common challenges, such as democracy and climate. The visit to Beijing had an important business component. Both were significant in consolidating Lula’s foreign-policy goals.

Brazil will continue its traditional non-alignment, non-interventionist approach to foreign policy, seeking to maintain close diplomatic relations with strategic partners, which include both the United States and China. At the same time, Lula will continue to push for the rethinking of the global order to reflect current times, carving out that relevance for Brazil. A few examples include Lula’s interest in leading peace conversations between Russia and Ukraine, hosting the Group of Twenty (G20) summit in 2024, questioning the reliance on the dollar, proposing changes to the United Nations Security Council, and sending a special foreign policy advisor to Venezuela for meetings with the Maduro regime and its opposition. The question that remains is whether or not Lula is picking the right battles—and if he will have the support, domestically and internationally, to be successful.

—Valentina Sader

5. How can the Lula visit be seen within the context of Xi’s renewed outreach to the Global South?

Lula’s visit to China and meeting with Xi reflects Lula’s desire to again—as in his previous times in office—be at the center of the global stage. And it is a visit that is squarely within China’s priorities to deepen ties with Brazil as part of its quest for greater leadership in the Global South. China is Brazil’s number one trade partner. And this visit is a clear signal that those economic ties will only deepen in the years to come.

What cannot be missed is the difference in pomp and delegation size between the China visit and Lula’s trip to Washington two months earlier. Whereas the US visit was a short, two-day stop without a business contingent, the China trip is twice as long with a large delegation of businesspeople looking for new commercial opportunities now that China has reopened after its COVID-19 lockdowns. It’s also reflective of Lula’s inauguration: China sent then Vice President Wang Qishan—a close ally of Xi—to lead its delegation, while the US delegation was led by Interior Secretary Deb Haaland.

—Jason Marczak is the senior director of the Adrienne Arsht Latin America Center.

The post What the Lula-Xi partnership means for the world appeared first on Atlantic Council.

The local economy of the earthquake-affected provinces accounts for 9.8 percent of Turkey’s gross domestic product (GDP), 8.6 percent of exports, and 15 percent of agricultural products. With a lower GDP per capita and a higher unemployment rate than the national average even before the disaster, the region employs over 3.8 million people, primarily in the agriculture, trade, textile, and food sectors, almost 40 percent of whom are employed informally. The local private sector—made up of more than 538,000 enterprises—now needs wide-ranging support to recover from the earthquakes.

Recovery and rebuilding will require a multi-faceted approach prioritizing private-sector support for local development along with social impact. This approach will need to ensure that the region continues progressing toward United Nations Sustainable Development Goals (SDGs) and does not leave vulnerable communities behind, including the displaced. Of the 3.7 million Syrian refugees who fled to Turkey since the Syrian war began, half of them lived in this region, constituting over 11 percent of its overall population, and were affected by the earthquakes. Turkey is now home to over three million internally displaced people, who are looking for economic and social support after this disaster.

One of the essential tools at Turkey’s disposal to tackle these daunting challenges and to design a more sustainable, resilient recovery is impact investing. These are “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return,” according to the Global Impact Investing Network, targeting a spectrum of returns depending on the type of capital and instruments used. As Turkey’s Impact Investing Advisory Board stated in a report published shortly before the earthquakes, urban resilience—which will need to be a priority following this disaster—will benefit from “innovative, sustainable capital allocation and commercial value generation” with an impact focus. Thankfully, the local impact investing ecosystem has been taking root to enable this.

Impact investing can also aim to create self-reliance for refugees and internally displaced people through “refugee lens” investing, which is a framework to qualify and track investments developed by the Refugee Investment Network (RIN), where I work with enterprises and investors focused on impact.  

Forced displacement cuts across at least thirteen of the seventeen SDGs around the world, according to RIN. Actively investing in displaced populations leads to new and sustainable solutions. In the aftermath of the earthquakes, that could include supporting the thousands of refugee-owned small businesses in the earthquake region, providing microfinance to local farmers and artisans, or facilitating tech-based remote employment. The goal is to increase displaced people’s livelihoods, financial inclusion, and continued skills development (especially to respond to workforce losses due to the earthquake), thus leading to equitable economic and social revival. Funding the communities and employers around the country that welcome the displaced will also be important.

Having value chains focused on supplier diversity, economic inclusion, and job creation will also help this cause. The public and private sectors can strengthen community resilience by prioritizing local and displaced suppliers affected by the disaster, including social enterprises and cooperatives employing and supporting vulnerable communities through “social procurement.” For instance, Innovation for Development (i4D), a local economic development organization, aims to connect three hundred local producers from the earthquake-affected region with buyers to ensure business continuity and new contracts.

In international trade, proponents of a “Turkiye Compact” call for trade concessions from the European Union, United States, and Canada to incentivize the private sector to hire both Syrian refugees and locals in Turkey with the goal of boosting the local economy and improving social cohesion. According to a United Nations Development Programme feasibility study conducted prior to the earthquakes, such a policy could create 284,000 new jobs (including 57,000 jobs for refugees) and boost exports by 3 percent, primarily of labor-intensive agricultural, processed food, and textile products. Furthermore, local enterprises participating in the Turkiye Compact would become attractive investment opportunities given their tangible impact on displaced communities through employment and sourcing.

Finally, Turkey’s vibrant entrepreneurial ecosystem is more crucial than ever. Accelerators, specialized funds, and growing communities of practice can nurture innovative, impact-driven ventures for earthquake-affected communities and create inclusive solutions. Examples so far have included a waste management start-up facilitating food aid, e-commerce solutions enabling microentrepreneurs, online mental health platforms offering therapy to survivors, and tech innovations in rescue and relief, among many others. Additionally, catalyzing entrepreneurship by underserved communities, especially those experiencing intersectional disadvantages, such as the refugee women entrepreneurs featured in an Atlantic Council documentary last year, will create new pathways to self-reliance.

Bringing all of these solutions together and amplifying their impact through the resources of the global impact investing community, local partnerships, and blended financing—with guarantees, concessional loans, or grants to attract private investments, for instance—will yield tremendous, complementary results.

With such a comprehensive toolbox, it will be possible to rebuild better after this terrible disaster and create more inclusive economies and resilient communities.

Selen Ucak is a social impact professional working at the intersection of private sector and international development. She currently leads a global community of refugee-led and refugee-supporting businesses and social enterprises at the Refugee Investment Network, as well as serving as a consultant on additional projects.

The post Impact investing can help rebuild an inclusive, resilient Turkey after the earthquakes appeared first on Atlantic Council.

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Public Event Fri, March 31, 2023 • 8:15 am ET

A conversation with Executive Vice-President Margrethe Vestager

AN #ACFRONTPAGE EVENT – Executive Vice-President of the European Commission Margrethe Vestager discussed how Europe is addressing the geopolitical moment and its economic challenges.

Digital Policy Economy & Business Energy & Environment Europe & Eurasia

As the European Union looks to reassess its relationship with China, European Commission Executive Vice-President Margrethe Vestager gave an early preview of what reposturing around economic and technological innovation might look like.

“We have no interest in decoupling from the second largest economy in the world. Rather, we need to build a de-risking strategy in order to manage the relationship that we will have in China,” Vestager said Friday at an Atlantic Council Front Page event in Washington.

It won’t be easy, though. Europe will need to juggle technological, climate, and economic concerns and use all the de-risking tools in its disposal, which Vestager said includes Europe’s new Foreign Subsidies Regulation, international screening and procurement instruments, and outbound investment controls.

Meanwhile, the European Union (EU) and its members will have to carefully balance regulation and much-needed government financing for new technology development while not stifling domestic innovation from private enterprise, which could also have effects on its economic and philosophical rivalry with China. 

That delicate dance was exemplified by the conversation around ChatGPT, as Vestager commended a recent letter from prominent tech leaders calling for a “pause” in developing artificial intelligence (AI) as a sign that society is taking AI concerns seriously, while also urging caution about actually holding off on developing such technology.

“Imposing a pause would be not only difficult to achieve, but maybe also not the way to go, because, as we speak, they’re coding in China,” Vestager said. “What we need is a direction. Where you say, well, this is where we want to go.” 

Across all these competing sectors, Vestager had one clear message: urgency.

“We have very little time, and we can only do it together,” she said of the United States and the EU.

In her role, Vestager addresses critical challenges around economic competition, trade and technology, digital sovereignty, and green energy, all of which she discussed in her conversation with Jörn Fleck, senior director of the Europe Center at the Atlantic Council.

Read on for more highlights.

Addressing the EU-China relationship

• Will the Commission’s repositioning on China going forward be more like Lithuania or more Germany? “I would hope you can expect more Europe,” Vestager said, going on to say that the European approach will need to be specific in its strategy. “I think precision, in what we see as risky, is absolutely key,” she said, alluding to how low-risk products need to be treated differently than sensitive technologies.

• Vestager said Europe should be aggressive in its strategy to combat China as an economic competitor and systemic rival, coming off the heels of Commission President Ursula von der Leyen’s call Thursday to reassess Europe’s diplomatic and economic relationship with China, ahead of her trip to China next week along with French President Emmanuel Macron. In the coming days, Europe “must put much more muscle on the bone of the strategy, so that we can take actions,” she said.

• A critical part of Europe’s pivot will be around reducing its strategic dependencies on China, a lesson gleaned from watching Europe struggle with soaring energy costs amid Russia’s war against Ukraine. “We should only need to learn this once. Now we need to act upon it,” Vestager said. However, other tactics will be needed as well, as Europe can’t succeed with just one approach, but will need to “combine the tools we have.”

• Combating Chinese cyber attacks and technology competition is key, with the acceleration of the digital age presenting unique challenges for democracies around the world. That will include addressing 5G networks but also data integrity and disinformation campaigns that threaten human rights. “We cannot throw away, in just a few years, what it has taken us decade after decade after decade to achieve,” she said.

On technology

• Commending a recent op-ed by US President Joe Biden aimed at keeping “Big Tech” accountable around privacy issues, Vestager noted that the EU has had the General Data Protection Regulation in place since 2016 and is currently investigating TikTok’s use of data. However, she added that such controls are not enough: “As long as this kind of data is for sale, and China can buy it anyway, we still have work to do.”

• She also addressed the challenges of moderating content, citing the EU’s Digital Services Act as one key effort to make sure platforms have systems for taking down illegal content while still preserving freedom of expression by “enabling people to come back if they find that they’re not being fairly treated,” she said.
  
• Platforms must conduct risk assessments to see how they are affecting young people’s mental health and how their service could be misused to undermine democracy, so that they can mitigate those concerns. “We want a digital market that is open, that businesses can get access to data that they would otherwise not have access to… and that they should not fear their data is being used against them,” she said.

• Change in the digital marketplace will be difficult to create without public buy-in, she said: “In my experience, when you change legislation, that is difficult, but what you have changed is perception. When you implement legislation, you want to change behavior—one hundred times more difficult.”

• However, Vestager warned against overregulation that kills healthy competition, as open, dynamic markets, and the innovation they bring, will be critical to advancing core technologies to confront major challenges, from China to climate change. “What we are in the midst of is, of course, a very small window to make sure we get some of the design right for a fully digitized world that honors the basics of our beliefs.” 

• That lesson was exemplified by the AI conversation, in which Vestager said she felt like the European Commission’s work to assess some of the high-risk cases was “on track,” including tools to help developers and regulators, such as the AI Roadmap and AI for Good initiative. Rather than ban AI technologies like ChatGPT, Vestager urged agreement around central questions, such as “what are the guardrails” and “what is the direction of travel, when it comes to AI?”

Climate change

• Commending Europe’s commitments to reach net-zero carbon emissions by 2050, Vestager noted how policies such as the US Inflation Reduction Act and the EU Green Deal Industrial Plan can push clean energy forward. Those initiatives must be mutually reinforcing, though, and also not result in a transatlantic subsidy race that doesn’t accelerate green efforts worldwide. “The paradox is that, while we have this back and forth in the short term, mid- to -long-term, there is enough for everyone,” Vestager said. “We need net-zero industries in the US, in Europe, in India, in China, in every jurisdiction. Otherwise we will fail.” 

• Avoiding disruptions to trade and investments will be essential to making progress on net-zero goals, said Vestager, who underscored the need to reinforce transatlantic supply chains after their weaknesses were exposed during the COVID-19 pandemic. “We need to be able to depend on one another, and we need to be able to trust that we can do that also on a rainy day.”

• Similar to technology, fighting climate change will require a delicate balance between enforcing regulation and encouraging innovation. Political leaders have a responsibility to make the green transition happen, Vestager said, but they also cannot succeed without relying on the free market. “This is why it’s so important to balance how you subsidize, how you incentivize, how you fix the market failures that are out there, in order to not break these market dynamics that are crucial for us all to be successful.” 

Nick Fouriezos is a writer with more than a decade of experience reporting around the globe.

Watch the full event

The post European Commission’s Margrethe Vestager: Europe must de-risk, not de-couple, from China appeared first on Atlantic Council.

• The priorities of the United States in the MENA region
• US perspective on China becoming a major player in the geopolitics of the region
• China’s regional diplomatic and peace efforts
• Opportunities and challenges for cooperation between China and the US in the MENA region
• The impact of the China-Iran relationship on US regional interests

Chapters

[00:00] Introduction
[01:29] US priorities on the MENA region
[06:55] China as a rising global actor
[14:03] US perspective on China’s deepening presence in the region
[20:26] China’s regional diplomatic and peace efforts
[22:22] Challenges and opportunities for cooperation between China and the US
[28:40] Assessing the impact of bilateral China-Iran relations on US interests
[31:30] Cooperation between China, the US, and the Middle East on climate change challenges
[36:34] Final takeaways from our guests

Chris Backemeyer
Deputy Assistant Secretary for Assistance Coordination and Regional and Multilateral Affairs, Bureau of Near Eastern Affairs
US State Department

In his current position, Chris Backemeyer oversees cross-cutting regional policy issues and coordinates over $7 billion in foreign assistance for the Middle East and North Africa. He is a career member of the Senior Executive Service. Previously, Mr. Backemeyer served as Special Advisor in the Office of the Vice President, advising Vice President Harris on national security and foreign policy issues related to the Middle East, international economics, and climate change. He also has served as Deputy Assistant Secretary for Press and Public Diplomacy and Assistance Coordination in the Bureau of Near Eastern Affairs; Deputy Assistant Secretary for Iranian Affairs and oversaw the Department’s diplomatic efforts toward Iran; Deputy Coordinator for Sanctions Policy; Director for Iran on the National Security Council staff at the White House; and Deputy Director of the Office of Sanctions Policy and Implementation at the State Department. He also holds a Master’s degree in International Affairs from the School of International Relations and Pacific Studies at the University of California San Diego and Bachelor’s degrees in Finance and Political Science from Arizona State University.

Julian Gewirtz
Deputy Coordinator for China Global Affairs
US State Department

Mr. Gewirtz recently joined the US State Department from the White House, where he was Director for China at the National Security Council. His prior government service includes roles on the Secretary of State’s Policy Planning Staff and at the US Department of Energy. He is the author of several books on modern China and was previously a Senior Fellow for China Studies at the Council on Foreign Relations. He received his doctorate in modern Chinese history from Oxford University, where he was a Rhodes Scholar, and his undergraduate degree from Harvard College.

Amid a perceived US retrenchment from the Middle East, China has been making greater inroads in the region, most recently by brokering the Saudi-Iranian peace deal. The deal added not only a win for China, but also another layer of complexity to an already intricate regional landscape. China’s expanding role in the Middle East continues to be a major topic of discussion for US policymakers as the country seeks to present an alternative to the US-led global order. To shed light on these issues, we are joined by two esteemed US government officials from the US State Department, Dr. Julian Gewirtz and Chris Backemeyer, who join us in this thought-provoking podcast episode.

Our guests provide unique insights from a US perspective on the potential implications of China’s growing presence in the Middle East. They examine the region’s strategic landscape and China’s efforts to replace US dominance in global governance and discuss the challenges and opportunities for cooperation between China and the US in the MENA region, as well as the priorities of the US in the Middle East. Tune in to gain a better understanding of how the US perceives and reacts to China’s evolving role in the region and how recent developments may shape the region’s future and US response.

Fellow

Jonathan Fulton

Nonresident Senior Fellow

Rafik Hariri Center & Middle East programs Scowcroft Middle East Security Initiative

China Chinese

The China-MENA podcast features conversations with academics, think-tankers, and regional specialists on Chinese Influence in the Middle East and informs US and MENA audiences in the policy and business communities about the nature of China’s outreach to the region.

At a time when China’s global footprint is getting deeper and deeper, it has never been more important to understand its foreign policy and the Middle East is one of the world’s most consequential regions: home to major religions, diverse cultural and social heritage, central to global energy markets, and of course, geopolitics, linking people and markets in Asia, Africa and Europe.  This show will help you understand what China is doing in the region, and how the region is engaging with China as an increasingly important external power.

Podcast series

Listen to the latest episode of the China-MENA podcast, featuring conversations with academics, government leaders, and the policy community on China’s role in the Middle East.

Listen

New Atlanticist Feb 19, 2023

China-Iran relations are warming. Here’s what the rest of the world should know.

By Atlantic Council experts

While much of the world is focused on Chinese balloons violating US airspace, Iranian President Ebrahim Raisi recently flew to Beijing to meet with Chinese leader Xi Jinping.

China Iran

MENASource Dec 15, 2022

No, Xi’s visit to Riyadh wasn’t because of bad US-Saudi relations. It’s about much more.

By Jonathan Fulton

Given the bad state of US-Saudi relations, it is natural to see Xi’s visit in the context of geopolitical competition between Washington and Beijing, but that framework misses the bigger picture.

China East Asia

MENASource Jul 14, 2022

Biden’s Middle East trip focuses on the region. But China is the elephant in the room.

By Ahmed Aboudouh

US President Joe Biden’s visit to the Middle East on 13-16 July won’t directly focus on China. However, the rising power will be the elephant in the room at the Saudi summit in Jeddah.

China East Asia

Middle East Programs

Through our Rafik Hariri Center for the Middle East and Scowcroft Middle East Security Initiative, the Atlantic Council works with allies and partners in Europe and the wider Middle East to protect US interests, build peace and security, and unlock the human potential of the region.

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This podcast was funded in part by a grant from the United States Department of State. The opinions, findings, and conclusions stated herein are those of the author and do not necessarily reflect those of the United States Department of State.

The post US Perceptions of China’s Middle East Presence appeared first on Atlantic Council.

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The post Nikoladze and Bhusari cited by the Washington Post on Chinese-Russian collaboration on dedollarization appeared first on Atlantic Council.

The blockade of Ukraine’s Black Sea ports began on the eve of Russia’s full-scale invasion in February 2022. It aims to break Ukraine economically by undermining the country’s position as one of the world’s leading agricultural exporters. The impact of the blockade goes beyond Ukraine and is global in scale. By preventing the free passage of merchant shipping in the Black Sea, Russia deprives world markets of vital Ukrainian agricultural produce while also challenging the core principles of international maritime law.

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As the world watches the Russian invasion of Ukraine unfold, UkraineAlert delivers the best Atlantic Council expert insight and analysis on Ukraine twice a week directly to your inbox.

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From the very beginning, Russia’s attack on Ukraine has always gone beyond the boundaries of conventional military operations and attempted to strike at Ukraine’s very ability to exist as a functioning state. Russian troops have systematically destroyed vast swathes of farmland and made Ukraine the most mined country in the world. For the past six months, Russia has conducted a campaign of airstrikes targeting Ukraine’s civilian infrastructure in a bid to deprive Ukrainians of access to heating, electricity, and water supplies. The maritime blockade is another element in this war against Ukrainian statehood.

The suffering inflicted by Russia’s brutal invasion is not restricted to Ukrainians. According to the country’s Ministry of Infrastructure, more than 400 million people in Asia and Africa face the prospect of mounting food insecurity as a result of Russian efforts to restrict Ukrainian agricultural exports. While the current Grain Deal goes some way to countering this threat, it offers only a partial and short-term solution. Much more is needed in order to improve global food security and reaffirm the right to free passage for merchant shipping in international waters.

It is clearly in the interests of the international community to work toward ending Russia’s Black Sea blockade. First and foremost, this would lead to dramatically improved food security for many of the world’s most vulnerable communities. The resumption of maritime trade in the Black Sea would also provide the Ukrainian economy with approximately $20 billion in additional annual revenues. This would significantly reduce the economic burden on Ukraine’s partners and international financial institutions, which are now being asked to prop up the struggling Ukrainian economy indefinitely. Renewed merchant shipping would also be good for other economies, allowing Ukraine to resume imports worth tens of billions of dollars in 2021.

Eurasia Center events

Online Event Thu, July 20, 2023 • 8:00 am ET

After Vilnius: What’s next on Ukraine’s path to NATO?

Eastern Europe NATO Security & Defense Ukraine

Ukrainians understand that there is no international appetite for any direct military intervention to break Russia’s Black Sea blockade. Nevertheless, there are numerous other tools available to the international community that could be used to pressure Moscow. The most obvious measures would include additional sanctions and restrictions targeting Russian shipping.

This approach has yet to be fully explored. At present, Russian ships are not subject to the same checks and inspections that Ukrainian vessels must undergo in line with the terms of the Grain Deal. Instead, they are free to continue their international trade unhindered. Over the past year, Russia has reportedly increased its maritime exports by more than a quarter. At the same time, there have been numerous accusations made against Russian vessels for allegedly shipping military cargoes, including in contravention of the 1936 Montreux Convention governing maritime passage through the Bosporus and Dardanelles Straits in Turkey.

By blockading Ukraine’s Black Sea ports, Russia is violating the United Nations Convention on the Law of the Sea (UNCLOS) and the UN Charter. In response, Ukraine is calling on the International Maritime Organization (IMO) to force Russia to unblock the country’s sea ports. The IMO must use its powers as a UN agency to hold Russia accountable for violating the UNCLOS, and must be ready to impose suitable sanctions measures if Moscow refuses to comply.

Russia’s invasion of Ukraine has created a wide range of fundamental challenges to the rules-based international order that first emerged from the ashes of World War II. This is very much part of Putin’s plan. He wishes to return the world to an era when a handful of major powers were able to dictate to their weaker neighbors.

One of the many front lines in this geopolitical confrontation is the maritime front. Putin seeks to bankrupt Ukraine and overcome international opposition to his war by weaponizing agricultural exports. He does so in clear violation of international maritime law. If he succeeds, other autocrats will take note and adopt similarly aggressive tactics, with potentially catastrophic consequences for global trade. Ending Russia’s Black Sea blockade will not be easy and will require considerable political courage, but failure to do so will lead to rising costs in the years to come.

Oleksiy Goncharenko is a Ukrainian member of parliament with the European Solidarity party.

Further reading

UkraineAlert Feb 20, 2023

‘You cannot outlast us’: Biden’s Kyiv visit sends strong message to Moscow

By Peter Dickinson

US President Joe Biden’s bold surprise visit to wartime Kyiv sent a strong message to Moscow that time is not on Putin’s side and Russia should not pin its hopes on a weakening of Western resolve to stand with Ukraine.

Conflict Freedom and Prosperity

UkraineAlert Mar 19, 2023

Putin the Pariah: War crimes arrest warrant deepens Russia’s isolation

By Anders Åslund

The ICC decision to indict Putin for war crimes is a highly consequential step that will deepen Russia’s international isolation while weakening Putin’s personal position both at home and abroad, writes Anders Åslund.

Conflict Human Rights

UkraineAlert Mar 8, 2023

Ukrainians will never surrender. How long can they count on the West?

By Serhiy Prytula

Ukraine’s remarkable resistance during the first days of the Russian invasion convinced the democratic world to back the country but with Putin now preparing for a long war, continued Western resolve is vital writes Serhiy Prytula.

Civil Society Conflict

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

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The post Russia’s Black Sea blockade is part of Putin’s war on international law appeared first on Atlantic Council.

Jump to an expert reaction

Leland Lazarus: Rather than wagging the finger at Honduras, the US can take some practical steps to help Taiwan

Kitsch Liao: This is not as big a blow to Taiwan as it would have been in years past

Isabel Bernhard: Which country will switch sides next? Keep an eye on Paraguay.

Jason Marczak: Another reason for the US to invest more in Central America

Parsifal D’Sola: China’s gain points to the United States’ loss

María Fernanda Bozmoski: With the Northern Triangle divided on China, US strategy becomes more complicated

Rather than wagging the finger at Honduras, the US can take some practical steps to help Taiwan

Honduras’s decision, while unfortunate, was not unexpected. As a presidential candidate, Castro signaled that she would foster ties with Beijing, although that talk subsided after her election. Earlier this year, Honduran Foreign Minister Eduardo Enrique Reina met with Chinese Vice Minister of Foreign Affairs Xie Feng on the sidelines of Brazil’s presidential inauguration. The fact of the matter is that it makes hard economic sense for countries to do business with the world’s second-largest economy, especially countries like Honduras looking to boost economic growth to deal with income inequality, security, and climate change. 

The most immediate benefit Honduras will likely receive is Chinese financing for the Patuca III hydroelectric dam, which would provide much-needed electricity in rural parts of the country. In January, China’s ambassador to Costa Rica, who oversaw unofficial engagement with Honduras, said there was no possibility of such financing while Honduras remained a diplomatic ally of Taiwan.

Honduras will also be able to export its core commodities such as coffee, bananas, and seafood to the large Chinese market. Costa Rica, Panama, El Salvador, and the Dominican Republic have all seen their exports increase after establishing relations with China. Honduras will also likely join the Belt and Road Initiative, gaining access to concessional loans that are often hard to get from the World Bank, International Monetary Fund, or Inter-American Development Bank. China may also donate equipment and offer law enforcement training to Honduras’s national police to boost public security, which China has done in Nicaragua and elsewhere.

For the United States, rather than criticizing countries that switch sides, a far better strategy would be to encourage countries to maintain unofficial economic relations with Taiwan even as they make Beijing a new diplomatic ally. Several countries around the world still have Taiwan Economic and Cultural Offices. They should work collectively with regional and international partners to protect themselves from possible economic coercion from China. 

It will be interesting to watch the upcoming presidential elections in two other Taiwan allies in the region: Paraguay (April 30) and Guatemala (June 25). If the opposition wins in both countries, they may make the same economic cost-benefit decision as Honduras’s Castro. 

But measuring Taiwan’s success based on the number of diplomatic allies it has compared to China is a losing battle. Taiwan can always do a better job at selling its narrative and importance globally. The global role of TSMC as the manufacturer of 90 percent of the world’s most advanced chips has really come to the forefront in recent years. But Taiwan also has a great story as a foreign-assistance provider; its International Cooperation and Development Fund engages in agricultural technical assistance, digital connectivity, public health, and language teaching. In short, it’s not the quantity of diplomatic allies that count; it’s the quality. Taiwan and the United States should work together to tell Taiwan’s story to the world so that countries will keep Taiwan as a key partner, even if it’s no longer a diplomatic ally.

—Leland Lazarus is a nonresident fellow at the Global China Hub and associate director for national security at Florida International University’s Jack Gordon Institute of Public Policy. He formerly served as special assistant and speechwriter to the commander of US Southern Command and as a US State Department foreign service officer in China and the Caribbean.

This is not as big a blow to Taiwan as it would have been in years past

Castro’s announcement on Twitter marks Honduras’s second attempt to switch recognition to the PRC. Castro first attempted this in January while attending Brazilian President Luiz Inácio Lula da Silva’s inauguration. However, significant domestic opposition arose because of the widespread technical assistance Taiwan provides to Honduras, especially in agriculture, including shrimp farming, papaya, and fisheries.

Officials from Taiwan’s Ministry of Foreign Affairs claim to not have received an official notice regarding the severing of ties, suggesting that this might be a last-ditch negotiating tactic by Castro to try to secure previously requested financial aid. The Castro administration has also requested five hundred million dollars in aid from Taiwan to build a second hydroelectric dam; Sinohydro Corporation, a Chinese state-owned firm with questionable profit motives, already helped Honduras build the first Petuca III hydroelectric dam.  

A formal shifting of Honduras’s recognition to the PRC would have a smaller impact on Taiwan’s ability to preserve its international space than it would have before the international developments of the past year. While Honduras has long been an important ally for helping Taiwan raise awareness of its unique situation within international fora such as the United Nations, Russia’s full-scale invasion of Ukraine has raised Taiwan’s profile significantly as the international community draws comparisons between the situations in Ukraine and Taiwan. Furthermore, then US House Speaker Nancy Pelosi’s visit last year and the subsequent Chinese military exercise generated a significant outpouring of support and created opportunities for Taiwan to formalize and upgrade its various existing engagements with non-diplomatic partners in Europe and elsewhere. Taiwan in the last several years has been working to expand these working-level relationships on a bilateral and multilateral level, focusing on countries sharing similar values and facing similar threats.

These changing circumstances have all contributed to a reluctance on Taiwan’s part to accede to the ever-increasing demands for loans and aides from the Castro administration. While losing Honduras as an ally would be regrettable for Taiwan, given their long history of cooperation and exchanges, Taiwanese leaders are weighing the potential costs of maintaining such ties with the potential gains of channeling their efforts elsewhere.

—Kitsch Liao is an assistant director at the Global China Hub.

Which country will switch sides next? Keep an eye on Paraguay.

There are a couple of elements that are critical to take into consideration when assessing which Taiwan allies in Latin America and the Caribbean could switch diplomatic allegiances next.  

First, Honduras’s switch did not catch Taiwanese authorities off guard. Taiwan’s government had been working to strengthen relations in the past few months, particularly through Vice President Lai Ching-te’s visit to Honduras in January. A Taiwanese news outlet quoted an unidentified insider as saying that the warning light had been “red” for some time.

Second, Honduras’s switch was likely motivated more by political than economic considerations. After entering into a free trade agreement with Taiwan, Honduras ran an average yearly trade surplus of sixty million dollars with Taiwan. Although Honduras will almost certainly receive more trade and investment opportunities from China because of its diplomatic decision, Honduras may soon run a trade deficit with China, as other regional countries have done. 

Therefore, in trying to identify the next Taiwan ally in Latin America likely to switch, look for a country that recently had a high-level meeting with Taiwanese authorities and may have an upcoming election, regardless of its economically beneficial relationship with Taiwan. That suggests Paraguay (which will hold elections in April and saw its president travel to Taiwan in February for a state visit) or potentially Guatemala (which is expected to host Tsai later this month ahead of its June elections) may jump ship. 

Paraguay’s switch to diplomatic recognition of China seems more likely than ever, as the principal opposition candidate in the neck-and-neck election contest is vowing to derecognize Taiwan. Meanwhile, there was evidence of significant behind-the-scenes Chinese pressure on Paraguay to derecognize Taiwan during the COVID-19 pandemic in exchange for vaccines and other assistance, as well as an explicit Paraguayan request for one billion dollars in Taiwanese investment to remain allies.  

—Isabel Bernhard is an assistant director at the Adrienne Arsht Latin America Center.

Another reason for the US to invest more in Central America

Honduras’s decision to switch diplomatic relations with China—although a seismic moment for Taiwan as the number of its regional allies cascades—was not entirely a surprise. Castro previewed this possible move during the campaign before doing an about-face when a groundswell of pressure mounted in response. 

In the end, it’s a pragmatic move for the Honduran government. China is increasingly a robust regional economic partner, and Honduras does not want to be left behind. The move, for Honduras, is about diversifying its economy and its diplomatic partners as other countries in Central America have done in recent years. Since 2017, Panama, El Salvador, and Nicaragua have all switched to relations with China. Keep an eye on Guatemala. It’s a strong Taiwan ally but presidential elections this year could lead to a rethink as China’s influence grows in Central America.

Honduras’s move is yet another reason for the United States to advance concrete policies that incentivize US investment in Central America and to move nearshoring from rhetoric into reality. After all, China will use this moment to step up its own investments in the region. 

From a bilateral perspective, diplomatic recognition of Taiwan will not alter the course of US-Honduras relations. US engagement with the new Honduran government—a 180-degree turn from its predecessor—will be especially important in the months ahead as Title 42, which allowed the United States to immediately expel migrants because of COVID-19 concerns, is set to expire. Joint work to avoid a surge in migration will be a US priority.

—Jason Marczak is the senior director of the Adrienne Arsht Latin America Center.

China’s gain is the United States’ loss

To this day, Taiwan remains a hot topic in Central America and the Caribbean because of the United States. Counting Honduras’ break with Taiwan as official, six of the remaining thirteen countries that recognize Taiwan are in Central America or the Caribbean. Without US influence —sometimes with carrots, other times with sticks—odds are that every country in Central America and the Caribbean would have shifted recognition to Beijing a long time ago. From an economic standpoint, there’s simply no reason why a small state like Honduras should shun Beijing over Taipei. Shifting recognition is a pragmatic choice by the leadership in said country, a decision usually sweetened by PRC investment commitments. Since “national reunification” is a fundamental goal for the PRC, it dedicates vast resources and diplomatic efforts to push countries to abstain from any type of official contact with Taiwan. If there is one key takeaway from Tegucigalpa’s decision to break with Taipei, it is not so much greater PRC influence in the region but a loss of influence by the United States. 

—Parsifal D’Sola is a nonresident senior fellow in the Atlantic Council’s Global China Hub and the founder and chief executive officer of the Andrés Bello Foundation–China Latin America Research Center in Bogotá, Colombia.

With the Northern Triangle divided on China, US strategy becomes more complicated

As a presidential candidate, Castro’s foreign-policy plan previewed her intentions to switch recognition to Beijing, but those plans were paused once she assumed office. While Honduras’s overt rapprochement to China is not a surprise—Reina met with Xie in Brasilia during Lula’s inauguration to talk about a hydroelectric dam in Honduras—the move raises alarm bells throughout the hemisphere. It also further distances El Salvador and Honduras from neighboring Guatemala, which will have an effect on a potential cohesive US strategy towards the region. Historically in Central America, the establishment of relations with China has come with little to no transparency and massive infrastructure projects that generate little to no local jobs. The back-and-forth in Honduras’s foreign policy exemplifies the tough position in which Taiwan’s remaining Latin American and Caribbean allies are in, with pressure from the United States, China, and their own citizens. 

Additionally, Honduras’s foreign-policy shift reflects domestic pressures and the effect on foreign direct investment and investor appetite for recent and proposed reforms—including a fiscal reform currently in discussion in Congress.

—María Fernanda Bozmoski is the deputy director of programs at the Adrienne Arsht Latin America Center.

The post Experts react: Honduras is establishing ties with China. What should Taiwan and the US do? appeared first on Atlantic Council.

The ongoing convergence of the economic, security, and political crises in Pakistan is having an impact on this strategic relationship. While the near-term impact of these crises has led to a slowdown in the execution of CPEC, the economic crisis in particular makes it likely for Pakistan to become even more reliant on Chinese support. This essay explores the potential impact of the ongoing crises on the China-Pakistan relationship and its implications for US-Pakistan bilateral relations, especially in the context of the growing strategic competition between the United States and China.

Increased dependency is the likely medium- and long-term outcome

In the midst of yet another economic crisis, Pakistan is currently facing significant upheaval in the political, economic, and security domains. Amplified by near-historic polarization among ruling elites, the rapidly deteriorating situation has significant implications on near- and long-term Chinese influence in the country. 

The evolution of the crisis will determine the exact trajectory of this influence, but the following scenarios are likely to materialize in the near future:

1. Increased concessions made to China to secure financial inflows. Even with the completion of the ninth review of the ongoing Extended Fund Facility (EFF) with the International Monetary Fund (IMF), Pakistan is going to continue facing significant balance of payments pressures. Almost 30 percent of the country’s external debt is owed to China and Chinese commercial banks; debt owed to China in the power sector is in addition to this figure. Negotiations to either ease conditions or access additional debt to ease the balance of payments crisis may lead to increased Chinese demands in the economic and security domains.
2. Higher dependency on Chinese weapons to modernize the military and maintain strategic parity with India. Given the growing relationship between the United States and India, and Pakistan’s inability to meet its defense spending needs due to the economic crisis, it is likely that Islamabad becomes significantly more dependent on China in the coming years. This transition may accelerate in the nuclear and maritime domains in particular, with concessionary Chinese financing enabling Pakistan to procure advanced weapons systems considered critical for its national security interests. In addition, an acceleration of this trend is also likely to increase interoperability between Chinese and Pakistani military forces.
3. Demands to deal with growing unrest in Gwadar due to economic exclusion. Higher rates of inflation are exacerbating the challenges faced by communities that have historically been on the periphery of Pakistan’s political economy. This includes the local community in Gwadar, where China has made significant investments to build a port and other related infrastructure. While weeks-long protests have been quashed in recent weeks, locals remain unhappy over lack of access to clean drinking water, loss of livelihood due to Chinese deep-water fishing, and limited access to jobs in key projects being undertaken in and around Gwadar.
4. Presence of Chinese security to combat growing insurgent attacks on Chinese personnel and infrastructure. Recent months have seen a significant uptick in terror attacks across Pakistan, especially in Khyber-Pakhtunkhwa and Balochistan. The western corridor of the China-Pakistan Economic Corridor (CPEC) passes through this region, and both Baloch and Islamist militants have conducted a series of attacks targeting China. A sustained uptick in the tempo of these attacks may lead to increased demands for the presence of Chinese personnel to provide security to Chinese citizens and projects.

With its economy on the brink, Pakistan may make significant concessions to China to secure a large bailout package.

When it was first launched, CPEC was portrayed as a series of projects that would alter Pakistan’s developmental trajectory, generating new jobs, investment, and sustainable growth. While CPEC has managed to solve key infrastructure challenges for Pakistan, notably key among them being the chronic power shortages in the country, it has failed to deliver the type of sustainable growth many in Pakistan were expecting. Instead, the dollar-denominated debt taken on to finance large infrastructure projects has now saddled Pakistan’s economy, with economic experts suggesting that the country will likely require a debt restructuring in the coming months.

As of March 9, 2023, Pakistan is still engaged in talks with the IMF to complete the long-delayed ninth review of the ongoing EFF. Securing this agreement is vital to near-term economic stability and unlocking additional flows from friendly countries like China and Saudi Arabia. These inflows, however, are unlikely to bring long-term stability to the country given the scale of the near-term financing needs for the country.

This means that Pakistan will either have to engage with China for additional loans and deposits to build back its reserves, or engage in debt restructuring talks with both the Chinese and the Paris Club. In this scenario, China may demand additional concessions from Pakistan, including those that have long-term geopolitical ramifications. For example, during the crisis in Sri Lanka, China conducted a debt-to-equity swap for Hambantota Port, advancing the country’s geopolitical strategy in the Indian Ocean. In the Central Asian country of Tajikistan, similar agreements have been signed, including an October 2021 agreement to build a Chinese security facility in the country.

Local reports from key interlocutors in Pakistan suggest that China has previously made certain asks that Pakistanis have resisted, including a port call for a Chinese naval vessel at the Gwadar port. A rapidly deteriorating economy, with limited support from countries like the United States, is likely to increase Chinese leverage over Pakistan, forcing the latter to yield to Chinese requests that both expand Chinese influence in the Arabian Sea and also in the Himalayas, where the Chinese have built significant infrastructure to connect Gilgit-Baltistan to Xinjiang.

A reliance on geopolitical rents has created significant vulnerabilities.

Since its independence in 1947, Pakistan has found itself routinely at the door of the IMF. These bailouts are necessitated because policymakers pursue economic policies that generate unsustainable growth, leading to external sector crises where the country finds itself tapped out of foreign currency needed to repay its debt and fulfill import payment obligations.

Following the ouster of General Pervez Musharraf as president, successive democratically elected governments have required IMF bailouts, but only one in history has been successfully completed (in 2017, after which in 2018 Pakistan was already negotiating a new IMF program). 

This stems from the failure of successive governments, both civilian and military, to restructure the economy away from benefiting a tiny elite at the expense of the welfare of ordinary citizens. These failures have not only created an unsustainable macroeconomic environment, forcing governments to seek bailouts from the IMF, but they also make strategic concessions to key allies and partners like the United States, China, and Saudi Arabia.

For example, a key driver of the cooperation provided to the United States in Afghanistan was the state of the economy in 2001. Once Pakistan decided to join forces with Washington, debt restructuring and an influx of dollars soon followed, leading to a short-lived economic boom that many Pakistanis still remember. A similar situation played out from 2013 onwards, when China decided to launch CPEC, the crown jewel of the Belt and Road Initiative. Inflows of foreign debt fueled economic growth, only for the country to find itself short on foreign currency needed to repay these obligations. 

Successive IMF programs demand resolution of the same long standing issues. They also have the same impact on the broader economy: growth slows down, inflation rises, and millions of households fall below the poverty line. 

The ongoing crisis, however, is significantly different both in terms of the scale of the crisis—Pakistan has only weeks of import cover left—and the fact that geopolitical rents are difficult to come by. In this situation, Pakistan has struggled to access additional funding from key allies, especially China.

However, should the crisis spiral out of control, Pakistan’s political and military elite are likely to accede to Chinese demands to stabilize the political economy. Should such an outcome materialize, Chinese influence in Pakistan, the Arabian Sea, and the Himalayas is likely to increase, leading to significant impact on the United States’ strategic interests in Central and South Asia as well as the Indian Ocean.

Economic pressures are likely to increase dependency on Chinese weapons, particularly in the nuclear and maritime domains.

While Pakistan has a historic defense partnership with China, its military has preferred weapons systems provided by Western countries, especially the United States. Over the last few years, however, a closer relationship between Washington and New Delhi has increased concerns in Rawalpindi, leading to an increased dependency on Chinese weapons. The economic crisis in Pakistan, if left unaddressed, will significantly accelerate Rawalpindi’s dependency on Chinese weapons, especially more expensive platforms considered critical to maintaining strategic parity with India.

Pakistan’s growing defense needs are likely to be met by cheaper Chinese weapons provided through concessional financing, as Islamabad finds it difficult to pay for modernization out of its own budget. Over time, such a transition is likely to reduce US influence in Pakistan, especially among the country’s powerful military establishment. As a result, Washington may find it difficult to have diplomatic and strategic leverage over Pakistan, given the declining reliance on US equipment on the one hand and growing defense ties between Washington and Delhi on the other.

As Pakistan’s dependence on Chinese systems grows, this cooperation is already accelerating interoperability between Chinese and Pakistani military forces.

Increased militarization of Gwadar due to local protests may deepen the Chinese military influence in the port city.

Chinese investments in Gwadar have led to a growing sense of isolation and exclusion among the local communities in the city. This has turned into a political crisis, with local leaders conducting a series of protests in early 2023. Key demands from the protestors have revolved around access to clean water and electricity, investments in the local community, and provision of jobs and protection of livelihoods for fishermen from deep-sea trawlers, many of which are Chinese.

In 2022, the Haq Do Tehreek (Gwadar Rights Movement) staged sit-in protests for over fifty days in Gwadar, including outside the main entrance to the port. They “blocked the Gwadar East Bay Expressway” and conducted protests “outside the under-construction New Gwadar International Airport.” In addition, the protestors demanded that the Chinese leave the city.

Succumbing to Chinese pressure, Pakistani officials acted aggressively to deal with the protests, arresting the movement’s leader and imposing emergency law in the city to prevent a worsening of the situation. These actions have only further angered the local community, risking further protests and violent actions in Gwadar. Most recently, Pakistan’s army chief visited the port city, blaming a “handful of misguided elements” for the worsening situation.

The continuation of these tensions are likely to further militarize Gwadar in the coming months, especially due to a deteriorating political and economic environment. This is likely to not only lead to increased presence of the Pakistani military in the area, but also increased demands by the Chinese to allow their own security personnel—private contractors and others—in the area to guard key facilities.

A worsening security situation may also lead to a growing presence of Chinese security personnel across Pakistan.

Recent weeks have also seen an increase in the tempo of militant attacks carried out by both Baloch and Islamist militant groups, including the Baloch Liberation Army (BLA) and the Tehreek-e-Taliban Pakistan (TTP). Recognizing the growing discontent among Baloch, the TTP has also started to target Baloch youth in its information operations, arguing that they have the same enemy.

As a result, a sustained uptick in attacks on Chinese engineers, teachers, and facilities has been witnessed in recent months, including a suicide bombing that killed Chinese language teachers in Karachi. The growing security concerns have led Chinese officials to demand increased security measures from Pakistan and reportedly some conversations about providing permits to Chinese security personnel to provide security details to Chinese officials and facilities in Pakistan. While Pakistan has so far resisted these demands, a worsening economic and security situation is likely to increase Chinese pressure. Pakistan will find it challenging to resist these demands in a scenario where US support to counter militant groups is limited, especially if China makes these demands as part of a broader economic and security assistance package to stabilize the country’s economy.

Indifference from the United States will accelerate these trends.

The ongoing crisis in Pakistan is perhaps the most serious threat to national cohesion since the war in 1971, which culminated in the surrender at Dhaka and the birth of Bangladesh. With Pakistan’s economy on the brink of default, groups such as the TTP and BLA are sensing a weakness, leading to a rapid uptick in their attacks on Pakistani security personnel. In addition, these groups have selectively targeted Chinese personnel and key CPEC projects to further undermine domestic and international confidence in the country’s ability to deal with these challenges.

As these crises metastasize, Islamabad is likely to engage both the United States and China for additional support. With the former signaling a largely cold indifference to Pakistan in these trying times, Pakistan has sought support from both China and Saudi Arabia. These allies have, for the time being, asked Islamabad to engage with the IMF and bring the EFF back on track. However, they have also indicated that they will not let Pakistan descend into a chaotic and disorderly default akin to what Sri Lanka experienced several months ago. This makes it all the more likely that as the economic and security crisis worsens, China will retable some key security and geopolitical demands in discussions with Pakistani officials. 

Should the crisis reach a point of no return for Pakistan, its leaders may accede to Chinese demands, leading to a dramatic increase in Beijing’s influence in the region, including the Arabian Sea, the Himalayas, and onwards into Afghanistan and Central Asia.

Given this context, it is vital for the United States to consider the implications of the possible scenarios laid out above and perhaps seek to develop a more robust strategy that prevents (or at the very least slows down) Pakistan from becoming a major Chinese outpost in Southwest Asia and the Indian Ocean basin regions.

Uzair Younus is director of the Pakistan Initiative at the Atlantic Council’s South Asia Center. He also is the Vice President at The Asia Group.

The South Asia Center serves as the Atlantic Council’s focal point for work on the region as well as relations between these countries, neighboring regions, Europe, and the United States.

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The post <strong>With Pakistan’s economy in freefall, Chinese economic and military influence is likely to grow in the country</strong> appeared first on Atlantic Council.

This work empirically examines China’s growing footprint in Sub-Saharan Africa’s investment, trade, cultural, and security landscape over the past two decades. It highlights China’s increasing appetite for Sub-Saharan Africa’s natural resources and growing young labor force—identifying the region’s consumer market as an important destination for Chinese goods and services over the next few decades. 

The analysis identifies more than 600 Chinese investments and construction contracts in Sub-Saharan Africa (SSA), valued at over $303 billion, signed between 2006 and 2020. Four sectors attract 87 percent of China’s investment and construction in the region: energy at 34 percent; transport, 29 precent; metals, 13 percent; and real estate, 11 percent. This is very similar to the Middle East and North Africa Region, where the energy sector attracts close to 50 percent of China’s investment, followed by transport, 19 percent; real estate, 15 percent; and metals, 6 percent.

In terms of trade, this work shows that between 2001 and 2020, China’s merchandise trade with the region increased by a whopping 1,864 percent—surpassing SSA’s trade with both the United States and the European Union. In other words, from 2001 to 2020, China’s share in total merchandise trade in SSA rose from 4 percent to 25.6 percent, while during the same period, the shares of the United States and the EU in SSA’s total trade declined by 10 percentage points and 8 percentage points, respectively.

The report also takes a look at China’s arms trade with the region. Twenty-two percent of SSA’s arms imports are sourced from China, making China the region’s second-largest supplier of arms and military equipment, with Russia in the lead (24 percent). 

Finally, the report highlights the fact that the size of Chinese migrants in Africa is estimated at one to two million, with around one million permanently residing in the region. The largest numbers are in Ghana, South Africa, Madagascar, Zambia, and the Democratic Republic of the Congo.This work is the first in a series of empirical analyses that will be conducted on China’s presence in developing economies and low-income countries.

Explore the data in the Issue Brief

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The post China in Sub-Saharan Africa: Reaching far beyond natural resources appeared first on Atlantic Council.

Frances Burwell: Sunak proves the UK and EU can work together—at his own political peril

Livia Godaert: What this deal says about the union, the monarchy, and the PM’s soft power

Jörn Fleck: The UK and EU can finally move forward on trade, defense, and more 

Sunak proves the UK and EU can work together—at his own political peril

The agreement Monday between the United Kingdom and the European Commission on Northern Ireland represents a remarkable reconciliation between the EU and the UK government. As prime ministers, Boris Johnson and Liz Truss had completely lost the confidence of the European Commission and of the EU member state governments. Since moving into Number 10, Sunak—a Brexit supporter from the beginning—has proven that the United Kingdom and EU can address their differences constructively. Analysts have long seen a path forward in these negotiations to a settlement very similar to the one announced today, so the details are not surprising. But until Sunak became prime minister and established a more pragmatic approach, there was little chance that even this obvious solution could be agreed upon.  

This more constructive climate is vital not only for achieving the Windsor Framework, but also because there will inevitably be hiccups in its implementation. Both parties, and the Northern Ireland government in Stormont, must be prepared for continuing negotiations over technical details. For those who want to play politics and exacerbate differences, there will be plenty of ammunition. But we can hope that calmer personalities will prevail and push forward to make this new arrangement work. If it does work, Northern Ireland stands to benefit tremendously. Not only will there be renewed political stability, but foreign direct investment, especially in the manufacturing sector, will be strong, given that the province will be a doorway to both the EU and UK markets. 

However, the agreement has some tall hurdles to overcome before it becomes reality. Sunak has pledged to let Parliament vote on the accord, and a wing of his own party, the Conservatives, seems oddly opposed to anything that will finalize Brexit. Perhaps these MPs see themselves coming back to power if divisions over Brexit persist, and thus a settlement is contrary to their ambitions. Similarly, the Democratic Unionist Party (DUP) has found political support in opposing the previous arrangement—the Northern Ireland Protocol—and it is not clear that the DUP will now go along with this new formulation (party leaders say they will take a few days to review and decide). 

A failure by the United Kingdom to formally adopt the Windsor Framework will trigger two crises: a political crisis within the United Kingdom and a rupture in UK-EU relations. Sunak cannot survive as prime minister if defeated on such a major issue. Moreover, if he wins the parliamentary vote because of the support of the Labour party (which has already indicated that it favors the agreement) rather than his own, he will be significantly wounded. Britain will likely return to the state of continuous political chaos that it suffered from 2016 until Sunak’s arrival, with consequences for both domestic governance and its international presence. Failure to move forward with this agreement will also cause an enormous rupture with the EU, exactly when the United Kingdom and EU need to be working together on a range of issues, from climate change to Ukraine. Already in Brussels, there is a feeling that the United Kingdom has essentially disappeared, rather than building a new relationship. The fate of the Windsor Framework will determine the future of that cross-Channel partnership—or even if there will be one.

—Frances Burwell is a distinguished fellow at the Atlantic Council and a senior director at McLarty Associates.

What this deal says about the union, the monarchy, and the PM’s soft power

It’s not déjà vu or a time loop—there has been an agreement reached between the United Kingdom and the EU on Northern Ireland. Again. As we parse through the nitty-gritty details of yet another “agreement in principle” between the United Kingdom and the EU, there are three interesting takeaways for the state of the United Kingdom and its role in the world, seven years on from the initial Brexit vote.

Let’s first talk about devolution and what this agreement tells us about the state of the union. This framework—which renames and replaces the beleaguered Northern Ireland Protocol—gives an important power to Stormont. This agreement establishes the “Stormont Brake,” which would allow Northern Ireland to call for the UK government to veto any new or amended EU rules that would have a “significant impact on the day-to-day lives of businesses and citizens.” Within the context of a long-running dispute with the Democratic Unionist Party, which refuses to participate in Northern Ireland’s power-sharing arrangement because of the Northern Ireland Protocol, and broader debates about the Union writ large, this is a significant outreach. 

The rhetoric of addressing a democratic deficit, of upholding constitutional duties to the Good Friday (Belfast) Agreement, and of “safeguarding” Northern Ireland’s place in the union reflect a deeper anxiety. This agreement follows a strong showing by Sinn Fein in last year’s Northern Ireland assembly elections, as well as a fight of a different nature with Scotland over a gender self-identification bill that brought Number 10 and Holyrood to the brink of a constitutional standoff. The unity of the kingdom has felt precarious since the Brexit vote, but there is a new urgency. The cost-of-living crisis has thrown into sharp relief the fact that that the petty interparty squabbles of the last several years have real consequences outside Westminster, and that some parts of the union may have had enough. Number 10 may be hedging its bets here, building up goodwill and incentivizing partnership with the devolved government in Northern Ireland to stave off further intra-UK fights. 

Second, the role of the monarchy in this agreement cannot be ignored. The United Kingdom no longer has a sovereign removed from politics—unlike Queen Elizabeth II, King Charles III engaged with a variety of political issues before ascending to the throne. We see the next stage of this in how intertwined the monarchy is with the optics of this agreement: from its name—the Windsor Framework—to the meeting between the king and von der Leyen at Windsor Castle on the official itinerary. Whether this is a net benefit or negative remains to be seen, as some Parliament backbenchers have expressed anger at the king for this intervention, but it marks a new era in the relationship between the government and the monarchy. 

A third takeaway is that this is a soft-power victory for Sunak. There are still fights to be had with Parliament and the DUP, and Northern Ireland will probably always be a point of re-negotiation and tension in the UK-EU relationship, but managing to untangle the mess that his predecessors made of Northern Ireland in their various negotiations is quite an achievement. When Sunak was first appointed as prime minister, I made the point that one of his key priorities should be repairing Britain’s reputation on the international stage, particularly with the EU and the United States. The Northern Ireland Protocol—and the subsequent bill attempting to take it all back—was a sticking point in both of these key relationships, and Sunak has shown that he is capable of taking that huge step forward. 

This will open doors for the United Kingdom to pursue its broader international strategy. For example, von der Leyen has already discussed allowing the United Kingdom to participate in the Horizon research scheme, which will be key to the success of Sunak’s technology-focused government reshuffle. The Windsor Framework shows that Sunak is capable of moving beyond Brexit to be a partner to friends and allies. He also can break through a stalemate, a skill that will be an asset for the entire transatlantic community if he can continue to wield it. 

—Livia Godaert is a nonresident fellow at the Atlantic Council’s Europe Center.

The UK and EU can finally move forward on trade, defense, and more 

The new Northern Ireland Protocol deal is a pragmatic compromise and a welcome sign for EU-UK relations. But the announcement of the so-called Windsor Framework is just the first step. The agreement itself will need to be approved by both the European Union’s members and, more crucially, the UK House of Commons—whose earlier rejections of the “Irish backstop” to deal with the border issue ended Theresa May’s premiership. 

More broadly, the compromise could be a stepping stone toward a more constructive EU-UK relationship. That von der Leyen traveled to London to iron out the details personally and announce the agreement shows the concerted effort and goodwill in Brussels and London to move past the worst parts of the Brexit acrimony. For years the relationship between London and Brussels was toxic, and even a short train ride by the Commission president to London would have been unthinkable. But geography, economic realities, and the need for European and transatlantic unity in the face of Russia’s aggression in Ukraine all make a lasting estrangement between the United Kingdom and the EU unsustainable. The Northern Ireland Protocol remained the foundational roadblock to setting the UK-EU relationship on a better footing. With the matter on the path to be settled, Brussels and Britain can finally begin to build out a successful and productive relationship on issues of trade, defense cooperation, and even digital policy—especially when unity is needed now more than ever.

—Jörn Fleck is the senior director of the Atlantic Council’s Europe Center.

The post Experts react: Will a new deal on Northern Ireland repair UK-EU relations? appeared first on Atlantic Council.

Atlantic Council research shows that a mere 10-minute reduction in wait times at the US-Mexico border can have increasingly positive effects on communities and economies on both sides of the border. The Adrienne Arsht Latin America Center, in collaboration with the Hunt Institute for Global Competitiveness and Colegio de la Frontera Norte, analyzed three major potential economic impacts of this reduction. The first, “The economic impact of a more efficient US-Mexico border: How reducing wait times at land ports of entry would promote commerce, resilience, and job creation,” looks at the impact of a 10-minute reduction for Mexico and the United States on a national level. The second, “The transformative power of reduced wait times at the US-Mexico border: Economic benefits for border states,” looks at the economic impact for the United States’ four and Mexico’s six border states. The third, and final report “US-Mexico commerce: Tracking the final destination and Mexico’s fiscal benefit with Greater Border Efficiency,” tracks the final destination and economic impact of commerce entering the United States via three key ports of entry. 

This interactive map summarizes the three reports’ findings. It separates the data into US national benefits, US border benefits, Mexico national benefits, and Mexico border benefits. The red dots analyze three specific ports of entry — San Diego, California; El Paso, Texas; and Laredo, Texas — tracking where cargo passing through each ends up in the United States.

Click along the map to find out more about the economic impact of a 10-minute reduction in wait times at the US-Mexico border. 

In-depth research and reports

Report Feb 17, 2023

The transformative power of reduced wait times at the US-Mexico border: Economic benefits for border states

By Alejandro Brugués Rodríguez, Noé Arón Fuentes Flores, David Gaytan, John Gibson, Mayra Maldonado, Jason Marczak, Jorge Eduardo Mendoza Cota, José Ángel Moreno, Roberto Ransom, and Ignacia Ulloa-Peters

Atlantic Council’s new data shows that a mere 10-minute reduction in wait times – without any additional action – can create thousands of Mexican jobs, grow the gross domestic product (GDP) of several Mexican states, and generate hundreds of thousands of dollars in new spending in the United States.

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Report Sep 27, 2022

The economic impact of a more efficient US-Mexico border: How reducing wait times at land ports of entry would promote commerce, resilience, and job creation

By Alejandro Brugués Rodríguez, John Byrd, Noé Arón Fuentes Flores, David Gaytan, John Gibson, Camila Hernández, Mayra Maldonado, Jason Marczak, Jorge Eduardo Mendoza Cota, Roberto Ransom, and Ignacia Ulloa

Improvements in border management and the adoption of new technologies at the US-Mexico border have the potential to enhance border security and generate economic benefits for the United States and Mexico through expedited flows of goods and people.

Economy & Business Latin America

Issue Brief Feb 27, 2023

Beyond the US-Mexico border: Destination of final goods, environmental impact, and future scenarios for border relations

By Atlantic Council

Three complementary analyses on the value and final destination of northbound commercial trade flows; the environmental impact of idling vehicles at the US-Mexico border; and three potential scenarion for the future of US-Mexico relations.

Economy & Business Energy & Environment

The post Ten minutes at the border: Revving the US and Mexican economies appeared first on Atlantic Council.

A joint analysis by the Atlantic Council’s Adrienne Arsht Latin America Center, the University of Texas at El Paso’s Hunt Institute for Global Competitiveness, and El Colegio de la Frontera Norte.

US-Mexico commerce: Tracking the final destination and Mexico’s fiscal benefit with greater border efficiency

By Edgar David Gaytán Alfaro, John Gibson, Mayra Maldonado, Jason Marczak, Roberto Ransom, and Ignacia Ulloa-Peters

This report determines the value and final destination of northbound commercial trade flows. Based on limited data, it finds that 45 percent of trade entering the United States remains in border states (Arizona, California, New Mexico, or Texas), while 55 percent is distributed to other regions across the United States. It also evaluates the tax revenue collected by Mexico’s six border states (Baja California, Chihuahua, Coahuila, Nuevo León, Sonora, Tamaulipas) stemming from increased efficiencies at the border. Read our report to find out more about the top 5 receiving states, as well as the economic impact that different regions across the United States would experience following a 10-minute reduction in wait times.

Our border environment, water, and air pollution

By The Hunt Institute for Global Competitiveness, University of Texas at El Paso

This environmental impact analysis evaluates the impact idling vehicles have on water and air pollution across the US-Mexico border. Reduced wait times can significantly reduce particulates in the air and water, which currently pose a significant threat to the health of people living in border communities. To find out more about the potential reduction in pollution following decreased wait times, read our report or view our infographic.

Border 2033: Three scenarios for the United States and Mexico

By Peter Engelke, Deputy Director of Foresight, Scowcroft Strategy Initiative; and Nonresident Senior Fellow, Global Energy Center, Atlantic Council

Foresight scenarios help us tell stories about how the future might unfold and are intended to stir imaginative thinking. In this report, we portray three scenarios of a world that might exist ten years from now in 2023 based upon uncertainties in the United States and Mexico’s relationship today. More specifically, we hypothesize what the US-Mexico relationship would look like if 1) there is little to no change in the manners that the United States and Mexico engage, 2) fears over border security leads to an increasingly hardened border, and 3) Mexico and the United States increase collaboration on border issues. Find the full report below.

Report Sep 27, 2022

The economic impact of a more efficient US-Mexico border: How reducing wait times at land ports of entry would promote commerce, resilience, and job creation

By Alejandro Brugués Rodríguez, John Byrd, Noé Arón Fuentes Flores, David Gaytan, John Gibson, Camila Hernández, Mayra Maldonado, Jason Marczak, Jorge Eduardo Mendoza Cota, Roberto Ransom, and Ignacia Ulloa

Improvements in border management and the adoption of new technologies at the US-Mexico border have the potential to enhance border security and generate economic benefits for the United States and Mexico through expedited flows of goods and people.

Economy & Business Latin America

Report Feb 17, 2023

The transformative power of reduced wait times at the US-Mexico border: Economic benefits for border states

By Alejandro Brugués Rodríguez, Noé Arón Fuentes Flores, David Gaytan, John Gibson, Mayra Maldonado, Jason Marczak, Jorge Eduardo Mendoza Cota, José Ángel Moreno, Roberto Ransom, and Ignacia Ulloa-Peters

Atlantic Council’s new data shows that a mere 10-minute reduction in wait times – without any additional action – can create thousands of Mexican jobs, grow the gross domestic product (GDP) of several Mexican states, and generate hundreds of thousands of dollars in new spending in the United States.

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The post Beyond the US-Mexico border: Destination of final goods, environmental impact, and future scenarios for border relations appeared first on Atlantic Council.

In part, the shock came because Banga hails from the private sector. He is the vice chairman of the private equity firm General Atlantic and a former chief executive officer of Mastercard. Names floated as potential nominees in recent weeks favored current and former government officials. 

Banga’s nomination comes after the current World Bank president, David Malpass, announced that he will step down in June, ahead of the end of this five-year term. It also comes as the nearly eighty-year-old organization faces an array of global crises, from the COVID-19 pandemic and food insecurity to climate change. In fiscal year 2022 alone, the World Bank provided more than $104 billion in loans, equity investments, grants, and guarantees to partner countries and private businesses. 

Below, experts from our GeoEconomics Center answer the burning questions around this announcement. 

Do you expect any pushback on Banga’s nomination?

Other countries can put forward their nominees, and then the World Bank’s executive board will consider the nominees. The board has signaled they will decide by the end of May. However, per an informal agreement at the creation of the Bretton Woods Institutions in 1944, the United States has always chosen the World Bank president and has always selected an American. The Europeans are informally granted the privilege of selecting the head of the IMF (currently Kristalina Georgieva, a Bulgarian economist who was actually a former acting president of the World Bank herself). It is possible that other countries from emerging markets may try to oppose this arrangement this time around, but it seems unlikely that they could prevent Banga from ultimately being selected.

—Josh Lipsky is the senior director of the GeoEconomics Center.

There has been explicit signaling from the World Bank’s executive board, as well as a push from the nongovernmental-organization community, including ONE, that it’s time for a woman to (finally) helm the World Bank. There has also been an increasing sense that emerging markets and developing economies should have a stronger role in governance. With this nomination of Banga, we could very well see an alternative candidate emerge. 

—Nicole Goldin is a nonresident senior fellow with the GeoEconomics Center and the global head of inclusive economic growth at Abt Associates.

What does Banga’s nomination reveal about how the Biden administration views the World Bank?

The US nomination of Banga as the next president of the World Bank seems to convey the priorities the Biden administration expects from the institution going forward. Besides sharing the administration’s concerns about mobilizing resources to combat the effects of climate change, Banga brings to the table his track record as a successful chief executive officer of Mastercard, skill in mobilizing public and private capital, and experience doing business in developing countries. These skills and knowledge are important in leading the World Bank in the period ahead. 

—Hung Tran is a nonresident senior fellow with the GeoEconomics Center and a former IMF official.

Selecting a former leader of a major international company (which is not the typical mold for a president) suggests that the United States is focused as much on internal reform of the bank as it is on changing World Bank lending policy on climate and China. Reforming the inner workings of the World Bank has been a perennial mission for the institution’s presidents, and it’s unclear if Banga will have more success than others. 

We have done work on this issue at the Atlantic Council through our Bretton Woods 2.0 project, and what we show is that the World Bank’s ability to lend effectively to countries around the world ties directly to how it is structured internally.

—Josh Lipsky

What is the most pressing issue the next World Bank president will face?

The next World Bank president will have to contend with compounding crises: COVID-19, climate change, and conflict. The fallout from them includes learning loss, the reversal of gains against poverty, inflation and food insecurity, widening inequality between and within countries, and debt.

—Nicole Goldin

While the White House announcement of Banga’s nomination highlighted climate change among “the most urgent challenges of our time” facing the World Bank, there are several other issues that will require his immediate attention, notably the debt crisis that has enveloped dozens of countries since the COVID-19 pandemic hit. An estimated 60 percent of low-income countries are in, or at high risk of, debt distress, and a solution to their plight has been elusive because of an impasse in getting private-sector lenders and China (the World Bank’s third-largest shareholder) to agree to debt-restructuring deals.

The US government and Malpass have repeatedly criticized China over the issue, and the White House likely will expect Banga to keep up the pressure. But as China cuts its lending to developing countries, the World Bank will face calls to increase its commitment of funds not just to climate change programs, but in traditional areas such as infrastructure and poverty reduction.

—Jeremy Mark is a nonresident senior fellow with the GeoEconomics Center. He previously worked for the IMF and the Asian Wall Street Journal.

The post The big questions (and answers) about Ajay Banga’s nomination to lead the World Bank appeared first on Atlantic Council.

Full interview

Featured quotes

Here are a few highlights from Profumo’s conversation with Matthew Kroenig, senior director of the Atlantic Council’s Scowcroft Center for Strategy and Security.

On emerging technologies

“We have to consider that there are some areas of the technological advancement where the civil world is more advanced—typically artificial intelligence, big data, simulation. But there are threats like hypersonic or direct energy weapons which are not civil, but we must invest in them as an industry.”

On the future of transatlantic relations

“A strong and unified Europe can be a pillar in defense of the Western value system. This is very important. Italy can be the bridge that connects all these elements.”

On the challenge posed by China and the possibility for the West to decouple its economy from Beijing’s

“Completely decoupling from China is not possible. We must manage selective decoupling. …It is important in any situation to diversify your sources of suppliers to ensure your survivability no matter what.”

On US-Italy relations

“The largest exporting sector is machinery, not fashion, because we can have the right solutions to specific problems with a tailor-made production capability. We are capable of finding solutions in very difficult situations.”

The Scowcroft Center for Strategy and Security works to develop sustainable, nonpartisan strategies to address the most important security challenges facing the United States and the world.

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The post Leonardo CEO Alessandro Profumo on Italy’s role in unifying Europe and ‘selective decoupling’ from China appeared first on Atlantic Council.

Russia has since pursued alternatives to manage its trade and reserves. Chinese yuan and gold became the stars of the show, but both introduced new vulnerabilities and inconveniences. Yuan makes Russia dependent on Beijing’s goodwill, while gold is not as sanctions-proof as Moscow expected, and Russia has had a hard time scaling up its illicit gold trade.

Yuanization creates new vulnerabilities

In February 2022, heavily sanctioned and isolated, Russia had to find an alternative to dollar-denominated transactions. The new currency needed two characteristics: It had to be relatively stable and minted by a non-sanctioning country. Of the few eligible options, such as the Indian rupee and South African rand, China’s yuan was the only one actively seeking an international role and able to take it on.

Moscow has rapidly intensified its use of yuan in two main ways: increasing the yuan’s share in Russia’s reserves and switching to direct ruble-yuan trade instead of using the dollar as an intermediary. At the end of last year, Russia’s Finance Ministry increased the permitted share of yuan reserves in the National Wealth Fund to 60 percent. Meanwhile, ruble-yuan trade increased eighty-fold from February to October 2022. With each of these actions, Russia created new vulnerabilities and cemented itself as the little brother in the relationship.

Ruble-yuan exchange rate vulnerability. China is Russia’s top trade partner, and its tight control of the yuan-ruble exchange rate creates risks for Russia’s balance of trade. A tightly controlled yuan may inherently seem more stable than a floating dollar, but Chinese authorities have managed the ruble-yuan exchange rate to its advantage before. Specifically, shortly after the invasion began, the Chinese government relaxed yuan controls to allow the rapidly depreciating ruble to fall faster, thus avoiding subsidizing Chinese goods for Russians by giving them more yuan than their rubles were really worth. As a result, it became much more expensive for Russia to buy Chinese goods. In other words, China could choose at any time—for political reasons or otherwise—to make Chinese imports really expensive and Russian exports to China much cheaper.

Chinese bond liquidation risk. The Russian Central Bank might not be able to sell Chinese bonds and convert the proceeds to rubles if Beijing decides to impose restrictions on yuan outflows. The liquidity risk of Chinese bonds is one of the main reasons why central banks around the world avoid purchasing them. In March 2022, the Russian Central Bank and National Wealth Fund were estimated to own 140 billion dollars’ worth of yuan-denominated assets, money that could be not be obtained by Moscow if Beijing decides to impose capital controls.

Currency swap lines elimination risk. Russia is vulnerable to Beijing’s political will when it comes to currency swap lines—an agreement between two central banks to exchange currencies. Moscow has used bilateral swap lines with the Chinese Central Bank to build up its yuan reserves. In 2014, Russia made a three-year currency swap deal worth 150 billion yuan and renewed it for another three years in 2017. In January, the Russian and Chinese central banks agreed to set up a new yuan currency swap instrument. However, such agreements expose Chinese financial institutions to US secondary sanctions for helping Russia’s sanctions evasion efforts. If Beijing determines that the threat of secondary sanctions is becoming substantial, it will soon abandon the swap lines with Russia. 

Last year saw Russia take the first major steps toward the yuanization of its economy, a necessity for Moscow that in turn is increasing Beijing’s clout in international finance. While the yuan helped Russia weather the effects of sanctions in the short term, it also opened a Pandora’s box of new vulnerabilities for Moscow. For as long as sanctions remain in place, Russia will have to stay on the right side of Beijing. 

Is Russia turning to gold-digging?

Moscow has been looking for alternatives to the euro and dollar since its first invasion of Ukraine in 2014. Its gold holdings, for example, have nearly tripled since 2014. Moscow is currently sitting on 150,000 gold bars valued at about $140 billion, mostly stacked in Russian vaults out of reach of Western asset freezes. 

Russia is also the world’s second largest gold producer, and miners are keen to sell excess gold in international markets. Beijing has been an enthusiastic buyer. Russia is reportedly selling gold to China at a discount of up to 30 percent, and gold transfers from Russia to China increased by 67 percent in 2022. 

Nevertheless, we haven’t so far observed a global mass sell-off of Russian reserve gold for four reasons.

1. Legal trade of Russian gold has been mostly blocked off.
2. Illicitly transporting 150,000 gold bars is a logistical nightmare.
3. Moscow has not yet felt an intense need for financing due to its energy export windfall in 2022.
4. Most critically, Russia will struggle to find willing and able partners to scale this illicit trade. Fellow sanctioned countries, the likes of Iran, Venezuela, and Myanmar, are deprived of dollars and euros themselves. Other gold hubs such as China, India, and the United Arab Emirates (UAE) are not interested in mass purchases due to the heightened risk of exposure and Western retaliation. 

Formal channels cut off. The London Bullion Market Association’s decision to suspend all Russian refineries from its accredited list in March 2022 and a gold import ban by Group of Seven (G7) countries in June 2022 meant that Russian gold’s traditional sales routes to the United States and Europe were cut off. Russia also cannot use gold as collateral for loans or for location swaps—a transaction in which two parties agree to exchange gold they have in different locations without physically moving the gold. But no one would want to swap their non-sanctioned gold with sanctioned Russian gold. Moscow has hence turned to illicit means to liquidate its gold.

Illicit channels are also challenging. Gold’s physical nature can make it a hassle-ridden financial asset since transporting gold is more difficult than digital assets. But its advantage is its ability to be moved outside of electronic financial networks. Russia could use gold to bypass sanctions by partnering with non-Western gold hubs including China, the UAE, and India in exchange for cash or barter. Refineries are permitted to list intermediary countries as the source of unrefined gold, meaning its Russian origin is fairly easy to mask. While refined gold is inscribed with the refinery’s name and date, making it readily identifiable as Russian, it can be remelted and then resold as anything-but-Russian gold. 

Recent history is replete with precedents for gold smuggling by sanctioned economies. In 2019, Russia reportedly flew Venezuelan gold around the world and exchanged it for cash dollars which were then flown back to Caracas. In 2012, Iran sold natural gas to Turkey in exchange for gold, which was then sold for cash in Dubai. 

Potential partners will remain hesitant to trade a sanctioned asset in large quantities unless the risk of exposure is alleviated. But as illicit trade of other commodities between Russia and non-Western countries expands, Russian President Vladimir Putin’s shadow fleet of ships grows, and networks become entrenched, risks could be managed and more gold could clandestinely start flowing with it.

China’s global yuanization ambition

Russia and China have partnered in dedollarization since 2014. But Russia’s invasion of Ukraine and the resulting Western sanctions have created an imbalance in the urgency for dedollarization. 

In addition to increasing its yuan reserves and eliminating the dollar intermediary in yuan-ruble exchange, Moscow is planning its own international standard for gold and other precious metals where prices will be fixed to members’ national currencies, likely including the yuan. 

China is all too happy to assist Russia in this process. Beijing has a longer-term goal of competing with the dollar and of advancing the yuan as an international currency. Russia will be a test case as the first large economy to embrace the yuan in this way. With the power dynamic in the relationship strongly tilted in China’s favor, Russia’s urgency will permit the People’s Bank of China to experiment with financial and monetary policies in a controlled environment while easing the yuan into a more international role.

Maia Nikoladze is an assistant director for economic statecraft at the Atlantic Council’s GeoEconomics Center. Follow her on Twitter @Mai_Nikoladze.

Mrugank Bhusari is an assistant director with the GeoEconomics Center focusing on international finance and global governance. Follow him on Twitter @BhusariMrugank.

The post Russia and China have been teaming up to reduce reliance on the dollar. Here’s how it’s going. appeared first on Atlantic Council.

• An overview of India’s interest in the Middle East and the shift toward the Gulf region
• New Delhi’s viewpoint on the India-US-China triangle in the Middle East
• The India – China relationship in the recent decade
• The geopolitical play of Iran, India, Pakistan, and GCC in the Indian Ocean
• The growing partnership between India and the Gulf
• The perspective of geopolitical forces in Asia

Chapters

[00:00] Introduction
[01:25] An overview of India’s interests in the Middle East
[09:11] India’s shift toward the Gulf region
[13:12] The I2U2 group and India’s approach to the Middle East
[15:34] New Delhi’s perspective on the India-US-China triangle in the Middle East
[21:04] The India-China relationship today
[26:00] An assessment of the China-Iran relationship
[28:53] Maritime security in the Indian Ocean
[31:32] Geopolitics of Iran, India, Pakistan, and the GCC
[34:52] India’s growing partnership with the Gulf
[38:01] Integrating different cultures and people in the Middle East
[40:20] Balancing geopolitical forces in Asia
[42:27] Conclusion

C. Raja Mohan
Senior Fellow
Asia Society Policy Institute in Delhi

C. Raja Mohan is a Senior Fellow with the Asia Society Policy Institute in Delhi — a division of the Asia Society India Centre, Mumbai. He is a Visiting Research Professor at the Institute of South Asian Studies (ISAS), National University of Singapore, and was previously the Director of ISAS. Mohan was the founding director of Carnegie India in Delhi, the sixth international center of Carnegie Endowment for Peace. He was associated with several Indian think tanks, including the Institute of Defense Studies and Analyses, the Observer Research Foundation, and the Center for Policy Research in New Delhi. Mohan was a Professor of South Asian Studies at the Jawaharlal Nehru University, New Delhi, and the Rajaratnam School of International Studies, Singapore. He served on India’s National Security Advisory Board. He was the Henry A. Kissinger Chair in Foreign Policy and International Relations at the Kluge Center, US Library of Congress, Washington DC, during 2009-10. He convened the India chapter of Pugwash Conferences on Science and World Affairs, during 1995-2005. Mohan has published widely on India’s foreign and security policies, Asian geopolitics, and the global governance of advanced technologies. In his most recent, Mohan co-authored the Adelphi Book, The New Asian Geopolitics: Military Power and Regional Order published by the International Institute of Strategic Studies, London in 2021. He is a columnist for Foreign Policy and the Indian Express.

The United States and China are frequently brought up when discussing great powers in the Middle East; however, India also plays a role in the geopolitical dynamics within the region. With its long-standing linkages in economics, culture, and religion, India has long had a significant presence in the area. But as New Delhi has been interacting on political, diplomatic, and security fronts lately, this has taken a more strategic tone.

In this episode, we are joined by C. Raja Mohan, a Senior Fellow with the Asia Society Policy Institute in Delhi. Mohan shares with us his knowledge about India’s role in the Middle East’s geopolitics and New Delhi’s perspective on the influence of the US-China tug-of-war within the region. He will also discuss India’s relations with some regional states and provide insights about maritime security in the Indian Ocean and the growing influence of mixed cultures in the Gulf.

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The China-MENA podcast features conversations with academics, think-tankers, and regional specialists on Chinese Influence in the Middle East and informs US and MENA audiences in the policy and business communities about the nature of China’s outreach to the region.

At a time when China’s global footprint is getting deeper and deeper, it has never been more important to understand its foreign policy and the Middle East is one of the world’s most consequential regions: home to major religions, diverse cultural and social heritage, central to global energy markets, and of course, geopolitics, linking people and markets in Asia, Africa and Europe.  This show will help you understand what China is doing in the region, and how the region is engaging with China as an increasingly important external power.

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New Atlanticist Feb 19, 2023

China-Iran relations are warming. Here’s what the rest of the world should know.

By Atlantic Council experts

While much of the world is focused on Chinese balloons violating US airspace, Iranian President Ebrahim Raisi recently flew to Beijing to meet with Chinese leader Xi Jinping.

China Iran

MENASource Dec 15, 2022

No, Xi’s visit to Riyadh wasn’t because of bad US-Saudi relations. It’s about much more.

By Jonathan Fulton

Given the bad state of US-Saudi relations, it is natural to see Xi’s visit in the context of geopolitical competition between Washington and Beijing, but that framework misses the bigger picture.

China East Asia

MENASource Jul 14, 2022

Biden’s Middle East trip focuses on the region. But China is the elephant in the room.

By Ahmed Aboudouh

US President Joe Biden’s visit to the Middle East on 13-16 July won’t directly focus on China. However, the rising power will be the elephant in the room at the Saudi summit in Jeddah.

China East Asia

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Through our Rafik Hariri Center for the Middle East and Scowcroft Middle East Security Initiative, the Atlantic Council works with allies and partners in Europe and the wider Middle East to protect US interests, build peace and security, and unlock the human potential of the region.

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This podcast was funded in part by a grant from the United States Department of State. The opinions, findings, and conclusions stated herein are those of the author and do not necessarily reflect those of the United States Department of State.

The post The Middle East in the US-India-China Strategic Triangle appeared first on Atlantic Council.

Friendshoring includes the concept of nearshoring (bringing production near to consumer markets) and reshoring (repatriating production back to the home market). It was intended to be a defensive posture to enhance the resilience of supply chains. Efforts to friendshore have been observed in several important sectors—as highlighted in “Our guide to friendshoring: sectors to watch.” For example, the US government has invested in rare earth mining and processing facilities in the United States and Australia to reduce its reliance on China. In the process they have reduced China’s global market share in these critical minerals from 80 percent to 60 percent.

However, friendshoring has recently been used as an offensive policy tool, rather than defensive. As articulated by US policy makers, their goal is to ring-fence international supply chains for strategic goods, such as advanced computer chips, in friendly countries. They hope to use friendshoring to exclude China from essential supply chains to delay its economic and military modernization. This aggressive approach is part of the high-tech war between the United States and China, which has become the main arena for their strategic competition.

The weaponization of friendshoring escalates US-China strategic competition. It is therefore important to identify its implications. First, offensive friendshoring will make it more difficult for the United States to encourage the European Union, Japan, and other allies to fully align their China policy with the United States. Second, it could push China to respond more aggressively than the mainly defensive measures adopted so far. This will make managing US-China strategic competition, and preventing open military conflicts, more difficult going forward.

The weaponization of friendshoring

The United States weaponized the concept of friendshoring by continuing to elevate the goals of the strategy, as summarized last September by US National Security Adviser Jake Sullivan. Though initially intended to reduce US reliance on China in global supply chains, the recent aggressive approach is designed to help the United States “prevail in strategic competition with China.” It is driven by the assessment, articulated in the 2022 US National Security Strategy, that “the People’s Republic of China…is the only competitor with both the intent to reshape the international order and, increasingly, the economic, diplomatic, military and technological power to advance that objective.” Friendshoring is now expected to go beyond just preserving  the US lead over China—for example, in advanced computer chips by two chip generations. It also aims to widen such strategic leads as much as possible, in the process derailing, delaying, and retarding China’s economic and military modernization. Essentially, this strategy aims “to impose costs on adversaries, and even over time degrade their battlefield capabilities.”

The United States has taken several actions to implement this approach, with varied success.

In October 2022, the United States significantly widened the scope of its ban on sales to a greater number of Chinese entities. The ban now included not only advanced chips, but also the equipment, designs, and software necessary to manufacture them—as well as banning US persons from participating in those activities. The United States also used its Foreign Direct Product rule to prohibit non-US companies from providing China with banned products if they contain US ingredients—including intellectual property.

After a period of intense negotiation, the United States convinced the Netherlands and Japan to agree to join its ban on the export of crucial equipment—such as the extreme ultraviolet lithography systems—necessary to fabricate the most modern chips (smaller than 14nm). However, Japan has already indicated that it will opt for milder restrictions than the United States. It is likely that the Netherlands may do likewise as details of the agreed ban are ironed out. Their reticence reflects the incomplete alignment of China policy between the United States and its allies. The more aggressive the US measures, the more challenging it is for the United States to obtain full buy-in from its allies.

The United States and India agreed last month to elevate and expand their joint initiative on Critical and Emerging Technology—or iCET—to foster “technology partnership and defense industrial cooperation.” The agreement covers artificial intelligence, quantum technology, high performance computing, advanced wireless, space activities, defense systems, and resilient semiconductor supply chains.

The United States has also launched its proposal for a CHIP 4 Alliance with Japan, Taiwan, and South Korea to coordinate steps to secure the supply chain for advanced chips in the region. However, the proposal has encountered resistance from the invited countries, mostly South Korea, given their substantial economic links to China—and has yet to take concrete shape.

Most recently, after shooting down the Chinese spy balloon flying over US airspace, the Biden Administration added six Chinese government-backed entities with links to the balloon program to the Entity List. The recently formed House Select Committee on the Strategic Competition between the United States and Chinese Communist Party “might also press for tougher measures to slow advancement of Chinese military capabilities.”

All together, these measures intend to exclude China from international supply chains crucial in producing advanced chips—and potentially other high-tech products. After all, the industry leader accounting for more than 90 percent of the global output of advanced chips—Taiwan Semiconductor Manufacturing Company—cannot operate in isolation. It depends on the United States for chip design and software; on the Netherlands and Japan for chip making equipment; and other countries including China for raw materials.  It cannot function without close international collaboration with leading companies and suppliers in many countries. It will be very difficult and costly—if not impossible— for China to replicate the advanced chip ecosystem all by itself. If fully implemented, these exclusion measures could delay and retard China’s efforts to modernize its economy and military.

China’s responses

The US offensive use of friendshoring risks pushing China to take strong countermeasures.

So far, China has primarily responded to US chip restrictions with defensive steps. Besides filing a complaint with the World Trade Organization against what it called “US trade protectionist practice,” China plans to roll out a $143 billion package to support its semiconductor sector, as part of its effort to become self-sufficient in high tech.

China has increased domestic production of legacy chips (those from 14nm and above—not subject to the US bans but still required in most modern products)—to increase its global market share.  Its market share grew from a negligible amount in 1990, to 10 percent around 2010, and about 15 percent now—just ahead of Japan, the United States, and Europe, but lagging behind Taiwan (22 percent) and South Korea (21 percent). China’s progress cuts into sales and revenue opportunities for US and Western firms and strengthens China’s central role in supplying manufactured goods using legacy chips. In addition, China’s top chip maker, the Semiconductor Manufacturing International Corp, has announced that it can now manufacture 7nm computer chips. However, there is doubt about its ability to do so at scale without the advanced equipment—which has been banned.

Most recently, two of China’s influential scientists wrote in the bulletin of the Chinese Academy of Sciences that the country should launch a counter strategy by amassing “a portfolio of patents that govern the next generation of chip making, from novel materials to new techniques…giving China the clout to push back against US sanctions”.

Theoretically, China can respond more rigorously to US tech containment measures. For example, it could limit or withhold the supply of goods it enjoys dominant market shares for. These include key minerals such as rare earths or chemical ingredients crucial for the West to produce many goods including pharmaceuticals. However, doing so will hurt the Chinese economy as well, since global production and consumption would likely plummet. While this dismal prospect has constrained China so far, more aggressive countermeasures cannot be excluded if the US tech containment strategy gains traction with allied countries and effectively derails China’s modernization plans.

In short, the increasingly offensive use of an offensive US friendshoring policy will make it more challenging to manage US-China strategic competition, and make a military conflict—with disastrous global consequences—more not less likely. Containing China’s high-tech development will make it more difficult to encourage China to cooperate with the United States in other areas, such as climate change and disease control, among other global issues. Despite Biden’s intention to “seek competition and not conflict” with China, the US-China relationship continues to deteriorate. The stakes are rising for all.

Hung Tran is a nonresident senior fellow at the Atlantic Council; a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.

The post Offensive friendshoring and deteriorating US-China relations appeared first on Atlantic Council.

What are Sweden’s main policy priorities during its EU Council Presidency?  How will Sweden, as one of Europe’s more free trading nations, navigate the turn to industrial policy in Europe and lead the charge in boosting European competitiveness?  What ways is the European Union changing to adapt to an uncertain geopolitical and economic future? How influential is the EU Council Presidency and how will Sweden lead in Europe on issues, including Ukraine, the green transition, trade, security and democracy?

On this episode of the #AtlanticDebrief, Ben Judah sits down with Cecilia Malmström, Nonresident Senior Fellow at the Peterson Institute for International Economics, to discuss the main issues facing Europe as Sweden embarks on its EU Council Presidency. 

You can watch #AtlanticDebrief on YouTube and as a podcast.

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Ben Judah

Director

Europe Center Transform Europe Initiative

Economy & Business European Union

Europe Center

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The Europe Center promotes the transatlantic leadership and strategies required to ensure a strong Europe.

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The post #AtlanticDebrief – What’s on the Swedish EU Council Presidency agenda? | A Debrief with Cecilia Malmström appeared first on Atlantic Council.

A joint report by the Atlantic Council’s Adrienne Arsht Latin America Center, the University of Texas at El Paso’s Hunt Institute for Global Competitiveness, and El Colegio de la Frontera Norte.

Executive summary

The announcements and commitments made at the North American Leaders Summit in January 2023 reiterated the importance of North American competitiveness, inclusive growth and prosperity, and the fight against drugs and arms trafficking.¹ To achieve the goals and deliverables established during the summit, it is critical that the US-Mexico border be managed and perceived as an essential contributor to national, binational, and regional security and economic development.

A more efficient US-Mexico border has the potential to reduce border crossing times for commercial and noncommercial vehicles, generating positive externalities for the United States and Mexico including enhanced security and economic growth.² This report – the second in a two-part series – outlines the economic impact of reduced wait times at the border, focusing on the costs and benefits for border states in both countries.³

This report shows that a mere 10-minute reduction in wait times – without any additional action – can create thousands of Mexican jobs, grow the gross domestic product (GDP) of several Mexican states, and generate hundreds of thousands of dollars in new spending in the United States. Ten minutes is then hopefully the starting point for even shorter wait times and even greater economic gains and job creation.

More precisely, increasing border efficiency by 10 minutes can result in more than 3,000 additional jobs across Mexico’s six border states while increasing their combined GDP by 1.34 percent.⁴ Additionally, this reduction would allow for an additional $25.9 million worth of goods to enter the United States every month and lead to $547,000 in extra spending across the United States’ four border states.⁵ A forthcoming standalone short report will evaluate the final destination of traded goods and the economic benefits for states beyond the border.

In terms of Mexico’s border states, Tamaulipas would see the greatest growth in GDP (1.9 percent), followed by Baja California (1.6 percent) and Chihuahua (1.5 percent). Overall, this would generate a $2.2 billion increase in GDP and a $167 million increase in intermediate demand and a $3.2 million increase in labor income across Mexico’s six border states.

A 10-minute reduction in wait times would also lead to an average of 388 new loaded containers entering the United States from Mexico monthly. This translates to $25.9 million worth of cargo crossing through the United States’ four border states (Arizona, California, New Mexico, and Texas), a figure identified in the part-one of this study.⁶ New research shows that approximately 222 (57.2 percent) of these containers would enter via Texas ports of entry, carrying $17 million in cargo every month.

Separately, the 10-minute reduction in wait times would lead to 5,020 additional noncommercial monthly crossings, resulting in $547,000 in extra monthly spending by families and individuals traveling from Mexico to the four US-border states every month. The model estimates that these individuals would spend an additional $256,000 in California alone, representing nearly 50 percent of the total increase in spending. The clothing retail industry would experience the greatest gains across the board, with $132,000 in additional annual revenue from streamlined noncommercial crossings.

Results were informed by engaging local and regional stakeholders in roundtables, focus groups, and one-on-one interviews to identify areas for practical improvement in border management. These include investing in technologies, infrastructure, management, staffing, and supply chains. For instance, deploying high-tech screening technologies further away from ports of entry would facilitate a greater and faster flow of cargo and passenger information. Similarly, a collaboration between the United States and Mexico to develop joint, decentralized tools for border management and processing could ensure a more efficient flow of legitimate cross-border traffic while detecting illegal activity. Improvements in infrastructure and an increase in personnel staffing ports of entry would prevent bottlenecks and decongest queues that regularly spill over onto interstate highways and local roads.

While this report outlines the potential economic impact of a more efficient US-Mexico border for the border region, it also identifies new spaces for growth and new questions to be asked, studied, and addressed. For example, a lack of data in non-border Mexican states makes it difficult to estimate what the impact of enhanced efficiency in non-border inspection points would be for overall binational commerce and within each individual state. Similarly, limited US data exists to determine the final beneficiaries of new economic activity. New, reliable data is essential to understand the greater implications of streamlined border processes and tools in the United States and Mexico.

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Issue Brief Dec 15, 2022

Road to the tenth North American Leaders’ Summit: Spotlight on competitiveness and supply chains

By María Fernanda Bozmoski, Jacob Kaufhold, and Isabel Chiriboga

North American competitiveness and supply chains are at an inflection point. The three leaders must take the momentum of the last meeting and continue to advance key priorities. In an increasingly complicated global context, close collaboration and partnership on all fronts is key.

Report Sep 27, 2022

The economic impact of a more efficient US-Mexico border: How reducing wait times at land ports of entry would promote commerce, resilience, and job creation

By Alejandro Brugués Rodríguez, John Byrd, Noé Arón Fuentes Flores, David Gaytan, John Gibson, Camila Hernández, Mayra Maldonado, Jason Marczak, Jorge Eduardo Mendoza Cota, Roberto Ransom, and Ignacia Ulloa

Improvements in border management and the adoption of new technologies at the US-Mexico border have the potential to enhance border security and generate economic benefits for the United States and Mexico through expedited flows of goods and people.

Economy & Business Latin America

The post The transformative power of reduced wait times at the US-Mexico border: Economic benefits for border states appeared first on Atlantic Council.

The post Graham and Bhusari cited by Munich Security Report 2023 on strengthening ties between China and GCC appeared first on Atlantic Council.

My company, Nibulon, is one of Ukraine’s largest grain producers and exporters. We were enjoying some of the best years in our 30-year history before the start of Russia’s full-scale invasion in February 2022. In a matter of weeks, we went from being a healthy business with a bright future to one battling for survival.

Around 20% of Nibulon’s assets are currently inaccessible in temporarily occupied regions of Ukraine. Other assets including grain elevators, barges, silos, and terminals have been destroyed. In 2022, our exports collapsed because we could no longer access our main export route through the port of Mykolaiv. Thousands of other Ukrainian companies have had similarly grim wartime experiences.

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The liberation of Kherson and the surrounding region in late 2022 revealed the scale of the effort that will be necessary to restore agricultural production in regions of Ukraine subjected to Russian occupation. These regions are now believed to be among the most heavily mined areas in the world. De-mining will add significant costs and delays before farming activities can resume. Experts say that one day of war means one month of de-mining. We are already investing in de-mining equipment and personnel. At present, we calculate that with 20-25 people working ten hours a day, it will take three years to clear our fields in the worst affected areas.

To a greater or lesser degree, these problems are affecting the entire agricultural industry in Ukraine. The UN estimates that this strategically crucial sector of the Ukrainian economy has already suffered damages and losses of over $30 billion. Prior to the full-scale Russian invasion of February 2022, Ukraine had been steadily expanding its global reach as a food exporter and was widely seen as an emerging agricultural superpower. There is now a very real danger that Putin will succeed in bankrupting the Ukrainian breadbasket.

Like so many other Ukrainian companies, we have been adapting our business model to wartime conditions. We have successfully re-routed exports via land and rail and have built a new grain terminal on the Danube close to the Romanian border. However, we need to invest more in order to increase our exports and reduce the much higher transportation costs that farmers are now having to pay.

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Online Event Thu, July 20, 2023 • 8:00 am ET

After Vilnius: What’s next on Ukraine’s path to NATO?

Eastern Europe NATO Security & Defense Ukraine

One of the key problems facing the entire private sector in wartime Ukraine is the lack of access to financing because of prohibitively high borrowing rates domestically and internationally. Not surprisingly, war creates a significant risk premium. As a result, international capital markets are effectively closed for Ukrainian companies. Alternative forms of financing are urgently needed.

The United Nations and Turkey have succeeded in establishing a grain corridor to allow limited exports of Ukrainian grain through the Black Sea. Now is the time to establish a “financing corridor.” Just as the grain corridor has been a lifeline for Ukraine’s agricultural sector, the Ukrainian economy needs a mechanism to help private businesses secure immediate survival and safeguard their futures by investing to become more resilient and competitive.

A financing corridor would help ensure private businesses are not forced to close and can instead go on to underpin Ukraine’s reconstruction and recovery. The requirements are simple. First, lenders should offer Ukrainian businesses a standstill on their existing liabilities. A standstill will provide much-needed flexibility to address some of the immediate challenges to their operations. Second, international institutions should provide fresh financing for urgent working capital needs or strategic investments. Third, G7 countries and international financial institutions should offer partial guarantees to enable Ukraine’s major exporters to issue new debt at acceptable cost levels.

In the agricultural sector, enhanced financial support is essential as businesses look to repair or replace damaged equipment and facilities. The World Bank estimates the sector will require $18.7 billion in new investment over the coming decade. The next agricultural planting season is just around the corner. Without increased access to capital, farmers will not be able to obtain the equipment and fertiliser they need to sow their crops as planned.

If this happens, the consequences will be felt not only in Ukraine but far beyond the country’s borders as well. Reduced yields in Ukraine will impact global food security. The UN World Food Program estimates that the ongoing Russian invasion of Ukraine could increase the number of people at risk of acute hunger by 47 million, with the greatest impact on Sub-Saharan Africa.

Agriculture is a slow-motion business. If producers cannot invest today, the negative effects will be felt for years to come. The survival of the country’s major agricultural exporters is essential for Ukraine’s long-term economic reconstruction and recovery. It is also important for global stability. Good business strategy requires looking to the risks and opportunities that lie ahead. Western governments need to think beyond the immediate challenges of the war today and also consider what will be needed to secure Ukraine’s future.

Andriy Vadaturskyy is the owner and CEO of Ukrainian agribusiness Nibulon.

Further reading

UkraineAlert Jan 28, 2023

Poland is leading Europe’s response to the Russian invasion of Ukraine

By Diane Francis

Poland was the unsung hero of the recent landmark decision by Berlin and Washington to provide Ukraine with tanks as Polish leadership continues to shape the European response to Russia’s genocidal invasion.

Conflict Economic Sanctions

UkraineAlert Feb 6, 2023

Hero Ukrainian medic: “Russia will not stop until it is stopped”

By Peter Dickinson

Ukrainian military medic Yulia Paievska has a simple message for anyone who still believes in the possibility of a compromise peace with Putin’s Russia. “They will not stop until they are stopped,” she says.

Civil Society Conflict

UkraineAlert Feb 1, 2023

Europe’s last empire: Putin’s Ukraine war exposes Russia’s imperial identity

By Botakoz Kassymbekova

Vladimir Putin’s genocidal invasion of Ukraine has exposed modern Russia’s unapologetically imperial identity but could yet lead to the collapse of the Kremlin’s broader imperial ambitions, writes Botakoz Kassymbekova.

Belarus Central Asia

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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The post Vladimir Putin must not be allowed to bankrupt the Ukrainian breadbasket appeared first on Atlantic Council.

In the second half of 2022, China veered from one extreme to the other, with carefully choreographed control followed by sudden turmoil. In October, President Xi Jinping was elevated to an unprecedented third term, underscoring his iron grip on China’s Communist Party and the country. Two months later, the chaotic abandonment of zero-COVID measures, in place for nearly three years, triggered a nationwide health crisis. Throughout, the Chinese government has continued to claim that the path it has chosen for China’s economy and its people is the only right one.

Nevertheless, China’s economic weakness is pushing leadership to strike a more business-friendly tone. In recent months, Chinese officials have been reassuring a private sector hammered by regulatory crackdowns and rolling out the welcome mat for foreign investors who have been turned off by years of draconian COVID lockdowns. The defining question of 2023 will be whether the shift in policy and rhetoric is merely a short-term tactic by the Chinese government to shore up growth. So far, evidence of a more meaningful commitment to structural reform is hard to find.

The bottom-line assessment for H2 2022 shows that Chinese authorities were active in five of the six economic clusters that make up the China Pathfinder analytical framework: financial system development, competition policy, trade, direct investment, and portfolio investment. There were fewer developments in the innovation cluster, though we are watching to see if Beijing can muster a response to profound semiconductor controls imposed by the United States on China in October 2022. In assessing whether China’s economic system moved toward or away from market economy norms in H2, our analysis shows a mixed picture.

This issue of the China Pathfinder Update looks ahead to China’s post-COVID era and analyzes the “two confidences”—that of domestic consumers and businesses, and foreign investors—the Chinese government needs to rebuild in order to restart the economy. The end of zero-COVID restrictions and the resumption of travel and services sector activities for Lunar New Year will bring about an improvement in China’s economy—especially the consumer-facing segments—in the first half of 2023. However, an end to zero-COVID does nothing to remedy long-running structural problems. Distress in the property sector, lingering unemployment for new graduates, and weak growth in disposable income all stand in the way of a rebound. China’s charm offensive on the international front will also require follow-through, as foreign governments and investors await evidence of the country’s commitment to structural reforms.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Report Oct 10, 2022

China Pathfinder: 2022 annual scorecard

By GeoEconomics Center and Rhodium Group

Over the year, teams from the Atlantic Council and Rhodium Group have taken a dive into China’s economy to address a fundamental question: Is China becoming more or less like other open-market economies? 

China Economy & Business

Report Jan 20, 2023

China and the new globalization

By Franklin D. Kramer

The unitary globalized economy no longer exists. Driven in significant part by security considerations, a new and more diverse globalization is both required and being built. The transition is ongoing, and its final form is yet to be determined.

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New Atlanticist Nov 10, 2022

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Without reform, China’s economy could be five trillion dollars smaller than projected by the end of the decade—with ramifications for global growth.

China Economy & Business

The post China Pathfinder: H2 2022 update appeared first on Atlantic Council.

Even as they confronted the war’s near-term challenges, such as Russian attacks on Ukrainian energy and civilian infrastructure, G7 leaders recognized the urgent need to establish a body to coordinate the planning and execution of the enormous rehabilitation and reconstruction effort Ukraine will require. The leaders directed the creation of a “Donor Coordination Platform” and a supporting secretariat. Senior officials from each G7 nation and Ukraine met on January 26 to begin organizing the platform. 

When the Donor Coordination Platform next convenes in March, the agenda must include identifying ways to mobilize Ukrainian and international companies to support the reconstruction effort—for example, by establishing a private-sector advisory board for the Donor Coordination Platform. Humanitarian aid and direct government budgetary support are rightly the short-term priorities of today’s civil assistance to Ukraine. Along with military equipment and training for Ukraine’s armed forces, this aid must continue for Ukraine to survive the winter. But it will take more than government aid alone to rebuild Ukraine’s economy.

The private sector can make a substantial contribution to this rebuilding campaign. There are international infrastructure firms ready to invest in Ukraine’s future. Private companies could offer donors and international institutions valuable project-management expertise learned from their work in other post-disaster and post-conflict zones. Companies can streamline logistics and provide oversight of the operationalization of funds in challenging environments. They can leverage private-sector financing to complement financial and insurance guarantees that we trust governments and international financial institutions will make available. The recent announcement that Kyiv and the US-based investment firm BlackRock will coordinate “potential investors and participants” in reconstruction is a useful first step, if it then connects to the G7 platform and encourages wider private-sector involvement. 

There is not yet any engagement mechanism for the private sector that parallels the “Ramstein” effort established in 2022 to produce, procure, and deliver military equipment to Ukraine. Getting the private sector involved now will pay future benefits. It will enable Ukrainian firms to establish partnerships with international companies that can create employment and economic growth, which can then attract more investment. These partnerships can help create a productive, competition-based, and law-abiding economy, which, given Ukraine’s history of corruption, Ukrainians will want and international donors will require.

Mobilizing the private sector is also one antidote to donor fatigue, which has grown as governments have committed more taxpayer money to support Ukraine. A recent poll by the Chicago Council on Global Affairs found that 40 percent of Americans favor continuing the current level of assistance to Ukraine indefinitely, down from 58 percent in July. 

Getting the private sector involved, however, will not be easy. Ukraine remains under fierce Russian attack. No one knows how much rebuilding will really cost or when it can begin at large scale. 

These challenges can be met in partnership with the Ukrainian government. Kyiv is focused on securing the seventeen billion dollars that the World Bank has identified as Ukraine’s “first stage, rapid recovery” needs in 2023. While meeting these needs, private-sector donors can put anti-corruption benchmarks into aid contracts, which in turn could serve as a template for future investment agreements through the Donor Coordination Platform and a catalyst for political reform. Zelenskyy’s recent moves against corruption in the government are also a strong signal to Ukrainians and to international investors that Ukraine is a full partner in fighting corruption.

On the donor side, the World Bank Group’s Multilateral Investment Guarantee Agency should finish its work on a preliminary risk insurance framework for firms seeking to operate in Ukraine. This will provide a template for the export credit agencies of individual nations, which should also be authorized to provide full risk insurance (including acts of war) to national firms willing to invest in Ukraine’s recovery.

In Washington, Zelenskyy reminded Americans and the world that today’s fight against aggression is about what life should be like tomorrow. G7 leaders have identified an important coordinating mechanism to help create a brighter future for Ukraine. The sooner systematic planning for the country’s rebuilding begins, and the earlier and more fully those conversations include the private sector, the better placed nations will be to further support Ukrainians in their quest to become a free and prosperous nation.

Marc Grossman is a former US undersecretary of state for political affairs and US ambassador to Turkey. He is a vice chairman of The Cohen Group, which has clients in the architecture and engineering sectors operating globally, including in Ukraine.

Kurt Volker served as US special representative for Ukraine negotiations from 2017 to 2019 and as US ambassador to NATO from 2008 to 2009. He is a distinguished fellow at the Center for European Policy Analysis. 

Earl Anthony Wayne is a former US ambassador to Argentina and Mexico, and assistant secretary of state for economic and business affairs. He is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a public policy fellow at the Woodrow Wilson International Center for Scholars, and a distinguished diplomat in residence and professorial lecturer at American University’s School of International Service. 

The post How to get the private sector involved in reconstructing Ukraine appeared first on Atlantic Council.

How does the Western price cap on oil work?

As the G7 and European Union implement their new restrictions on Russian oil and gas exports, Ben Judah spoke with Eddie Fishman, Senior Policy Scholar at the Center on Global Energy Policy at Columbia University and nonresident senior fellow at the Atlantic Council’s Eurasia Center, to discuss the price cap.

Has the price cap already had an impact on Russian oil exports at this early stage? Is the price cap a new tool of economic statecraft? And can the price cap be used in a way to accelerate ongoing efforts to improve renewable energy infrastructure?

You can watch #BritainDebrief on YouTube and as a podcast on Apple Podcasts and Spotify.

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The post #BritainDebrief – How does the Western price cap on oil work? | A Debrief from Eddie Fishman appeared first on Atlantic Council.

Click to jump to an expert reaction:

Dave Keating: Think big with EU treaty reform

Daniel Fried: Sustain momentum on aid to Ukraine and Russia sanctions

Marie Jourdain: Find the ridgeline of EU military support to partners

Ilva Tare: Find a meaningful path forward for EU enlargement

Rachel Rizzo: Integrate and deepen defense efforts—with a leadership role for Germany

Aaron Korewa: Develop a ‘military Schengen’ and forge a stronger Polish-German relationship

Olga Khakova: Come together for the sake of energy security and decarbonization

Frances Burwell: Push a more active US-EU Trade and Technology Council

Tyson Barker: Advance a heavy digital legislative docket

Security and defense

Think big with EU treaty reform

Russia’s invasion of Ukraine roughly one year ago has prompted an EU response that for years had seemed unthinkable, and 2023 may see the bloc implement institutional changes to formalize that shift into EU structures. The idea of a European Defense Union, long just a pipe dream, is now a reality and is guiding the EU’s first-ever funding of equipment for a foreign conflict. Russia’s gas brinksmanship has also prompted unprecedented decisions on energy sourcing, another area which, like defense, has typically been a competence belonging to member states, not the EU.

So far, these unprecedented moves have been made using existing institutions and the existing EU treaties. But the EU is long overdue for another round of treaty reforms, having last updated what serves as the EU’s constitution in 2009. Last year, citizens at the Conference on the Future of Europe called for the treaties to be revised to enable the EU to act with greater speed and unity of purpose. That would first require calling a constitutional convention, such as the one that took place in 1999 to draft what eventually became the 2009 Lisbon Treaty. This time, the EU would want things to move much faster, given current events.

Treaty reform has been embraced with varying degrees of enthusiasm by some member states in Western and Southern Europe and by European Commission President Ursula von der Leyen. But it is being strongly opposed by member states in Eastern and Northern Europe—and particularly opposed by Sweden, which currently holds the rotating presidency of the Council of the EU. French President Emmanuel Macron is keen to put the subject on the Council’s agenda this year. One of the most contentious ideas, supported by German Chancellor Olaf Scholz, Macron, and von der Leyen, is ending remaining unanimity voting requirements in the Council in areas like foreign policy—so for instance, Hungarian Prime Minister Viktor Orbán can no longer veto EU action against Russia. But this is strongly opposed by smaller member states who fear they will always be outvoted by larger ones under qualified majority voting, which is weighted by population.

If these changes are made, it could make the EU a more dependable and flexible partner for the United States on diplomatic and security matters.

—Dave Keating is a nonresident senior fellow at the Europe Center and the Brussels correspondent for France 24.

Sustain momentum on aid to Ukraine and Russia sanctions

Despite shortcomings, a slow disbursement of funds, and agonizing German debate on military assistance, the EU and European member states helped Ukraine sustain its fight against Russia in ways that few—and especially not Russian President Vladimir Putin—anticipated before February 24 last year. Arms and funds for Ukraine, support for millions of Ukrainian refugees, and sanctions against Russia look impressive in the aggregate. Europe, with the help of a warm winter, resisted Putin’s use of his energy leverage. While Poland, the United Kingdom, Baltic and Nordic states, and other Eastern European states led the way, the French and German governments have stepped up, notwithstanding uneven rhetoric. A few years ago, there were no NATO plans to defend its eastern frontier from Russian attack. Now, Western Europeans debate not whether to send armor to Ukraine but what sort and how much.

But Putin appears determined to crush Ukraine by attacking civilians and creating stalemate or even retaking the offensive. In that case, European (and US) resolve will be tested, especially if Putin offers a “peace plan” that includes the West’s acceptance of his aggression while he prepares for more.

In 2023, Europe’s (and the United States’) task will be to help end the war on Ukraine’s terms. That means intensifying the flow of military and economic assistance to Ukraine and ramping up economic pressure on Russia.

The economic to-do list includes making the oil price cap work; finding other Russian exports to restrict; enforcing and expanding export controls on Russia; and enforcing existing sanctions, going after sanctions violators wherever they are. As the price tag for assistance to Ukraine rises, Europe and the United States should find ways to repurpose immobilized Russian exchange reserves to benefit Ukraine.

Skeptics from the outset questioned whether Europe and the United States could stay the course politically. The track record so far, and evidence suggesting continued Russian atrocities and war crimes, suggests they may in the future.

—Daniel Fried is the Weiser Family distinguished fellow at the Atlantic Council and a former US ambassador to Poland.

Find the ridgeline of EU military support to partners

Over the past year, the EU devoted an unprecedented level of resources and energy for Ukraine, making available up to thirty billion euros in financial, economic, and humanitarian support to Ukraine, plus twelve billion euros in military assistance, including 3.6 billion euros of support through the European Peace Facility (EPF). Ukrainian needs in its war effort require the EU and member states to maintain this mobilization through 2023. While the EU will continue to prioritize Ukraine, and rightly so, there is a risk that the EU will leave out other partnerships and unbalance them: The EU’s credibility and attractiveness as a partner are at stake here. That does not mean the EU should stop investing in Ukraine’s future, but it does mean that the EU must not disregard critical partnerships. The EU, in attempting to step up as a geopolitical actor, must maintain a global reach, which will help avoid allowing potential adversaries to shape the strategic environment in a way that affects the EU’s stability and security.

Keeping an eye on the balance between the south, east, and close neighborhood will require close coordination within the EU. One instrument to do that is the EPF: It was designed to fund the costs of EU Common Security and Defence Policy missions and operations and to provide assistance to partners across the world (including providing lethal and non-lethal military equipment for the armed forces, as it is doing for Ukraine). The EPF’s 2021–2027 budget was settled ahead of the war, meaning it did not plan for the level of support to Ukraine that it will end up issuing: In 2021, the EPF gave the Ukrainian armed forces thirty one million euros in support (compared with the 3.6 billion euros in support in 2022). As demonstrated by the EU’s dormant training missions in Mali and the Central African Republic (although the EU did recently launch a new military mission partnership with Niger), the EU seems to be shifting from the south to the east with a new EU Military Assistance Mission for Ukraine, support for Moldova and Georgia that is likely to increase, and growing attention on the Western Balkans’ needs. While the European Council agreed to increase the financing of the EPF (because 86 percent of the financial ceiling had already been committed for use by 2022), the EU must demonstrate its reliability by offering attractive partnerships to countries showing interest, risking otherwise to leave a vacuum that will quickly be exploited by adversaries.

—Marie Jourdain is a visiting fellow at the Europe Center and previously worked for the French Ministry of Defense’s Directorate General for International Relations and Strategy.

Politics and diplomacy

Find a meaningful path forward for EU enlargement

The war in Ukraine has brought the question of EU enlargement to the forefront of European debate in ways that it hasn’t been in more than a decade. By offering candidacy to Ukraine and Moldova, the EU has been forced to start grappling with why its policy of enlargement had stalled out in the first place. This reinvigorated debate may spur new thinking about how the dream of a Europe whole, free, and at peace may eventually get realized despite the many roadblocks still in its way.

The old enlargement policy was already showing early signs of weakness with Turkey’s candidacy, but it really ran aground in the Western Balkans, which the EU had committed itself to fully absorbing at a summit in Thessaloniki, Greece in 2003. The path to full membership was based on the belief that the countries could be induced to reform and democratize in exchange for getting full voting rights in the bloc. But the carrot and stick approach lost credibility over the years, with reforms stagnating while European voting publics lost the enthusiasm for admitting new members.

The new thinking involves a process of “staged accession,” or “gradual integration,” wherein tangible benefits—most notably, access to and participation in the common market—are granted piecemeal as candidates make key reforms. By not promising full voting rights in the bloc in the immediate and medium term, the inherently political question of how new members might upset existing power balances in the union are set aside. And tangible, potentially lasting, benefits for candidate countries’ citizens and economies are likely to be accessed sooner.

The Western Balkans could be the laboratory for how this new approach could work. As Ukraine fights for its right to exist, building a workable model for integrating new countries into a meaningful and prosperous European system is of the highest importance. Once the shooting stops, Ukraine will have to have a meaningful path forward for its Western aspirations.

—Ilva Tare is a nonresident senior fellow with the Europe Center and host of the Europe Center’s #BalkanDebrief series.

Integrate and deepen defense efforts—with a leadership role for Germany

The EU has shown impressive solidarity over the past year in response to Russia’s invasion of Ukraine. From bilateral support including weapons and financial aid to taking part in (and helping hold together) a vast Western sanctions regime against Russia, the unity has been strong. The EU as an institution has also responded decisively by setting up mechanisms through which the EU can better integrate its defense and security efforts. The problems that have long plagued deeper integration, however, remain.

There is a fundamental lack of trust between some European countries, which leads to an unwillingness to work together or to hand over (either in reality or by perception) any part of their decision making to Brussels. There’s also a lack of a real leader in European security. Germany set expectations sky-high last February after Scholz’s “Zeitenwende” speech, but the country has been slow to deliver. Of course, Germany’s contributions to helping Ukraine win this war should be lauded. However, the debate around whether Germany should send Leopard 2 tanks (or sign off on third party transfers of those tanks), for example, shows just how timid the country still is. Ultimately, Germany made the right decision, and it deserves credit for that. However, Germany must eventually be willing to truly play a leadership role instead of waiting for the United States to provide diplomatic cover. If this doesn’t occur, I have my doubts whether the EU as a whole will be able to integrate and deepen its security and defense efforts in the way that it must, especially as the United States continues its rebalance toward Asia.

—Rachel Rizzo is a nonresident senior fellow at the Europe Center.

Develop a ‘military Schengen’ and forge a stronger Polish-German relationship

Just as with Russia’s war of aggression against Ukraine in 2022, 2023 will likely see major developments for a crucial European relationship that has been strained by war but has the potential to emerge better and stronger if the right choices are made.

On the eve of the war, 60 percent of Poles viewed Germany as an ally. In October, that number had plummeted to 20 percent. Yes, key voices in the Polish government have publicly engaged in sharp anti-German rhetoric, but it would be a mistake to view this mistrust as partisan. With Berlin dragging its feet to provide necessary weapons deliveries to Ukraine, what looks like German ambivalence in the face of the Russian threat has left many Poles questioning if their NATO partner will have their back should Poland itself come under attack. Germany may be changing—witness the recent decision to send Leopard 2 tanks to Ukraine—but perhaps not fast enough. It may be hard for Germany to have its decades-long assumptions shattered about how best to handle Russia, but Ukraine hardly has time for a German therapy session.

A constructive and operationally relevant Polish-German relationship is key for the future of transatlantic relations. For Germany, Poland is now a frontline state, the way it was during the Cold War. For Poland, Germany is the strategic depth and supply line for US military aid. Thankfully, there are many officials on both sides who realize this, even if the public debate may suggest otherwise.

For the EU, a smart policy would be to develop a “military Schengen area” that would make transportation of allied forces across borders easier and incentivize strategically important German-Polish defense cooperation. What Brussels should avoid is any perception that the EU prefers one side in the Polish parliamentary elections this fall—particularly since Poles sometimes equate Brussels with Berlin.

With the right kind of engagement, Poland will influence Germany’s and Europe’s view of Russia. Considering that the Poles were right about Putin, that is a very good thing.

—Aaron Korewa is the director of the Europe Center’s Warsaw Office.

Trade and technology

Come together for the sake of energy security and decarbonization

Russia’s weaponization of energy irreversibly transformed European energy systems. In response to the cutoff of Russian gas, Europe pivoted to alternative supplies and routes in record time. This transformation continues into 2023. But this year, Europe is taking the reins of its energy strategy and moving beyond mitigating the shocks from the Kremlin’s unsuccessful blackmail in 2022. Even though Russia lost the energy war, Europe must continue the shift toward a clean, secure, and affordable energy future.

To sustain and accelerate its energy transformation, the EU will need to maintain solidarity across member states and with its Western allies, while balancing immediate needs with long-term security and decarbonization concerns. The bloc has multiple avenues for achieving these goals.

Within Europe, energy ministers should work together to ensure that temporary emergency measures such as the natural gas price caps and windfall taxes do not impede investments. The impacts of these mechanisms on private-sector behavior and confidence must be carefully assessed. Europe must also agree upon efficiency measures, which the continent desperately needs to resolve the supply crisis.

A broader challenge involves unifying pathways to fund new clean energy and low-carbon generation. The proposed Sovereignty Fund—a joint borrowing mechanism—is  one possible solution, but it already faces fierce opposition from some parts of the EU. The public sector should not shoulder these investment costs alone, but it must play a bigger role in incentivizing clean energy and low-carbon projects and mitigating risks to unlock private sector financing.

On the multilateral front, the transatlantic cohesion over multiple waves of sanctions is an undisputable, unprecedented win for the alliance. Fine-tuning implementation and enforcement will optimize sanctions’ sting on the Russian economy and funding for the war. This unity must continue as global routes are reshuffled for oil and refined products in order to comply with the Group of Seven (G7) nations’ price caps, which aim to reduce Russia’s revenues while keeping the volumes on the market.

But tensions remain for US-EU relations due to the massive US climate law, the Inflation Reduction Act (IRA), which favors homegrown electric vehicle manufacturing among other climate incentives. The EU and the United States must find ways to mitigate these concerns and focus on areas of cooperation, such as critical minerals supply chains, standards alignment, permitting reform, and expedited commercialization of new technologies. And finally, multilateral coordination will be essential to securing multiple alternative energy suppliers. Europe will have to commit to the next wave of long-term contracts to satisfy future demand, while working with exporters to lower the carbon intensity of shipments. 

By strengthening internal and transatlantic cohesion, the EU will be able to get ahead of the looming supply shortages anticipated for next winter, while forging a broader security and climate strategy for decades to come. Russia’s role will be diminished irrevocably in both.

—Olga Khakova is the deputy director for European energy security at the Atlantic Council’s Global Energy Center.

Push a more active US-EU Trade and Technology Council

In 2023, the European Union will find the global multilateral trading system—which has been key to Europe’s own prosperity—increasingly challenged. Leading EU economic policymakers, including Executive Vice President Valdis Dombrovskis and Director-General Sabine Weyand, have made clear the continuing EU commitment to the World Trade Organization (WTO)—albeit a reformed WTO. Meanwhile, the new Swedish presidency of the EU Council of Ministers has identified trade negotiations as a priority (the EU currently has trade agreements with seventy-two countries and negotiations ongoing with thirty more).

Yet the multilateral trading system is arguably a thing of the past. The current geopolitical climate has made everyone re-examine their supply chains. Cost and market access can no longer be the sole determinant of where goods are made. The EU’s own policies will also challenge the system of free trade, especially with growing environmental, social, and governance (ESG) rules. New EU reporting requirements or restrictions on forced labor, deforestation, carbon emissions, and other issues will force companies to adjust their supply chains.

But the biggest challenge to the EU’s trade policy in 2023 will be the approach of its closest economic partner, the United States. US trade policy, with its “worker-centric” focus and emphasis on reshoring key industries, is moving far from its former leadership of the multilateral trading system. This shift has been demonstrated in the Biden administration’s rejection of the WTO decision against the Trump administration’s steel tariffs, as well as the discriminatory provisions in last year’s Inflation Reduction Act (IRA).

At the same time, the US-EU Trade and Technology Council (TTC) has emerged as the most prominent bilateral transatlantic mechanism. It has largely focused on building cooperation on future tech and trade challenges and harmonizing some responses to the Russian invasion of Ukraine, while avoiding tough trade conflicts, with the IRA and steel tariffs assigned to special task forces. Those task forces should be brought into the purview of the TTC, so that its leadership and credibility can address the growing transatlantic gap over the global trading system. This will be a risk for the TTC, but cooperation on artificial intelligence taxonomies will mean little if the United States and EU cannot find a way to jointly address the changes needed in the global trading system, especially as related to subsidies and sensitive supply chains. Geopolitics has made returning to the old multilateral system impossible, but the United States and Europe, along with their like-minded partners, could build a new (or reformed) system that balances rule of law with resilience and security. As the United States heads toward its 2024 elections, the EU must take the lead.

—Frances Burwell is a distinguished fellow at the Europe Center and a senior director at McLarty Associates.

Advance a heavy digital legislative docket

This year will see a last, mad dash of EU digital legislation before the 2024 European Parliament elections. This will mean a flurry of legislative and new implementation actions—as the Von der Leyen Commission tries to fulfill the promise of Europe’s “digital decade”—with significant stakes for US and Euro-Atlantic interests.

First, the window is narrowing for the EU to scale up its signature techno-industrial policy on semiconductors—resolving EU CHIPS Act funding questions on semiconductors, fast-tracking Important Projects of Common European Interest authorization, and accounting for increased gas and raw-material prices resulting from Russia’s war in Ukraine. On Europe’s double helix of platform governance—the Digital Services Act and Digital Markets Act—2023 will see the first major enforcement push, testing big tech’s ad-based business models and challenging, at times, wayward content-moderation decisions from Musk to Meta. Euro-Atlantic discussion around EU legislative enforcement in the metaverse is also likely to increase. As this enters the enforcement phase, some have contended the TTC could play a bigger role.

At the same time, the EU is undertaking an ambitious set of interlocking rules around the Internet of Things and industrial data. These touch on cybersecurity (the Cyber Resilience Act), data ownership and usage (Data Act), algorithmic governance (AI Act and AI Liability Directive), data space creation, and cloud governance. With an adequacy decision on the US-EU Data Privacy Framework, successor to the ill-fated US-EU Privacy Shield, expected to be in force by summer 2023, the United States and Europe need to focus on a thriving Euro-Atlantic data space that guarantees free data flows, cybersecurity standards, rule of law, and human-rights protections. Even as it does so, the EU—together with the United States—should anticipate potential blind spots and divergences. Some areas include EU proposals for “fair share” payments by data-intensive tech to internet service providers, implementation of the Organization for Economic Cooperation and Development (OECD) agreement on a 15 percent minimum corporate tax, and increased techno-industrial policy around satellite internet connectivity. Both sides should also start consultations on next-generation strategic tech policy, including high-performance computing governance and 6G standards.

—Tyson Barker is a nonresident senior fellow with the Europe Center.

The post In 2022, the war in Ukraine awakened Europe. Here’s how it must adapt in 2023. appeared first on Atlantic Council.

What is the future of Ukraine’s relationship with the European Union? How much integration between the EU and Ukraine can we expect in the coming months to years? Is membership in the EU in the near, medium, or even long-term future for Ukraine, and what will have to happen in order to achieve that?

Ahead of the EU-Ukraine summit following Russia’s invasion of Ukraine, Ben Judah speaks with Europe Center Distinguished Fellow Gérard Araud on the relationship between the EU and Ukraine for a special Atlantic Debrief.

You can watch #AtlanticDebrief on YouTube and as a podcast.

Fellow

Ben Judah

Director

Europe Center Transform Europe Initiative

Economy & Business European Union

Europe Center

Providing expertise and building communities to promote transatlantic leadership and a strong Europe in turbulent times.

The Europe Center promotes the transatlantic leadership and strategies required to ensure a strong Europe.

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The post #AtlanticDebrief – What’s Ukraine’s future with the EU? | A Debrief with Gérard Araud appeared first on Atlantic Council.

Where is Europe headed on industrial policy? Could the loosening of state aid rules risk fragmentation of the EU’s single market? How can the European Union manage the risks associated with decoupling from China? What plans does the European Union have in place to diversify its chips industry?

On this episode of #AtlanticDebrief, Jörn Fleck sits down with Centre for European Reform Senior Research Fellow Zach Meyers to discuss the latest developments in the transatlantic industrial policy debate.

You can watch #AtlanticDebrief on YouTube and as a podcast.

Staff

Jörn Fleck

Senior Director

Europe Center Transform Europe Initiative

Digital Policy Economy & Business

Europe Center

Providing expertise and building communities to promote transatlantic leadership and a strong Europe in turbulent times.

The Europe Center promotes the transatlantic leadership and strategies required to ensure a strong Europe.

Explore the program

The post #AtlanticDebrief – What’s in store for transatlantic industrial policy? | A Debrief from Zach Meyers appeared first on Atlantic Council.

• China’s opposing view against the international order
• China’s Global Development Initiative and Global Security Initiative
• China’s narrative to the world as a rising power in the geopolitical stage
• China’s control and strategy in maintaining power locally and globally

Chapters

[00:00] Introduction
[02:16] Global order
[07:38] China’s view against the international order
[15:07] Overview of GDI and GSI
[24:50] China’s solution to the world’s fundamental problems
[39:46] China’s political values
[48:08] The resilience and adaptability of one-party rule in China

Nadège Rolland
Distinguished Fellow
China Studies
The National Bureau of Asian Research

Nadège Rolland is a Distinguished Fellow, China Studies, at the National Bureau of Asian Research (NBR). Her research focuses mainly on China’s foreign and defense policy, grand strategy, and the articulation of China’s vision for itself as a great power on the world stage. Her most recent project examines where the African continent fits in relation to China’s overall strategic vision and identifies the main instruments used by Beijing to achieve its objectives. “A New Great Game? Situating Africa in China’s Strategic Thinking,” published in June 2021, is the first of a series of reports she edited: “(In)Roads and Outposts: Critical Infrastructure in China’s Africa Strategy” (2022) and “Political Front Lines: China’s Pursuit of Influence in Africa” (2022). Before joining the NBR, Rolland served for two decades as an analyst and Senior Advisor on Asian and Chinese strategic issues to the French Ministry of Defense, for which she has been awarded the Medal of Honor.

China’s rise to power has led to discussions about whether the country will support or try to change the current international system. China has both supported and been dissatisfied with certain aspects of the system, demonstrating a preference for a Chinese-led global order via the Belt and Road Initiative and Global Development and Security Initiatives.

To better understand the actions of China, in this episode, we invited Nadege Rolland, a Distinguished Fellow of China Studies at the National Bureau of Asian Research (NBR). Nadege will share an overview of China’s initiatives, the perspective of other countries towards China’s rise in the global economy, and whether China will continue to support the existing global order or try to change it.

Fellow

Jonathan Fulton

Nonresident Senior Fellow

Rafik Hariri Center & Middle East programs Scowcroft Middle East Security Initiative

China Chinese

The China-MENA podcast features conversations with academics, think-tankers, and regional specialists on Chinese Influence in the Middle East and informs US and MENA audiences in the policy and business communities about the nature of China’s outreach to the region.

At a time when China’s global footprint is getting deeper and deeper, it has never been more important to understand its foreign policy and the Middle East is one of the world’s most consequential regions: home to major religions, diverse cultural and social heritage, central to global energy markets, and of course, geopolitics, linking people and markets in Asia, Africa and Europe.  This show will help you understand what China is doing in the region, and how the region is engaging with China as an increasingly important external power.

Podcast series

Listen to the latest episode of the China-MENA podcast, featuring conversations with academics, government leaders, and the policy community on China’s role in the Middle East.

Listen

MENASource Dec 15, 2022

No, Xi’s visit to Riyadh wasn’t because of bad US-Saudi relations. It’s about much more.

By Jonathan Fulton

Given the bad state of US-Saudi relations, it is natural to see Xi’s visit in the context of geopolitical competition between Washington and Beijing, but that framework misses the bigger picture.

China East Asia

MENASource Jul 14, 2022

Biden’s Middle East trip focuses on the region. But China is the elephant in the room.

By Ahmed Aboudouh

US President Joe Biden’s visit to the Middle East on 13-16 July won’t directly focus on China. However, the rising power will be the elephant in the room at the Saudi summit in Jeddah.

China East Asia

MENASource Feb 23, 2022

China and Russia are proposing a new authoritarian playbook. MENA leaders are watching closely.

By Ahmed Aboudouh

It’s on major Western democracies to make democracy appealing again by aggressively filling the gaps China and Russia exploit to make the world more accommodating to their political models and the new trend of rising authoritarianism.

China East Asia

Middle East Programs

Through our Rafik Hariri Center for the Middle East and Scowcroft Middle East Security Initiative, the Atlantic Council works with allies and partners in Europe and the wider Middle East to protect US interests, build peace and security, and unlock the human potential of the region.

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This podcast was funded in part by a grant from the United States Department of State. The opinions, findings, and conclusions stated herein are those of the author and do not necessarily reflect those of the United States Department of State.

The post China’s Vision for a New World Order appeared first on Atlantic Council.

Indications of Ukraine’s European trajectory remain evident despite the horrors of Russia’s ongoing invasion. The tiny state-owned Ust-Dunaisk port complex sits in an inlet in southwestern Ukraine where the Black Sea meets the Danube River, roughly thirty miles northwest of Snake Island. There are no roads traversing the small canals from the nearby village of Vylkove to the port, which serves as a key cargo loading point for transport between seafaring vessels in the Black Sea and river ships on the Danube.

In what was the first seaport privatization of its kind in Ukraine, the State Property Fund recently auctioned off the Ust-Dunaisk port and its Danube River berths in Vylkove and nearby Kiliya for $5.5 million. Ukrainian fertilizer company Elixir won the auction against seven other bidders, more than tripling the price from the $1.6 million opening bid.

The bidding war for Ust-Dunaisk points to a larger trend in Ukraine’s maritime exports. Russian forces currently occupy much of the Ukrainian coastline and have imposed a blockade of Ukrainian ports that has made maritime trade virtually impossible for almost a year. While a grain deal brokered by Turkey and the United Nations in summer 2022 partially opened Odesa’s major ports once again, the Russian Navy continues to harass commercial vessels entering and exiting Ukrainian waters.

As a result, shipping companies are increasingly turning to the Danube River to export Ukrainian grain. In 2022, grain shipments through the Danube grew 42 times year-on-year to 6.1 million tons, while overall cargo nearly tripled to 14.5 million tons, reaching the full capacity of Ukraine’s three Danube ports.

With demand growing rapidly, companies are now racing to build shipping capacity on the Danube. Ukrainian agribusiness company Nibulon, which has traditionally operated mainly out of Black Sea port Mykolaiv, is working to expand its Danube River capacity in the port of Izmail to be able to process 300,000 tons of grain per month. As Ukrainian companies adapt to wartime market conditions, so too have the government’s privatization authorities. Plans are underway to privatize the Bilhorod-Dnistrovskiy Seaport just up the coast from Ust-Dunaisk by the end of the winter season.

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Ukraine’s port privatization push is part of a broader initiative to renew privatization efforts following suspension in the immediate aftermath of Russia’s February 24, 2022 invasion. Rustem Umerov was appointed as the new head of Ukraine’s State Property Fund in September 2022. He has vowed to simplify the privatization process and make it more accessible to foreign investors. If successful, this should help the country to partially offset the catastrophic economic impact of the war while laying the foundations for a revival in the Ukrainian economy once the fighting is finally over.

At the same time, significant concerns remain regarding Ukraine’s commitment to privatization. Since the invasion began, the Ukrainian authorities have invoked wartime laws to nationalize a number of strategically important companies. While these measures reflect the gravity of the situation in the country, they also raise questions over Ukraine’s future economic direction.

Eurasia Center events

Online Event Thu, July 20, 2023 • 8:00 am ET

After Vilnius: What’s next on Ukraine’s path to NATO?

Eastern Europe NATO Security & Defense Ukraine

Even if the relaunched privatization push proves effective, huge challenges still lie ahead for Ukraine as the country looks to achieve a decisive break from the discredited past. Meaningful judicial reform is only just beginning to take shape and is vital for the country’s future. Encouragingly, President Zelenskyy now appears more willing to listen to calls from Ukraine’s international partners to clean out corrupt courts. With Ukraine heavily reliant on military and financial aid, these calls will certainly be more difficult to ignore in the months ahead. Ukraine’s partners will also be encouraged by the Zelenskyy administration’s response to recent corruption allegations, which led to a flurry of dismissals and resignations.

Post-war Ukraine will need to tackle a range of other major modernization tasks while dramatically reducing the state-owned share in the country’s banking sector. The list of necessary reforms is long and painfully familiar to anyone who has been engaged in Ukraine’s notoriously patchy efforts since the country’s 2014 Revolution of Dignity. Nevertheless, some veterans of Ukraine’s reform drive believe the incredible sacrifices of the past eleven months have made the prospect of further backsliding intolerable and opened a window of opportunity for once-in-a-lifetime progress. The Ukrainian authorities must not miss this chance.

We may never know exactly why Vladimir Putin chose to invade Ukraine, but fear of the country’s emergence as a fully-fledged European democracy was clearly a factor. Putin has long viewed Ukraine’s successful transformation as an existential threat and a potential catalyst for democratic change inside Russia itself. As Moscow continues its genocidal war to extinguish Ukrainian statehood and subjugate the Ukrainian people, it is more important than ever to maintain the commitment to a European future that so many Ukrainians are currently fighting for. This means implementing economic and governmental reforms whenever possible, even in the most trying of wartime circumstances.

Andrew D’Anieri is assistant director at the Atlantic Council’s Eurasia Center. Follow him on Twitter @andrew_danieri.

Further reading

UkraineAlert Dec 26, 2022

Eight reasons for Ukrainian optimism in 2023

By Brian Mefford

Ukrainians have experienced an incredibly traumatic year but the country enters 2023 with reason for cautious optimism that Vladimir Putin’s criminal invasion can be decisively defeated, writes Brian Mefford.

European Union NATO

UkraineAlert Jan 18, 2023

Putin’s nuclear blackmail must not prevent the liberation of Crimea

By Andriy Zagorodnyuk

Putin’s nuclear threats have led some analysts to argue against attempts to liberate Crimea but bowing down to the Russian dictator’s nuclear blackmail would have dire consequences for global security, writes Andriy Zagorodnyuk.

Conflict European Union

UkraineAlert Jan 17, 2023

How Europe can help Ukraine defeat Russia and win the peace in 2023

By Andreas Umland

Continued European support for Ukraine will be crucial in 2023 and must feature a combination of intensification and innovation if Vladimir Putin’s invasion is to be decisively defeated, writes Andreas Umland.

Conflict Economic Sanctions

The views expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff, or its supporters.

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UkraineAlert is a comprehensive online publication that provides regular news and analysis on developments in Ukraine’s politics, economy, civil society, and culture.

The Eurasia Center’s mission is to enhance transatlantic cooperation in promoting stability, democratic values and prosperity in Eurasia, from Eastern Europe and Turkey in the West to the Caucasus, Russia and Central Asia in the East.

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The post Wartime Ukraine must maintain course from Russian past to European future appeared first on Atlantic Council.

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Hearing on

“Examining Outbound Investment”

September 29, 2022

Thank you, Chairman Brown and Ranking Member Toomey as well as your hard-working staff for inviting me to testify on outbound investment, its implications for national security, and factors to consider if Congress decides to move forward with legislative proposals around screening or controlling such investments. It is an honor to speak with the committee today.

Let me clarify from the outset that the views expressed in my testimony today are my own, and do not necessarily reflect the view of my employer, Indiana University, or of the Atlantic Council, where I am a non-resident fellow.

I speak today as someone with both an academic and a government background. I am an associate professor of international studies at the Hamilton Lugar School at Indiana University. My research expertise includes the politics of investment liberalization, investment attraction, and the intersection of national security and investment policy, most notably inbound investment screening.

As a Council on Foreign Relations International Affairs Fellow, I worked as a policy advisor and Committee on Foreign Investment in the United States (CFIUS) staffer in the Office of Investment Affairs at the Department of State from August 2019 to August 2020.

And, in my capacity as a fellow at the Atlantic Council I have had the distinct pleasure of co-leading a policy working group on outbound investment controls with Emily Kilcrease of the Center for New American Security. Emily and I recently published a policy brief where we lay out our suggestions for how to design an outbound screening mechanism. Much of my comments today draw directly from that co-authored report.

The point of today’s hearing is to take a step back from tactical issues of policy design to instead:

1. lay out the potential national security risks that outbound investment may engender; 
2. identify existing gaps in US authorities to adequately address these risks;
3. develop overarching principles to guide the development of any additional authorities related to outbound investment controls that the USG, including Congress, may pursue.

The central guiding point of my testimony is this: While there are a set of national security risks that some kinds of outbound investments generate, there remains a great deal of uncertainty about the size of the problem and the cost of potential solutions.

Given that the openness of the US economy has been a major driver in our prominent position in the global innovation economy and therefore our national security, any attempt at addressing the risks of outbound investment must equally consider the potential unintended consequences of action. Smart policy will be narrowly scoped to national security, rooted in fact, tailored to the technologies of greatest concern, mindful of the limits of de facto enforcement power, non-duplicative of existing tools, and attuned to the need to act multilaterally. This is not to say that controls are not desirable or feasible, but that any action should be carefully measured.

I want to use the remainder of my time this morning to offer five observations that Congress should keep in mind while contemplating outbound investment controls:

First, there are gaps in the United States’ ability to address national security risks associated with some kinds of outbound investment. Export controls can stop the flow of US technology to these activities. But active forms of US investment—particularly foreign direct investment (FDI) and venture capital (VC) can provide intangible benefits to the Chinese firms and industries in which they invest. The United States can cut off all economic activity between US persons and problematic entities through list-based sanctions programs. However, there are reasonable arguments for why narrowly scoped expanded review authorities are necessary to protect national security.

Second, Congress should resist temptations to use outbound investment screening for purposes other than national security. The United States has national and economic security interests that intersect, and sometimes conflict, with the outbound investment activities of US multinationals and investors in several respects. To be consistent with a broader and long-standing commitment to market openness, the authority to intervene in an outbound transaction must be limited to a fact-based national security risk assessment, as is the case with inbound investment through the CFIUS process. It is my assessment that any outbound screen should focus on national security risks associated with indigenous technology development in countries of concern.

Third, Congress should recognize the uncertainty that pervades this issue. Crucially, current data collection on US investment flows to China is not detailed enough to be able to assess the national security implications of individual transactions. This is one reason why I advocate for a notification regime to help scope the size of the problem. An executive order related to outbound screening is likely a good first step because it allows for more experimentation before committing to a statutory requirement. This mirrors the experience of CFIUS, which was first established through executive order in 1975 and gradually became a statutory requirement through a series of amendments to the Defense Production Act, starting in 1988.

Fourth, Congress should not assume that a mirror image of CFIUS will work for outbound screening. The enforcement issues associated with regulating the movement of investment abroad is more challenging to address than regulating inbound flows. In the CFIUS case, a prohibition is enforced by preventing a foreign entity from buying a domestic asset, which is subject to US regulation. For outbound transactions, the United States can impose penalties on the US entity implicated in the transaction. But enforcement options become much less palatable if a multinational decides to channel the otherwise prohibited investment through a third country. It is also easier to compel a US target of a CFIUS review to provide the committee with the sensitive non-public technical information often required to complete a risk analysis. Compelling similar information revelation from a foreign target in the context of an outbound review will be much harder. The People’s Republic of China (PRC) might simply prohibit the transfer of such information.

Congress should be clear-eyed about the compliance and enforcement challenges likely to arise from outbound investment review that are less problematic in the context of inbound review. It should only move forward with a screening concept if it is reasonably sure that it has adequate monitoring and enforcement capabilities to give the regulation teeth.

Finally, Congress should think in network terms when contemplating what technologies to work hardest to protect. An administrable outbound investment review system will need to be relatively narrow in scope. We should avoid a “boiling the ocean” mentality. A broadly scoped review is likely to generate substantial negative consequences for US companies’ competitiveness and capacity to innovate. Congress can narrow its focus while remaining maximally effective by examining technology chokepoints in supply chain networks where US firms currently have the advantage and where process and know-how are central to the production of these technologies. A recent Center for Security and Emerging Technology report mapped China’s technology chokepoints. It found that the technologies for which China has the least domestic capacity tend to be in areas with very high quality control specifications. These kinds of technologies are likely of high national security value, require substantial know-how to perfect, and have outsized follow-on effects to other technologies relevant to US national security. They are good candidates for review.

At the same time, the United States’ ability to leverage its network position depends on China being integrated to some degree into the technology network. Congress should be mindful to not control technology and outward investment so much as to push China out of the network entirely. Take semiconductors as an example. The sanctions alliance against Russia’s invasion of Ukraine has been highly effective at cutting off Russia’s access to advanced semiconductors. As National Security Advisor Sullivan recently stated, this has substantially degraded the Russian military’s capabilities.¹ However, if Chinese entities could fabricate advanced semiconductors without access to US and other alliance members’ technology, we would lose this powerful tool. Right now, many Chinese companies seem to prefer to use US technology rather than invest the capital and time necessary to develop their own solutions. But, if we cut them off from this technology entirely, or if we develop policies that create enough uncertainty about future access, they will have no choice but to develop critical technologies domestically.

Prudent policy must balance the national security imperative to deny countries of concern indigenous capabilities in technology of high national security import, while also avoiding an overly restrictive regime that would inadvertently further push Chinese entities toward self-sufficiency.

US investment in China

To determine the size of the problem, we must first gather basic facts about how much US investors are active in China, through what vehicles, in what industries, and for what purposes. According to surveys of the Bureau of Economic Analysis’s surveys of US multinational corporations activities abroad, US companies have accumulated about $118 billion in foreign direct investment positions in China.² This equates to about 1.8 percent of all US FDI abroad. For comparison, 61.4 percent of all US FDI abroad is located in Europe. Measurement of US assets abroad, rather than FDI positions, suggest US multinationals have roughly $779 billion in assets in China.³ US venture capital, which is usually not included in FDI figures, has invested about $60 billion into Chinese start ups since 2010. To place this figure in context, venture capital activity in the United States over the same period was roughly $1.28 trillion.⁴

These numbers suggest that US investment in China remains relatively small compared to US investment activity at home and also compared to US investors’ activity overseas. Other argue, however, that evaluating the risks of such investment into China also requires attention to trends and to the specific activities to which US investors are contributing. On the first point, all measures of US investor activity suggest direct forms of US investment into China peaked between 2015- 2018 and have declined since then. The second point is harder to address given the data that are currently available. Data on sector specific investments provide some relevant information. US investments in theme parks, real estate, and consumer retail are not likely to have substantial deleterious effects on national security. Investments in some information communication technology businesses and activities—which was the sector that received the largest share of US FDI in recent years—could have security implications. But even sectors are too aggregated of a level of analysis to determine national security concerns. For example, investment in an enterprise software company serving the China market and investment in advanced semiconductor research and development likely have very different national security implications.

In other words, whether US investment in China poses national security concerns is best analyzed at the level of transaction, item, or activity rather than by aggregated investment values. And, currently available data do not provide enough insight to adequately judge the potential national security consequences of these investments because they do not provide detailed enough information about the activities of the investment target.

Defining policy objectives of a potential outbound screening mechanism

The United States has national and economic security interests that intersect, and sometimes conflict, with the outbound investment activities of US multinationals and investors in several respects. These include to prevent US capital from supporting firms implicated in China’s systemic abuse of human rights, to enhance the resiliency of critical US supply chains, and to address concerns arising from China’s indigenous development of technologies relevant to US national security.

At the same time, an open, market-based economy remains a key source of economic and technological strength of the United States. The fungibility of capital and the global mobility of firms limits the ability of unilateral US actions to prevent capital, knowledge, and technological flows to countries of concern. Policy action in this space needs to balance justifiable national security restrictions with a broad commitment to an open, market-based economy that seeds and sustains technological innovation. Bureaucratically complex and resource-intensive authorities are likely to have negative effects on competitiveness and could encourage the most innovative and productive businesses to relocate to less restrictive jurisdictions. Authorities that are too broad or ambiguous may have the same effect. Additionally, rules that do not have clear enforcement mechanisms for non-compliance will be of limited value.

The United States should limit any outbound control measures to national security—rather than broader economic competition—policy objectives. Furthermore, it should focus attention at the nexus of the most pressing national security concerns and the areas where interventions are most likely to successfully impede the most problematic policy objectives of countries of concern. This entails strengthening existing authorities before creating new ones and finding opportunities to pursue multilateral coordination or action with allies and partners wherever possible. National concerns related to China’s indigenous technology development are those that can be most directly addressed through an outbound investment mechanism and represent a genuine gap in existing authorities. Human rights concerns and issues of supply chain resiliency are best addressed through other measures.

Human rights

The United States has several existing tools that can be used to address concerns related to the use of US capital or technology in facilitating human rights abuses. First, it can use the Non-Specially Designated Nationals Chinese Military-Industrial Complex Companies List (SN-CMIC) sanctions program to prevent US capital from contributing to Chinese companies operating in the surveillance technology or defense and related material sectors. Second, export controls—via the Entity List or other means—can effectively stop the flow of US technology to these activities, especially if the Export Control Reform Act of 2018 (ECRA) is amended to expand a prohibition on US persons from providing support to a “foreign military, security, or intelligence services.”⁵ The Uyghur Forced Labor Prevention Act is another example of authorities Congress and the executive branch can use to address similar concerns. 

Supply chains

Recent legislative efforts have coalesced around supply chain resiliency issues, which is not surprising in the context of Covid-19 and related supply chain disruptions. However, outbound investment screening is a poor tool for addressing supply chain restructuring. Because so much of the US supply chain is already offshore, policies addressing supply chain security must focus on how to move operations already in countries of concern back to the United States or onward to partners and allies. Blocking a proposed outbound investment on reshoring grounds would not provide the company attempting to offshore with the capability to succeed in the United States on commercially viable terms. In other words, screening would only address a symptom rather than the cause of offshoring.

Moreover, using outbound screening to address supply chain resiliency is likely to generate problematic legal issues as well as complicate economic and security cooperation with our partners and allies. Blocking a proposed outbound investment on issues of supply chain resiliency would require either: a) an outbound review mechanism to provide the president with the authority to block a transaction for reasons beyond national security, or b) a further expansion of the concept of national security in ways that would damage the United States’ reputation as an excellent place to start and grow innovative companies.

Expanding blocking rationale beyond national security would likely invite increased litigation from US firms subject to an investment prohibition. CFIUS largely avoids such litigation because courts provide the president with substantial deference in the area of national security. Prohibitions on other grounds will likely be easier to challenge in court, and could create lengthy and costly legal battles that would increase regulatory uncertainty, thereby reducing the United States’ status as one of the most desirable places to do business.

Further expanding the concept of national security also has important negative consequences. The first has to do with perceived legitimacy of US government action. While the public and industry mostly recognize the right of the US government to intervene in market activity that generates clear risks to national security, this support rests on common understandings of what is a reasonable claim to national security. Overuse of national security rationales to justify government intervention into private sector transactions decreases the public’s trust in the reasonableness of these claims. Eroding trust could lead to reduced voluntary compliance with the law, more creative work-around solutions, and a US public that is increasingly skeptical of US actions in the area of national security and economic policy.

Whatever the United States does with respect to outbound screening, we should be prepared for other countries to develop similar authorities. Outbound mechanisms focused on supply chain structures as an essential security issue and/or an economic resiliency issue that warrants prohibitory intervention could be used among our European allies and others in ways that would create substantial harm to US interests, including by making it harder to develop more redundancy and multiple suppliers in critical supply chains through increased ties with allies’ economies.

Establishing more resilient supply chains requires an affirmative industrial policy that addresses the root economic causes of offshoring of critical capabilities long before a company enters an offshoring transaction and that makes reshoring production commercially viable. In this regard, the incentives and other “run faster” provisions of the CHIPS and Science Act of 2022 are an excellent start. Attempts to reshape supply chains must also consider how to do so without creating additional negative supply shocks. These considerations are particularly important in the current context of high inflation that has been largely driven by supply-side shocks.

Impeding Chinese indigenous technology development

Concerns over how US technology and investment can support indigenous technology development in China was central to the policy discussion surrounding the 2018 reforms of CFIUS and export control authorities, through the Foreign Investment Risk Review Modernization Act (FIRRMA) and ECRA. The initial draft of FIRRMA provided CFIUS with review authority over outbound investments. Some lawmakers were especially worried that the PRC was benefitting from critical technology transfer from US firms to Chinese counterparts through joint ventures. After substantial debate, Congress found a compromise in which CFIUS would remain focused on inbound—though it does have jurisdiction over some forms of outbound joint ventures—while national security concerns related to outbound investment would be regulated through expanded export control authorities.

The gap in this approach is that there are ways in which the participation of US multinationals and investors in China’s innovation economy can harm US interests through channels other than technology transfer. Decades of research on the role of foreign direct investment in development has shown that inward FDI, particularly when paired with active host country regulatory strategies, can help FDI-receiving countries expand domestic markets and move up the value chain.⁶ Multinational corporations and their affiliates make up 36 percent of global output and are responsible for two-thirds of exports and one-half of imports.⁷ Domestic firms participate in global supply chains largely through incorporation into MNCs supply chain. For instance, MNCs operating in the United States source 25 percent of their inputs domestically. MNCs in Japan source over 50 percent of inputs domestically. The more domestic firms interact with MNCs, the more they learn from those MNCs, including how to increase their production capabilities. By interacting with MNCs, domestic firms gain foreign market knowledge to directly compete in international markets. Domestic firms that integrate into MNCs’ supply chains are statistically significantly more likely to become exporters, increase their ability to supply the domestic market, and produce higher quality and more complex products. Normally, we view all of these spillover effects of FDI as beneficial to economic development. However, in narrow cases related to specific critical technologies relevant to national security, the linkages literature provides insight into how US MNCs can help develop Chinese critical industries. The issue goes beyond technology transfer. MNCs help foster indigenous industries by incorporating local firms into their supply chains and by importing knowledge about international markets, connections to MNCs’ broader supplier and buyer networks, and other managerial practices that increase efficiency and quality control. These, less tangible, contributions to the domestic market are not able to be controlled through export controls.

In the realm of US venture capital (VC), there are also potential concerns that are not addressable through export controls. As the National Venture Capital Association (NVCA) lays out in their 2022 Yearbook, venture is distinct from other types of investing because it typically entails relatively small equity stakes in a company, but the general partner in the investment is much more involved in strategic management decisions of the target than passive investors are.⁸ VCs provide more than an infusion of capital; they mentor and advise founders who often need substantial strategic and logistical help to scale up their business. They often play prominent roles on corporate boards. Moreover, they provide founders and their teams with access to the investors’ financial, commercial, professional, and political networks. By investing in a company, VCs are putting their seal of approval on the enterprise, signaling that the company was able to pass a thorough vetting process. And, when VCs invest in a company, they are tying their financial future to the company. It is in a VC’s interest to crowd in more investors into future funding rounds so that the companies in which they invested increase in value in each funding round, which ultimately leads to an acquisition or initial public offering through which the VC can exit the investment, hopefully at great profit.

Venture capital plays a critical role in the continued dynamism of the US innovation economy. From 1974-2015, 42 percent of US companies that went public were venture backed.⁹ These 556 companies accounted for 63 percent of the market capitalization of the 1,339 US companies that went public over the period and 85 percent of all the research and development expenditures associated with those companies. The flip side, however, is that these same features that have been so central to the journey from start up to commercial viability in the United States could generate national security risks if US VC contributes to critical technology start-ups in countries of concern. Similarly, to the intangible benefits of FDI described above, export controls do not provide an adequate remedy to these kinds of national security concerns. 

Approaching outbound controls

As the Congress moves forward with an outbound screening concept tailored to issues of the national security risk of indigenous technology development in countries of concern, it should: 1) be mindful of dynamics that make outbound investment screening harder to enforce than inbound review; 2) measure potential tools against five principles of good design; and 3) follow a strategy that leverages the United States’ privileged position in many technology supply chain networks.

Enforcing outbound screening

The conversation around outbound screening is colored by the United States experience with inbound review. CFIUS is widely seen as well-designed and effective and Congress should be careful to not overlearn from the CFIUS example. It much easier from an enforcement perspective to control market access than to limit outflows. In the CFIUS case, a prohibition is enforced by preventing a foreign entity from buying a domestic asset, which is subject to US regulation. For outbound transactions, the United States can impose penalties on the domestic entity implicated in the transaction. But enforcement options become much less palatable if a multinational decides to channel the otherwise prohibited investment through a third country. Enforcing a prohibition in that case would likely require substantial extraterritorial reach that the US government will likely wish to avoid due to issues of proportionality and allies’ and partners’ sensitivities.

Other aspects of administration and enforcement are much easier for inbound investment than for outbound. For instance, it is easier to compel a US target of a CFIUS review to provide the committee with the sensitive non-public technical information often required to complete their review than it would be to compel the same information from a foreign target in the context of an outbound review. Indeed, other country government may simply prevent the foreign target from providing such information. Additionally, in the case of mitigation agreements, it is reasonable to assume it is much easier for the US Government to monitor behavior of firms in its own jurisdiction than firms overseas.

For these reasons, Congress should be clear-eyed about the compliance and enforcement challenges likely to arise from outbound investment review that are less problematic in the context of inbound review. Congress should only move forward with a screening concept if it is reasonably sure that it has adequate monitoring and enforcement capabilities to give the regulation teeth.

Design principles

Along with having enforcement capabilities strong enough to deter, Congress should consider the following principles when designing a screening tool

1. Review should be targeted to transactions that present the highest national security threat and any governmental action should be subject to a national security risk assessment. As with CFIUS, an outbound mechanism should be narrowly tailored to national security risks rather than a tool to bolster broader economic competitiveness objectives. Congress should instead pursue issues of competitiveness and social standards through affirmative industrial policy such as the CHIPS and Science Act and through trade and investment frameworks such as the Indo Pacific Economic Framework (IPEF).
2.  A review mechanism along with any additional outbound controls should be clearly defined and understandable to private-sector participants. This includes clear definitions of what types of investors and economic activities are covered. The private sector will be responsible for the first line of compliance, so they must understand to what they are obligated. For the regulation to be seen as a legitimate use of the government’s regulatory authority, its purpose and necessity must be explainable to the American public. Without public support, firms will not face substantial reputational costs for evading the spirit or the letter of the regulation. A supportive public is key to regulatory compliance.
3. Any review should be non-duplicative of existing tools such as export controls. In the context of inbound transactions, CFIUS is designed as a tool of last resort. Any outbound investment screen should be thought of similarly and any use of outbound authorities should occur only when other authorities are insufficient to address the national security risk that arises from the transaction in question.
4. Any review mechanism must be scoped proportionately to the government’s institutional capacity to effectively administer a new mechanism. We should not take lightly the administrative burden that a well-functioning outbound review process would place on the executive branch. For example, CFIUS requires hundreds of staff and attention across its nine member agencies plus ex officio and support agencies. FIRRMA appropriated $20 million a year for five years to help build up CFIUS agencies to support the expansion of its authorities.
5. Finally, any Congressional action on outbound screening should be paired with meaningful multilateral engagement with allies and partners so that US investors are not disadvantaged and so the goal of impeding national security relevant indigenous technology development in countries of concern is more likely to be met. Similar to export controls and inbound screening, outbound investment controls are more likely to be effective if large portions of the global economy implement similar measures. This is especially important in the context of outbound investment where there is justifiable concern that a US outbound mechanism without coordination with other advanced economies could just lead to MNCs from other OECD countries occupying the investments that US firms otherwise would have participated in. Similarly, multilateral engagement is important in the context of critical technologies, as the United States is not the only relevant member of these supply chains.

Leveraging the US network position

As a final conceptual point, I encourage Congress to think in network terms as much as possible when contemplating any outbound investment control mechanisms. Even before the Covid-19 pandemic, scholars of international relations started to borrow from complexity science to understand on the structure of different kinds of global networks generate power and vulnerabilities. The United States has effectively leveraged its central position in currency and finance networks to extend its power in important ways. Even now, we see how this centrality has imbued the United States with regulatory power over companies that wish to list on US-based exchanges.

As the Congress shifts from conceptual issues to more tactical and technical concerns related to coverage and definitions, I encourage it to use insights from complexity science to design its mechanism. This entails focusing attention on chokepoint technologies as much as possible. Rather than trying to “boil the ocean” and cover all technologies possible, it will likely be more effective for the US to evaluate what specific technologies are especially critical to a host of other technologies. For instance, it may be particularly challenging to cover all manner of artificial intelligence technologies. However, limiting investment in specific extreme ultraviolet lithography tools and technology as well as most likely candidates for the next next-generation lithography may be more feasible. To the extent that advanced AI relies on advanced semiconductors, controls on NGL will have spillover implications for AI as well.

As another example, the Center for Security and Emerging Technology recently published a report evaluating “China’s Self-Identified Strategic Technology Import Dependencies.”¹⁰ It found that China’s chokepoints tend to be in technologies with very high-quality control specifications including precision requirements, consistency requirements, and the ability to perform under stress. Focusing attention on these areas—or more broadly, areas that the Chinese self-identify as chokepoints—would likely be particularly because these chokepoints relate to production process issues rather than the underlying technologies. Additionally, research on information problems in authoritarian contexts suggest that achieving high levels of quality control will likely remain a challenge for Chinese companies so long as delivering bad news is politically dangerous. This suggests not only that the PRC currently faces disadvantages in these chokepoint technologies, but also that the United States’ open, democratic system provides us with a clear competitive edge in these areas. This is an important reminder that the United States’ leadership position in advanced technology and economic dynamism is a function of our open, non-arbitrary, rules-based system. To best protect our national security, we should confidently embrace those core principles that have fueled our economic prosperity rather than erect overly complicated bureaucratic structures that emulate competitors’ systems.

Conclusion

I close my testimony where I began. Outbound investment creates a range of policy issues that Congress may want to address. The issue is which issues warrant a policy response and, of those, what policy response, or combination of policy responses, is most likely to produce outcomes that strengthen US national security.

I recommend that Congress consider five issues while contemplating the path forward:

First, the gaps that currently exist in the government’s authorities relate to the ability to control the intangible benefits associated with outbound FDI and VC flows. Export controls already provide authority over technology transfer. Policy solutions will need to address the components of investment that generate risks through managerial expertise, transfer of know-how, connection with supplier and buyer networks, and the legitimation effects of partnering with a US investor.

Second, any outbound investment review mechanisms should be narrowly focused on national security rather than broader policy objectives. Issues of economic competitiveness are best addressed through other tools.

Third, outbound investment screening would be a new authority and represent a substantial break from central tenets of decades of US economic policy. There is a great deal of uncertainty about the size of the problem and the potential negative unintended consequences of outbound review. An approach that is designed to gather more information as well as allow for experimentation is likely to work better than enacting a broad statutory screening requirement all at once.

Fourth, Congress should not assume that a mirror image of CFIUS will work for outbound screening. The enforcement issues associated with regulating the movement of investment abroad is in many ways more challenging to address than regulating inbound flows. Congress should make sure that any mechanism be narrowly scoped to national security, clearly defined and seen as a legitimate use of government authorities, non-duplicative of existing tools, administrable, and paired with meaningful multilateral engagement on the issue with allies and partners.

Finally, smart policy will take cues from networks and complexity science. Clamping down on all outbound investment to countries of concern is not a viable option. By focusing on chokepoint technologies, the United States can scope coverage in a way that is most impactful with the least amount of negative economic consequences.

Fellow

Sarah Bauerle Danzman

Nonresident Senior Fellow

Economic Statecraft Initiative GeoEconomics Center

Economy & Business Financial Regulation

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Mark Linscott: Results in the Trade Policy Forum will be disappointing but predictable

Dr. Ajay Chhibber: The world’s two largest democracies have huge untapped potential for expanding trade ties, but they need a roadmap

Adnan Ahmad Ansari: An opportunity to reignite US-India trade talks

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Results in the Trade Policy Forum will be disappointing but predictable

Despite the best efforts of US trade negotiators to deliver meaningful results for US stakeholders on bilateral trade with India, they had limited leverage with their Indian counterparts and the results will make that crystal clear. There will be some glossing over of serious bilateral trade problems, positive language on the architecture of TPF discussions across goods and services, and repackaging of specific areas of the agenda, such as labor, environment, and good regulatory practices, as part of a new working group on “resilient trade.” But it will be difficult to avoid the conclusion that the current approach on bilateral trade is not working. These are the first and fifth largest economies in the world that have compelling national interests in solidifying and expanding their strategic partnership, yet the trade relationship is stuck with prospects for improvements dim.

Two possibilities for 2023 could substantially alter the dynamics and put the trade relationship on a better, healthier course for the future. The first would be reauthorization of the US Generalized System of Preferences (GSP) program by Congress so that the two sides could come back to the table in the TPF with enticements to offer for concluding a wide-ranging trade agreement. If the United States could offer the reinstatement of India’s GSP benefits, the prospects are strong that the two sides could reach an agreement on a series of issues, covering agriculture, health-sector products, digital services, and new trade issues (e.g., environmental sustainability and more equitable distribution of the benefits of trade).

The second would be a reversal of the Biden administration’s allergy to negotiating free trade agreements (FTAs), which has handicapped the United States in competing in global markets as their trading partners negotiate preferential trade terms among themselves (India concluded an FTA with the United Arab Emirates (UAE) and an interim FTA with Australia in 2022 and is actively negotiating with the United Kingdom, European Union, and Canada). The playing field has become less level for US export interests as a result, and a more captive US domestic market is neither realistic nor more beneficial. While it is unlikely that India would be at the top of the list for early negotiation of an FTA if the Biden administration changes course (the United Kingdom and Kenya are more likely candidates), even the start of an exploratory process for a US-India FTA would kick-start the expansion of the trade relationship. The two governments would experience new, exciting dynamics in their bilateral engagement, more attention from stakeholders on both sides, and enhanced leverage to fix problems and venture into new frontiers on trade.

If neither of these possibilities emerge over the next year, it is likely that the TPF will continue to fall short of expectations. Both governments should consider the consequences of a trade relationship that has been going nowhere for too long.

Mark Linscott is a non-resident senior fellow with the Atlantic Council’s South Asia Center.