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Energy & Economics
Concept of the trade war between the USA and China.

How to better equip the U.S. DFC to compete with China

by Andrew Herscowitz

한국어로 읽기 Читать на русском Leer en español Gap In Deutsch lesen اقرأ بالعربية Lire en français When U.S. President Biden and Chinese President Xi met in November 2023, Biden remarked that the countries must “ensure that competition does not veer into conflict.” A recent ODI report Hedging belts, de-risking roads: Sinosure’s role in China’s overseas finance illustrates the scale of the competition and reveals how one of China’s less-known institutions – Sinosure – has been giving China the edge. This blog offers some thoughts about how the U.S., through its U.S. International Development Finance Corporation (DFC) can better compete. Competing requires resources, but really not as much as you think Competing credibly requires money, dedicated staff, and creativity. It requires studying the competition. Infrastructure development requires low-cost financing, capacity-building, and getting everyone aligned. As Sinosure has demonstrated again and again, deploying guarantees and insurance – particularly from official financing – can de-risk overseas investment, reducing costs of finance and mobilising commercial investment from the private sector. When it comes to infrastructure, China has a far more robust, albeit imperfect, track record when compared to others. The U.S. and its G7 partners have not been much of a match for China in financing infrastructure worldwide. The G7 could successfully compete with China, and doing so does not have to cost hundreds of billions of dollars. The U.S. Congress, despite its strong desire to counter BRI, has yet to appropriate the resources necessary to compete credibly in a battle of influence against China in developing countries. There’s been plenty of rhetoric, repurposing of existing programs and resources into initiatives like the Partnership for Global Infrastructure and Investment (PGII) and the Global Gateway. Each time the U.S. launches a new overseas economic development initiative, however, it rarely dedicates sufficient resources to help it scale – examples include the Partnership for Growth, Power Africa, Prosper Africa, and PGII. When it was fully funded, Power Africa, which coordinated the efforts of 12 U.S. government agencies, helped 120 power projects in Africa get across the finish line in just a few years, building a strong brand for the U.S. in Africa for economic development for the first time in decades. Then the U.S. cut Power Africa’s budget by 75% because of political shifts. The initiative stalled in its progress on new infrastructure, while still helping 200 million Africans get access to more reliable electricity. PGII, which has no dedicated budget, involves a handful of smart people working hard to deliver on a G7 promise of $600 billion in global infrastructure by 2025. Other than the Lobito Corridor project, it has not been clear to date what PGII is able to deliver at scale in Africa without additional resources. That could be about to change, though. The State Department just requested another $4 billion from Congress to up its game against China, which should help tremendously if that funding is secured to support PGII. Why Sinosure has been such an effective tool for China, despite its low margins BRI has not been particularly innovative, but it’s been steady. Sinosure, along with other Chinese export credit agencies, offers highly favorable terms and longer-term finance – this approach has well suited Global South governments in advancing their development and political objectives. While some projects have been problematic, Chinese creditors have provided the low-cost, patient capital at scale that many countries need for long-term productive infrastructure investment. But as the report shows, this approach has challenged established regimes governing the use of public money (link to blog 2). Sinosure insurance covers non-payment up to 95% of the insured equity or debt for up to 20 years, but most OECD Export Credit Agencies (ECAs) only provide 85% coverage for up to 10 years – though this policy soon will soon change [link to blog 2] Sinosure can work anywhere, except where there’s a live conflict or in cases of repayment arrears. By contrast, the U.S. International Development Finance Corporation (DFC) has a list of over 100 countries where it cannot do business. Sinosure’s premiums max out at 7% of the total debt servicing cost of a project, making it relatively cost-effective. In this aspect, it is surprisingly transparent. DFC’s fees and costs are numerous and opaque, with DFC passing some of its own costs on to its clients. By the end of 2022, Sinosure had provided over $1.3 trillion-worth of insurance on export and investment, with a quarter of this going only to BRI countries. In 2022 alone, it supported a total portfolio of $900 billion through its insurance for over 170,000 clients, of which $80bn went to overseas investment and long-term finance, which mostly supports projects in infrastructure such as power, transportation, construction, telecoms and shipping. It received a total net insurance premium of $1.9 billion and paid out $1.5 billion in insurance claims. Despite its significant payouts, however, Sinosure continues to earn a modest profit of $102 million – not much of a margin, but enough to propel China’s global leadership on trade and infrastructure development.     By contrast, DFC’s current total portfolio-wide exposure is $41 billion, with just over $9.3 billion committed in fiscal year 2023 for 132 transactions – of which only around $3.5bn of this was for guarantees and risk insurance. DFC has many of the same tools available to it as the Chinese government, and DFC is not even legally required to earn a return on its investments. Yet DFC has not made full use of its capital resources and has not deployed its capacity for risk-mitigation finance in the same way. An unleashed DFC could make the U.S. more competitive It’s not too late for the U.S. and others to compete. The U.S. has an opportunity to further change how it conducts business to compete with China, while promoting sustainable development. DFC is starting to flex its competitive muscles with its own insurance product, recently using political risk insurance to support a $1.6 billion debt-for-nature swap in Ecuador and another $500 million debt-for-nature swap in Gabon, which support broader debt relief efforts, as well as channelling money towards climate and conservation goals. Moreover, those deals come at a very low cost to the U.S. government given DFC’s pricing models. DFC is up for reauthorisation in 2025. It has both foreign policy and development mandates. In a previous blog, we laid out 10 recommendations about how DFC could be more effective in achieving its development mandate. Here are 9 recommendations to help DFC be more effective in competing with China and achieving its foreign policy mandate: 1. Spend some money and spend it right All it took for Sinosure’s expansion in the early 2010s was a capital injection of $3 billion. To make its financial institutions just as competitive, the U.S. only needs to commit a few extra billion dollars of appropriated resources per year, just as State Department has proposed, not hundreds of billions. Sinosure, with its somewhat loose investment criteria, still managed to earn over $100 million profit on a $900 billion portfolio in 2022. Even if DFC were to spend $1 billion/year of additional budgetary resources – for the purpose of leveling the playing field with China and providing developing countries with the type of inexpensive financing they need – that could be money well spent for the U.S. taxpayer. That money could cover legal fees that DFC currently passes on to clients. It could be deployed through innovative instruments: to take on some of the currency risk on strategic transactions, to cover first loss on strategic investments, or to provide technical assistance that does not need to get repaid–comparative advantages that Chinese financial institutions still sorely lack. That funding also could be used, simply, to reduce interest rates and fees, at a time when borrowing costs for lower-income countries have risen astronomically. 2. Structure deals to outcompete China Encourage DFC to structure transactions to use its funding to maximize competition with China in a way that promotes a more level playing field. DFC should not crowd out competitively tendered and transparent private sector investment, but where inexpensive or even concessional DFC co-financing might help the private sector out-compete opaque Chinese investment, DFC should be equipped to support those projects. 3. Don’t obsess over returns Even though DFC is not legally required to earn a return on a portfolio-wide basis, most members of Congress expect DFC to be revenue neutral to the U.S. Treasury. If members of Congress would adjust their return expectations even slightly, DFC could significantly advance its development and foreign policy goals. Effective development and foreign policy are not free – especially when competing with China. Even earning back $.95 on the dollar on a portfolio-wide basis would be a significant leverage of 1:20 of appropriated resources to private investment – giving DFC broad flexibility to structure deals that prioritise development impact and foreign policy. 4. Remove DFC’s limits Eliminate ceilings on DFC financing – including the $1 billion transaction limit, the $10 billion annual portfolio limit, and the $60 billion total portfolio exposure. It really doesn’t cost anything to do this. It’s like raising its credit card limit. 5. Let DFC work anywhere when necessary Give DFC the authority to determine the countries where it can do business on a case-by-case basis, depending on what the foreign policy and development priorities are. DFC should be required to continue to prioritize investments in low and lower-middle income countries, but it should have flexibility to respond quickly and selectively anywhere that doing so will credibly advance a compelling U.S. national security interest, such as financing a strategic port or lithium processing. To prevent DFC from sliding into becoming just a national security tool, abandoning its development mandate, DFC should be required to clearly articulate the compelling national security interests of projects and should provide a detailed report to Congress each year on its investments in upper-middle income and high-income countries to explain these interests (even classified, if necessary). 6. Empower DFC to support “nearshoring” DFC can help the U.S. diversify its supply chains and reduce dependencies on China. To encourage companies to move operations out of China and into the Americas (if operating in the U.S. is not commercially viable), give DFC broader authority to support strategic transactions in the region. 7. Make it easier for DFC to support equity investments in strategic infrastructure When DFC takes an equity position in a company or an investment fund, it gets a seat at the ownership table. That allows DFC to drive decisions regarding sourcing of goods and services (i.e., making sure contracts do not always go to Chinese companies). Investing in equity funds that develop and finance a portfolio of infrastructure projects is an effective way for DFC to increase and spread its strategic influence -- except that DFC often struggles to make these types of investments because U.S. legal requirements make DFC a slow and clunky, and hence, an unattractive investment partner. DFC needs flexibility to bypass some of these requirements. 8. Help DFC scale its risk insurance instrument For years, DFC has been hugely innovative in deploying its insurance products to leverage capital from others. DFC used its political risk insurance tool to crowd in private investment in Ukraine, and to catalyze pioneering debt-for-nature swaps worth hundreds of millions of dollars in Ecuador and Belize. But according to recent reports, the U.S. Office of Management and Budget has been threatening to start treating insurance investments like guarantee instruments from a budgeting standpoint. This will make it more expensive for DFC to deploy this tool. If it ain’t broke, why fix it? As we’ve shown, one of the main factors behind China’s competitiveness abroad is through Sinosure’s expansive use of its insurance tool: OMB’s changes will make it more expensive and difficult for the U.S. to scale its own. OMB needs to read the room. We’re not going to suddenly balance the U.S. budget by tinkering with a formula that has worked for decades. Let DFC do more of what it does well. 9. Help speed DFC up Before committing any transaction over $10 million, DFC is required to notify Congress in advance. This “Congressional notification” requirement provides a valuable extra level of oversight to ensure that DFC does not doing anything out-of-whack with Congressional priorities. But the process slows DFC down, when Chinese financiers are known for their speed. Even though DFC only is required to “notify” Congress of its deals, and not seek “approval,” practically and politically speaking nobody wants to run afoul of any one of the 535 members of Congress. Consequently, DFC rarely moves forward on a project until it can resolve the concerns of members of Congress. DFC needs to work with Congress to come up with a reasonable alternative to the Congressional notification process that balances speed with continued close collaboration with Congress. In addition, DFC’s Board can help speed things up by focusing its efforts on high level policy guidance instead of individual transactions. The Board should delegate more decision making on individual deals to DFC’s CEO. It makes no sense for the Secretary of State, who chairs DFC’s Board, to dig into a $20 million investment into a healthcare fund, not to mention the hundreds of State Department staff with little development finance experience who review the documentation before it goes to the Secretary with a recommendation for a vote. U.S. taxpayers probably would prefer to have the State Department focus on resolving the Middle East conflict. From the perspective of many Global South countries, this competition between the G7 countries and China is not inherently bad if it brings them more desperately needed resources and improves the quality of their infrastructure. The U.S. could be more competitive if it empowered its development finance professionals to use DFC’s tools the way they were designed to be used. DFC must be properly resourced with enough people and enough money to allow it to grow its portfolio. While development impact remains the key priority for DFC, delivering for the needs of partner countries is what also will deliver long-term influence. That is how the U.S. can compete – and all at relatively low cost to the U.S. taxpayer.

Energy & Economics
Border between USA and Mexico

How the US Regime Subsidizes Immigration—both Legal and Illegal

by Ryan McMaken

In recent months, stories from both the legacy media and the independent media have continued to pile up on how undocumented foreign nationals—also known as "migrants" and "illegal aliens"—are able to take advantage of a vast network of taxpayer funded benefits in daycare, medical care, housing, and more. For example, both the New York Post and Denver Post report that these foreign nationals have "overwhelmed" the Denver Health hospital system in Denver, and that the situation is "unsustainable." Meanwhile, public schools report classrooms are filling up quickly with the children of these foreign nationals. Denver is hardly alone. The New York Post notes that both the City of New York and the state government have expanded local welfare programs, including pre-paid credit cards, to further ensure that migrants continue to receive cash and resources from American taxpayers. This is in addition to the approximately 66,000 foreign nationals who are housed in hotels and shelters, care of both New York and federal taxpayers. USAToday reports that colleges "across the country" are receiving millions in taxpayer money to offer housing to migrants at no charge. Chicago's mayor is bragging he's giving away $17 million in taxpayer-funded giveaways to "asylum seekers" who are presently living off the sweat of the taxpayers in government shelters. This, of course, is just a downpayment on many more planned giveaways. Just how much in taxpayers' resources is going to foreign nationals? It's difficult to estimate for a number of reasons. The spending is done through numerous different government agencies at various levels of government. Moreover, much of the money if filtered through non-profits (i.e., "NGOs") that are labeled "charities" but are simply adjuncts of the regime. Once we add up $1 billion here and $77 million there, after a while we're talking about real money, and one thing becomes abundantly clear: the regime and its partners are subsidizing the influx of foreign nationals who are promised a variety of both cash and in-kind benefits. It must also be noted that, contrary to certain myths, the largesse is not reserved for only the so-called "illegal aliens." Legal immigrants can take advantage of the generous and well-funded American welfare state even more readily than can the undocumented migrants. What is the effect of subsidizing a particular product or activity? It is usually the same everywhere we look: you get more of what you subsidize. This is true of student loans, it's true of ethanol, and it's true of migrants. Economic theory tells us that the government cannot possibly know the "correct" number of migrants, nor should the regime be free to centrally plan some arbitrary number. On the other hand, it is extremely unlikely that the number of migrants—even with lax border enforcement—would be as high as it is without the regime's incessant subsidization of migrants, both legal and illegal. How Many Foreign Nationals Live in the United States? According to the Congressional Research Service, it is estimated there were approximately 45-46 million foreign-born residents of the United States in 2022. Of those, about 53 percent, or 24 million, are naturalized citizens. In addition to this there are 12.9 million legal permanent residents (LPRs) and approximately 11 million more are so-called "illegal" immigrants. All combined, we find that 23 million non-citizen US residents—i.e., "foreign nationals"—are living in the United States. That's about 51 percent of the overall foreign-born population. As we will see, many of them receive financial support and resources from US taxpayers. (This measure does not count the approximately 3.2 million nonimmigrant workers, students, exchange visitors, diplomats, and their relatives who have sought only temporary residence in the United States. These nonimmigrant groups are not eligible for public benefits.) Are Foreign Nationals Eligible for Welfare? Among immigrant foreign nationals, most are eligible for some form of taxpayer-funded "public" benefits. For example, undocumented foreign nationals may legally access "treatment under Medicaid for emergency medical conditions," a variety of in-kind services such a soup kitchens and temporary housing, and "programs for housing or community development assistance or financial assistance administered by the Secretary of Housing and Urban Development..." That's just the direct federally-funded services. State and local government may elect to provide additional services at local taxpayers' expense. The welfare programs available to legal foreign nationals are far more broad. Legal foreign nationals (LPRs) can access most federal welfare programs after an initial five-year period. This includes non-emergency Medicaid, CHIP, TANF (i.e., cash assistance), food stamps, and SSI. Access to these programs have been further broadened by state governments. As noted by the National Immigration Law Center: Over half of the states have used state funds to provide TANF, Medicaid, and/or CHIP to immigrants who are subject to the five-year bar on federally funded services, or to a broader group of immigrants. A growing number of states and counties provide health coverage to children, young adults, or pregnant persons regardless of their immigration status. Several states offer or will offer health coverage to older adults regardless of their immigration status. And five states (California, Colorado, Minnesota, Oregon, Washington) and the District of Columbia offer or will offer public or private health coverage with state subsidies to all otherwise eligible immigrants regardless of their immigration status. It is not necessary to be employed to maintain legal permanent resident status, even if one is of working age. After all, LPRs are not the same at temporary nonimmigrant workers like H1B visa holders: "Green card holders [LPRs] can also collect unemployment compensation the same way citizens do ...nor can a legal permanent resident be deported for being unemployed." Legal immigrants do not jeopardize their legal status by applying for additional taxpayer funded benefits such as food stamps: "SNAP enrollment will NOT affect your ability to remain in the United States, get a green card/permanent resident status, keep your green card/permanent resident status, or become a U.S. citizen." In short, nearly the full gamut of taxpayer-funded welfare programs are open to legal foreign nationals after the initial five-year bar. Moreover, many migrants aren't even held to that, including "[r]efugees, people granted asylum or withholding of deportation/removal, Cuban/Haitian entrants, certain Amerasian immigrants" and other specific groups are exempted from the waiting period. All these foreign nationals, regardless of status, are free to send their children to government childcare centers known as "public schools." How Much Do Foreign Nationals Use American Social Benefits? A variety of organizations have attempted to quantify the extent to which both naturalized immigrants and current foreign nationals use welfare programs. This study from the National Academies concludes that the data show[s] that the immigrant households use several programs, most notably food assistance and Medicaid, at higher rates than do households led by the native-born. ...This higher use of welfare programs by immigrants is attributable to their lower average incomes and larger families. In the NA study, immigrant households with children utilized welfare programs at higher rates in nearly every US state. In California, 61.5 percent of households utilized welfare while 40.7 percent of immigrant households did. In Texas, the same measures are at 66.3 and 44.2 percent, respectively. Similar proportions are found in Florida and New York. This report unfortunately does not differentiate between naturalized immigrants and foreign nationals. However, given that naturalized immigrants tend to earn 50 to 70 percent more than non-citizen immigrants, it is safe to conclude that foreign nationals utilize welfare programs more than naturalized immigrants, and therefore more than the native population. An increasingly important addition to legal immigration in recent decades has been the population of immigrants legally designated as refugees. In total, this all costs the taxpayers nearly two billion dollars per year, or $80,000 per refugee per year in the form of federal and state programs including food stamps, child care, and public housing. The Center for Immigration Studies has published studies similar to the NA study. These CIS studies show similar results. In 2012, 51 percent of households headed by an immigrant (legal or illegal) reported that they used at least one welfare program during the year, compared to 30 percent of native households. Welfare in this study includes Medicaid and cash, food, and housing programs. Immigrant households have much higher use of food programs (40 percent vs. 22 percent for natives) and Medicaid (42 percent vs. 23 percent). Note that these conclusions reflect immigrant households rather than immigrant individuals. This is an important distinction because many immigrant households contain citizen children who became citizens at birth due to being born in the United States. Thus, the household may contain both citizens and foreign nationals—some of whom may be illegal foreign nationals. These households, however, enjoy access to welfare programs by virtue of the underage members' citizenship. Thus, immigrant households can access taxpayer funded healthcare, food stamps, housing programs (and more) through the native-born children. Similar trends persist when non-citizen households are measured separately from all immigrant households combined. Some researchers insist that welfare benefits for foreign nationals ought to be measured only on an individual, per capita basis. For example, in this report from the CATO institute, the researchers conclude that for 2020, native-born residents, on average, cost welfare programs $8,335 per capita while immigrants cost welfare programs $6,063. These proportions can vary by program. For example, the per capita Medicaid cost for immigrants is $1,859, while the cost for native-born residents is $2,081. The use of food stamps is similar ($190 per capita for immigrants versus $214 per capita for natives), Immigrants usage of SSI is slightly higher ($188 per capita) than it is for natives ($169 per capita). How much taxpayer funding are we talking about overall? The CATO report estimates that the total cost of welfare going to non-native US residents in 2020 was $290.4 billion, That's a sum equal to the combined budgets of the Departments of Education and Homeland Security. Yet, only about half of non-natives are non-citizen foreign nationals. To find the sum used by non-citizen immigrants, we can't just divide the sum in half because foreign nationals tend to use welfare more than naturalized immigrants. So, given the $290.4 billion total for immigrant welfare spending, we can estimate that at least $150 billion of that is consumed by foreign nationals—a sum about equal to the combined budgets of the Departments of Education, State, and Housing and Urban Development. (This spending total excludes state and local spending on government schools for the children of foreign nationals.) An older CATO study (from 2013) does break out non-citizens from immigrants overall. Here, the researchers conclude that low-income immigrants use food stamps more than naturalized immigrants, and only slightly less than native-born residents. When it comes to taxpayer funded healthcare: one in five non-citizen immigrants collect this benefit while slightly more than 1 in 4 natives collects this particular form of taxpayer largesse. The Migration Policy Center reports that in 2021, 32 percent of immigrants (both citizen and non-citizen) used government health insurance. That's comparable to 38 percent of natives. Yet, even by this conservative measure of immigrant welfare usage, the best we can say is that immigrants use welfare at a rate slightly lower than that of natives. One could argue that, at the low end, immigrants receive (per capita) about 70 to 75 cents for every welfare dollar that goes to natives. That's not exactly "good news" given that overall federal spending on social benefits amounts to about half of the annual $6.3 trillion budget and is clearly out of control. The fact that natives get most of this is hardly an exoneration of immigrants. It's more of an indictment of native-born Americans, millions of whom exploit their most productive fellow citizens every month to keep the government benefits flowing. In any case, we find tax money flows freely to foreign nationals, and immigration to the United States is heavily subsidized. We should not be surprised when a lot of immigrants show up to get their share.

Energy & Economics
Page of the book highlighting the words

Disquiet in the world’s middle class

by Homi Kharas

“Originally published by Homi Kharas at Brookings Future Development on 21 November 2023,” “Middle-class life satisfaction rests on two pillars. The first is the idea that hard work and self-initiative will lead to prosperity. The second is that thanks to this prosperity, the children of middle-class families will enjoy even more opportunities for the good life. Both pillars are shaking.” Joining the middle class has been a ticket to the good life for two centuries now, a history I trace in a new book “The Rise of the Global Middle Class.” The American Dream, the glorious years of European reconstruction after World War II, miracle economic growth in Japan and other East Asian countries, Xi Jinping’s great rejuvenation of the Chinese nation, and India’s software revolution each brought hundreds of millions of people into the ranks of the global middle class. Today, thanks to this progress, most of the world, upwards of 4 billion people, enjoy a middle-class or better lifestyle for the first time ever. Yet, across the world there is a clear sense of disquiet in the middle class. In the U.S., Princeton economists Anne Case and Angus Deaton have documented the prevalence of “deaths of despair” due to suicides, opioids, and alcohol poisoning among non-college educated white middle-class males. The Japanese have coined a specific word, karoshi, to describe deaths due to overwork among salaried professionals. China is seeing a campaign of tang ping, or lying flat, to protest the “996” expectations of employers—9 a.m. to 9 p.m. 6 days a week. India ranks 126th out of 137 in the rankings of the 2023 World Happiness Report. What is amiss? Middle-class life satisfaction rests on two pillars. The first is the idea that hard work and self-initiative will lead to prosperity. The second is that thanks to this prosperity, the children of middle-class families will enjoy even more opportunities for the good life. Both pillars are shaking. The first is threatened by the effects of technological change on jobs. The foundations of the second are being undermined by climate change, pollution, and the destruction of nature. For most of history, technology has changed the nature of work by reducing repetitive, routine, and manual labor. During COVID-19 and the ensuing recovery, many workers changed occupations. Those with good jobs, requiring cognitive, non-routine tasks, did better than those engaged in manual, repetitive tasks. There are pathways to high-wage work, but, as my Brookings colleagues Maria Escobari and co-authors have shown, access to these paths is unequal, and that is creating stress and mental health problems for many middle-class workers. Stepping-stone occupations that serve as a bridge between low-and higher-wage occupations, and even high-wage occupations themselves, are increasingly under threat from artificial intelligence. When the Writers Guild of America went on strike in May 2023, they demanded that ChatGPT be used only as a research tool, not for actual script writing, the creative process that is at the heart of their jobs. The wobbly second pillar of middle-class satisfaction is that young people are worrying that the mass consumption of the middle-class is responsible for unsustainable levels of greenhouse gas emissions, pollution and species extinction. On current trajectories, children born today will live in a world that is at least 3 degrees warmer than pre-industrial levels. The impact of such changes, according to the best available science, is terrifying. “Is a middle-class lifestyle consistent with a livable planet? Thankfully, the answer is yes, but only if there is significant change in economic policies.” This science forces the middle class to confront an existential question. Is a middle-class lifestyle consistent with a livable planet? Thankfully, the answer is yes, but only if there is significant change in economic policies. Consider the case of Switzerland, one of the richest economies in the world. The Swiss emit only 5 tonnes of greenhouse gases per person per year, less than one-third the U.S. level. One reason is that Switzerland buys a lot of electricity from France’s nuclear reactors. But on other measures, too, such as building efficiency, moving people on electric trains and buses, and insulating homes, the Swiss middle class outperform many of their peers. True, this is not enough. The 5 tonnes must be reduced to zero by 2050, but Switzerland’s case shows that most of the current levels of carbon emissions are not tied to middle-class standards of living but simply to bad or thoughtless policies in rich countries that can be readily corrected. In similar vein, pollution is a man-made problem, not a necessary corollary of high living standards. In its current form, recycling is not effective. A new concept of a circular economy offers much more promise. The idea is to “design out” waste and pollution, recycle materials and regenerate nature. One of the first problems the circular economy concept is tackling is the issue of plastic packaging. Because of its ubiquity, plastic continues to accumulate in our oceans (and increasingly in our bodies). There are, however, alternative materials that can be used for packaging, and already the European Union is on track to make all packaging recyclable by 2030. A third area of concern is human encroachment into nature. The current global system of food production is based on expanding croplands to grow feed or as pasture for animals, especially cattle and sheep. This system has a double cost. It contributes significantly to greenhouse gas emissions, and it destroys wildlands and biodiversity. The simplest option would be to encourage the middle class to switch to a vegetarian diet. If this magically happened in the world, a land area stretching from Alaska to Tierra del Fuego could be returned to nature. In a less extreme version, if beef and lamb were taken out of our diets, an area the size of North America could be re-wilded. These examples are not offered as realistic policy options in the medium term. They do, however, serve to make a point. If the middle-class is serious about preserving nature, it will require a major change in diet. That could come about through taxes on land-intensive foods or through technology—lab-grown meat is available but only at a higher price point, and it has yet to scale. The common theme in these threats to a middle-class lifestyle is that the values of hard work and personal responsibility that are the hallmark of middle-class success are no longer enough. Policymakers are caught in trying to deliver higher living standards to their citizens and more sustainable living standards for their children. There are long-run strategies where economic growth and sustainability go hand-in-hand, but no countries have yet shown how to manage the transition onto these low-carbon pathways in a rapid, credible way. So the future is uncertain, and the middle-class, which hates uncertainty, will remain disquieted until they are clear about how to best secure the lifestyles and progress to which they have become accustomed.

Energy & Economics
miniature people figure businessman standing on united states of america map on globe as world leader decision concept

Washington Declaration: Beyond Korea, What it Means for India?

by Jagannath P. Panda

In April 2023, South Korea and the United States released the Washington Declaration to reiterate and upgrade their treaty alliance. In outlining a joint nuclear deterrence strategy, the Declaration reaffirmed that South Korea would not pursue independent nuclear capabilities, and instead continue to rely on the alliance-based approach. This paper considers the strategic impact of the Washington Declaration beyond the U.S.-ROK nexus. Highlighting the importance of the agreement on security and stability in the broader Indo-Pacific region, this paper focuses on India’s stake in the new development. In particular, this paper emphasizes that despite its stated focus on the North Korean nuclear threat, the Washington Declaration also considers the Chinese and Russian threats in the region, making it of immense interest to India. It analyzes whether and how the Washington Declaration can complement India’s interests, and the potential for it to pave the way towards a closer India-U.S.-South Korea trilateral partnership in the Indo-Pacific.  Introduction  The release of the Washington Declaration in April 2023 has not just temporarily halted the Republic of Korea’s (ROK or South Korea) ambitions of developing its own nuclear weapons, but has also given more attention to the debates on nuclear deterrence in the Indo-Pacific. Even as the United States is concerned about growing nuclear developments in China, Russia, and North Korea (or the Democratic People’s Republic of Korea, DPRK), it is primarily focused on countering China – “the most comprehensive and serious challenge to U.S. national security.” Given that China’s military activities in its extended neighborhood, including in the Taiwan Strait, South and East China Seas, and the Himalayan borderwith India, have attained built greater momentum in the past decade, the Declaration assumes greater significance: As a forward-looking step to mollify U.S. treaty allies and partners in the region with the larger aim of bolstering a “cooperative” approach against the growing nuclear threat.  In this context, even as the Washington Declaration does not directly impact India, its implications for the IndoPacific amid India’s substantial role in the budding IndoPacific security architecture compels a closer examination into the new debates centered on South Korea’s extended deterrence. India is a “special strategic partner” for the ROK: Post the launch of the ROK’s Indo-Pacific strategy in December 2022, the two are exploring their increasing strategic convergence via respective inclusive policies as “pivotal” Indo-Pacific partners. Therefore, the security concerns in East Asia are not just important for India because of the domino effect on South Asia—home to near-perpetual instability due to the three nuclear states of China, India, and Pakistan—but also in terms of the negative impact on India’s (as yet) nascent efforts to boost multilateralism, middle power coalition, and regional integration.  Can New Delhi capitalize on South Korea’s gains from the U.S.’ latest declaration against North Korea’s and China’s nuclear threats? Could the Washington Declaration complement an envisioned India-ROK-U.S. trilateral in today’s divisive geopolitics? Could the new nuclear debates focusing on extended deterrence engender mechanisms for strengthening South Asian nuclear stability? Contextualizing the Washington Declaration Beyond the Peninsula Undoubtedly, the bilateral summit, including the Declaration will have an impact not just on the ROK but also on all stakeholders in the region—from U.S. partners like Japan and India to nuclear rivals China, Russia, and North Korea. What does the new pact bring to the fore for the ROK? In what ways will the latest U.S. approach to the Korean Peninsula affect the Indo-Pacific security landscape and partnerships, particularly for India?  Parsing the Declaration – (Not) New Significance for ROK?  In April 2023, the ROK-U.S. bilateral summit in Washington commemorated the 70th anniversary of the ironclad U.S.-ROK alliance—the duo’s dynamics have evolved from security treaty allies under the Mutual Defense Treaty, signed in October 1953, to global comprehensive strategic allies in May 2022. Presidents Joe Biden and Yoon Suk-yeol, through their joint statement, press conference, and a separate “Washington Declaration”, reiterated the shared commitment under the Mutual Defense Treaty, as well as toward establishing peace and stability in the IndoPacific. Moreover, Yoon’s state visit resulted in a stream of “political understandings” that ranged from billion-dollar economic and environmental tie-ups to technological and developmental cooperation. However, the event that has grabbed the maximum eyeballs is the Washington Declaration—unveiling new measures to concretize the “ambitious path” to secure the U.S.-ROK defense and global security cooperation and advance shared priorities in the Indo-Pacific.  This new pact claims to further the credibility of U.S. extended deterrence measures—referring to modernizing the U.S. capabilities, including nuclear forces, to deter attacks on allies, as also discourage allies from going nuclear, in the increasingly threatening regional security environment. For instance, the U.S. has constituted at the assistant secretary level a Nuclear Consultative Group (NCG) to assuage the ROK about the U.S.’ intent to formulate a consensus-based approach to handling the North Korean threat. This includes not just enhancing deployment of U.S. strategic assets, including nuclearcapable platforms, in and around the Korean Peninsula, but also augmented information-sharing, joint contingency planning, and an inter-agency table-top simulation. One of the most important objectives of this comprehensive outcome was to showcase to the domestic public in South Korea that the U.S. is a long-term reliable security partner—while also exemplifying the same for the other U.S. allies and partners in the region, such as Japan.  The U.S.-Japan-ROK trilateral is a central aspect in the Northeast Asia deterrence measures given that they face common threats from North Korea. Yoon has already opened the doors for a “three-way” strategic and nuclear planning “at any time” in the future to boost the combined response to a nuclear contingency: “The Washington Declaration is a bilateral agreement between Korea and the U.S., but we do not rule out Japan’s participation.” Already, there are speculations about Japan joining the NCG. For the present, the three countries have agreed to strengthen trilateral military cooperation including regularizing ballistic missile defense exercises and antisubmarine warfare exercises. They have also initiated efforts toward a “data sharing mechanism to exchange realtime missile warning data before the end of the year,” in line with the November 2022 trilateral leaders’ summit commitments.  At the same time, the Declaration has put on hold, even if temporarily, South Korean goals to build autonomous nuclear weapons. Yoon, who has been facing criticism at home for not heeding the extraordinary public support for acquiring an indigenous nuclear weapons program, had earlier this year stirred up a hornet’s nest by openly declaring nuclear weapons development as a possible policy option, which at the very least pushes the U.S. to re-deploy nuclear weapons. However, the Declaration clearly reaffirms the ROK’s continued commitment to the Nuclear Non-Proliferation Treaty (NPT) and the new 123 Agreement, with the U.S. president as the “sole authority” to launch nuclear weapons. It has therefore curtailed any independent nuclear notions for the near future and only served to strengthen the ROK’s alignment with the U.S. view of the global non-proliferation regime.  Consequently, the response in the South Korean media was subdued, if not sweepingly critical. Despite Yoon hailing the alliance as “nuclear based”, polls conducted during April-May 2023 (by the Korea Institute for National Unification, KINU) showed a significant drop in public support for the ROK going nuclear, especially in cognizance of the risks involved. The ROK government describing the Declaration as a Mutual Defense Treaty 2.0 or attesting to its “nuclear sharing” aspect have been touted as “false claims”; U.S. officials have also noted that the Washington Declaration is not a “de facto nuclear-sharing” agreement.  Importantly, questions have been raised domestically about South Korea paying a “high price” in return for “hardly … any substantive changes” in the U.S. nuclear policy on South Korea—sharply referred to by some domestic critics as “a redundant declaration produced by mutual distrust in the South Korea-U.S. alliance.” In concrete terms, the pact has been likened to the “jettisoning” of South Korea’s right to protect itself from the nuclear threat from North Korea—U.S. President Biden has categorically stated that he has the “absolute” authority as commanderin-chief to use nuclear weapons even though it would be in consultation with the allies. There are also legitimate concerns about the agreement having turned China and Russia into “de facto adversaries”. Misgivings have also been raised about the lack of U.S. assurance on increased business and investment ties, including in semiconductors and green technologies—areas where closer ties with the U.S. could help reduce Korean dependence on China.  The Chinese state media has raised serious concerns about the ROK “sacrificing” its “win-win” economic ties with China, but at present, maintains that “cooperation remains an irreversible trend in the long run.” Regarding these worries, some political observers in Seoul have contended that the ROK need not go back to its “strategic ambiguity” approach to pursue economic ties with China. This is primarily because countering China’s rise as a strategic challenge while maximizing economic benefits is a concern faced not only by the ROK but all liberal democracies in the present complex, transitional geopolitical scenario. Notably, the North Korean response has been predictable, calling it an opportunity for the DPRK to “perfect” its nuclear option; the official DPRK statement labeling it a “nominal” declaration highlights that the Kim regime sees it as business as usual.  A disconcerting aspect of the Declaration, even though it is in line with the sentiment of the times, has been the relegation of “pursuit of dialogue and diplomacy” with North Korea to a byline at the end. It indicates a closing of doors on diplomacy, albeit with a rogue state (namely the DPRK) unwilling to compromise, but nonetheless important given the near-consensus about the Declaration being an “evolution” in deterrence but not a panacea for the peninsular concerns. Some have also contended that “these outcomes will likely not provide enduring solutions to the North Korea challenge.”  Another notable issue that would have impacted the U.S.- ROK summit is the fallout from leaked U.S. intelligence documents, days before Yoon’s state visit, which suggested that the United States was spying on one of its foremost treaty allies. There are concerns in South Korea that the U.S. has “already penetrated into the Korean government’s networks and intercepted communications, possibly including phone and email.” As the U.S. has been accused of spying on the ROK in 2013, too, when its extensive surveillance program was exposed in press reports, the mistrust between the allies is likely to re-surface time and again. Therefore, in view of the South Korean government’s restlessness and nuclear claims prior to the April joint statement, there is some truth to the assertion that the Declaration arises out of the need to downplay the U.S. allies’ misgivings and trust issues. Its importance hence lies in shoring up of the U.S.-ROK partnership amid fears of the current security situation in Northeast Asia and the Indo-Pacific becoming worse due to the growing divisions in global geopolitics. Nonetheless, Yoon’s embrace of “strategic clarity” for the Indo-Pacific construct; sanctions on Russia during the Ukraine war; the success in resuming the U.S.-ROK-Japan trilateral in the past year; and the importance accorded to Yoon’s state visit, including the broad-ranging joint statement and the not-so-definitive yet formidable Washington Declaration, all highlight that the upward trajectory of the U.S.-ROK bonhomie is not a superfluous achievement. It points to a steady, forwardlooking alliance with implications for the wider IndoPacific. Ascertaining India’s Interests At a broader level, for the Indo-Pacific, especially for U.S. allies and partners in the region, the 2023 Washington Declaration is a sign of the U.S.’ willingness to negotiate the partners’ growing need for an inclusive, if not entirely equal, cooperation mechanism. Such an approach will not only strengthen the respective bilaterals with the United States but also present a stronger coalition in the fight against both North Korea and China. The latter is intent on destabilizing the existing status quo through its military aggression—from the Taiwan Strait to the Himalayas.  For India, which has been facing the brunt of China’s military tactics along the Line of Actual Control (LAC) with an increased frequency in the past decade, the Washington Declaration highlights a strengthening of like-minded partnerships in the continuing democratic face-off against China. Thus, the Declaration’s impact is felt in Indo-Pacific geopolitics, including India’s immediate neighborhood— particularly as it compels the ROK to sharpen its global pivotal leadership by embedding itself deeper in the U.S.- led Indo-Pacific construct. Though the Declaration is specifically targeted against North Korea, not China, the evolving alliance is a response to the ever-growing threats in and around the Korean Peninsula, as well as in broader Asia: From Central Asia to the Middle East; the Himalayan States to the Indian Ocean; the South China Sea to the East China Sea, China’s diplomatic-economic clout and military presence is growing. In short, the Chinese threat is the main concern for the U.S.  As a result, China’s Foreign Ministry Spokesperson Mao Ning was stringent in his criticism of the new pact: “What the U.S. is doing ... provokes confrontation between camps, undermines the nuclear nonproliferation regime and the strategic interests of other countries.” China was also immediate to voice its opposition against Japan’s potential involvement through the Washington Declaration, after Yoon was positive about turning the bilateral agreement into a trilateral one in the future. The inclusion of the phrase “peace and stability in the Taiwan Straits” and critical technologies cooperation in the joint statement also raised hackles in China in terms of South Korea isolating China and crossing its red lines.  China sees this agreement as another U.S. tool to strengthen a values-based security coalition in the region à la Quadrilateral Security Dialogue (Quad comprising Australia, India, Japan, and the United States). The Quad’s successful bonhomie has not only inspired other such U.S.- led platforms (e.g., the latest with Australia, Japan, and the Philippines and the West Asian one with India, Israel, and the UAE) but has also become a thorn in the side of China’s goals of regional dominance. Any deterrence for China’s growing ambitions is in India’s interests, which is not only facing a continental threat but also recognizes China’s growing reach in India’s traditional stronghold of the Indian Ocean region.  Consequently, despite not being directly connected to this agreement, India may nonetheless benefit from the Washington Declaration in a number of ways both in the Indo-Pacific and the Korean Peninsula. Firstly, the Declaration is critical to increasing the Quad’s strength. The reaffirmation of U.S. commitment to its Indo-Pacific allies and partners, including India, will not only boost the Quad but also set the stage for renewed deliberations on the Quad “Plus” framework, of which the ROK is a part, thereby opening up more avenues of India-ROK collaboration. In turn, such integration of South Korea with the Quad will further push the North Korean agenda onto the Quad’s table.  Secondly, in response to Chinese (and North Korean) aggression, the Washington Declaration emphasizes the need for maintaining the status quo in the Indo-Pacific and rejects any illegitimate maritime claims, militarization of reclaimed features, and coercive actions. This might be seen as normal diplo-speak; however, it will further concretize the ROK’s aims to build greater maritime collaborations, including naval deterrence capabilities, in the Indo-Pacific. For instance, the Chungnam frigate (FFX), launched by South Korea’s Hyundai Heavy Industries (HHI) in April 2023, will be incorporated into the ROK Navy— its second-largest naval expense. Such an investment is poised to contribute to stronger South Korean presence in the Indo-Pacific in line with its newly launched IndoPacific strategy. It is a positive development for India, which is looking to bolster its IOR presence through likeminded partners like the ROK, the European Union and its members, and Japan.  Here, it is also important to note that even though the ROK has traded off its nuclear development ambitions for “deeper, cooperative decision-making on nuclear deterrence” in the Washington Declaration, the road to fulfilling its nuclear-based ambitions has not closed down. In the future, for instance, Seoul might still be inclined to renew its post-AUKUS (Australia-UK-U.S. defense pact) demands to gain access to the U.S.’ nuclear-power submarine technology. India, which is one of the few countries to have nuclear-powered submarines with ballistic missile launch capabilities, can use this opportunity to further increase naval exercises with the ROK, along with making a stronger push towards defense technology and manufacturing collaborations.  Thirdly, India and South Korea are strengthening their bilateral and regional relationship based on democratic and inclusive visions, characterized by the centrality of the Association of Southeast Asian Nations (ASEAN). Their future-oriented partnership has a sound foundational convergence, namely the Act East Policy (AEP)-New Southern Policy (NSP) Plus connect. Notably, the degree to which the Yoon government embraces India’s AEP (and Indo-Pacific vision) will not only determine the natural progression of India-South Korea regional relations but also provide momentum to diversification goals. The latter is important in light of the ROK’s growing security and techno-economic dependence on the United States at the cost of neglecting its long-standing economic partner China, as underscored by the latest joint statement and China’s response to it.  In this context, India’s and the ROK’s quest for economic security, through participation in various regional and panregional forums, will enable them to build strategic links, and work together to balance regional developmental goals and their own economic-military growth. Both countries can use their participation in platforms like the Asian Infrastructure Investment Bank (AIIB) and the Indo-Pacific Economic Framework (IPEF) to build a stronger economic partnership. For example, the ROK, which joined the AIIB in 2015 and is the fifth-largest stakeholder of the AIIB with its shares at 3.86 percent, is looking to expand ties and find new joint project opportunities. India, as a founding member and the second largest shareholder with the largest project portfolio within AIIB, could facilitate the ROK’s enhanced contributions in the bank’s turn toward green infrastructure for providing “high-quality development finance.” India and ROK’s participation in forums like the Supply Chain Resilience Initiative (SCRI) and the U.S.- led Minerals Security Partnership (MSP) respectively, can help them coordinate their actions as they look to diversify critical value chains. The contested Asian and Indo-Pacific landscape has made supply chain diversification a priority. As U.S.-China trade and technological competition makes economic security vital, India and South Korea can build on their natural complementarities and work together to restructure their supply chains to reduce reliance on Chinacontrolled supply chains. While South Korea can support India’s goal of emerging as a manufacturing hub for key industries, India can be an important partner in South Korea’s aim to diversify its economic partnerships beyond China under the NSP.  Lastly, if South Korea heeds to domestic criticism about “jettisoning” its strategic autonomy (that is, deferring to the U.S. by not acquiring a nuclear weapons development program), it will continue to diversify its partners, particularly in defense manufacturing and new technologies. Given that India and the ROK have expanded their defense cooperation, including joint production and export of military hardware, in recent years, the new pact will allow the ROK to push boundaries. For instance, the ROK could continue supporting India’s membership bid for the Nuclear Suppliers Group (NSG) or the MSP and India could facilitate South Korea’s increased participation in the Quad, a much-desired goal for Yoon.  Moreover, ROK-India could partner for peaceful nuclear purposes. At present, India does not allow foreign direct investment in the nuclear power sector, but as per Indian media reports, the government is mulling changes in the near future. Their coming closer together, which is already in motion, will consolidate the middle power-dominated multipolar Asia architecture, primarily to mitigate the constraints due to the growing bipolar rivalry. It will further their common goal to achieve a global standing while preserving strategic autonomy. U.S.-ROK-India: A Trilateral Inches Closer? The latest U.S.-ROK summit and the Washington Declaration have certainly strengthened the U.S.-led alliance structure in the region, giving partners outside this alliance hope for a consultative and cooperative security mechanism for the region, U.S. primacy notwithstanding. What is clear is that a democratic values-based coalition will be able to successfully maneuver the ups and downs through the times and give impetus to the new-era security, economic, technological, and diplomatic cooperation. In this vein, the Declaration could be seen as a clarion call for unity to deal with the current hostile regional and global geopolitical circumstances. The boost to the Japan-ROKU.S. trilateral through this pact, as well as the bilateral summit’s assertion to implement their respective IndoPacific strategies while enhancing “Indo-Pacific voices in multilateral forums, especially in addressing climate change, sustainable energy access, and food insecurity,” could pave the way for other minilateral coalitions.  India as a vital cog in the Indo-Pacific security network will naturally play a significant role. India’s increasing closeness to the United States as a counterweight to China and a strategic partner, especially in defense and technological areas, for a free and open Indo-Pacific (FOIP) makes it an important component in today’s U.S.-led liberal order, which is at a transition stage. Moreover, the bonhomie with South Korea is based on growing common values and interests of assertive middle powers, including strategic autonomy and global governance aspirations.  India will be closely watching to see whether Seoul’s emphatic turn to “strategic clarity,”—first with its “Strategy for a Free, Peaceful, and Prosperous Indo-Pacific Region” and now the Washington Declaration—will enable the ROK to fulfill its middle power potential as a “technological, economic powerhouse.” In other words, for India, the new ROK approach could enable a deeper strategic connect between the two partners by moving beyond economic and limited regional ambitions. The new goals would have to include extended joint military exercises, joint manufacturing of defense equipment, expanded connectivity (digital and physical), regional integration initiatives, global supply chain resilience, increased green technology sharing, effective critical mineral collaborations (to lower dependency on China and Russia), and technological norms building, among others.  Importantly, as both India and the ROK have signed the respective 123 Agreement with the U.S. on peaceful uses of nuclear energy, there is potential for cooperation in the power sector, as well as via technical exchanges, scientific research, and safeguards discussions. In March 2018, India and South Korea signed a bilateral civil nuclear agreement that allowed Korean companies to participate in India’s civil nuclear industry (including in atomic power plant projects and selling nuclear reactors to India). With energy security front and center on the global agenda in wake of the Ukraine crisis, trilateral cooperation in the civil nuclear sector can be an important step forward. Notably, nuclear exports are an important part of China’s Belt and Road Initiative (BRI). By 2030, China plans to build about 30 nuclear reactors abroad, worth $145.5 billion; it has already built four nuclear reactors in Pakistan (and is now building two more), has signed agreements to build reactors in Argentina, entered the UK nuclear market, and is currently negotiating with several other countries including Saudi Arabia and Kazakhstan. Amid the ongoing energy crisis, China’s foray into the global nuclear market could give it greater influence and potentially enhance its coercive power. In this context, the U.S., South Korea, and India have reason to bolster cooperation in this area and ensure they can stand as competitive nuclear vendors against China’s offer of advanced technology, competitive prices, and rich financing.  India, the ROK and the U.S. have several shared interests and are already engaged in high-level cooperation at bilateral and multilateral levels; as such, a trilateral between the three powers would help coordinate their actions in pursuit of their regional goals. At the same time, for India and the ROK, any such trilateral cooperation could serve to provoke China and make managing the U.S.-China equation much more difficult. Nevertheless, while India faces a belligerent China on its border and South Korea is dealing with an economically coercive China, a trilateral partnership could be necessary to bolster collaborations and further shared interests. Furthermore, the benefits of a U.S.-ROK-India trilateral would be equally distributed to not just the three countries, but also other regional powers. Improvement of ties between Japan and South Korea—which is shaping up to be a focal point of both Yoon’s and Fumio Kishida’s leadership legacies—will gain smoother and faster traction owing to Japan’s close ties with India and the alliance with the U.S. Australia and Indonesia, too, have responded positively to South Korea’s Indo-Pacific strategy. The establishment of a new U.S.- led defense-ministerial level quadrilateral mechanism with Australia, Japan, and the Philippines is another shot in the arm for “allied and like-minded” countries. Therefore, the U.S.-India-ROK trilateral would draw on the bilateral gains and their common belief in ASEAN centrality to further regional integration aims. This will also give impetus to Seoul and Delhi (and also Canberra) emerging as strong candidates for an extended G-7. Overall, the Declaration sets the stage for a strong U.S.-ROK camaraderie that will extend beyond nuclear deterrence goals, impacting broader regional multilateral dynamics of the Indo-Pacific. Lessons for South Asian Nuclear Dynamics: Potential for Reassurance and Deterrence? In many ways, the Washington Declaration seeks to be a show of strength—and a reprieve—against the North Korean nuclear threat that has rapidly escalated over the past year with the sudden rise in missile tests and an expanding nuclear program. Since his election for presidency, Yoon has frequently expressed willingness for South Korea to be a more active player in the Indo-Pacific, including by being a part of the Quad framework. The Declaration is a part of Seoul’s efforts to meet its security goals. While it is certainly a significant step to counter the North Korean threat, it is also an indication of a stronger alliance against provocative actions by China. The bolstered U.S.-ROK partnership under the Declaration is a step towards a more proactive and stronger South Korea in the region, and could eventually ease the way for Seoul’s productive involvement in the Quad, perhaps through a Plus framework. While South Korea will still need to establish itself as a reliable partner with the other members of the Quad, the Declaration certainly demonstrates its commitment to regional (and global) security, and by extension, the important role it can play through greater interaction and burden-sharing with the Quad.  Undoubtedly, this new bilateral agreement between the U.S. and the ROK (potentially also involving Japan through the trilateral) will usher in new lessons for the wider Indo-Pacific, and in turn for India, too. For instance, the prospects of closer consultations that will strengthen the combined defense posture are relevant for not just U.S. treaty allies like the ROK and Japan but central strategic security partners like India that is facing a two-front border escalation with China and Pakistan. However, could this new deterrence declaration in Northeast Asia pave the way for a common strategic mechanism between the U.S. and India that enhances deterrence and provides a degree of reassurance against the growing nuclear risk in South Asia?  As much as it is possible that the U.S. extended deterrence for ROK would fuel an arms race, as also underscored by Russia and China in their response to the Declaration, not just in Northeast Asia but also in nuclear-heavy South Asia, it is often contended that “the drivers of nuclear instability in the region have more to do with conventional warfighting strategies.” The grave escalation in 2019 between India and Pakistan is one such example, and the accidental firing of a missile into Pakistan’s territory in 2022 that fortunately did not result in a retaliatory attack is another—both highlight the need to pursue definitive de-escalation and crisis management measures, and the latter puts a spotlight on the current fragility of the South Asian situation. The danger of an accidental nuclear war in such tense conflicts has not been stressed enough, and it bears repeating that such a threat was a constant refrain during the Cold War posturing.  Broadly speaking, today, India and Pakistan are not signatories to the NPT but have been gradually increasing their nuclear arsenals. China is a nuclear weapons state recognized by the NPT, and has accelerated its nuclear development program. All are developing newer “ballistic missile, cruise missile, and sea-based nuclear delivery systems.” As of January 2023, Pakistan’s nuclear arsenal was about 170 warheads (by some estimates the stockpile might go up to about 200 by 2025), China’s about 410 nuclear warheads; and India’s about 164 nuclear weapons.  Moreover, while India and China both have declared nofirst-use (NFU) policies, Pakistan has no such policy; its “full spectrum deterrence posture,” especially the development of tactical nuclear weapons capabilities for use on the battlefield to offset India’s (superior) conventional military tactics has been of concern to not just India but the United States as well. At the same time, recently questions have been raised about China shifting its nuclear policies, including the NFU, because of the nuclear expansion and modernization. Vis-à-vis India, too, there are speculations that “India could be transitioning towards a counterforce nuclear posture to target an adversary’s nuclear weapons earlier in a crisis, even before they could be used.”  In this context, controlling escalation is not a conclusive plan of action, and dialogue, too, has limitations when the live-wire conflict, as it is with both India-Pakistan and IndiaChina, has historical roots and nuclear leverage. Also, India has called nuclear risk reduction an “interim” strategy; and as per its security review in 2003, India retains the option of nuclear weapons in the event of an attack by chemical and biological weapons. However, as part of its doctrine of credible minimum nuclear deterrence, including the NFU and non-use against non-nuclear weapon states, India is “prepared to convert these undertakings into multilateral legal arrangements.”  Therefore, for South Asia, the U.S. and its partners, including India, need to focus on building creative, reliable mechanisms for limiting the possibilities of crossing the nuclear threshold, as well as controlling the use of highprecision conventional weapons. For example, India, Japan, South Korea, and the U.S. should either as a new minilateral or in conjunction with Quad (Plus) strengthen a strategic dialogue that looks into ways of information sharing, including intelligence on nuclear threats in the sub-region, as well as take into account India’s pursuit of “global, verifiable and non-discriminatory” multilateral legal arrangements for a nuclear weapon free world.  Importantly, a vital tool that should be widely used is the dissemination of information about the dangers of nuclear weapons and the limitations of ballistic missiles among the public and policymakers. Lessons must be drawn from the South Korean scenario where public survey results in the recent past have highlighted a concerning trend of a high degree of support for nuclear weapons deployment without fully being made aware of the pitfalls. A recent study revealed that even in the U.S. and the UK, there is a lack of awareness about “nuclear winter”—a term used to illustrate the potential “catastrophic long-term environmental consequences from any exchange of nuclear warheads”— and that even brief exposure to these risks reduces the public’s support for nuclear retaliation. The dramatic lowering of public support for nuclear development is seen in the latest (aforementioned) KINU survey in the ROK, too, when presented with different possibilities of risks. Raising awareness and educating the public and decision-makers about such risks should also be part of the state’s strategy to reduce the heightened perceptions about nuclear weapons: the responsibility surely lies to a large degree on national governments and relevant multilateral organizations, which seem to have been caught napping.  In the wake of the Washington Declaration, which has rekindled the nuclear debates in the Indo-Pacific, it is imperative that concerted efforts be made by all stakeholders, especially the nuclear states and the ones desirous of autonomous nuclear weapons capabilities, to first raise regional public awareness about the ramifications of nuclear armament, and only then pursue responsible deterrence measures.

Energy & Economics
Collision of shipment containers with Chinese and US flags

Drivers of U.S.-China Strategic Competition

by Stephen R. Nagy

Understanding the Chinese Perspective The relationship between the United States and China is one of the most important and mutually beneficial bilateral relationships in the world. Nonetheless, it is also complex and contentious, with both countries vying for geopolitical influence and economic dominance. This brief examines drivers of U.S.-China strategic competition from the perspective of Beijing incorporating the prism of MarxistLeninist ideology, domestic politics in the U.S., China's needed alignment with Russia, nationalism, technological advancements such as AI, the role of regional players such as ASEAN, Japan, and the E.U., and Comprehensive National Power (CNP). Understanding this analytical lens contributes to deeper comprehension of China's security anxieties and world view that may provide insight to enhance engagement, resilience, and deterrence in bilateral relations with China. Introduction The relationship between the United States and China is one of the most important and mutually beneficial bilateral relationships in the world today. To illustrate, according to data published by the U.S. Bureau of Economic Analysis (BEA), total imports and exports grew 2.5 percent year-on-year to reach US$690.6 billion in 2022, breaking the previous record of US$658.8 billion set in 2018. This increase is despite the divisions associated with the COVID-19 pandemic and mutual unfavorable ratings. Nonetheless, the U.S.-China relationship is also complex and contentious, with both countries vying for geopolitical influence and economic dominance. Whether it is the rules-based Free and Open IndoPacific or the realization of Xi Jinping’s China dream, the competition for primacy between the U.S. and China will impact friends, partners, and foes of both states. Viewed from Beijing, Chinese scholars and analysts base their assessment of the trajectory of the U.S.-China strategic competition through several lens including the prism of Marxist-Leninist ideology, domestic politics in the U.S., China’s needed alignment with Russia, nationalism, technological advancements such as AI, the role of regional players such as ASEAN, Japan, and the EU, and Comprehensive National Power (CNP). Shaped by Marxist-Leninist Ideology Marxist-Leninist ideology has played a leading if not central role in shaping the Chinese Communist Party's (CCP) approach to governance and foreign relations. The CCP came to power in 1949 following a successful revolution led by Mao Zedong. Mao was heavily influenced by Marxist-Leninist thought. Since then, the CCP has maintained a commitment to Marxist-Leninist ideology, although its interpretation and application have evolved over time. Today, as former Australian Prime Minister Kevin Rudd and author of The Avoidable War: The Dangers of a Catastrophic Conflict between the US and Xi Jinping's China writes, Xi’s China leans left in terms of Marxist-Leninist socio-economic organization and right in terms of nationalism. Rudd’s analysis echoes President Xi’s speech on “Hold High the Great Banner of Socialism with Chinese Characteristics and Strive in Unity to Build a Modern Socialist Country in All Respects” in his report to the 20th National Congress of the CPC. In that speech, Xi stressed that “Marxism is the fundamental guiding ideology upon which our Party and our country are founded and thrive. Our experience has taught us that, at the fundamental level, we owe the success of our Party and socialism with Chinese characteristics to the fact that Marxism works, particularly when it is adapted to the Chinese context and the needs of our times.” At its core, Marxist-Leninist ideology emphasizes the importance of class struggle and the need for the working class to overthrow the ruling class to achieve a classless society. In the Chinese context, this has translated into a focus on creating a socialist society and promoting the welfare of the Chinese people under the umbrella term ‘Socialism with Chinese Characteristics’. In terms of China’s relationship with the U.S., Marxist-Leninist ideology has contributed to a view of the U.S. as a capitalist and imperialist power that seeks to undermine China’s socialist system. This view is rooted in the Marxist-Leninist belief that capitalist powers are inherently expansionist and seek to dominate other countries to secure their own economic and political interests. They see the U.S. as an imperialist power seeking to maintain its hegemony over the world, while China represents a rising power challenging the established order, as written by Graham Allison in his book Thucydides’ Trap. Chinese analysts believe that the U.S. is threatened by China’s rise and is seeking to contain it through various means, including economic sanctions, military posturing, and diplomatic pressure as evidenced by the Trump administration’s trade war, its network of alliances throughout the region, the advent of minilateral cooperation such as the Quad and AUKUS, and the perceived fomenting of independent movements in Hong Kong, Xinjiang, and Taiwan.  They argue that the U.S. is using its military alliances and partnerships with countries such as Japan, South Korea, and Australia to encircle China and limit its influence in the region. These perspectives ignore that the U.S. alongside with Japan and others openly supported China’s entry into the WTO, the 2008 Summer Olympics, and gave China a leadership position at the Paris Climate Accord. These initiatives demonstrated that the U.S. and other countries were willing to work with China on global issues and support its development. Destabilizing Influence of U.S. Domestic Politics While Marxist-Leninist perspectives of U.S.-China relations offer a macro-level understanding of how China views the inevitability of great power rivalry between Washington and Beijing, Chinese analysts also pay close attention to domestic politics in the U.S. and its impact on U.S.-China relations. Chinese analysts believe that the current political climate in the U.S. is highly polarized, and that these domestic political dynamics are affecting U.S. foreign policy, including its stance towards China. They see the Trump administration’s trade war with China as a reflection of this polarization, and argue that it has damaged the relationship between the two countries. They also note that the Biden administration has continued many of the same policies as the Trump administration, including maintaining tariffs on Chinese goods and pursuing a tough stance on technology transfer and intellectual property theft. The build-up to the 2024 presidential election for most will be one of intensifying securitization of relations with China. President Biden will not be in a position to show any weakness in his China policy. Equally so, the Republicans, whether it is former President Trump or an alternative GOP candidate will take an “All because of China” approach, when it comes to foreign policy, like advocating for a hard decoupling of the economies or even more provocatively, possibly migrating away or redefining the “One China” policy. Developing China-Russian Alignment Chinese analysts also view the relationship between China and Russia as an important factor in the trajectory of U.S.-China relations. They see the two countries as natural partners, sharing a common interest in challenging U.S. dominance of the world. They believe that the China-Russia all-weather partnership is growing stronger and that it poses a significant challenge to U.S. interests. For Russia, Pax Sinica would offer it a much more hospitable environment than the one provided by the Pax Americana, according to the authors of The Beijing-Moscow Axis: The Foundations of an Asymmetric Alliance published by the Centre for Eastern Studies (OSW). For China, a tightening of the alignment with Russia will be critical to ensuring that U.S. does not drive a wedge between China and Russia by pursuing a policy of containment against both countries, a policy that Chinese analysts view as unlikely to succeed. The invasion of Ukraine is a case in point. Despite Russia’s invasion violating the U.N. Charter and China’s Five Principles of Peaceful Co-existence, Beijing has taken a pro-Russian neutrality position refusing to condemn Russia. This is not an endorsement of the invasion or of Putin. It is a clear indication of the importance China places on the deepening Sino-Russian alignment and the reality that neither country can afford a geopolitical divorce. In fact, the recent paper ‘China’s Position on the Political Settlement of the Ukraine Crisis’ continues to echo President Xi’s Workers Report at the 20th Party Congress in October 2022, which explicitly used the expression that “no country’s security should come at the expense of another country’s security,” an explicit rejection of the U.S. and Western countries’ views that Russia has engaged in an unprovoked attack against the sovereign state of Ukraine.  Intensifying Nationalism Chinese nationalism is another important factor by which Chinese analysts understand the trajectory of U.S.-China relations. They view Chinese nationalism as a natural response to the country’s history of humiliation at the hands of foreign powers, including the U.S. Carefully curated since the Tiananmen Square incident in 1989, Zheng Wang writes in his book Never Forget National Humiliation: Historical Memory in Chinese Politics and Foreign Relations that Beijing has placed the century of humiliation at the center of China’s national building process and a nationalist movement in which victimhood, national rejuvenation, and a perineal sense of insecurity concerning the West and particularly the U.S. is the major pillar. These narratives have been meticulously manipulated and deployed to build a national identity in which China must resist anti-China forces and those states that wish to prevent “China’s rightful rise.” Events such as the 70th Anniversary of Victory of Chinese People’s War of Resistance Against Japanese Aggression and World Anti-Fascist War, 100th anniversary of the founding of the Chinese Communist Party, or national aspirations such as the China Dream are all constructed with the purpose of infusing into Chinese citizens a nationalism linked to the CCP’s selective understanding of history. Based on these selective views of history, scholars such as Qin Pang in their co-authored article on “China’s Growing Power Makes Its Youth Hawkish?” Evidence from the Chinese Youth’s Attitudes toward the U.S. and Japan’ find that Chinese citizens view the United States as seeking to contain China’s rise and limit its influence in the region, and that this is seen by many Chinese as an affront to their national pride. Chinese analysts believe that Chinese nationalism is a powerful force that will shape the country's foreign policy for years to come, and that it will continue to be a source of tension in U.S.-China relations. For the U.S. and other like-minded states, Chinese nationalism that is based on victimhood, national rejuvenation, and a perennial sense of insecurity concerning the West will not be a platform for stabilizing and creating constructive relations, especially if this nationalism drives territorial expansion in the South and East China Seas, the Himalayan plateau or across the Taiwan straits.  Dominating AI and Other Technologies  The rapid advancement of technology, particularly in the areas of AI and 5G, is another factor that Chinese analysts believe will shape the trajectory of U.S.-China relations. They see China as a leader in these areas, with the potential to surpass the United States in terms of technological innovation and economic growth. Chinese analysts argue that the U.S. is threatened by China’s technological progress and is seeking to limit its access to advanced technology, particularly in the areas of AI and 5G. They also believe that the United States is using national security concerns as a pretext for restricting Chinese access to these technologies. The U.S. Chips Act and the growing first tier semiconductor and technology firewall that is being erected around China by the U.S. in cooperation with Japan, South Korea, the Netherlands and Taiwan demonstrate the centrality the U.S places on dominating these spheres of technology. The consequence for China according to analysts in and out of China is that it will no longer have access to the most sophisticated semi-conductors, semiconductor producing machines and the associated expertise to keep up in the race to be the first mover when it comes to AI and other technologies that rely on first tier semi-conductor chips. In concrete terms, this means that as the U.S. and its allies will form a chips coalition among like-minded countries resulting in their collective abilities to generate scientific breakthroughs that can be translated into military and economic advantages that will preserve U.S. dominance and the existing rules-based order. Beijing is aware of this challenge and has attempted to reduce its reliance on the U.S. and Western states through its Made in China 2025 strategy and Dual Circulation Strategy. Whether these initiatives will be sufficient to outmaneuver U.S. initiatives to dominate semi-conductors and ultimately AI and other sensitive technologies is yet to be determined. Role of ASEAN, Japan, and the EU Chinese analysts also pay close attention to the role of regional players such as ASEAN, Japan, and the EU in the trajectory of U.S.-China relations. They believe that these countries have a significant influence on the balance of power in the region and that their relationships with the United States and China are critical. Japan’s release in December 2022 of three strategy documents—the National Security Strategy (NSS), National Defense Strategy (NDS), and Defense Buildup Program aims to uphold the current rules-based order and prevent the emergence of Chinese hegemony in the IndoPacific region. Meanwhile, the new Washington Declaration between the United States and the Republic of Korea (RoK) commits to engage in deeper, cooperative decision-making on nuclear deterrence, including through enhanced dialogue and information sharing regarding growing nuclear threats to the ROK and the region. The recent meeting between U.S. President Biden and Philippine President Marcos reaffirms the United States’ ironclad alliance commitments to the Philippines, underscoring that an armed attack on Philippine armed forces, public vessels, or aircraft in the Pacific, including in the South China Sea, would invoke U.S. mutual defense commitments under Article IV of the 1951 U.S.- Philippines Mutual Defense Treaty.”. These are explicit examples of how U.S. allies, through their cooperation and partnerships with the U.S., are aiming to preserve U.S. hegemony. In short, Chinese analysts argue that the United States is seeking to use its relationships with these countries to contain China’s rise, while China is seeking to build closer relationships with its neighbors and BRI partners to expand its influence and build win-win relationships based on its Five Principles of Peaceful Co-existence. Lastly, U.S. and ASEAN watchers in China believe that the United States is losing influence in the region, particularly with ASEAN countries, and that China is poised to fill the power vacuum owing to its extensive economic ties in the region, ties that many in Southeast Asia are dependent on for sustainable development despite reservations over the possible negative ramifications of increased Chinese economic and diplomatic influence in the region. Heft of Comprehensive National Power (CNP) Sensitive to the changing power balances and what this means for China’s ability to achieve its core national interests, China places enormous weight on Comprehensive National Power (CNP) as a key measure of a country’s overall strength and capability in all aspects of national development, including economic, military, technological, cultural, and diplomatic power as Hu Angang and Men Honghua write in their article title “The rising of modern China: Comprehensive national power and grand strategy”. The concept of CNP has been used by Chinese leaders since the 1980s to assess China’s relative strength compared to other countries, particularly the United States. In recent years, China has focused on increasing its CNP as part of its strategic competition with the U.S. Beijing aims to surpass the U.S. in terms of overall power and influence, believing that a higher CNP will enable the country to better protect its national interests, enhance its global influence, and achieve its long-term strategic goals. To increase its CNP, China has pursued a range of policies and initiatives. One of the key areas of focus has been economic development, with China becoming the world’s second-largest economy and a major player in global trade and investment. Through the Made in China 2025, the Belt Road Initiative (BRI), and the Dual Circulation Model, China has also invested heavily in science and technology, with a particular emphasis on emerging technologies such as artificial intelligence, quantum computing, and 5G networks.  In addition, China has modernized its military and expanded its global military presence based on the civil-military fusion (MCF), with the goal of becoming a world-class military power by the middle of the century. China has also pursued a more assertive foreign policy, seeking to expand its influence in key regions such as Southeast Asia, Africa, and the Middle East. Concurrently, China has also sought to promote its soft power, through initiatives such as the Belt and Road Initiative (BRI), which aims to enhance connectivity and economic cooperation between China and other countries. China has also sought to promote its culture and values through the Confucius Institutes and its latest Global Civilization Initiative calling for “called for respecting the diversity of civilizations, advocating the common values of humanity, valuing the inheritance and innovation of civilizations, and strengthening international people-to-people exchanges and cooperation.”  China’s focus on increasing its CNP is driven by its desire to become a major global power and to challenge the U.S.’ dominant position in the international system. While China’s rise has brought many benefits to the country and the world, it has also raised concerns among some countries, particularly the U.S., about the potential implications of China’s growing power and influence. This is especially true as we have seen a growing track record of economic coercion, grey zone tactics, and rejecting international law such as the Permanent Court of Arbitration’s July 2016 decision against its claims in the South China Sea.Conclusion Chinese analysts clearly view the relationship between the United States and China through a complex lens. They see the relationship with the United States as one of the most important in the world and believe that it will continue to shape the trajectory of global politics and economics for years to come. While there are significant challenges and tensions in the relationship between the two countries, Chinese analysts also see opportunities for cooperation and collaboration, particularly in areas such as climate change and global health.

Energy & Economics
President of France Emmanuel Macron

A north-south lifeline: What Macron hopes to accomplish with the Summit for a New Global Financing Pact

by Dr. Célia Belin , Lauriane Devoize

France is looking to give political impetus to reform of the global financial architecture. Others should swing in behind its gambit  Almost 500 days into the war in Ukraine, Europeans and Americans are anxious about their relationship with the global south. While the transatlantic allies are united, they have been left perplexed by the often tepid reaction of third countries to Russia’s aggression. And the gap between north and south appears only to be growing. The global crises of the last five years – covid-19, Russia’s war on Ukraine, inflation, climate change – have pushed Europeans’ focus inward, while these challenges have plunged much of the developing world into economic decline alongside exacerbating energy and food insecurity. Worse, some of the solutions put in place to overcome these crises – border closures, sanctions, re-shoring – have had major negative impacts on the global south. Meanwhile, the multilateral system has spiralled further into crisis, accelerated by the effects of the US-China rivalry, and has failed to provide relief to developing and vulnerable countries. More deeply affected by this ‘polycrisis’ than the global north, they have much less resource to tackle its consequences: dozens of low-income and medium-income countries now face crippling debt. To start to address these problems, President Emmanuel Macron is holding an ambitious event that seeks to focus political attention on the injustices and inequities of the current global financial architecture. Hurriedly decided on after last year’s COP27 in Egypt, his Summit for a New Global Financing Pact will bring leaders, civil society advocates, private actors, and international financial institutions together in Paris. The gathering’s goal is to find ways to build a more inclusive and equitable financial system, one that enables the climate transition and promotes biodiversity without jeopardising development. From its colonial and post-colonial history, and with its permanent seat on the United Nations Security Council, France maintains many close relationships on other continents. In response to brewing discontent and despair, Macron has stressed the need to address global south grievances, using frequent speeches to do so, whether in New York, Washington, or Bratislava. He is now once again engaged in an ambitious yet hasty endeavour: inspired by COP21 in Paris in 2015, the president believes diplomatic elbow grease goes a long way in mobilising around global issues, and he has made good use of it. As early in his first presidency as 2018, he launched the Paris Peace Forum, an annual event bringing together leaders and civil society to work towards a revived and innovative multilateral order. After President Donald Trump rescinded the Paris Agreement on climate change, Macron launched summit after summit on aspects of the issue (One Planet, One Ocean, and One Forest). To tackle the impact of covid-19 on Africa, in May 2021 France hosted the summit on the financing of African economies. This time, the goal is to reinvent the global financial architecture. Ever since the paradigm shift brought about by the pandemic, Macron has argued for a new approach – a “Paris consensus,” in a reference to the 2015 Paris agreement on climate change – to replace the market-orientated Washington consensus with net zero, sustainable economic development goals. In his view, the metrics used in the past are “not valid any more to fight against poverty, for the decarbonisation of our economy, and for biodiversity”. He is therefore pushing to reform the global architecture to incentivise net zero investments for a sustainable future. Macron’s idea behind the new summit is to give a political boost to an issue all too often discussed only on a technical level, and in silos. No one expects an actual “pact” to be signed, but France – along with the summit’s steering committee, which is composed of states and international organisations – is aiming for a political declaration that would muster firm commitments from world leaders, and force consequences down the line. And world leaders are indeed showing up: the secretary general of the United Nations, the new president of the World Bank, the president of the European Commission, the US Treasury secretary, the president of Brazil, the German chancellor, and the Chinese prime minister are all expected to attend, along with 40 heads of state, one-third of whom will be from Africa. As so often before, Macron hopes to be transformational in record time. The summit planning started with high ambitions, but sources say it has had to adapt due to a lack of time and focus. Initially launched around the Bridgetown initiative of Barbados prime minister Mia Mottley, France had aimed to include topics other than climate, such as health and poverty, and sought a G20 presidency endorsement by India. Unfortunately, Indian prime minister Narendra Modi will be in Washington during the summit and, despite the fact that India is co-chairing the summit’s steering committee and the expected presence of Lula and Li Qiang, the event may not in the end be a show of force for the global south. NGOs have been privately critical of the lack of inclusivity and transparency of the working groups, and disillusionment is running high. Some concrete results could still emerge from the four working groups, if negotiations are successful. Among the ambitions floated are debt suspension clauses for natural disasters, reallocation of special drawing rights, scaling up private capital flows through improved de-risking instruments, freeing up more concessional resources from multilateral development banks, and new international taxes (such as a levy on maritime transport). In an increasingly fragmented world, a united political declaration in support of these changes at the conclusion of the summit would be a win for everyone. However, a more modest but attainable goal from the summit would be the emergence of a “coalition of ambition,” in which a number of committed countries, or “champions,” take on specific challenges and sustain the diplomatic effort beyond the summit in Paris. Many other opportunities to build on momentum created in Paris will shortly follow: the African Climate Action Summit, the SDG summit, the New Delhi G20 Leaders Summit, and COP28 in Dubai. Since this summit has no mandate, it can only be a success if it is able to agree actions that then endure. For global south countries, the gathering should in turn create opportunities to strengthen support for their demands in all these upcoming forums. The success of the Paris summit will also depend on the capacity of states and other major players to take on the challenge – including Europeans. Germany is backing France in this effort, but most Europeans have yet to show their commitment to the process. Thirteen world leaders have penned a declaration of good will in an op-ed ahead of the summit, although without offering specific pledges or a timeframe for results. Unfortunately, the American president will not attend the summit, nor will the Italian, Canadian, or British prime ministers. The choice to stay away may stem from irritation at yet another grandiose French summit. But rich industrialised countries have no excuse for lacking interest in the dire situation of developing and vulnerable countries. It also puts responsibility on France to continue to move the ball forward after the summit – and not be content with the impression that it tried. Even if France may indulge in summit-mania, and however imperfect the event will inevitably turn out to be, Europeans and Americans must realise that France’s solo act is worth supporting. With clear steps taken by France ahead of the summit, such as the reallocation of 30 per cent of its special drawing rights (about €7.8 billion), Macron is defending his concept of an effective multilateralism in action, one that delivers. With Russia seeking to peel global south states away from the West, Europeans and the United States need to take up concrete actions that correct the imbalances of the current system and offer developing countries greater voice and power. By finally accepting that the institutions set up after the second world war must change, they would enhance their own credibility among global south states while escaping multilateralism limbo. The only way to salvage international cooperation – and to push back against the narrative of an inevitable north-south polarisation – is to demonstrate that it bears fruit for all.

Energy & Economics
US dollar behind torn white paper

The US role in the global financial system is changing – here’s how it could affect the world’s economy

by Steve Schifferes

The last-minute resolution of the US debt ceiling crisis recently has led to a collective sigh of relief in global financial markets. But the way it was resolved has renewed concerns about the the dominant role of the US in the world economy at a time of unprecedented challenges including low growth, high inflation and worries about the stability of the banking system. There is a high degree of uncertainty about how these issues will play out. But the political paralysis in Washington, the rise of populism and a retreat from free trade means that the US may not have either the means or the will to deal with another global crisis as effectively as it once did. As a BBC economics reporter during the 2008 global financial crisis, I saw first hand the dominant role the US played, both domestically and internationally, in resolving the situation. There is little evidence of the same commitment from the US today. The US Federal Reserve Bank played a crucial role in 2008. It stabilised the global banking system by lending over US$1 trillion (£796 billion) to other central banks through so-called “swap lines”, which pumped money into the financial system. This facilitated the bailout of the European banking system by lending much-needed dollars. This year, at the height of the banking crisis in March, the Fed intervened again to provide daily currency swaps to other central banks. During the 2008 crisis, the US was also the driving force behind urging the major industrial countries to introduce expansionary policies to grow their economies in order to avoid a global recession. It also enabled the International Monetary Fund (IMF) to make a further US$1 trillion available to stabilise the threat to the financial system and help emerging market and low-income countries. And the US took the lead, through the G20, in creating the global financial regulator, the Financial Stability Board (FSB), to ensure the stability of large global banks. More recently, the world’s financial system has been shaken by another financial crisis, although it has been smaller in scope: the failure of several US regional banks and the rescue of Swiss bank Credit Suisse. The latter is one of only 30 global systemically important financial institutions identified by the FSB as likely to cause a financial crisis if they fail. It is by no means clear that the latest banking crisis has run its course. There are concerns about the so-called shadow banking system, largely unregulated financial institutions that now make up half of all global financial assets. For example, in the US many people invest in money market funds, which pay higher interest than banks, but provide no deposit insurance. Meanwhile, the international regulatory system created in 2008 has been either ineffective or weakened. Political pressures led the US to reduce regulation and capital requirements for its regional banks, during the Trump administration, while worries about their soundness remain. Internationally, geopolitical tensions within the G20, due to differences between emerging market countries and G7 countries on Ukraine, have furthered weakened the impact of FSB recommendations. The future of US global economic influenceThere are strong reasons to doubt whether the Fed would be willing or able to lead another large-scale 2008-style bank rescue. In the first place, in contrast to the relatively low inflation in 2008, the Fed is now facing conflicting pressures, having sharply raised interest rates to curb inflation. This might surge again if the Fed is forced to cut rates to save banks which lent heavily during the recent period of low rates and are now seeing a rise in bad debts as rates rise and borrowers struggle to manage their repayments. For the same reason, the Fed would be reluctant to support a further expansion of the US economy, which could add to inflationary pressures. Finally, the US’s ability to mount a major bank rescue, either domestically or internationally, is limited by the fact that the Fed still has a huge balance sheet overhang remaining from the 2008 rescue, which it is trying to reduce by US$30 billion, and soon US$60 billion, per month. And the Fed’s authority to issue swaps to other central banks could also be challenged by politicians who might question the need to help the US’s economic rivals. The twin threats of inflation and slow growth have not yet been tamed, either in Europe or the US. This calls the credibility of central banks – which is key to their ability to manage the economy – into question as never before. Meanwhile, the value of financial assets that underpin the global financial system, particularly US Treasury bonds, have seen dramatic fluctuations due to the banking and debt ceiling crisis, as well as concerns about the huge size of fast-rising US government debt. Recent attempts by right-wing House Republicans to block the passage of some spending bills could ultimately lead to a government shutdown. This would further weaken the US government’s credit rating. All of this has put unprecedented pressure on the stability of the banks around the world. The growing tensions within the globalised financial system, coupled with a weakened US in retreat from its global role, could spell danger for world economy.

Energy & Economics
Oil refinery plant in Louisiana, United States of America

US Needs to Play Larger Role as Swing Producer of Oil and Gas in the Current Crisis

by Thomas J. Duesterberg

In response to Russian aggression in Ukraine, European nations have drastically reduced imports of crude oil, refined petroleum products, and natural gas from Russia. The 2021 levels of these energy imports were around 2.2 million barrels per day (mbd) of crude oil, 1.2 mbd of refined products, and 155 billion cubic meters (bcm) of natural gas on an annual basis.In addition to extreme difficulties in obtaining new sources of natural gas and to a lesser extent oil, the price increases throughout Europe since the onset of the war have been of historic proportions. In the days following the invasion, natural gas prices shot up by 62 percent, and UK energy prices were up by 150 percent. The full impact of the war, along with the related need to rein in the highest inflation numbers in over 40 years, has pushed Europe into a recession that threatens households and small businesses as well as European manufacturers’ ability to remain competitive. As a result, if the region cannot quickly assemble alternative supplies, the European commitment to assist in containing Russian aggression may weaken.  Swing Producers Alternative sources of crude oil and refined products are more readily available than natural gas since the latter requires costly new infrastructure to be put in place. Building new pipelines, liquified natural gas (LNG) facilities, and transportation infrastructure and ramping up production all require permitting and financing that is difficult to obtain , at least in the developed world. Saudi Arabia and other OPEC members were the traditional swing producers of crude oil and some refined products until the fracking revolution in the US. OPEC has decided to cut back production in the current situation, apparently at least in part to placate its Russian fellow traveler. Both the Saudis and the Emiratis, despite embarrassing entreaties from the Biden administration, have publicly sided with President Vladimir Putin on the question of supplies in the short run. Both Venezuela and Iran, whose oil sectors are now under US sanctions, could conceivably put new supplies on the market. The ongoing negotiations to renew the Joint Comprehensive Plan of Action (JCPOA)—which the European Union and some voices in the Biden administration are promoting—and behind-the-scenes US-Venezuela talks are both intended in part to address existing shortages and high prices. In addition to how agreements with these two rogue powers would damage long-standing US policy, relying on these authoritarian states would set back any hope of progress in reducing atmospheric pollution. Figure 1 shows some of the world’s largest emitters of methane, which is 80 times more potent as a greenhouse gas than carbon dioxide (CO2). Methane is responsible for about 25 percent of today’s global warming, according to the Environmental Defense Fund. Russia, Iran, and Venezuela rank among the world leaders in this race to the bottom, even though the much larger US, European, and Chinese economies produce more of this gas. Figure 2 shows that, in terms of methane intensity, the US emits about 35 tons of CO2 equivalent in methane per million dollars of GDP. The equivalent number is 404 for Russia, 733 for Iran, 137 for Saudi Arabia, and 1,864 for Venezuela. Figure 3 gives similar comparisons for CO2 intensity for leading countries. Again, Russia is much more profligate in its performance than the US or EU, releasing about 1,006 tons of CO2 per million dollars of GDP. Iran, Venezuela, and Saudi Arabia spew out 2,162, 1,756, and 651 tons of CO2 per million dollars of GDP, respectively.  China now produces about 750 tons of CO2 per million dollars of GDP, compared to 225 for the US and 174 for the EU. China is by far the world’s largest producer of CO2, with higher levels of greenhouse gas emissions than all members of the Organization for Economic Cooperation and Development combined (see figure 4). This measurement does not include emissions that will occur after the completion of 94 thousand megawatts (MW) of new coal-fired electric generation capacity that is now under construction or the 196 thousand MW of new capacity already permitted. China is not a major oil and gas producer but has built up 30 percent excess capacity in oil refining, using crude oil imports in large and growing quantities from Russia, Venezuela, and Iran at favorable prices. Figure 5 shows recent data, derived from Chinese customs statistics, on the level and price of crude oil imports from Russia.   As the US and Europe have closed refineries in recent years, due in part to policies that made the financing of new fossil fuel projects uneconomic, China could possibly rush to compensate for current shortages of diesel fuel and aviation fuel. Whether for crude oil or refined products, relying on US- or European-based products is clearly preferable from an environmental point of view.  There are of course many other producers of crude oil: Norway, the United Kingdom, Brazil, and Africa. The reserves of these countries are large, and for the most part, their production has not been subject to political instability, except in certain African countries. Nonetheless, there are limits to their future expansion in the near term. Much of the production outside Africa is offshore, where the fields are difficult, expensive, and time-consuming to ramp up. Many Sub-Saharan countries rely on Chinese development assistance, which has already resulted in distressed debt in 60 percent or more of these countries. Volumes from these areas are unlikely to meet immediate needs. Finally, as figure 6 illustrates, Central Asia and the Caucasus have been exporting around 1 mbd to the EU. Much of this comes to Europe through a pipeline from Tengiz in Kazakhstan to the Black Sea and onto Europe and other destinations. But the pipeline passes through southern Russia and is potentially subject to sanctions from the EU and the US. Russian firms hold about 36.5 percent of the project while US majors own about 22 percent. Russia could cut off the flows through this pipeline at any time. Huge amounts of oil reserves are available in this region but must be transported via Russia or Iran to reach western destinations. Neither of these allied powers is keen on competition from non-aligned sources of petroleum, although Russia has allowed some exports of oil from Azerbaijan. Larger supplies of oil from Kazakhstan across the Caspian Sea could be brought through pipeline via Turkey, but these too are complicated by the interests of the Iran-Russian entente. Sources of Natural Gas for Europe Since February 24, 2022, Europe has only had partial success in replacing the huge amounts of natural gas that either EU sanctions or Russian actions have cut off. Most of the replacements have been in the form of LNG. A relatively mild summer in East Asia and price arbitrage allowed cargoes contracted to this region to be resold to Europe, but this source of supply is beginning to decline as winter approaches. The EU also has negotiated new pipeline supplies from existing sources in North Africa and Norway. Prior to the Russian aggression, Norway regularly supplied Europe with about 100 bcm yearly. It has raised supplies by some 8 percent since late 2021, but this represents only a small proportion of the 155 bcm that Russia previously delivered. There is huge potential to increase pipeline imports from Central Asia and the Caucasus. But again, the difficulty of bypassing Russian and Iranian territory and these countries’ opposition to competition makes any near-term additions unlikely. The existing “Southern Corridor” pipeline from Baku is delivering about 10 bcm of Azerbaijani gas through Turkey and into southern Italy. Plans to increase production and pipeline throughput are in place but remain difficult due to political instability in the Caucasus and hesitations of both buyers of the gas and financial providers to undertake long-term, risky investments at this time. Figure 7 shows the largest LNG exporters as of 2021. The Gulf Cooperation Council members have ample supplies of gas, but only Qatar ships LNG in any material amount to Europe. Its exports via LNG to Europe were about 11 bcm in 2021. Qatar has plans to expand capacity significantly, but not until 2026 at the earliest. Its plans also depend on securing long-term contracts with buyers, and European buyers remain hesitant to agree to these. Australia was the biggest LNG exporter in 2021 but sent only 0.037 bcm directly to Europe that year. Australia has no current plans to expand its capacity for exports, and internal politics have turned against new exports in any case. Role of the United States The US will have the largest volume of LNG export capacity in the world when new plants that are now being built and are expected to become operational in the next two years start production. Figure 8 charts the progress of LNG export capacity in the US, which in 2022 has already become the largest exporter of this comparatively clean fossil fuel resource, with projected exports of 114 bcm. New capacity coming online between 2023 and 2025 represents more than 50 bcm of capacity. The newest facility started exporting in August and represents 17 bcm of additional capacity. The US has already exceeded President Joe Biden’s pledge in March to increase LNG exports to Europe by 15 bcm this year, and it is estimated that the total increase will reach 45 bcm in this calendar year.Total production of natural gas in the US has reached all-time records throughout 2022, facilitating increases in exports. The US is thus poised to steadily increase its exports to Europe and the rest of the world if public policy does not undermine further gains in production or infrastructure construction. It is worth noting that, as of 2020, only 11 percent of total natural gas production in the US originated on federally owned lands. Reliance on private property for gas production will limit the current administration’s ability to reduce production, although it does have other means to prevent the building of new infrastructure and discourage financing of new projects. In short, the US does have the means to be a swing producer and exporter of natural gas to address the current energy crisis. US production of crude oil and refined petroleum products remains below peak levels set prior to the pandemic. The pro-production policies of the Trump administration, as well as the de facto tolerance of the Obama years, facilitated production and export capacity growth. In contrast, the Biden administration has adopted a whole-of-government effort to discourage and prevent crude oil exploration and development, as well as the construction of infrastructure required to bring supplies to refineries, chemical plants, and export facilities. Over 25 percent of crude production in the US originates on federally owned lands. New federal leases for exploration and development on federal lands are at the lowest levels since just after World War II, partially explaining the loss of production in recent years. Crude oil production in 2022 is averaging about 1 mbd below the peak reached in late 2019. Total exports of crude oil and petroleum products declined in 2021 but grew to early 2020 levels during the summer months as prices rose and the administration depleted the national petroleum reserve to levels not seen since the 1980s. However, exports of crude and refined products to leading destinations in Europe are trending upward. Figure 9 shows that EU imports of oil and gas from the US by volume have increased substantially in the last five years. The pace of increases has accelerated since February 24. Summary Europe is in a desperate economic slump. High prices for energy are sapping the ability of homeowners to heat their homes, small businesses to remain solvent, and energy intensive industries to keep operating. High prices are also affecting other countries around the world, including close allies in the Pacific Rim. The US has the raw resources of oil and gas to be a bridge producer to meet much of the current shortage. The Biden administration ought to make a more substantial contribution to alleviating these problems. Instead, it asserts that the US must concentrate its ambitions and funding on developing renewable energy resources, even though these new sources will require decades to replace oil and gas power in the modern economy. Biden’s approach also ignores the fact that renewables production relies on China—which accounts for 80 percent of global supplies of solar panels, 58 percent of wind turbines, 60 percent of the rare earths needed for solar energy and ubiquitous semiconductors to power the modern economy, and nearly 80 percent of the lithium-ion batteries needed for electric vehicles and power storage in a renewables-based electric grid. China is also the largest emitter of CO2 and methane in the world and continues to build new fossil fuel capacity. The US needs a realistic course correction to address the economic and political crisis caused by Russia’s aggression against Ukraine, and to minimize the environmental damage caused by the need to replace Russian oil and gas from other sources.