By assenting to the continued abuse of corporate structures and short-circuiting the establishment of a database of the people who own and control real businesses operating in the United States—or “beneficial owners”—the Treasury has made the American financial system, and Americans, less safe. But that outcome wasn’t inevitable and is reversible.

The first Trump White House supported the CTA in a 2019 statement of administration policy, writing that the law “will help prevent malign actors from leveraging anonymity to exploit these entities for criminal gain… strengthening national security, supporting law enforcement, and clarifying regulatory requirements.” Other supporters included the US Chamber of Commerce, federal prosecutors, international human rights non-governmental organizations, financial institutions, police, sheriffs, faith-based groups, national security experts, and more than a hundred other organizations.

The persistent risk of anonymous shell corporations

Despite the passage of the CTA in 2020, anonymous shell companies remain a risk to the US financial system. Drug traffickers, terrorists, and nation state adversaries, including China, use our opaque corporate structure to harm Americans. In the CTA, Congress found that malign actors use US corporate law to facilitate “money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption, harming the national security interests of the United States and allies of the United States.”

High profile prosecutions demonstrate the roles that anonymous shells continue to play. For example, a Shanghai-based international drug trafficking organization used domestic Massachusetts shell companies as a US base for its operation to distribute fentanyl to customers across the country, resulting in multiple deaths before being shut down by the Department of Justice (DOJ) in 2018. Similarly, a February 2024 DOJ indictment revealed a scheme where a Chinese national used a US front company to launder Iranian oil into China, the proceeds of which funded Iran’s Islamic Revolutionary Guards Corps, a designated foreign terrorist organization in the United States.

The enduring danger that shady corporate structures present creates an imperative to act. It may also put Treasury Secretary Scott Bessent’s rollback strategy in legal peril, as long as the CTA is on the books. By statute, in order for a court to uphold the new rule, the rule must demonstrate that eliminating anonymous shell corporations: “(1) would not serve the public interest”; and “(2) would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes.” The Treasury makes little attempt to achieve this impossible showing. Given this shaky legal foundation, the new rule is likely to end up in court.

Building a beneficial ownership system with less burden

If Secretary Bessent’s true objective is to ease the burden on small businesses and banks, a better way forward is to determine what went wrong in the first round of implementation and fix it, eliminating uncertainty, confusion, and unnecessary compliance burdens. Secretary Bessent has spoken fondly about how the new technology expertise at the Treasury can bring our “Blockbuster-style government in a Netflix world.” He should deploy it to ease the pain points of the first round of implementation.

For example, technology can significantly ease the compliance burden on companies who are required to report their beneficial ownership information. Reporting companies are the smallest of small businesses—by statute, only companies with fewer than 20 employees are required to report. These firms usually only interact with the federal government to file taxes. With time and resources, Treasury could collaborate with the Internal Revenue Service to allow small businesses to opt in to submitting their beneficial ownership information alongside their tax information.

Secretary Bessent could also rationalize the beneficial ownership and customer due diligence (CDD) systems, which already require financial institutions to collect beneficial ownership information from their customers. Initial implementation froze the status quo for banks and built an entirely separate—and barebones—beneficial ownership database at Treasury. There must be a better way where financial institutions and Treasury join forces to collect, maintain, validate, and deploy data jointly. They should share the costs so that the American people can enjoy the formidable national security and public safety benefits of securing our financial system against illicit actors. This could functionally reduce compliance burdens of banks without reducing the quality of information available to law enforcement.

As long as the CTA remains law, Treasury is obliged to accurately implement and enforce it. Perhaps more importantly as long as anonymous shell corporations endanger our national security and safety, the US government should mitigate the grave threat they present. Following the money remains one of the most potent tools we possess to solve crimes and protect our national security. We must not disarm.

Julie Brinn Siegel is a contributor at the Atlantic Council, former Deputy Chief of Staff at the US Department of the Treasury, and former Deputy Federal Chief Operating Officer.

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The objectives of transatlantic financial services regulation and the future of international cooperation

By Matthew L. Ekberg

Much has been written in recent weeks about heightened geopolitical tensions and the impact of policy changes concerning international trade on global markets. Less has been said about the growing shift in focus on both sides of the Atlantic—and across the English Channel—on the next stage of development for financial services regulation.

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Factors will depend, however, on evolving political circumstances coupled with the effects of a continuing shift toward more fragmented policy making across borders. This issue has long been on the minds of government and industry alike, but it may become more complicated in the near to medium term. It is timely to examine these trends to better understand the direction of travel between the UK, European Union (EU), and United States, and how this will impact markets and economies globally.

First, in the UK, the government’s Financial Services Growth and Competitiveness Strategy will be published this July. It will focus on five priority growth opportunities—sustainable finance, asset management, fintech, insurance, and capital markets. The Prudential Regulation Authority and the Financial Conduct Authority will be at pains to continue emphasizing that the primary objectives of consumer protection and systemic stability will not be compromised through any changes. However, it will be important to reflect on how issues such as the Basel III Endgame implementation will be addressed in light of these priorities, considering the approach of other jurisdictions (especially the United States) to the future of this global prudential package.

Second, in the EU, the European Commission has similarly affirmed that it will increasingly focus on growing financial market activity and ensuring the bloc can adequately compete with other world actors in financial services. This will likely lead to further discussions on, inter alia, sustainability standards, financial risk rules, and closer market integration. Though there is consensus on the need to make the EU more competitive, concerns have already been raised, for example, by Frank Elderson, vice-chair of the European Central Bank supervisory board that increasing competitiveness should not be pretext for watering down regulation and potentially increasing instability.

Further complicating matters is the issue of how, or if, the bloc will respond to any escalation of punitory trade measures by the US administration. Though the pace of recent trade talks has accelerated, questions remain in the near term about the potential application of the EU Anti-Coercion Instrument if negotiations fail, and what that may mean for the imposition of restrictions on financial services activity from third countries.

Third, in the United States, a more complex picture is emerging. The economic implications of White House trade policy will have to be weighed against the general deregulatory bent of the administration, but a few themes have come to light. There is a clear indication that the US Treasury will play a greater role in financial services regulation. Treasury Secretary Scott Bessent is on record stating that lending policies should better match the risk of financial firms, and that bank regulation has not taken economic growth into account. Federal banking agency rulemaking will also likely shift. Federal Reserve (Fed) vice chair for supervision, Governor Michelle Bowman, has indicated that supervisory reform, the promotion of innovation, and a pragmatic approach to regulation will be prioritized. The objective of cost-benefit analysis being applied toward regulation will affect how the Fed addresses the outstanding issue of the Basel III Endgame implementation, alongside an expected review of the supplementary leverage ratio and its impact on the US Treasury market.

Lastly, how the United States approaches international regulatory initiatives is also expected to be gauged by how they align with updated US regulatory policy objectives and the America First approach of the administration. SEC Commissioner Hester Peirce recently questioned the agendas of the international standard setters in light of calls for increased domestic control over policy. Secretary Bessent has also raised the issue of US reliance on these bodies. Such interventions will be important to monitor considering the wider gap between national and international rhetoric on cooperation geopolitically.

This is certainly a non-exhaustive snapshot of trends across three major economies, but it raises the question of where the rest of the world stands. How will international cooperation on financial stability evolve with this more domestic-minded focus on growth and competitiveness? This question is coupled with potential disputes on international trade in goods spilling into reciprocal action against the services sector.

On the first point, cooperation will likely continue around topics of consistent mutual concern at the Basel Committee, the Financial Stability Board, the Committee on Payments and Market Infrastructures, and the International Organization of Securities Commissions. Areas of focus will include oversight of the non-bank financial institution sector, modernizing cross-border payments, and addressing issues for operational resilience and cyber security. In his April letter to the Group of Twenty finance ministers and central bank governors, outgoing Financial Stability Board Chair Klaas Knot emphasized the importance of vigilance and international cooperation to address emerging risks and ensure the continued resilience of the financial system. Bilateral and multilateral regulatory collaboration is also continuing in the crypto currency space. The United States and the UK, in particular, are working together to support the responsible growth of digital assets.

However, the prospect is significant for increased fragmentation in regulatory approaches to capital, liquidity, and financial risks related to climate, among other issues. Cross-border financial institutions will potentially have to navigate a much more complicated and disparate set of requirements, which ultimately may impact systemic safety and soundness.

On the second point, the Bank for International Settlements recently warned that geopolitical tensions between countries reduce cross-border bank lending between them. The specter of retaliatory responses in reaction to punitive trade policies seeping into the regulation of financial services can exacerbate this concern. This is particularly acute in the regulation and supervision of foreign banks. Trapping capital and liquidity can have a specific negative impact on the provision of domestic financial services products, hurting the very objectives of growth and competitiveness that appear the ubiquitous watchwords of national policymakers.

There is still a strong case to be made for an interconnected global financial services system where regulatory authorities collaborate on the best means to ensure stability and security across borders. Doing so is not mutually exclusive with objectives for increased domestic growth and competitiveness. It can, in the case of cross-border capital flows, contribute to achieving those goals. An important area of reflection for both the public and private sectors in the coming months is how cooperation can be activated to prioritize economic development while maintaining stability with consistent global standards.

Matthew L. Ekberg is a contributor at the Atlantic Council and former Senior Advisor and Head of the London Office for the Institute of International Finance (IIF).

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At the same time, the quality of government bonds issued by developed countries, mainly the United States, has been questioned. Developed countries face fiscal pressures reflecting demands for higher government spending on defense, infrastructure, and other needs, while their budget deficits and government debts are already at high levels.

The ensuing search for safe assets has come up against the fact that there are no obvious alternatives to US Treasuries. Efforts to deal with the problems of fiscal deterioration in major countries by diversifying safe asset portfolios could lead to market volatility, posing a risk to global financial stability.

US dominance in the global bond market

The global bond market is estimated to be about $140 trillion, dominated by the United States, which amounts to $55 trillion—or 39.3 percent of the total. The bulk of the US bond market is made up of US Treasury securities marketable to the public. These securities are worth $28.8 trillion, and amount to the biggest and most liquid bond market in the world. A total of $9 trillion, or 31.2 percent are held by foreigners and $4.2 trillion, or 14.6 percent, are held by the Federal Reserve. Together with intragovernment holding of US Treasuries totaling more than $7 trillion, US government debt has reached $36 trillion, or 124 percent of US gross domestic product (GDP)—doubling the debt-to-GDP ratio of 62 percent posted in 2007 prior to the global financial crisis.

Moreover, the US fiscal outlook has worsened. The administration’s budget package—named the One Big Beautiful Bill Act—has been approved by the House, and is currently under the Senate’s consideration. It makes the 2017 tax cuts permanent and, if enacted, would increase the $1.8 trillion budget deficit in 2024 by $2.4 trillion between 2026 and 2034. These estimates, provided by the Congressional Budget Office, would raise the amount of government debt in the process. The United States’ deteriorating budget deficit trajectory has prompted international investors to share concerns about the sustainability of US public finance, which could lead to upward pressure on yields to compensate for the higher perceived risk. This has been manifested by the fact that, since recent stock market turmoil following the announcement of reciprocal tariffs on April 2, 2025, yields on US Treasuries have risen by forty basis points. The US dollar also weakened by 4.2 percent. If international investors flock to US Treasuries as safe havens, Treasury yields would have risen and the US dollar would have become stronger.

No good alternatives to US Treasuries

The deterioration of the US fiscal outlook has put international investors, especially foreign central banks, in a quandary. There is no good alternative to US Treasuries as safe reserve assets. Other major countries have also been burdened with high budget deficits and public debt levels—albeit generally less acute than the United States. Those markets that have lower deficits are smaller and less liquid than the US Treasury market, making them less attractive as reserve assets.

The euro has been frequently mentioned as an aspirant to compete with the dollar—a point recently emphasized by Christine Lagarde, president of the European Central Bank (ECB). However, the public bond markets dominated by the euro are fragmented and collectively smaller than the US Treasury market. They are able to supplement but not replace US Treasuries.

The European Union (EU) has launched three programs to issue joint Eurobonds within its budgetary authority: SURE, a program to support employment during Covid-19, for up to €100 billion; NextGenerationEU, a stimulus package to grow Europe’s economy, for up to €712 billion; and the European Financial Stability Mechanism, which provides assistance to member states in financial distress, for up to €60 billion. To date, about €468 billion ($533 billion) worth of Eurobonds are outstanding—just big enough to be an attractive niche market segment.

The euro area (EA) member states have a combined government bond market of more than €10 trillion ($11.4 trillion), of which about 35 percent is held by the ECB and 22 percent is held by foreigners. Trading, especially by hedge funds, has concentrated on the German, French, Spanish, and Italian markets. However, the EA market is fragmented into national markets, each of which is shaped by different and often divergent domestic economic and fiscal circumstances.

The UK government (gilt) bond market is fairly substantial at £2.6 trillion ($3.5 trillion), with about 30 percent held by foreigners.

The Japanese Government Bond (JGB) market amounts to $7.8 trillion or 250 percent of Japan’s GDP. The Bank of Japan (BOJ) holds 52 percent of the JGB market due to its massive JGB purchases, though the BOJ has been scaling back its purchasing volume while Japan emerges from deflation. Along with prospects of substantial borrowing needs by the Japanese government, this has pushed up yields and stymied demand from foreign investors who already account for only 6.4 percent of the JGB market. Finally, the Chinese bond market—at $21.3 trillion—is the second biggest in the world after the US market. However, the bulk of the public bond segment of $14.4 trillion is in bonds issued through local government financing vehicles, which are fragmented and illiquid. Central government bonds only account for $3 trillion. Foreign investors take up only 7 percent of the Chinese government bond market. Overall, the lack of free convertibility of the renminbi and the closed capital account have rendered Chinese government bonds not completely suitable as safe assets for global central banks.

Some central banks have purchased substantial amounts of gold in recent years to hedge against economic uncertainty and geopolitical tension. This has helped push the price of gold up 42 percent over the past year to record highs around $3,300 per ounce. As a result, the average share of gold at market values in global centeral bank reserves has reached 15 percent. It’s unlikely that this share will continue to rise much further in future, given the limited supply of gold. The costs of holding it also include lack of interest earnings, storage and transportation costs, and the inconvenience in using gold as means of settling international transactions.

Conclusions

The deteriorating fiscal outlook of major countries, especially the United States, has made safe assets more difficult to find. Going forward, there will likely not be an effort to replace US Treasuries with other government bonds—there is simply no viable alternative. Instead, a trend toward diversification to better manage heightened sovereign and credit risks on what used to be thought of as risk-free assets is probable. More frequent portfolio restructuring and the substitution necessary for diversification measures would add to market uncertainty and volatility, at a time when both measures have already been elevated by the tariff war and geopolitical tension. This trend would increase risk to global financial stability.

In particular, the share of the US dollar and US assets, such as Treasury securities in global safe asset portfolios, will likely decline gradually over time as international investors move to diversify their portfolios. When looking at the composition of global central bank reserves, this development is consistent with the gradual decline of the dollar from 72 percent in 1999 to 57.8 percent in the fourth quarter of 2024. The trend was not in favor of any other major currency such as the euro, whose share has been stable around 19.8 percent in recent years, but to a variety of nontraditional reserve currencies. If the world’s central banks were to maintain a neutral allocation to US Treasury securities in their reserves portfolios, that would be 36 percent—the share of US Treasuries in the global government bond market totaling $80 trillion.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center and senior fellow at the Policy Center for a New South; and former senior official at the Institute of International Finance and International Monetary Fund

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The $4.6 billion initial public offering (IPO) by the battery manufacturer Contemporary Amperex Technology Co. (CATL) in late May was a clear riposte to a US Department of Defense decision to place the company on a watchlist for alleged links to the Chinese military. It also highlighted the fragility of business ties that once seemed to inextricably bind the world’s two largest economies.

The Chinese government is steering more and more of its companies away from New York for IPOs; the country’s second-largest car maker, Chery Automobile, is preparing to launch a $1.5 billion share issue in Hong Kong as well. About three-quarters of the largest twenty-five Chinese firms listed on Wall Street have set up parallel listings in Hong Kong in the past few years and already represent 60 percent of the value of shares listed there. The purpose of listing in Hong Kong is to create an escape valve if the United States follows through on its periodic threats to delist all Chinese stocks on Wall Street. The most recent such warning came from US Treasury Secretary Scott Bessent on April 9, when he declared that “everything is on the table” in response to a journalist’s question about the possibility of forced delistings. Chinese stocks in the United States have a total market capitalization of about $1.1 trillion, which, while no small change, is only a tiny portion of the roughly $52 trillion US markets.

American investors with accounts outside the United States can buy Chinese stocks in Hong Kong, and some fund managers have already shifted their holdings to the dual-listed shares there to protect against future disruptions. But many institutional investors whose governance rules do not allow for such foreign trading could not participate in the CATL IPO. The company specifically structured its share issue that way to avoid US regulatory oversight—a response to the Pentagon’s decision to blacklist the firm.

Hong Kong’s emergence as the market of choice for Chinese companies is no accident. Beijing has worked systematically to revive it as a regional financial center after many foreign investors and financial institutions retreated from the city in recent years, especially after the Chinese government’s began cracking down on mass political protests in 2019. The centerpiece of the financial market strategy is to establish Hong Kong as the largest venue for offshore transactions denominated in renminbi. Stocks are also part of the blueprint. While Chinese companies have been listing in Hong Kong for years, the stock market has gained prominence in China’s plans as US-China relations have worsened. A senior Chinese official said late last year that 80 percent of mainland businesses seeking an offshore listing are prioritizing Hong Kong, no doubt with a push from Beijing’s regulators.

The core issue for both Washington and Beijing is the national security implications of Chinese companies’ presence on Wall Street. Each US presidential administration over the past five years has sought to exclude companies regarded as part of China’s military-industrial complex from American financial markets. In 2020, the first Trump administration launched an effort to prohibit US investments in companies with ties to the Chinese government and military. This initiative resulted in the delisting of several large state-owned Chinese companies from US exchanges.

At the same time, Chinese regulators became increasingly concerned about US requirements for financial disclosure that they believed could reveal national secrets. That became a headline issue in the bilateral relationship after China refused, for many years, to allow US government auditors to inspect listed Chinese companies’ books. The US Congress eventually passed a law that mandated mass delisting if Beijing did not cooperate. A 2022 agreement that permitted American oversight defused the standoff, but the remaining Chinese state-owned firms  voluntarily delisted from Wall Street on that accord was finalized. Since 2021, China has stepped up its scrutiny of all Chinese companies seeking to list in the United States.

These issues have often been most visible when they involve publicly listed companies. However, US policymakers have also focused on restricting US venture capital and private equity investments in China, as well as Chinese investments in the United States. American venture capital and private equity investments in China in 2024 fell to $1.62 billion from a peak of $40.81 billion in 2018, and President Donald Trump issued a national security memorandum in February outlining plans to further restrict these capital flows.

There is a domestic political dimension to Beijing’s decision to expand its oversight of public listings: Control of China’s most important private sector companies, including the e-commerce giant Alibaba Group. Chinese leader Xi Jinping’s campaign to bring private conglomerates to heel has been closely tied to the regulation of foreign listings. The squeeze on corporate fundraising on Wall Street began in late 2020 when Beijing blocked a huge, planned IPO for Ant Group, the financial arm of Alibaba, after Alibaba Chairman Jack Ma criticized financial regulators. That action came as the first restrictions on US investments in Chinese companies were imposed.

From that point on, tightening controls over US listings appeared to occur in lockstep with deteriorating US-China ties. As the Biden administration broadened restrictions on Chinese companies by American investors in 2021, Beijing sought to delay a huge IPO by the Chinese ride-hailing giant Didi Chuxing. China then forced the company to delist after it defied the regulators and proceeded with the deal. Beijing followed that sanction with a raft of regulations mandating stricter oversight of all companies applying for foreign listings. Chinese IPOs in the United States have never recovered. According to the US-China Economic and Security Review Commission, forty-eight Chinese companies issued IPOs in the United States between January 2024 and early March 2025, raising a total of $2.1 billion. By contrast, thirty-two companies raised $12.1 billion in 2021.

Even before the CATL listing, IPOs in Hong Kong had risen sharply this year. The number of deals was up 25 percent in the first quarter, and the total value of those listings increased 287 percent to about $2.3 billion. The ten largest IPOs so far have been Chinese companies.

Listing in Hong Kong certainly has its drawbacks compared with Wall Street. It is a more volatile market with trading volumes far below the levels on US exchanges and lower valuations relative to earnings. A Hong Kong listing generally doesn’t command the prestige of the American exchanges; that can mean less favorable terms on other forms of financing than a US-listed company might be offered. Hong Kong’s listing regulations are also stricter than on Wall Street, and an estimated 170 small Chinese companies listed in the United States may not have the option to obtain dual listings there. However, Hong Kong offers access to a largely untapped pool of Chinese investors through an official program that enables mainlanders to buy and sell Hong Kong shares, including stocks like Alibaba that are not listed on Chinese exchanges. As of late February, investors based in China held about 12 percent of Hong Kong shares, compared with 5 percent at the end of 2020. Their trades accounted for about one-quarter of daily turnover, up from 16 percent a year ago.

Ultimately, while the lure of China’s army of retail investors might provide some consolation for companies that might lose access to the US markets, the Chinese government is the real beneficiary Beijing is prepared to exchange the financial advantages of a market it can’t control for the comfort of a city that responds to its every whim. Its actions over the past five years suggest a calculus that the political benefits of an international financial center with Chinese characteristics will outweigh the pain that decoupling inflicts on China’s private sector.

Jeremy Mark is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center. He previously worked for the International Monetary Fund and the Asian Wall Street Journal.

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The post Hong Kong highlights China’s policy of decoupling from US financial markets appeared first on Atlantic Council.

The United States has opened meaningful space for reconstruction and private sector engagement. Efforts to do so include the Treasury’s Office of Foreign Assets Control (OFAC) issuing General License (GL) 25 (including frequently asked questions on May 28), a State Department Caesar Act waiver, and Financial Crimes Enforcement Network (FinCEN) USA PATRIOT Act Section 311 exceptive relief for the systemically important Commercial Bank of Syria. Along with other relief, the measures remove obstacles to reconnecting the sanctioned Central Bank of Syria and certain Syrian commercial financial institutions to the global financial system.

While a significant signal, these announcements do not mean a return to business as usual with Syria after forty-six years of punishing economic measures directed primarily against the former Assad regime. Syria remains a high-risk jurisdiction due to years of conflict, endemic corruption, state institution collapse, narcotrafficking of captagon, insufficient anti-money laundering efforts, and inadequate financing of terrorism controls. In February, the intergovernmental Financial Action Task Force affirmed Syria’s status on its “grey list” of jurisdictions under increased monitoring. These relief measures announced by the State Department and the Treasury are also either temporary in nature (the 180-day Caesar Act waiver) or subject to revocation at any time (GL25 and the FinCEN Section 311 exceptive relief). Additionally, other US legal and economic restrictions remain in place, including the following:

• Syria’s state sponsor of terrorism (SST) designation that, in part, removes some of Syria’s sovereign immunity in US courts;
• foreign terrorist organization (FTO) designations with attendant material support criminal liability enforced by the Department of Justice and civilly by US terrorism victims;
• United Nations sanctions, including on key members of the Syrian interim government; and
• export controls administered by the Department of Commerce.

As an immediate next step to build on this momentum, the Trump administration can take the following measures:

• Provide policy clarity on the outstanding restrictive economic measures and legal prohibitions related to the SST and FTO designations. The administration can publish a memorandum by the Department of Justice to articulate the administration’s prosecutorial policy involving alleged material support to FTOs operating in Syria. While novel, such guidance would provide greater legal clarity, especially for humanitarian organizations operating in Syria.
• Work with Congress to review the statutory sanctions in place against Syria to ensure that they reflect the fall of the Assad regime and current political developments.
• Work with allies and partners to calibrate the United Nations sanctions to current risks.
• Provide guidance, including frequently asked questions, for the Caesar Act waiver and the FinCEN Section 311 exceptive relief, as well as interagency policy guidance on the roadmap for further relief.
• Develop a policy for using and supporting partners with positive economic statecraft tools such as technical assistance to rehabilitate the financial sector, in addition to licensing, waiving, and removing restrictive economic measures.

The US government should be commended for acting swiftly to update sanctions and other authorities to better reflect the current realities on the ground. Significant work remains ahead to responsibly calibrate restrictive economic measures to achieve US foreign policy goals and support positive economic tools to allow the Syrian people to benefit from this dramatic change in US policy.

Alex Zerden is the founder of Capitol Peak Strategies, a risk advisory firm, an adjunct senior fellow at the Center for a New American Security, and a former Treasury Department financial attaché. You can follow him on X at @AlexZerden.

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After the Trump administration’s sweeping “liberation day tariffs,” the British government thought that taking the lead on negotiating with the United States might be risky. It feared other countries might blame the United Kingdom for enabling the United States’ 10 percent tariff, which is now assumed to be an unavoidable baseline, even for countries that US President Donald Trump likes. But there’s a palpable sense of relief that, so far, no other country seems to have blamed the United Kingdom for doing the deal.

British officials told us they had known it would be difficult to secure a broader tariff exemption for the United Kingdom, concurring with the GeoEconomics Center’s view that the Trump administration remains more serious about tariffs than the markets have considered. The separate exemptions for the United Kingdom from Section 232 tariffs on autos and steel (within certain quotas) are seen as significant achievements. Concessions made by the United Kingdom on imports of beef and ethanol have encountered only limited political backlash, so far.

Despite UK officials’ subtle understanding of the US administration, our interlocutors were still surprised when we warned them that the reciprocal tariffs announced on “liberation day” could be reimposed on other markets if bilateral negotiations fail to meet the US president’s expectations. This realization made them feel even better about securing a deal, and they underscored the serious misunderstanding that exists even in allied governments about the administration’s true trade goals.

The deal’s four short paragraphs on economic security show that the UK government has picked up on US concerns regarding avoiding tariffs through transshipments. An agreement was reached to refrain from further conversations on transshipments and risky vendors, though officials were keen to remind us that the deal does not constrain London’s reset with China. One of the authors (Charles Lichfield) was able to make this point on Wednesday when he gave oral evidence to the International Relations and Defence Committee of the House of Lords in a session on the future of the United Kingdom’s relations with the United States.

The sequencing of the Labour government’s trade deals was designed with domestic politics in mind. It is no coincidence that the US deal, as well as the recent trade deal with India, came before the UK-European Union Summit and its announcement of a renewed agenda for cooperation. Labour can now credibly say that it is achieving the global trade deals that the Conservative Party promised—and failed to deliver—after Brexit.

There are political risks to every deal. UK Prime Minister Keir Starmer’s government has been criticized for allowing firms to bring Indian tech workers to the United Kingdom without complying with British labor laws. Still, prioritizing the US and India deals has apparently protected the government from the inevitable accusations of “Brexit betrayal.” The attempt to reset relations with the European Union is also broadly popular. Disproportionate attention is paid to the fishing industry, which represents 0.02 percent of the gross value added by the British economy. The British beef industry, which will now face more competition from the United States, received much less attention.

The Labour government’s achievements haven’t prevented a sharp decline in the polls, fueled by mediocre growth (barely 1 percent this year) and a fraught migration debate. Without any remarkable improvement in public finances, Chancellor of the Exchequer Rachel Reeves has been forced to switch her priorities from reining in spending (and blaming this on the previous Conservative government) to prioritizing growth.

Last week, the prime minister partially walked back one of Reeves’s flagship policies of “means testing,” which is an entitlement that aims to help pensioners pay their winter heating bills by proposing that the cut-off threshold would be raised to a currently undisclosed level. Doing so makes the government vulnerable to its own parliamentary caucus, which will demand more concessions on social spending to deliver a sense of economic uplift faster.

The Trump administration is placing demands on its oldest allies, which it isn’t on newer friends in the Gulf. In a speech at Chatham House, one of the authors (Josh Lipsky) highlighted that the economic security dimension of the US-UK deal is what could underpin the future of a Group of Seven alliance to counter China economically. But our counterparts in the United Kingdom raised two key concerns. First, they asked whether the United States still saw value in alliances to achieve economic goals, or if the US priority was to reset global trade irrespective of alliances. Second, they remarked that there is no guarantee that policies decided by this US administration would continue in the years to come.

The same questions were raised at Bank of England, where senior officials questioned the Trump administration’s policies on stablecoins and cryptocurrency. Their own assessment was that unleashing these assets globally without the right regulatory framework could potentially destabilize other countries’ financial systems.

Overall, the unifying theme was a desire for stability but a begrudging acceptance that, at least from the United States, none was coming in the near term. As it approaches its first year in office, the Labour government is navigating these choppy international waters with some success. Alongside the trade deals, it has also kept the Trump administration engaged in Ukraine. These achievements all serve domestic prosperity in the United Kingdom—but making sure voters feel they are benefiting from these will be very challenging.

Josh Lipsky is chair of international economics at the Atlantic Council and senior director of the Atlantic Council’s GeoEconomics Center.

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

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

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As diplomatic efforts falter, attention is turning to economic statecraft—the strategic use of trade and economic leverage to influence state behavior. The European Union (EU) and United States are Israel’s largest and second-largest trading partners, and any economic pressure they apply could have severe consequences for Israel’s economy. Already facing tariffs from the US, Israel may soon encounter additional pressure from the EU, which is considering its own economic measures.

In Europe, growing humanitarian concerns about the scale of destruction in Gaza have prompted calls to reevaluate the best strategy to manage the conflict. Notably, the humanitarian blockade and high-profile incidents, such as the deaths of fifteen aid workers during an Israeli special forces operation in Rafah—an event Israel attributed to “professional failures”—have intensified pressure for a more impactful response. There is a growing sentiment that new tools may be needed to influence the trajectory of the conflict.

Recently, Dutch Foreign Minister Casper Veldkamp called on the EU to investigate Israel’s compliance with Article 2 of the EU-Israel Association Agreement, which ties trade relations to respect for human rights and democratic principles. Veldkamp argued that, “The blockade violates international humanitarian law. You have the right to defend yourself, but the proportions now seem completely lost. We are drawing a line in the sand.”

Although Veldkamp faced domestic political backlash for his move, support across Europe appears to be growing. On May 20, the governments of the United Kingdom (UK), France, and Canada issued a joint statement urging Israel to halt its renewed offensive in Gaza. While reaffirming Israel’s right to defend itself, the statement described the current escalation as “wholly disproportionate.” In tandem, the UK suspended talks on expanding a free-trade agreement with Israel and announced additional sanctions on extremist Israeli settlers in the West Bank.

Crucially, the majority of EU foreign ministers backed the Dutch proposal to review the EU-Israel Association Agreement. Their choice signals a potential turning point: the first serious momentum behind reevaluating a trade framework that underpins diplomatic and economic ties. Should the EU find Israel in breach of Article 2, it could suspend parts of the agreement or enact targeted economic penalties.

The implications are substantial. The EU is Israel’s largest trading partner, accounting for 32 percent of Israel’s total trade in goods as of 2024, amounting to $48.25 billion. Services trade added another $29 billion, while bilateral foreign direct investment stands at over $134.8 billion. This underscores a deeply integrated economic relationship.

Despite the ongoing conflict, Israel has so far managed to maintain some level of macroeconomic stability. Debt levels are within sustainable bounds, credit worthiness remains intact, and the economy has continued to grow (albeit slowly). However, the economic toll of war is has been straining certain sectors disproportionately. The tech industry continues to grow, partially due to defense contracts, but construction has largely halted, agricultural sectors have lost critical labor, and tourism has plummeted. While gross domestic product growth has not entirely contracted, it slowed to around 1 percent in 2024. This was a significant drop from 6.5 percent in 2022, with the deceleration primarily driven by reduced exports. In response, the Israeli government has implemented budget adjustments that include cuts to domestic welfare programs—historically an area of generous spending—as it works to offset growing wartime expenditures.

Compounding these challenges, Prime Minister Netanyahu recently announced plans to eliminate Israel’s trade surplus with the United States—its second-largest trading partner—which amounted to $7.4 billion in 2024. While the move is framed as a gesture toward economic rebalancing and strengthening bilateral ties, it may carry domestic economic consequences. Efforts to narrow this surplus—especially in a climate of shifting global trade patterns and economic uncertainty—could dampen Israeli export growth and further expose the economy to external shocks.

The potential suspension or downgrading of EU-Israel trade ties would add significant pressure. Given the scale and interdependence of EU-Israel trade, such a move could affect Israel’s economic resilience and, by extension, its ability to sustain long-term military operations in Gaza.

While no approach guarantees a swift end to such a deeply entrenched conflict, economic statecraft presents a credible alternative to stalled diplomatic channels. Unlike traditional negotiations, which often falter due to uncompromising demands or ideological impasses, economic levers could alter the cost-benefit calculus of continued hostilities. A concerted and coordinated effort by major economic partners could incentivize compromise, creating a window for diplomacy to succeed.

The EU’s evolving posture may represent a strategic recalibration—one that leverages economic influence to encourage de-escalation while remaining anchored in international law and human rights norms. Whether this shift can yield tangible results remains to be seen, but it marks an important recognition: that intractable conflicts may require not just moral outrage or political pressure, but a strategic application of economic power.

Lize de Kruijf is a project assistant at the Atlantic Council’s Economic Statecraft Initiative.

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Bilateral trade deals struck with Washington will redefine the balance of geoeconomic power and elicit powerful reactions domestically and abroad. In addition to negotiations with major trade partners (European Union, Mexico, Canada, China, Japan), at least twelve large economies reportedly have begun active trade talks with the United States. The first set of early agreements with the United Kingdom and India are incomplete; and new details could be announced at any point. These are not merely bilateral negotiations. Every public move and every new deal will change the landscape for negotiation among the other parties. 

The timing for the tariff negotiations seems certain to trigger additional policy volatility throughout the summer as overlapping – but not aligned — deadlines approach in relation to both the trade talks and domestic fiscal policy negotiations. US deadlines for reaching reciprocal tariffs agreements with trading partners are set to expire one month before separate negotiations with China. All trade negotiations will occur amid parallel budget and debt ceiling negotiations in the United States, where a trio of additional domestic pressure points loom large this summer:

• Budget negotiations, including controversial spending cuts and initiatives to make permanent the tax cuts from President Trump’s first term in office
• Treasury borrowing needs and debt ceiling challenges
• Increasingly agitated opposition party roadblocks within Congress

Consequently, the next 120 days present a critical window for decision making that will generate ripple effects across the global economy. Choices made over this period will  challenge corporate executives, financial institutions, and policymakers to chart solid trajectories amid an increasingly random news cycle that can trigger headline-driven market rollercoaster rides. Uncertainty regarding trade and tariffs could extend into the autumn and the new fiscal year if trade partners cannot agree.  The prospect for revival of the draconian tariff hikes announced in early April 2025 increase the risks of potentially destabilizing outcomes. 

The fiscal policy issues involve hard deadlines. US Treasury Secretary Scott Bessent’s letter to the speaker of the house on May 9 indicates that the next fiscal cliff (when taxpayer revenue must be supplemented by bond market sales in order to keep the government open) will likely materialize in August 2025. Secretary Bessent has requested that Congress increase the debt ceiling before departing for its traditional August recess. In other words, the deadline for resolving (or at least making progress on) the trade war truce with China now coincides with the debt ceiling “X date,” as well as the traditional summer recess for Congress.

These issues are not new. From President Obama onward, the summer budget season in the United States has consistently included debt ceiling brinksmanship, hard budget negotiations, and plenty of breathless headlines. Summer 2025 will be still more intense. Budget negotiations play out amid both a strikingly poisonous political climate and major tariff negotiations, the outcomes of which will materially impact economic growth rates globally. 

None of these inflection points align neatly with the quarterly reporting process that drives markets and corporate disclosures. Incomplete information within markets and corporates regarding daily policy decisions increases the risk of poor strategic decisions. Corporate executives understandably choose inaction pending final decisions. Inertia generates downstream slowdowns in economic activity, ratcheting up pressure on governments globally to deliver clarity. In such an environment, the risk of overreaction to a headline and a news story is high.

Those outside the policy process can, at least, anticipate new bouts of volatility and opportunity. Between June and September 2025, a number of scheduled events provide policymakers with potential offramps and opportunities to make deals, in addition to the steady stream of negotiating teams meeting with US government officials in Washington. These include:

• May 28-31, Department of Commerce rules due on the application of Section 232 tariffs regarding non-US content in auto parts
• June 3, South Korean election
• June 15-17, Group of Seven (G7) Summit in Canada
• June 19, Eurogroup Summit
• June 25-27, Penultimate Group of Twenty (G20) sherpa meeting
• June 27, EU Council Summit
• July 6-7, BRICS Summit in Brazil
• July 9, expiration of the current reciprocal tariff war ceasefire
• Mid-July, targeted date for debt ceiling extension by Congress
• July 29-31, G20 Trade and Investment Working Group meeting
• August 4, tentative Congress summer recess begins
• August 12, expiration of the reciprocal trade war with China ceasefire
• Mid-August, the latest estimate for the X date and the budget ceiling (the next fiscal cliff)
• August 21-23, Jackson Hole monetary policy conference
• September 30, end of the US fiscal year
• October 12, Department of Commerce Section 232 report due regarding critical minerals
• October 17, IMF and World Bank Annual Meetings (often with side meetings for the G20, the Financial Stability Board, the G7, and the BRICS)
• November 2, Department of Commerce Section 232 report due regarding timber and lumber
• 2026, USMCA partners must decide whether to extend or terminate the regional trade agreement

Several other events are expected, but at uncertain times. There might be changes to the United States-Mexico-Canada Agreement tariff structure, extensions to existing deadlines regarding tariff negotiations with the United States (particularly: July 9 and August 12), or a deterioration of truce terms. For example, the United States could revive at any time its doubling (to $200) of fees for de minimis packages shipped to the United States from China using the postal services.

News reports indicate that bilateral negotiations are underway between the United States and at least twelve significant global economies (in addition to ongoing negotiations with China, Canada, the European Union, the UK, and Mexico): Israel, Japan, Vietnam, Cambodia, Thailand, India, South Korea, Australia, Argentina, Switzerland, Malaysia, and Indonesia.

June and July will be a rolling feast of headlines and leaks. Each decision and headline will contribute to geoeconomic realignment, impact global growth rates, and shape the structure of cross-border economic engagement.

The current pause in the tariff war may be welcome, but the more intense negotiations still lie in the future. Never has it been more important to pay particular attention to every move of the policy cycle.

Barbara Matthews is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center. She is also Founder and CEO of BCMstrategy, inc., a company that generates AI training data and signals regarding public policy.

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

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That was made clear at this year’s International Monetary Fund and World Bank Spring Meetings, where financial leaders warned about job loss and increasing poverty rates across these countries. 

But there are changes African countries can make to better withstand the economic headwinds they are facing. One such opportunity they should immediately seize lies in strengthening their approaches to combating money laundering and terrorist financing. By addressing deficiencies in legal and regulatory frameworks and by adjusting for developments in financial technology, African countries can bolster financial inclusion and tap economic growth opportunities—while preventing the abuse of the global financial system by nefarious actors. 

Key deficiencies seen across Africa—in the form of weak legal and regulatory frameworks, limited institutional capacity to conduct financial supervisory or enforcement activities, and a high degree of informality of economic activities—make it difficult to combat money laundering, terrorist financing, and other illicit financial flows. The Financial Action Task Force (FATF), a global money laundering and terrorist financing watchdog, keeps track of jurisdictions that do not meet global standards to combat money laundering, publicly identifying jurisdictions with weak performance on a “black list” and “grey list.” The black list hosts only three countries (North Korea, Iran, and Myanmar), but on the grey list, fourteen of the twenty-five countries (just over half) are African. Grey listing can result in serious reputational and economic damage, with negative spillover effects on economic growth, borrowing costs, foreign investment flows, and financial inclusion efforts—a particularly concerning impact considering that in Sub-Saharan Africa, less than half the population has a bank account. Given these effects, African countries have worked to make significant improvements to their anti-money laundering and combating the financing of terrorism (AML/CFT) frameworks. Over the past few years, several countries that were once placed on the grey list have been removed, including Zimbabwe, Botswana, Morocco, and Mauritius.

One piece of the regulatory puzzle involves cryptocurrencies. FATF Recommendation 15 for combating money laundering and terrorist financing directs countries to identify and assess “risks emerging from virtual asset activities.” FATF data from March indicates that of the forty-one Sub-Saharan African countries with publicly available data, only seven countries were rated “compliant” with Recommendation 15, indicating that the country successfully met the global standard. For African countries looking to become more compliant, there are positive examples on the continent to draw upon; for example, South Africa was recently upgraded to “largely compliant” with Recommendation 15 and is continuing to make progress towards full compliance. 

At the same time, African governments must also harness the power of digital finance to weather today’s economic headwinds. According to the International Monetary Fund, as of 2022, just 25 percent of countries in Sub-Saharan Africa formally regulated cryptocurrencies, and two-thirds had implemented restrictions, with six countries having outright banned cryptocurrencies. The impact of this approach leaves the investors and entrepreneurs who are interested in Africa’s digital assets sector inclined to hold back investments due to the excessive regulatory uncertainty and possible regulatory swings. Africa is one of the fastest-growing crypto markets in the world, and crypto assets are actively used across the continent. 

Recent reporting from Chainalysis suggests that the cryptocurrency value received by Sub-Saharan Africa was less than three percent of the global share between July 2023 and July 2024. While this is a small global share, there is significant variance in adoption rates across the continent’s fifty-four countries, with a number of countries still rating relatively high in global adoption: Nigeria ranked second worldwide, and Ethiopia, Kenya, and South Africa also ranked in the top thirty countries. From 2022 to 2023, bitcoin was legal tender in the Central African Republic, but finance experts raised concerns about the lack of electricity and infrastructure and the high risk of money laundering and terrorist financing. One thing is certain: digital assets—including cryptocurrencies—are changing the financial landscape of the region. 

That digital finance can transform Africa’s financial landscape should be viewed positively. Africa’s population is set to increase from 1.5 billion in 2024 to 2.5 billion in 2050. This is the moment for African governments to leverage the economic power of their demographics, but to do that, they will need to consider public policies that support greater financial inclusion. Of the eight countries that will account for more than half of the global population growth between now and 2050, five of them are in Africa; two of them are global leaders in crypto adoption rates.  

As populations age and enter the workforce, African governments should consider how best to promote technological innovation in their societies, including in financial technology. Cryptocurrency adoption in African countries can be used for small retail transactions, for sending or receiving remittances, as a hedge against inflation, for business payments, and, potentially, for solving sticky foreign exchange issues in places such as Central Africa, where such issues dramatically reduce foreign investments. Due to its decentralized nature, cryptocurrencies can help people bridge the gap in access to financial services and formal banking systems in many countries across the continent.  

On one hand, governments have tried to use digital assets to boost financial inclusion, tax revenue, and small retail transactions with limited success; and on the other, countries have banned, unbanned, regulated, and deregulated cryptocurrencies, leaving a patchwork of regulatory frameworks across the continent for consumers and business to navigate. With such jurisdictional regulatory arbitrage and limited enforcement mechanisms, nonstate actors, including terrorist groups in Africa, are able to take advantage of the technologies and services that can move money the fastest and cheapest—and in ways that are least likely to be detected or disrupted. That can lead these actors to cryptocurrency.   

While serving as head of delegation to both the Central and West African FATF-style regional bodies, I heard from African government officials repeatedly that there were no digital assets being used in their countries and that their AML/CFT regulatory regimes were sufficient. This is simply not the case. African countries should consider policies to encourage the adoption of emerging financial technologies, including cryptocurrencies and other digital assets, while still exercising great care to avoid creating conditions allowing for regulatory arbitrage between countries or monetary unions that can be exploited by bad actors seeking to launder money or finance terrorism. Beyond policy frameworks, African governments should empower their enforcement agencies with the appropriate resources to ensure that policies, laws, and regulatory frameworks protect the integrity of the global financial system.  

Benjamin Mossberg is the deputy director of the Atlantic Council’s Africa Center. 

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The Basel III endgame was born out of the Basel III accord, which was created by a group of countries with strong financial sectors in response to the 2008 crisis and first implemented by US and other regulators in 2013. The accord provides a package of international financial regulatory standards for banks to stabilize them and mitigate the chance of another major financial disaster. The endgame includes the final set of recommendations to implement the Basel III accord, and was scheduled to be fully implemented by January 1, 2023.

However, the Basel III endgame has been disrupted by countries delaying implementation dates and tailoring recommendations to their own national interests. The trend over the last seventeen years toward national competitiveness gaining ground over coordinated regulations—most noticeable in the United States—could fragment the Basel III endgame and the global financial regulatory framework more broadly.

The Basel III endgame in the United States

On July 27, 2023, the US federal banking regulators—including the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve (Fed)—jointly proposed rules to implement the Basel III endgame. The Fed vice chair for banking regulation, Micheal Barr, also issued proposals applicable to banks with more than $100 billion of assets. By changing the calculation of risk-weighted assets, the proposed rules would raise the core equity tier 1 (CET1) capital for large and complex banks by 16 percent, and tier 1 capital by 6 percent. CET1 comprises of a bank’s common equity, retained earnings and other regulatory adjustments, representing the core and highest quality capital of a bank available to absorb losses.

According to the Fed, the average CET1 ratio of large US banks is currently around 13 percent. It already exceeds the minimum required ratio of 4.5 percent, in addition to stress capital buffer requirements and global systemically important banks (GSIBs) surcharges. —ranging from 13.63 percent for Citigroup, 15.68 percent for JPMorgan Chase, and 15.92 percent for Morgan Stanley.

The US banking industry, especially the large banks, objected to the rules proposed in 2023 that would have “gold plated” the Basel III agreed standards and raised the special GSIB surcharge by $250 billion. The fact that the scope of the supplementary liquidity ratio of 3 percent currently includes non- or low-risk assets such as US Treasury securities has drawn particular frustration. Their inclusion boosts the required capital level and makes it costly for banks to commit capital in their broker-dealer activities needed to support a smooth functioning of the US Treasury market. The new rules would also reduce banks’ reliance on their internal models to calculate risk-weighted assets. Opaque internal justifications by US agencies for these new rules, on top of the conduction of the annual bank stress test, have prompted sharp criticism from influential banks.

These objections have persuaded US financial regulators to consider revising the proposed rules, essentially  to half the average increase in required capital for large and complex banks. They may even remove US Treasuries from the calculation of the supplementary liquidity ratio, reduce the GSIB surcharge, and release more information about the regulators’ internal analyses—including for the stress test.

Motivated by the Trump administration’s approach to deregulation, Michael Barr has been replaced as vice chair for supervision by Michelle Bowman, who is more sympathetic to the banks’ views. Under such a supportive regulatory environment, large banks are arguing to fully implement the modified Basel III endgame now, so that the net impact will be capital neutral—meaning there would be no change in the capital requirements for major banks—rather than leaving it open risking a possible future Democratic administration favoring a stricter  regulatory framework. Travis Hill, the acting chair of the FDIC, has revealed his agenda of priorities, aiming to review all FDIC regulations, guidances and manuals, especially to streamline capital and liquidity rules in opposition to the Basel III Endgame—potentially opening more room for banks to seek further relaxation of Basel III standards.

European Banks Pushing for Similar Delay

Uncertainty in the United States has already encouraged European banks to push for delayed implementation of their own new rulebook, the Fundamental Review of the Trading Book (FRTB), to avoid being put at a competitive disadvantage.

The deferral has already been granted in the United Kingdom, where the Prudential Regulation Authority has postponed implementation of new regulations until January 1, 2027. The focus of most large banks in the European Union (EU) has turned to postponing the adoption of the new trading book rules by another year past the already extended target date of 2026—in the context of delays in the US and UK. The delay’s supporters hope to gain the time needed to make adjustments to the trading book regulation and render it capital neutral.

Currently, the aggregate CET1 ratio of EU banks is 15.73%; however the aggregate CET1 ratio of EU GSIBs is lower at 14.30%.

Pressure by large banks has encouraged the European Commission to launch a public consultation on the EU approach to implementing the FRTB, including raising the option of postponing the application date to January 1, 2027. Doing so is part of an effort to ensure a level playing field and keep EU banks competitive as compared to UK banks and US banks, which face unpredictable levels of regulation under the Trump administration.

Canada has implemented Basel III as well. However, its Office of the Superintendent of Financial Institutions has also indefinitely delayed increases to the Basel III capital floor, citing tariff-induced economic uncertainty and slow progress by other countries. Failure to implement the capital floor could seriously dilute Basel III if other countries follow suit.  By comparison, Japan and Switzerland have fully implemented Basel III standards in their domestic regulatory frameworks.

Divergent implementation timelines and an uneven regulatory landscape have raised concerns about global regulatory fragmentation. Widespread fragmentation of trade and investment flows driven by heightened geopolitical tension have undermined international trust and willingness to cooperate across national borders. With the combination of these factors, the overall trend toward global regulatory fragmentation will pose growing risks to international financial stability and should be closely monitored by the financial regulators of major countries.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center and senior fellow at the Policy Center for the New South. Formerly, he served as a senior official at the International Institute of Finance and International Monetary Fund.

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In her traditional Global Policy Agenda speech, the IMF managing director, Kristalina Georgieva, sought to temper market anxieties and reassure member countries. She struck a tone of cautious optimism and underscored the Fund’s institutional preparedness while candidly acknowledging a range of serious global risks. She outlined three interlocking priorities to frame the week’s deliberations: (1) resolving trade tensions and restoring confidence, (2) safeguarding economic and financial stability, and (3) reviving medium-term growth through structural reforms.

Acknowledging the gravity of the moment, Georgieva stated, “We’re not in Kansas anymore,” a metaphor underscoring the unfamiliar and turbulent terrain the global economy now faces. She advocated for a comprehensive and coordinated settlement among major economies aimed at rolling back trade barriers, reducing policy uncertainty, and restoring the openness of global trade flows. She warned that prolonged ambiguity was already suppressing investment and eroding consumer confidence.

In this context, the IMF reiterated its longstanding position that both tariff and non-tariff barriers must be lowered to preserve multilateralism. However, the challenge extends beyond immediate trade disputes. Structural imbalances—including China’s elevated savings and weak domestic consumption, the United States’ sustained fiscal deficits, and the European Union’s incomplete economic integration—are increasingly viewed as drivers of systemic strain. To correct these asymmetries, the IMF recommended: (1) stimulating domestic demand in China, (2) advancing infrastructure investment and market integration in Europe, and (3) embarking on credible fiscal consolidation in the United States. The IMF portrayed these national adjustments as preconditions for global macroeconomic rebalancing and long-term resilience.

The second thematic pillar—economic and financial stability—highlighted the narrowing margin for error after years of policy stimulus in response to the pandemic, inflationary shocks, and geopolitical disruptions. Georgieva’s appeal to “get your house in order” captured the moment’s urgency. She urged countries to reinforce their fiscal foundations by implementing credible and transparent medium-term frameworks.

While she broadly encouraged gradual deficit reduction, Georgieva gave particular attention to low-income and emerging economies, which are confronting acute debt vulnerabilities amid tightening global financial conditions. For these nations, the policy agenda emphasized enhanced domestic revenue mobilization, improved public financial management, and proactive engagement with debt restructuring mechanisms. On the monetary front, Georgieva advised central banks to remain guided by incoming data and preserve their operational independence, while continuing to focus on price stability. The meetings also addressed mounting concerns over the stability of the financial system, including the risks posed by non-bank financial intermediaries, and called for more robust regulatory oversight and international coordination.

Finally, the IMF’s managing director placed renewed emphasis on the structural transformation needed to revive medium-term growth. As Georgieva declared, “Now is the time for long needed but often delayed reforms.” With global potential growth trending downward, she plainly acknowledged the limitations of monetary and fiscal policy.

Instead, discussions centered on national reform agendas tailored to each country’s specific institutional context. These included measures to improve the business climate, enhance governance and the rule of law, modernize labor and product markets, and strengthen innovation ecosystems and digital capacity. For emerging and developing economies, the imperative to expand access to finance, invest in human capital, and build sustainable infrastructure was seen as crucial to catalyzing private sector participation. Climate resilience and inclusive growth were integrated into the broader reform discourse, reflecting the growing consensus that sustainability must be embedded in long-term economic strategy. The IMF committed to supporting member countries in these efforts through targeted instruments—such as the Resilience and Sustainability Trust—alongside bespoke policy advice and capacity development.

A pivotal intervention during the meetings came from US Secretary of the Treasury Scott Bessent, who addressed the Institute of International Finance with a call for the IMF to return to its original mandate. He criticized the Fund’s perceived “mission creep” into areas such as climate, gender, and inequality. He acknowledged these issues as important, but potentially distracting from the IMF’s core objectives of macroeconomic stability, balance of payments support, and monetary cooperation. Bessent reaffirmed US support for the Fund and the World Bank, while clarifying that continued engagement would hinge on institutional discipline, rigorous program conditionality, and a sharper focus on correcting global imbalances. His remarks signaled not just a recalibration of US expectations, but a broader ideological debate over the role of multilateral financial institutions in a fragmenting global order.

Georgieva’s response the following day was diplomatically calibrated. In an April 24 press briefing, she welcomed continued US engagement and described Bessent’s comments as constructive. “The United States is our largest shareholder… of course, we greatly value the voice of the United States,” she remarked, interpreting the speech as a reaffirmation of US commitment at a time when political rhetoric had raised fears of disengagement. She acknowledged the legitimacy of US concerns and noted that ongoing institutional reviews—including the Comprehensive Surveillance Review and the Review of Program Design and Conditionality—would serve as venues for deeper discussions. These mechanisms, she suggested, provide space to reexamine priorities, refine programs, and ensure alignment between the Fund and its major stakeholders.

But what do US concerns about the IMF’s direction truly entail, and how might they be addressed in the upcoming policy reviews? It is crucial to recognize that, despite holding over 16 percent of the Fund’s voting power, the United States cannot unilaterally block the IMF executive board’s approval of the regular Comprehensive Surveillance Review. This implies that the most consequential negotiations will, as is customary, occur informally and behind closed doors. We can anticipate that the US executive director’s office will try to shape a draft document that aligns with Washington’s preferences.

However, the United States is not the only influential voice at the table. Other member states—many of whom have divergent priorities, particularly on issues such as climate integration, social inclusion, and the future scope of macroeconomic surveillance—will also seek to assert their positions. The previous surveillance review in May 2021 introduced climate macro-criticality into Article IV consultations for the twenty largest greenhouse gas emitters. Whether the United States can successfully build a broad coalition to revise the surveillance framework in line with its renewed emphasis on “core” macroeconomic fundamentals remains to be seen.

Yet despite the Spring Meetings attendees’ efforts to project cohesion and forward momentum, the underlying global outlook remains clouded by persistent uncertainty. Geopolitical tensions, rising debt burdens, and diverging monetary policy trajectories continue to weigh on policy coordination platformed by the IMF.

As attention shifts toward the 2025 annual meetings this October, critical questions will come into sharper focus. Can the IMF meaningfully recalibrate its surveillance priorities? Will members find the political will to realign quotas and governance structures? How will the Fund balance its evolving role with the demands for institutional discipline? These meetings will not merely be another milestone in the global economic calendar—they may well constitute a stress test for the resilience of the postwar international system and its ability to adapt in an increasingly complex, multipolar world.

Bart Piasecki is an assistant director at the Atlantic Council’s GeoEconomics Center.

The views and opinions expressed herein are those of the author and do not reflect or represent those of the US Government or any organization with which the author is or has been affiliated.

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Twelve years after his own surprise election, how much did Pope Francis actually succeed in reshaping the church’s leadership? Here’s one way to look at it.

To understand the Church’s shifting priorities amid an evolving Catholic demography, we compared the economic profiles of the cardinal electors who selected Pope Francis in 2013 and Pope Leo’s 2025 conclave. This time, around 32 percent of Cardinals in the conclave came from countries in the bottom half of world gross domestic product (GDP) per capita, a notable rise from around 22 percent in 2013. Under Francis’s pontificate, the profile of the “median cardinal elector” shifted towards lower GDP per capita nations by 12 percentage points. Still, the majority of electors hail from middle to higher-income countries, partly reflecting the geographic concentration of the world’s 1.4 billion Catholics.

This shift among the cardinal electors mirrors the broader trend: the Catholic Church’s growth, and thus its future, is increasingly in emerging economies. In Africa and Asia, the Catholic population has expanded faster than their overall population growth, while North America experiences slower growth and Europe a reversal. Pope Leo XIV will have to continue adjusting to the Church’s new demographic reality.

Israel Rosales is a consultant with the Atlantic Council GeoEconomics Center.

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

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The post Pope Leo XIV’s electors represented Catholics’ changing economic distribution appeared first on Atlantic Council.

At the same time, threatening allied countries and fellow NATO members with tariffs or invasion upends any potential cooperative economic statecraft with these same states. It may seem like business as usual in certain corridors of the executive branch. The reality is that trade tensions and geopolitical shake-ups rattling traditional US alliances are weakening these tools and exacerbating business uncertainty at a time when the global economy may be least able to afford it.

As a force multiplier, partnerships are key to effective economic statecraft. To paraphrase Daleep Singh, former US deputy national security advisor for international economics, the force of economic statecraft is directly related to the size of the coalition implementing and enforcing the authorities. Multilateral sanctions and cooperative targeting amongst allies have been key pillars of US sanctions policy to date. They reinforce legitimacy by demonstrating agreement across governments and enable safe and legitimate markets to take shape, compounding confidence in the global flow of goods and services. Yet the actions of the current US administration—in many ways picking up where it left off—are straining US relations with stalwart friends like Canada and the European Union (EU). Ursula von der Leyen, the president of the European Commission, went so far as to say that “the West as we knew it no longer exists.”

The fracturing of traditional alliances carries significant consequences for companies facing multijurisdictional compliance obligations, meaning an already complex situation will become more chaotic. The United States used to expend significant diplomatic effort to convince its allies to harmonize sanctions and trade controls. This level of cooperation can no longer be taken for granted and may lead to more significant divergence, particularly regarding Russia. The Kremlin has already requested various forms of sanctions relief in exchange for a ceasefire in Ukraine. The United States has also quietly delisted some high-profile targets like Karina Rotenberg and Antal Rogan, with the secretary of state going so far as to publicize that Rogan’s “continued designation was inconsistent with US foreign policy interests.” Companies are taking notice, too. Raiffeisen Bank International, after years of concerns over its business in Russia, is reportedly slowing its efforts to exit Russia with the notion that “rapprochement between Washington and Moscow” may be in sight.

This complexity was foreshadowed in the wake of Russia’s February 2022 reinvasion of Ukraine and the 2018 US “maximum pressure” sanctions campaign against Iran. These events led to greater discord between US and allied sanctions and may contain clues for how the present situation could evolve. For example, when the first Trump administration withdrew from the Iranian nuclear deal, the EU expanded its “blocking statute.” The statute was intended to protect EU companies engaged in otherwise lawful business from the effects of extra-territorial application of US sanctions, but it ultimately produced a series of headaches and lawsuits for major multinational companies. Will the United States attempt the same, and try to shield US persons from EU and United Kingdom (UK) sanctions? Major multinational companies suddenly freed from the burdens of US sanctions may find themselves held back by EU or UK and risk drawing the ire of the US government if they err on the side of caution so as not to violate European laws.

The United States cannot expect to practice status quo ante economic statecraft while simultaneously trying to reshape the global order. US allies rightfully followed the lead of prior US administrations in establishing robust tools of economic statecraft, and these will not be “deleted” at the whims of the United States—if anything, present conditions suggest the EU may need to strengthen these tools. At the current rate, US actions are likely to produce a number of adverse consequences beyond diplomatic disunity and compliance nightmares. The United States may drive illicit finance into the US economy, for instance, if major US clearing banks are compelled to handle Russia-related transactions and the administration is already deemphasizing anti-corruption initiatives.

To be sure, US lawmakers may have leverage to prevent the Trump administration from providing wholesale sanctions relief. Some members are pushing for strong, new sanctions requirements tied to any Ukraine ceasefire deal. The negotiations between Presidents Trump and Putin and their teams are unpredictable, to say the least. However, it is becoming clear that no matter what the future holds, we may have already seen the zenith of transatlantic synchronization on sanctions and trade controls. The nadir is shaping up to be a mess.

Jesse Sucher is a nonresident senior fellow at the Atlantic Council’s Economic Statecraft Initiative.

The views and opinions expressed herein are those of the author and do not reflect or represent those of the US Government or any organization with which the author is or has been affiliated.

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First, the significant effect that government-led instant payment systems can have on citizens and the financial market transforms financial inclusion and market structures. Second, decisions made during the early stages of the process, such as system pricing and ownership structure, shape the power dynamics between local and international players, as well as incumbent and new entrants. 

These lessons are shaping an emerging framework governments can use to evaluate their need for central bank-led immediate payment systems, their potential structure, organizational features, and trade-offs involved in implementing a similar approach. The framework is composed of a three-step approach, including prerequisite weighting (i.e., “do we need this system”), the preparations needed to hit the ground running, and the process of setting up new immediate payment systems.

Pix and UPI: Initial development to growing pains

But first, it’s important to understand how immediate payment systems have developed into what they are today. 

Over the last decade, India and Brazil launched their instant payment systems, UPI and Pix, on a national scale, reshaping their payment landscapes. With 350 million UPI users and 140 million Pix users, about 25 percent of India’s population and approximately 65 percent of Brazil’s population use the systems. One of every eleven adults in the world uses either Pix or UPI to send or receive immediate payments. 

Brazil’s immediate payments policy is a payments-first approach. The Brazilian Central Bank (BCB) owns Pix and pushes it to cooperate with domestic private market players, focusing mainly on immediate payments and adjacent products. The system was launched in 2020 after a two-year ideation and development period.

Pix is the most quickly adopted immediate payment system in the world. As of the second quarter in 2024, it had reached 15.4 billion quarterly transactions. Its growth was fueled by a high degree of cooperation with the local financial ecosystem, as well as the fact that institutions with over 500,000 transacting accounts were required to participate, creating a network effect.

India developed UPI as a part of its Digital Public Infrastructure (DPI) program and implemented it as a part of a broad tech stack. Its approach to both DPI and UPI has long been for the state to develop the basic infrastructure, including a digital identity pillar, data exchange pillar, and payments pillar, allowing private sector innovation on top of the existing system.

UPI was developed under the National Payments Corporation of India, which is independent of India’s central bank and owned by various private banks. It became India’s most popular digital payment method, processing over 75 percent of the nation’s retail digital payments.

However, UPI’s growth was initially slow. It only reached 10 million monthly transactions in 2017 and took about three years to reach 1 billion monthly transactions. The growth was later expedited due to India’s demonetization, which started in 2016, the COVID-19 transition away from cash, and internationally backed payment providers entering the market.

Both Pix and UPI have significantly increased financial inclusion, supported growth in the fintech sector, and become the payment standards in their respective countries. However, their impact has not been entirely positive. Their use has also increased fraud and reshaped the power balance between different players in their markets.  

Winners and losers: Market impacts in Brazil and India 

Both systems transformed their respective markets, benefitting some players and reducing the market power of others. 

The table below provides a snapshot of the market dynamics, highlighting each of the key players, their initial power and interest mapping (green for high, yellow for medium, and red for low) and the power shifts in the market caused by Pix. Power shifts are categorized into market share and decision-making power—red with a downward-facing arrow indicates a decrease, green with an upward-facing arrow signifies an increase, and yellow represents retained power or a mixed trend.

In Brazil, Pix has transformed the financial sector by benefiting new domestic players while challenging incumbents and credit card schemes. 

Brazilian neobanks and fintech startups have grown significantly by leveraging Pix’s cost model to attract new customers. They take advantage of the optional fee structure for its value offer, including no fees for consumers and bearing the mandatory fees for businesses. Eliminated transaction fees and immediate payments increased consumer trust. It made digital payments more accessible, particularly for the previously unbanked population. Small businesses and micro-entrepreneurs have also gained access to low-cost, instant transactions, fostering financial inclusion and reducing reliance on cash. This, in turn, drove an increase in such banks’ target addressable market (i.e., relevant customer base).

However, traditional banks and credit card networks have been disrupted. Before Pix, Brazilian banks charged significant fees for interbank transfers, but Pix’s free and instant model eroded this revenue stream. As a result of Pix’s launch, traditional banks’ revenue from payments decreased by 8 percent between 2020 and 2021.

Credit card companies are seriously threatened by Pix. In 2022, BCB’s governor predicted that Pix would make credit cards obsolete. However, transaction data tells a more complicated story. With Pix introducing new consumers into the market, banks are leveraging “maturing cohorts” of consumers to offer them credit cards. Before Pix, credit card payment volumes were at a 12.7 percent annual CAGR (compound annual growth rate) between 2018 and 2020. After the launch of Pix, CAGR almost tripled, reaching 31.7 percent between 2020 and 2022.

UPI’s rapid adoption in India similarly transformed the power balance in the market and benefitted payment technology providers. 

Large-scale third-party application providers (TPAPs), particularly Google Pay and PhonePe, dominate the UPI transaction space, accounting together for over 80 percent of UPI transactions. These players leveraged UPI’s no-cost model to gain significant user adoption. Consumers and merchants have also benefited from seamless, real-time payments without additional fees. 

However, traditional banks struggle with UPI’s zero-fee structure, as it increases transaction volumes and associated costs without direct revenue gains. Some banks have pushed for the introduction of transaction fees to compensate for operational costs. For that reason, in 2022 RBI introduced subsidies for small transactions to banks, which they can share with TPAPs. In 2024, these accounted for 10 percent of PhonePe’s annual revenue. Credit card companies have also faced increasing competition. However, similar to Brazil, credit card usage volume has actually increased following UPI’s scaling. From a declining CAGR of 7.3 percent between 2018 and 2020 in payment volume, after UPI scaled, credit card growth reached a 24.2 percent CAGR between 2020 and 2022.

Big tech vs. local tech: Divergent approaches

A key distinction between Pix and UPI is their approach to global technology firms (“big tech”) and multinationals generally.

BCB has actively blocked big tech from entering the market, emphasizing the need for domestic control over digital payments. This approach is part of a general policy to strengthen the domestic ecosystem over incorporating multinational players. In 2020, for example, BCB suspended WhatsApp’s Brazilian immediate payments offering launch. It cited regulatory concerns and the potential risk to financial stability, launching Pix later that year. This strategy has helped the local fintech ecosystem and brought domestic players, mainly neobanks, to the front of the stage. 

In contrast, India’s approach has allowed big techs and multinational players to participate in the UPI ecosystem and often relied on them for last mile delivery, and consumer onboarding, driving its scaleup. Google Pay and PhonePe, respectively backed by Alphabet and Walmart, quickly dominated.They could offer payments as a loss leader (i.e., sell at a loss to attract customers to other, profitable products) while benefiting from other products over time. 

While doing so accelerated lagging adoption rates, it has also led to concerns about data privacy and market concentration. 

The Indian government has since explored regulatory measures, such as imposing a 30 percent market share cap on individual TPAPs, though enforcement has been repeatedly delayed. Another claim voiced by government officials in the debate is that, given UPI’s universal nature, providers are interchangeable, thus eliminating anti-competitive claims.

This divergence in strategies and outcomes reflects the broader debate about whether emerging economies should embrace or limit big tech’s role in financial infrastructure.

Stages of implementation

Based on Brazil and India’s experiences, a three-stage framework emerges for countries considering immediate payment systems adoption.

The first stage of weighting prerequisites involves assessing the need for a state-led payments system based on three factors: the existence of alternatives (e.g., a strong credit card presence), expected change (primarily driven by the level of financial inclusion, development costs, and the size of the economy), and state capacity. As a result, countries with low banking penetration and high reliance on cash are more likely to benefit from such systems. 

The second stage involves getting ready to hit the ground running, focusing on implementation and scaling. Understanding the existing market conditions and the shifts anticipated from the introduction of the system is crucial. Additionally, selecting an appropriate governance model—whether a central bank-led approach like Pix, a consortium-led model like UPI, or a provider model—plays a vital role in determining long-term implications. Lastly, the fee structure will also influence both adoption and market entry and should be actively established at this stage. 

The final stage involves setting up a long-term process by establishing cooperation mechanisms and managing externalities. Policymakers must implement regulatory adjustments based on market responses to address issues such as monopolization and consumer protection against fraud. They should also explore engagement mechanisms for local players through forums and bilateral consultation schemes, focusing on gaining knowledge and legitimacy as well as efficiency considerations. 

While many regions worldwide consider the future of payments, this framework can serve as an initial point of assessment. There is no perfect “one size fits all” solution. However, states’ varied ability to execute and enforce participation, the size of their economies, and the preexisting market structures significantly influence decisions concerning the “what” and the “how” of launching immediate payment systems.

Pix and UPI offer several additional insights into how state-led payment systems can reshape economies. 

While Brazil focused on domestic financial players and regulatory control, India leveraged global technology firms for swift adoption. Consequently, Brazil fostered the expansion of its local fintech ecosystem, while India established an environment with significant multinational involvement. 

In both cases, incentives for private market players aligned to support the growth of credit card provision as a subsequent step after initially introducing consumers to the financial system through Pix and UPI. While there is room for discussion about the implications of this step, it is a definitively critical point to consider when launching such systems and weighing their outcomes.

Lastly, the key lesson from these models lies in the decisions made by policymakers to initiate transformative processes. Both models illustrate the potential of such systems to enhance financial inclusion, disrupt traditional banking, and reshape economies, thereby aiding in their advancement. These lessons from UPI and PIX can be narrowly applied to public sector entities looking to create state-led systems, however, it is important to consider that market structure transformation might not be the ideal solution for every economy, especially more advanced economies which have a larger share of private sector players. Ultimately within a jurisdiction, policymakers bear the ultimate responsibility of acting to launch immediate payment systems.

Polina Kempinsky is a second-year Master of Public Policy student at the Harvard Kennedy School. This paper is part of Polina’s PAE (Policy Analysis Exercise) for her program, which explores the instant payment systems of Brazil and India.

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

Learn more

The post Fast payments in action: Emerging lessons from Brazil and India appeared first on Atlantic Council.

After Russia’s illegal full-scale invasion of Ukraine in February 2022, Western partners imposed unprecedented financial sanctions and export controls against Russia. These measures aim to achieve three objectives:

1. Significantly reduce Russia’s revenues from commodities exports;
2. Cripple Russia’s military capability and ability to pursue its war;
3. Impose significant pain on the Russian economy.

The Atlantic Council’s Russia Sanctions Database tracks the restrictive economic measures Western allies have placed on Russia and evaluates whether these measures are successful in achieving the stated objectives and bringing lasting peace to Ukraine. The Database is now static and was last updated in November 2024. You can access the final version here.

Sanctions have emerged as a central element of negotiations between the United States and Russia over the ceasefire in Ukraine. April 20 has been reported as a date by which US President Donald Trump intends to reach a ceasefire deal with Russia, although Russia is attempting to delay progress. However, excluding Ukraine and the EU from the negotiations could undermine Washington’s sanctions strategy—whether this involves lifting or intensifying them, both of which have been suggested by the Trump administration at different times. Considering the centrality of sanctions in the Ukraine negotiations, this edition of the Russia Sanctions Database:

1. Explains who controls which economic leverage over Russia
2. Assesses Russia’s negotiating power based on the performance of its economy
3. Analyzes the implications of lifting sanctions on Russia for US global dominance in energy and finance

What type of economic influence do Western powers exert on Russia and who controls it?

The United States maintains significant economic leverage over Russia as a result of sanctions and the traditional strength of the dollar in the global economy. However, the EU, as a historical trading partner with Russia, controls the levers causing Russia the most economic pain. The United States cannot deliver the economic relief Russia is seeking on its own and will need to work with its European partners on a negotiated settlement.

The United States maintains leverage over Russia’s oil revenues from China and India. The main economic leverage of the United States over Moscow is Washington’s ability to prevent Russian oil exports to China and India with secondary sanctions. Oil revenue is the lifeline of the Russian economy, and the rerouting of oil shipments from Europe to China and India as a result of the price cap and other restrictive measures kept the Russian economy afloat since 2022. This changed when the United States created the Russia secondary sanctions authority at the end of 2023 and expanded the definition of Russia’s military-industrial complex in 2024 to capture more entities and activity under secondary sanctions. Oil payments from China were suspended or delayed over Chinese banks’ concerns about secondary sanctions. On January 10 of this year, the Treasury Department designated two of Russia’s most significant oil producers and exporters—Gazprom Neft and Surgutneftegas—which resulted in Chinese and Indian refineries canceling their orders of Russian oil and looking for alternative suppliers in the Middle East. Further, on March 12, General License (GL) 8L, which allowed for energy transactions with sanctioned Russian entities pursuant to the price cap, expired. Companies that continue to transact with sanctioned Russian energy entities are exposing themselves to the threat of US sanctions. Thus, the main lever of the United States over Russia right now is its ability to influence China and India’s decisions to continue or discontinue importing Russian oil.

The EU is home to SWIFT. The EU and its member states control the outcome of one of Russia’s primary demands within the Black Sea ceasefire negotiations—reconnection to SWIFT. Certain Russian financial institutions were “de-SWIFTed” when the EU sanctioned them in 2022. Russia is demanding reconnection with SWIFT as a precondition for a ceasefire in the Black Sea. But if the United States unilaterally decides to lift its sanctions on Russia as part of the negotiated deal over the war in Ukraine, Russia will still be subject to European sanctions and restrictions. The EU has indicated its sanctions on Russia will remain in place until the “unconditional withdrawal” of Russian troops from Ukraine. In fact, Europe is considering additional sanctions on Russia according to a joint statement by the foreign ministers of Spain, Germany, France, Italy, Britain, and Poland. Because SWIFT is based in Belgium and must comply with EU law and sanctions, the EU is the primary arbiter of Russia’s reconnection to SWIFT.

The EU and its member states control Russia’s energy exports to Europe. The United States no longer imports Russian oil, and nor does the United Kingdom. Prior to Russia’s invasion of Ukraine in 2022, Russia was the largest source of EU imports of oil and gas. Russia rerouted its oil exports to China and India using a shadow fleet in response to the Group of Seven price cap and sanctions, which allowed the Russian economy to stay afloat. In the case of gas, Russia decided to stop the flows of pipeline gas to stymie European support for Ukraine, which did not work due to warm winters and US LNG. Russia ended up losing access to the lucrative and geographically proximate European market for both oil and gas exports. The price cap has also negatively affected Russia’s revenue from oil sales. The EU will decide if and when Russia regains access to the European energy market, and if the price cap and other restrictive economic measures the Europeans impose are lifted.

The EU and its member states control the majority of Russia’s blocked assets. Out of the estimated $280-300 billion worth of blocked Russian Central Bank and National Welfare Fund assets, at least $5 billion sits in the United States. Euroclear, a Belgium-based Financial Market Infrastructure service provider, holds approximately $210 billion, making the EU the most relevant decision-maker on the fate of the assets.

Western powers have more diffuse control over measures such as exports of sensitive technology, but the measures listed above are clear chokepoints. Ensuring that the United States and EU move together in sanctions removal or escalation against Russia will be critical in shaping effective outcomes that ensure stability and peace for Ukraine.

Assessing Russia’s negotiating position based on the performance of its economy

Putin is trying to prolong negotiations while pushing Washington to remove sanctions. Russia’s willingness to negotiate reflects the state of Russia’s economy and challenges in financing its costly war. In the weeks leading up to the thirty-day energy ceasefire—which has been in place since March 25 and intended to stop strikes on both parties’ energy infrastructure—Russia’s industry and trade ministry asked Russian companies to identify which sanctions Moscow should seek to have lifted during peace talks. Participants in the inquiry—many of whom work as major exporters, consultants, lawyers, economists, and advisors—identified sanctions on energy and payment systems to be the most painful and the first they would like to see come down. Gazprom, a Russian energy giant, has been hit the hardest by sanctions. For the first time since 1999, Gazprom recorded a net loss of $7 billion in 2023 and a net loss of $12.89 billion in 2024. Sanctions on Russian oil have squeezed its lucrative oil trade, with reports that Russian oil cargoes are stuck at sea as companies struggle to find buyers. In February 2025, Russia’s export volumes of seaborne crude oil fell by 9 percent on a month-over-month basis, while export revenues decreased by 13 percent.

Sanctions on Russia’s financial sector limited its ability to access international debt markets. To cover deficit spending, Russia has instead turned to domestic bond issuance as well as its National Welfare Fund (NWF), but three years into the war its liquid assets have shrunk by 60 percent. 2025 is predicted to be a difficult fiscal year for Russia and might be the last year it can rely on the NWF to cover its fiscal deficit. Russia’s corporate debt has surged by nearly 70 percent since 2022, with a large portion of this debt consisting of preferential loans that Russian banks made to its defense contractors. As Russia’s economy grows more precarious, sanctions relief for its financial sector could give the country some breathing room to fight the economic pressures created by sanctions. Relief could also mitigate inflation and economic overheating that prompted its central bank to increase interest rates to a high of 21 percent.

The combination of these factors explains why Russia demands that lifting sanctions be a precondition for any ceasefire deal. However, given Russia’s track record of violating ceasefire agreements, prematurely lifting sanctions could facilitate the recovery of the Russian economy while failing to achieve a meaningful ceasefire in Ukraine.

Implications of lifting sanctions on Russia for the US global dominance in energy and finance

Lifting sanctions on Russia will have implications not just for Ukraine, but also the United States’ global dominance in energy and finance. Policymakers will need to carefully consider options to lift sanctions against Russia.

Since 2022, the United States has played a crucial role in filling the energy gap left by Russia, particularly by becoming the world’s largest exporter of LNG. Over 80 percent of US LNG exports are now sent to Europe. Although 17 percent of Europe’s LNG imports still come from Russia, the EU has set a target to eliminate Russian oil and gas imports by 2027. A return to pre-war energy supplies is unlikely, even if sanctions are eventually eased. Consequently, the EU is increasingly turning to the United States for LNG to meet its energy needs, though continuing to do so is contingent on the United States’s ability to meet demand.

Under the Trump administration, the United States has worked to expand its LNG production by issuing additional project permits. However, some hesitation exists within the industry due to unpredictable capital costs and a poorer economic outlook, including the risk of rising material costs caused by the 25 to 50 percent tariffs on steel, which are vital for constructing LNG facilities. Moreover, the US natural gas market is heavily dependent on associated gas production from oil wells. Should sanctions on Russian energy be lifted, the potential increase in global oil supply could drive down oil prices, which might slow US oil drilling and reduce natural gas production.

Before the war, Russia had ambitious plans to increase its LNG exports to 100 million tons per year by 2030, up from just under 35 million tons in 2024. Despite the sanctions, Russia has reaffirmed its target to reach 100 million tons per year by 2035. Should sanctions be eased, Russia’s energy exports could experience a significant boost, especially if stalled projects like the Arctic LNG 2 and smaller LNG facilities such as Portovaya and Vysotsk resume. Together, these projects could add between 8.8 million and 16.4 million tons of LNG per year to global markets.

While the United States remains a dominant force in the LNG export market, Russia’s ambition to reclaim its position as a key global energy player means that it could once again emerge as a significant competitor to the United States. Sanctions relief, especially, could accelerate the development of Russia’s energy projects.

In addition to threatening ambitions for US global energy dominance, lifting sanctions on Russia could reduce US financial dominance, erode the power of US financial sanctions, and limit US visibility of transactions and potential sanctions evasion. Since 2014, when Russia was first sanctioned due to its invasion of Crimea, the Central Bank of the Russian Federation (CBR) has developed a Russian version of SWIFT called Sistema Peredachi Finansovykh Soobcheniy (SPFS). It also created the Mir National Payment System to avoid relying on American companies such as Mastercard, Visa, and American Express. The international reach of SPFS has expanded significantly since 2022, when ten major Russian banks were banned from SWIFT. As of 2024, SPFS included 160 foreign banks. Russian banks have also issued co-badged Mir and UnionPay cards, allowing Russians to take advantage of UnionPay’s substantial presence in 180 countries.

Russia is also the primary driver and advocate of the dedollarization agenda within BRICS. Moscow leverages BRICS as a platform to advocate adopting alternative currencies for trade and reserves, in direct conflict with the United States’ interest in maintaining dollar dominance. In fact, Trump has threatened to impose 100 percent tariffs on the BRICS members if they continue efforts to create a BRICS currency or “back any other currency to replace the mighty US dollar.”

Sanctions on SPFS and Mir payment systems thwart Russia’s ability to expand the reach of its alternative payment systems and to connect SPFS with China’s payment system, the Cross-Border Interbank Payment System. Mir has recently connected with Iran’s Shetab interbank network, which will allow for the use of respective bank cards in both jurisdictions. The CBR seeks to increase the number of countries using Mir from eleven to twenty-five by 2025 and has been in negotiations with several countries including China, Egypt, India, Indonesia, and Thailand. However, warnings and sanctions imposed by the United States in September 2022 caused many banks in Mir’s eleven operating countries to abandon the use of the payment system. Like Mir, sanctions have curtailed efforts to expand SPFS through deterrence and by limiting the domestic use of SPFS. In November 2024, the Office of Foreign Assets Control issued an alert warning that any foreign financial institutions and jurisdictions that join or already have joined SPFS may face sanctions pursuant to Executive Order 14024.

If US financial sanctions on Russia are lifted, Russia will almost certainly continue to expand the reach of its alternative payment systems and advocate for the adoption of alternative currencies. China and other BRICS members are likely to work with Russia on payment system integration if they are no longer facing the threat of secondary sanctions. Developing and integrating payment systems is a highly technical and complex process, and the use of non-Western currencies will also pose an additional challenge. However, Russia is likely to prioritize its work on financial payments if the United States lifts sanctions.

Conclusion

Western economic pressure on Russia has created the conditions that are bringing Putin to the negotiation table. As the US delegation continues to negotiate with Russian counterparts over a ceasefire deal and, ultimately, peace for Ukraine, it is crucial to remember that Russia is a US competitor in global energy dominance and has led the dedollarization agenda within BRICS. Sanctions relief for Russia carries consequences not only for Ukraine and Europe, but also for the United States’ goals to dominate in the global energy and financial sectors. It is equally important to have a clear understanding of the economic levers European allies control over Russia and ensure that the EU and Ukraine are actively involved in negotiations to shape effective outcomes.

Finally, the EU should uphold sanctions against Russia collectively, rather than shifting toward autonomous sanctions regimes. The EU needs to unanimously renew sanctions against Russia every six months. This year, the renewal of sectoral sanctions is due for January and July, while listings are due for renewal in March and September. Hungary disrupted the renewal process both in January and March, agreeing to it only after securing certain concessions from the EU. Recognizing that not being able to renew sanctions against Russia is now a possibility, EU officials and member states have started working on alternative solutions, including tariffing Russian imports and implementing autonomous sanctions. A fragmented EU sanctions approach would diminish the bloc’s collective economic leverage over Russia and risk exposing divisions within the bloc that Moscow could take advantage of.

Authors: Kimberly Donovan, Maia Nikoladze, Lize de Kruijf, and Nazima Tursun

Past editions

Russia Sanctions Database

November 2024 edition

After Russia’s illegal full-scale invasion of Ukraine in February 2022, Western partners imposed unprecedented financial sanctions and export controls against Russia. This edition includes the last update of the database.

Russia Sanctions Database

May 2024 edition

The Atlantic Council’s Russia Sanctions Database tracks the restrictive economic measures Western allies have placed on Russia and evaluates whether these measures are successful in achieving the stated objectives.

Russia Sanctions Database

November 2023 edition

Following Russia’s invasion of Ukraine in 2022, the West imposed severe sanctions and export controls. These measures aim to cut Russia’s export revenues, weaken its military, and damage its economy.

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The post Russia Sanctions Database appeared first on Atlantic Council.

After Russia’s illegal full-scale invasion of Ukraine in February 2022, Western partners imposed unprecedented financial sanctions and export controls against Russia. These measures aim to achieve three objectives:

1. Significantly reduce Russia’s revenues from commodities exports;
2. Cripple Russia’s military capability and ability to pursue its war;
3. Impose significant pain on the Russian economy.

The Atlantic Council’s Russia Sanctions Database tracks the restrictive economic measures Western allies have placed on Russia and evaluates whether these measures are successful in achieving the stated objectives.

The Database also centralizes the financial designations of more than five thousand Russian entities and individuals sanctioned by the Group of Seven (G7) jurisdictions, Australia, and Switzerland. The Database is updated quarterly and can be queried to determine if an individual or entity is designated. Please refer to the appropriate designating jurisdiction’s websites and platforms for additional information and confirmation. The data provided in the Database is intended for informational purposes only.

How to use this database to reveal sanctions gaps: Click on the check mark () and cross mark () filters at the top of each column. Doing so will build a list of entities/individuals that are sanctioned by one country but not by another.

The seven jurisdictions covered in this database are the United States, the United Kingdom, the European Union, Switzerland, Canada, Australia, and Japan. Data in the database was last updated on November 8, 2024

Objective 1: Significantly reduce Russia’s revenues from commodities exports

Lengthening of global oil trade routes

Restrictive economic measures against Russia’s energy sector have caused major restructuring of the global oil market and lengthening of oil trade routes, but Russia is still generating revenue from oil exports to India and China. 

When the European Union (EU) banned seaborne Russian oil imports, the United States stepped in and became the largest supplier of crude oil to Europe. US crude oil exports to Europe increased by 23 percent in June 2024 year on year. However, as the United States became the top oil exporter to Europe, it lost half of its share of the Indian market. India opted for cheaper Russian oil as a result of the oil price cap and cut US crude oil imports by 47 percent in 2023. 

This reshuffling in the global energy market resulted in the lengthening of oil trade routes: The United States and the Middle East are shipping oil to Europe, while Russia is shipping oil to India and China, which in some cases re-export refined Russian oil to Europe. 

Longer oil trade routes created new loopholes in the Group of Seven (G7) sanctions regime. For example, since the G7 does not have import restrictions on refined Russian oil from third countries, Europe has been buying Russian oil products such as fuel from India, lengthening the supply chain even more. Between December 2022 and December 2023, the price cap coalition members imported about nine billion dollars worth of Russian-origin oil products from India and other third countries.

Additionally, longer, multiparty trade routes are also ultimately related to enforcement issues. In response to the oil price cap, Russia has built up a shadow fleet of tankers that can easily take advantage of these routes. At the same time, Russia has developed a multiparty blending market against which sanctions are proving more complicated to enforce. 

Russia seems to be repeating Iran’s sanctions evasion playbook, which has been to re-export blended and refined crude oil through third countries. It might be time for the G7 to take a more comprehensive step and replace the oil price cap with sanctions on Russian oil. The price cap leaves much room for maneuvering both for Russia and third countries to profit from re-exporting. Sanctioning Russian oil would significantly increase global oil prices and negatively impact the global economy. However, if India were to stop importing Russian oil, Russia would lose a significant market for its crude oil, perhaps even becoming fully dependent on China just like Iran, who has to sell oil at a much lower price than Russia.

The Treasury Department’s November 21 action designating Gazprombank demonstrates the Biden administration’s resolve to restrict Russia’s ability to generate revenue from commodity exports. Gazprombank was previously designated by the United Kingdom, Australia, New Zealand, and Canada.

Proposed G7 restrictions could irreversibly damage the global diamond industry  

The G7 has introduced phased prohibitions on the imports of Russian-origin non-industrial diamonds. They are likely to cause shock waves in the global diamond industry, but it is unclear whether they would weaken Moscow’s ability to finance the war on Ukraine. Russia’s diamond industry generates about $3.8 billion in revenue annually, a minuscule amount compared to the about $100 billion Russia received in oil and gas revenues last year. While not being a critical commodity exporter for Russia, the Russian state-owned diamond mining company Alrosa has the largest share of the global diamond market (31 percent) and produces 35 percent of the world’s rough diamonds. This asymmetry implies that diamond restrictions will not impact Russia’s war chest, but will negatively impact the $100 billion global diamond industry. 

Russia still continues to profit from diamond sales despite sanctions. For example, in 2023, Hong Kong imported $657.3 million worth of diamonds from Russia, a dramatic 1,700 percent increase from the previous year. However, countries at the low end of the supply chain, such as India, that refine and polish diamonds and other precious gems, will no longer be able to re-export polished Russian diamonds to the G7. This will especially impact India which will have to either export polished Russian diamonds to other markets or import rough diamonds from other countries. In either case, India’s diamond industry will suffer from major supply chain restructuring. 

The G7 countries are in the process of creating new requirements for tracing the origins of all diamonds before they enter G7 and EU countries. The “mandatory traceability program” will go into effect on March 1, 2025 and will likely increase compliance costs across the diamond industry. In particular, the EU will require all non-Russian diamonds to go through Antwerp, Belgium to verify their origins. Industry leaders have expressed concerns about bottlenecks and the advantage Antwerp would be getting over other sellers in case this mechanism is approved. 

The World Federation of Diamond Bourses has acknowledged the need to trace diamonds’ origins but raised concerns about the plan the G7 has suggested. The cost of compliance with sanctions, including the cost of shipping diamonds to Belgium while paying for freight insurance will likely increase the price of non-Russian diamonds, ultimately making Russian diamonds comparatively less expensive and therefore more attractive to consumers. 

The G7 governments should take into consideration concerns from the world’s diamond industry and African stakeholders, and create the space for diamond experts to present an alternative plan for traceability that meets the G7’s intent.

Objective 2: Cripple Russia’s military capability and ability to pursue its war

Can India manage to enjoy the benefits of trading with Russia without facing the consequences?

After the United States pressured the United Arab Emirates and Turkey to comply with critical technology export controls on Russia, India has emerged as a primary transshipment hub and the second largest supplier of restricted technology to Russia. As it turns out, Russian authorities began finding solutions to transact with Indian companies through clandestine channels shortly after Russia invaded Ukraine. 

When the G7 imposed sanctions on Russia, India increased imports of cheap Russian oil. India was paying Russia in rupees for a portion of these imports, resulting in Moscow accumulating a considerable amount of rupees it could not spend anywhere else, similar to the phenomenon with China that we discussed in our analysis of the “axis of evasion.” 

According to the Financial Times, by October 2022, Russia’s Industry and Trade Ministry made a secret plan that would kill two birds with one stone: Russia would buy sensitive electronic components from India with the 82 billion rupees (about one billion dollars) the Russian banks had accumulated from oil exports. The payments would take place in a “closed payment system between Russian and Indian companies, including by using digital financial assets”, and outside of Western oversight. It is difficult to determine if the plan worked because the Financial Times obtained the information about this plan from leaked Russian documents. However, given that India is now the second largest sensitive technology provider to Russia and Russian banks maintain branches in several Indian cities, it is safe to assume that it did. 

If everything follows the current trajectory, India will increase technology exports to Russia to address the massive trade imbalance with Moscow. Specifically, in the fiscal year ending in March 2024, New Delhi imported $65.7 billion worth of crude oil from Russia and exported only $4.26 billion worth of goods. To restore the trade balance, India exported items such as microchips, circuits, and machine tools worth more than $60 million both in April and May, and $95 million in July. Thus, it is now in India’s interest to export more electronics to Russia so it can correct the trade imbalance before the end of the fiscal year. 

The United States is aware of India’s increasing role in supplying Russia’s military-industrial complex with critical technology. The Treasury Department included nineteen Indian entities in its latest tranche of designations of Russia’s military procurement networks. At the same time, the State Department sanctioned more than 120 additional entities and individuals supporting Russia’s military-industrial complex, and the Commerce Department imposed export controls on forty foreign entities to prevent them from obtaining US technologies. One of the designated companies is Shreya Life Sciences, an Indian drugmaker that, according to the Treasury Department’s sanctions designation, has exported restricted high-end servers optimized for artificial intelligence to Russia. Indian authorities’ cooperation with the United States and G7 allies will be significant in ensuring Indian companies such as Shreya Life Sciences stop undermining the sanctions and export controls regime against Russia. 

As a starting point, the United States and its G7 allies should increase engagement with Indian authorities and encourage India’s Financial Intelligence Unit to share information through Egmont Group channels that may shed light on the closed payment channel that Indian companies supposedly used to transact with Russian companies, and whether this channel is still operational. Western allies should strongly encourage India to consider the exposure risk Indian financial institutions have with Russian banks that have been sanctioned or removed from the SWIFT messaging system and have branches in India, such as Sberbank, VTB Bank, and Promsvyazbank, as Indian financial institutions transacting with these Russian banks are subject to US secondary sanctions. 

Indian banks should consider their exposure to and risk of connecting with Sistema Peredachi Finansovykh Soobscheniy or “System for Transfer of Financial Messages” (SPFS). The Treasury recently warned foreign financial institutions that SPFS is considered part of Russia’s financial services sector. As a result, banks that join Russia’s financial messaging system may be targeted with sanctions.

Finally, the G7 partners should take into account India’s high dependence on imported energy. India imports 88 percent of its oil and is working toward increasing the role of renewables in the energy mix. Engaging with Indian authorities on finding alternative energy resources and suppliers would be a recommended next step for the G7 allies. This would also help India address the payment challenges it has experiencing with Russian authorities, who have been demanding that Indian companies pay Russian companies in renminbi instead of rupees.

Objective 3: Impose significant pain on the Russian economy

G7 countries issued unprecedented coordinated sanctions on Russia following Russia’s invasion of Ukraine in 2022. Western sanctions have significantly impacted Russia’s ability to fight its war and have made it more difficult for Russia to operate. There are indications that Russia’s economy is struggling. For example, the Central Bank of Russia recently increased the interest rate to 21 percent. Russia’s National Welfare Fund is declining as well as its export revenues as a result of sanctions. However, after nearly three years of war and sanctions, Western partners have not fully achieved their objectives. 

As the war continues on, the effects of restrictive economic measures are waning as Russia has created workarounds and mechanisms to transact and trade with its partners outside the reach of Western sanctions. Russia has adapted and evolved into a wartime economy. Measures such as export controls are making it more difficult for Russia to import battlefield technology and materials. However, Russia is finding solutions such as partnering with Iran and North Korea to obtain missiles, unmanned aerial vehicles, and other military equipment. 

Further, Russia is not the only country affected by Western sanctions. Russia’s neighboring countries are struggling to comply with sanctions as they have historically relied on economic ties and trade with Russia and have few opportunities to develop alternatives. Meanwhile, entire industries, including oil and precious gems, have had to develop and implement new ways of doing business and adjust to sanctions compliance. Technology companies also continue to have trouble complying with export controls. Their sensitive Western technology and dual-use goods continue to end up on the battlefield in Ukraine.

Going forward, Western partners must continue economic pressure on Russia in concert with military assistance to Ukraine. Sanctioning Russian oil will be critical in imposing pain on the Russian economy since oil and gas revenues filled one-third of Russia’s budget in 2023. However, if the United States and its G7 allies continue to leverage economic measures to change the course of wars and behaviors of states, they will need to have clearly outlined objectives and measures of assessment before pulling the trigger on sanctions. Developing a comprehensive understanding of the industries such measures will target will be critical for managing expectations of what sanctions can achieve, and what ramifications they will have for the global economy. 

Above all, the United States and G7 allies need to recognize that the use of economic tools comes at a cost, such as oil price increases and supply chain reshuffling. Economic tools avoid the damage of human deaths, but they require economic and financial sacrifice. It is now up to the G7 allies to decide what is a bigger priority: Oil prices or international security. 

Authors: Kimberly Donovan and Maia Nikoladze

Contributions from: Mikael Pir-Budagyan

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The post Russia Sanctions Database: November 2024 appeared first on Atlantic Council.

Background to CFIUS reviews of foreign investment

CFIUS reviews strengthen US efforts to maintain national security by ensuring governmental review and national control of essential industries. Established to limit foreign control of US critical infrastructure and emerging technologies, CFIUS has grown to encompass major parts of the US economy.

CFIUS allows the US government to review investments into a wide range of sectors by foreign actors, state-owned companies, or private businesses with majority foreign ownership. These include traditional infrastructure and raw material production such as electricity and steel, as well as sectors essential to the modern economy such as semiconductors and artificial intelligence (AI).

In an attempt to further strengthen US government oversight and limit Chinese investment in US critical infrastructure, the Trump administration has issued the National Security Presidential Memorandum (NSPM). The NSPM relies heavily on updating and expanding CFIUS to include more sectors, strengthen CFIUS reviews, limit mitigation measures, and reshape exemptions.

However, the NSPM does nothing to fix the underlying issues which plague CFIUS and place limitations on cross-border investments into the United States from allies. 

Application of trusted partner exemptions matters

The largest complications surrounding CFIUS center on review of investments from fellow Western democracies and clearance process timelines. The NSPM offers the solution of a white list to expedite and clear investment from like-minded countries more easily, but the list poses more questions than solutions.

CFIUS currently includes specific exemptions, including surrounding investments by those with citizenship from trusted national security allies. The proposed white list would include additional trusted countries with appropriate approaches to China. This would be paired with a “fast-track” process for investments which fit these requirements.

However, in practice, existing exemptions have done little to provide certainty or clearance for investors. Nippon Steel’s proposed investment in US Steel illustrates the difficulty for investments which should be clear cut. This investment is from a critical security partner and longtime Asian ally, yet it continues to face numerous hurdles.  Despite offering a clear alternative to Chinese investment in a critical industry and providing numerous investment opportunities between longtime security partners, political support for the deal is limited. The CFIUS process may have cleared the investment based on the facts, but President Biden blocked completion of the deal through an executive order and President Trump’s support of the deal remains fickle at best.

Expanding reach without clear definitions will hinder investment

CFIUS as it stands offers comprehensive definitions for the sectors it covers. This is problematic for technology investments, when daily advancements are made in both hardware and software. From the development and incorporation of AI into daily life to the exploration of quantum computing solutions, CFIUS oversight touches nearly every part of the digital economy.

Instead of working to define these terms and provide clarity, the NSPM looks to expand CFIUS coverage into even more sectors. The proposed expansion for CFIUS oversight would include greenfields, agriculture, and other sectors outside of technology and infrastructure.

Once again, how these sectors and investments will be defined remains unknown. If the current CFIUS regime is anything to go by, these definitions will be expansive and vague. Investors will face increased uncertainty as they work to assess if any of their potential investments are captured by CFIUS screening.

Voluntary filing regime leaves investments in limbo long after completion

Though mandatory for certain industries and sectors, of which the NSPM proposes wide expansions, most investments fall under the voluntary CFIUS regime.

The voluntary filing process allows a firm to notify CFIUS of their proposed investment and gain approval prior to completion. Businesses can decide to voluntarily file through the regime, inviting CFIUS to review the potential investment and provide their approval. By drawing attention to the potential deal, firms open the investment to the in-depth scrutiny of a CFIUS review. Though time consuming and costly, approval through this system can provide certainty for the investment alongside symbolizing a firm’s commitment to US regulatory oversight.

If a firm decides against making voluntary filing, this does not guarantee a lack of CFIUS oversight. Though the filings are truly voluntary, CFIUS’s increased reach and powers can present a looming threat to investments.

CFIUS has the authority to review any investment, regardless of status. Any potential risk to national security as determined by CFIUS is worthy of review. This includes long-established investment arrangements which are past the point of completion. As industries transform and national security priorities shift, there is every chance that a previously completed deal could come under CFIUS review. When this happens, businesses face the complications of a CFIUS review, as well as the very real possibility of having to unwind their investments long after a deal is done.

This threat is more pronounced than ever as retroactive CFIUS reviews are triggered and approved by executive branch officials. With an administration that is taking an increasingly critical eye and politicized stance to foreign investment in the United States, the risk of a delayed CFIUS review drastically increases.

Presumption of denial is already the norm 

Some investment advisors say the proposed changes will create a “presumption of denial” for investments caught by CFIUS. Yet this is exactly how the current regime works in practice for international investment in critical sectors.

It is unclear which investments trigger a CFIUS review. The process itself is treated as a black box, and even if you are approved there is a possibility for political pressures to reverse any decision. Many firms now view CFIUS reviews as fickle as a magic eightball. Paired with the new outbound investment screening regime, the United States is creating more hurdles than incentives for global investors.

One potential increase in investor confidence could come in the form of clarification on second passports. Confusion about second passports especially hinders investment from British citizens. Though United Kingdom (UK) citizens are provided an exemption for CFIUS review, this exemption no longer applies if they are a dual passport holder. Post-Brexit, there is an uptick in second passport possession by British citizens looking to retain easy access to working and living in the European Union (EU). Obtaining a second passport comes at the cost of losing this CFIUS-based exemption. This is especially true for British citizens who hold Irish passports, writing off Northern Irish residents and investment in one fell swoop. By clarifying and reshaping potential citizenship exemptions, investors can begin to adjust their view of CFIUS.

Geopolitical landscape for investment screening is increasingly complex

CFIUS is not the only game in town when it comes to foreign investment screening. Countries across the globe have increasingly expanded their own regulatory landscapes to include similar structures.

In the UK, the National Security and Investment Act (NSIA) was passed in 2021. It came into force in January 2022 and has resulted in numerous investment reviews since. The reviews have focused mostly on what CFIUS labels emerging technology and operated as support for other domestic policy goals, including arguing for strengthening domestic industrial production.

When creating the NSIA, the UK government openly utilized CFIUS Foreign Investment Risk Review Modernization Act (FIRRMA) as a starting point for shaping the legislation. Yet they took care to learn from business insight when dealing with CFIUS. This resulted in a regime that permits investment screening and final governmental reviews for critical sectors while also providing businesses with clear timelines and definitions, direct communication from government during the process, and annual reports published by the government on NSIA reviews. These improvements could easily be incorporated into the US CIFUS regime, but are not captured by the NSPM changes. 

Following on from the United States and the UK, the EU is exploring and developing its own regime to standardize reviews across the bloc. If successful, doing so will lead to three of the world’s largest services economies implementing foreign investment screening.

In Canada, the Investment Canada Act was amended in 2024 to strengthen Canada’s approach to foreign investment screening. Changes included CFIUS-style requirements such as pre-closing filing requirements, including investment by foreign state-owned enterprises, and a wider catchment of investments. Reviews are judged both on “net benefit” to Canada and national security measures. This sweeping regime goes further than CFIUS and can be utilized by the Canadian government to review nearly any external investment into the country.

The creation and expansion of these regimes unfortunately only complicates investment flows between trusted allies. When each country is investigating and screening investments, capital flows become slower, more uncertain, and inherently limited.

To increase investment, the US must prioritize international collaboration and offer clarity on CFIUS

How can the United States truly work alongside allies to support US industry, innovation, and leadership if it is denying their investment?  Stifling cross-border investment between allies only limits access to capital, stymies innovation and growth, and weakens national security. The United States should be working alongside Western democracies to strengthen global markets and build upon each other’s strengths.

If the administration is looking to drive investment in the sectors of the future, from quantum computing to AI, investors need certainty and clarity. This should be combined with wide access to capital to offer the investment needed to make advancements.

CFIUS reform needs to be structured to drive investment, not complicate it. This means providing more insight into the process, clear evidence guidance for firms from application to completion, structured definitions of sectors covered, and defined timelines. Learning from the application of investment screening in other countries and openly engaging with businesses and investors to understand their concerns is an easy starting point.

Alex Mills is an international trade expert specializing in financial services, maritime law, and ESG. They have nearly a decade of experience across the private and public sector, including in UK and US government.

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

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The post Investment screening reform may stifle international investment in US appeared first on Atlantic Council.

For starters, the plan stems from a 2024 proposal by Senator Cynthia Lummis and largely functions as a centralized repository for assets that have already been seized by the federal government—for example, as part of criminal proceedings. That might be “budget neutral,” as the order says, but it is not a reserve in the traditional sense of a gold reserve used by central banks to redeem depositors or pay international debts. As a prominent Bitcoin thinker succinctly put it, “[t]here is no ‘strategic’ value in a crypto reserve.”

The executive order directs the government to simply hold (or later on, perhaps buy and hold) assets like bitcoins. Although the order vaguely criticizes the government’s “premature sales” in the past, “HODL’ing” (as the expression goes) may or may not be fiscally prudent, depending on whether or when to sell the assets. Separately, there are serious questions about if it is prudent for the government to essentially invest in select digital assets, as opposed to generating revenue in other ways. At the very least, the Secretary of the Treasury should develop concrete criteria and an authorization process for periodically selling or buying digital assets, to add transparency and provide an orderly means of decreasing volatility exposure. Senator Lummis’s original proposal, for example, contained some selling thresholds.

Second, the White House crypto czar David Sachs estimated that the federal government’s reserves comprised 200,000 bitcoin worth a staggering $17.5 billion at recent prices. If those numbers are still accurate, that would equal more than the total amount of gold held at almost all Federal Reserve Banks. That cannot be right as a matter of monetary policy. Even putting aside the polarizing debates about the long-term value of bitcoin (or lack thereof), the size of the new strategic reserve seems disproportionate given the risks and functions of the assets involved. Consistent with a transparent sales process, the Treasury should rightsize any digital asset reserve and use the remaining proceeds for other government programs.

Third, the cybersecurity challenges of having a centralized digital asset pool are not trivial, as the Atlantic Council highlighted in a prior report. Yet the executive order says nothing about how to start securing this new stockpile. Sacks tweeted that the pool would be akin to a “digital Fort Knox.” But Fort Knox has legendary security, is operated by 1,700 specialized employees, and adjoins a military base with 26,000 trained personnel. It is unclear what office, if any, at the Treasury could manage such a gargantuan security task for a digital asset reserve. The endeavor would be particularly difficult after the Department of Government Efficiency—or DOGE—unceremoniously disbanded teams of engineers like those in the 18F division, who were renowned for their private sector expertise. By contrast, Senator Lummis’s 2024 proposal highlighted security measures for “state-of-the-art physical and digital security” through inter-agency cooperation.

Perhaps most importantly, the ultimate risk of the executive order is that it embodies a form of crypto boosterism. Namely, it appears to tout an industry that President Trump came to embrace during the later phases of his political campaign, famously including the launch of his own meme coin just days before inauguration. To be fair, the White House revised the president’s earlier announcement that the reserve would include proactive purchases of select “altcoins,” which industry insiders worried “could be a vehicle for corruption and self-dealing.” That was a prudent move. But to many on Wall Street and main street, the order may still seem more like political maneuvering than sober monetary policy.

In a parallel universe, there could have been a thoughtful way for the Federal Reserve and Treasury to gradually study the possibility of holding digital assets on the balance sheet. They could have scrutinized the economic implications and prepared for security contingencies that might have included a bipartisan compromise around stablecoin legislation to specifically promote the strength of the dollar. But in today’s world, this executive order looks more slapdash than strategic. That may have been intended to bolster digital asset markets, but it has fallen flat on most fronts.

JP Schnapper-Casteras is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and the founder and managing partner at Schnapper-Casteras, PLLC.

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

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The post What is strategic about the new digital assets reserve? appeared first on Atlantic Council.

Today, Washington is once again chattering about the possibility of a currency deal. This time, the venue may move south for what Trump’s incoming chairman of the Council of Economic Advisers, Stephen Miran, described as a “Mar-a-Lago Accord.” In a September report, Miran declared the overvaluation of the US dollar responsible for the “roots of economic discontent.”

Several in Trump’s inner circle have expressed an interest in devaluing the dollar to address the US trade deficit. Weak-dollar advocates believe that the strong dollar creates international trade imbalances, handicapping US manufacturers. A weaker dollar would make US exports more competitive.

But there’s a key difference between the countries that would gather in Palm Beach today and the group that met in New York in the 1980s—the countries that comprise the US trade deficit.

How will this different constellation impact any potential negotiation? It makes a deal much more complicated.

Miran and others want to use tariffs to get countries to the negotiation table. If these countries are worried enough about the cost of tariffs, Miran thinks they will be willing to make major changes to their currencies that they’d never otherwise consider. But Miran doesn’t stop there. He knows tariffs alone aren’t enough of a stick, so he thinks it is time to put the US security umbrella up for debate.

Miran argues that the security zone should be financed by the beneficiaries, and this can be leveraged to both depreciate the dollar and to mitigate the inflation effect of tariffs. Countries in the security zone should “fund it by buying Treasuries,” especially century bonds, and “unless you swap your bills for bonds, tariffs will keep you out.” US Treasury Secretary Scott Bessent has also discussed the idea that countries can enjoy shared defense as long as there are shared currency goals, while tariffs can be used for negotiation of terms. This administration seems at least open to the idea of linking the US security umbrella with the restructuring of the global trade system to benefit the United States.

The problem, of course, is that the countries the United States has the highest trade deficits with are no longer allies dependent upon this security umbrella. In 1985, the United States provided the security guarantee for France, Germany, Japan, and the United Kingdom. These signatories of the Plaza Accord hosted nearly a fourth of all overseas US military bases in the ’80s. Neither China, nor Mexico, nor Vietnam rely on the US military in 2025.

Without the incentive of shared security, are tariffs enough to push non-allies towards a currency agreement? It doesn’t seem to be for China. A major reason for resistance is that Beijing sees Japan’s experience after the Plaza Accord as a cautionary tale.

The “Japanification” of China?

The Plaza Accord forever altered the trajectory of Japan’s economy. The appreciation of the Japanese yen contributed to bursting Tokyo’s asset bubble and the lost decades of economic stagnation. At least, that is the lingering impression of the 1985 currency agreement in China.

There are certain similarities between Japan’s economic slowdown in the ’90s and the one that China is currently experiencing, such as deflation, low consumer demand, and capital flight. In January, China’s thirty-year government bond fell below that of Japan’s for the first time, and over the weekend, China’s inflation dropped below zero again. China is willing to go to lengths to avoid a “Japanification” of its own economy, including refusing to appreciate the renminbi against the dollar, even if it means weathering a protracted trade war.

China has previously raised concerns about the US dollar’s role as the dominant reserve currency and wouldn’t necessarily complain if the dollar’s preferential position in foreign reserves and global finance weakened. But with persistently sluggish consumer demand, China is still counting on the export sector to help drive economic growth in 2025. Beijing won’t want to risk any changes to the renminbi that would decrease the competitiveness of its exports in the midst of a trade war.

The idea of a Mar-a-Lago Accord is going to appeal to Trump. After all, he was the man who bought the Plaza Hotel in 1988, right after the famous agreement. But getting there is going to require more than just tariffs and a threat to remove security guarantees. China is going to have to see what’s in it for them. And that, so far, remains a mystery.

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Jessie Yin is an Assistant Director with the Atlantic Council GeoEconomics Center.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

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“We will take a people-centered approach and place a stronger economic policy focus on improving living standards and boosting consumer spending,” declared Premier Li Qiang in his work report to the gathering.

A close look at the spending plans unveiled at the NPC suggests far less than full bore support for consumers and businesses that are trying to keep their heads above water after several years of desultory demand and falling prices. The plans are unlikely to restore the household wealth destroyed by China’s real estate crash or provide jobs to millions of unemployed college graduates.

The announced government outlays won’t exactly light a fire under an $18 trillion economy.  There will be $41 billion for an enhanced trade-in program for consumers and businesses. That initiative was introduced last year and lifted sales of cars, household appliances, and business equipment. The additional subsidies will cover new smartphones and home renovations. In addition, seniors will receive an additional twenty renminbi ($2.76) a month in old-age benefits—the same increase they received last year—and two subsidies for healthcare will rise by a combined thirty-five renminbi. This, in a society where high hospital costs can ruin a family’s finances.

Certainly, the overall spending plan is expansionary, with plenty of infrastructure investment. The budget deficit has been raised to four percent of gross domestic product from three percent in 2024, and one estimate that includes off-budget spending and borrowing shows the deficit totaling 9.9 percent of gross domestic product. Beijing insists that this will keep China’s economic growth at “about five percent” this year—the same level it claimed last year. However, many economists take that achievement with a grain of salt. Rhodium Group colleagues estimate that last year’s growth was actually between 2.4 and 2.8 percent.

The 2025 budget again includes vast sums for high-tech industries. About 11.9 trillion renminbi of “special funds” is earmarked to “support the high-quality development of key manufacturing sectors,” an increase of 14.5 percent from 2024, according to the budget report to the NPC—although the time frame for those expenditures is not specified. There will be expanded credit for exporters hit by US tariffs, and a 7.2 percent increase in spending on China’s military—a number that the US government says significantly understates the real level of military expenditures. In addition, the government announced  several trillion renminbi of special purpose bonds to continue restructuring local governments’ vast debt burden over the next three years. There is also 500 billion renminbi dedicated to state-owned banks to shore up capital reserves depleted by the country’s property crisis. On top of that, the central bank has announced that it is prepared to continue cutting interest rates and bank reserve requirements at the “appropriate time,” and the Ministry of Finance  has said it has the ability to increase spending as needed. Both of those statements have been made regularly since last September.

A lot of the planned spending—for example, the local government bailout—will be unproductive since it will go to restructure debts. Admittedly, the rising fiscal tide inevitably will lift some boats, especially businesses with ties to Xi’s high-tech dream for China. But most Chinese citizens earn their livings outside of these industries, and their immediate prospects remain far more uncertain. One-third of white-collar workers told a recent poll that their wages fell last year.

Indeed, the daily problems facing China’s citizenry have become severe enough that the government was forced to acknowledge them before the NPC—no small admission for a communist party whose propagandists normally offer a steady diet of hubris. The premier’s reference to “weak public expectations” in his work report, and the decision to spotlight the importance of consumption, were a bow to public opinion in a country where the public normally has no way of expressing itself.

However, Xi clearly remains deeply committed to his core economic policies—a point underlined on the eve of the NPC with the publication of a speech he delivered in December. While also acknowledging “consumption shortcomings,” he made clear that the highest priority must remain “more world-class enterprises and leading technologies.” The speech also insisted that the government’s response to China’s economic problems had already “boosted the property market, stock market, market expectations, and social confidence,” suggesting that China’s paramount leader is skeptical about opening the taps too much for those struggling to make ends meet. Xi is well known for his criticism of policies that encourage “welfarism.”

Xi’s laser focus on technology can only be heightened by rising US-China tensions. President Donald Trump’s imposition of twenty percent tariffs on Chinese exports, continued restrictions on semiconductor sales to China, and a recent presidential memorandum outlining policies that would further restrict investment flows between the two countries all point to greater pressure on Beijing to pursue economic and technological self-sufficiency. As the Wall Street Journal’s Lingling Wei and Alex Leary reported last week, Xi is privately concerned that Trump’s policies could isolate China. So, while stronger domestic demand would make the Chinese economy more resilient, the signals from the NPC suggest that the many unfunded social safety net programs outlined at the NPC likely will remain that way.

In the meantime, Beijing may be betting that public sentiment already has started to return to optimism—just somewhat later than the shift in “social confidence” that Xi claimed was underway back in December. Last month’s unveiling of the DeepSeek artificial intelligence program shook global markets and caused Chinese technology stocks to go on a bull run.

How much this shot in the arm for China’s artificial intelligence (AI) development ends up affecting the whole economy remains to be seen. Some investment banks are raising their forecasts for the country’s “potential growth,” at least in the short term. But the government certainly made every effort to talk up AI at the NPC.

All that helped fuel the premier’s optimism when he declared that the “giant ship of China’s economy will continue to cleave the waves and sail steadily toward the future.” But for now, China’s consumers appear to be stuck in steerage.

Jeremy Mark is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center. He previously worked for the International Monetary Fund and the Asian Wall Street Journal.

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

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As a forum specifically created to address shared economic challenges, the G20 is critical for accelerating progress on issues of women’s economic empowerment and security. The group’s efforts are especially relevant since compounding crises in recent years have exposed existing economic inequalities. Research shows that working women experienced worse effects from the COVID-19 recession—unlike previous economic downturns that predominantly affected men. In September 2021, women were 2.4 times more likely than men to report losing paid work in order to care for others. Pursuing gender-inclusive policies is critical for achieving collective prosperity and sustainable development.

The United States is set to take over the G20 presidency in 2026. If the United States puts gender empowerment high on the agenda, it can help deliver growth both at home and around the world. Despite recent efforts in the G20, there is still a lot of work to be done to address inequalities and promote progress for women.

Here are five charts that demonstrate these persisting economic gaps:

The Women Peace and Security (WPS) Index measures progress on gender equality on thirteen indicators across three dimensions—inclusion, justice, and security. These indicators include maternal mortality rate, intimate partner violence, employment, and financial inclusion. While most G20 countries have made progress since the start of the index in 2017, the story looks different when we take a closer snapshot.

From 2021 to 2023, almost all G20 countries experienced significant backsliding, according to the WPS Index. This regression was primarily driven by the uneven recovery from the COVID-19 pandemic, which triggered global economic recessions and was further compounded by conflicts in Europe and the Middle East. These crises exposed and exacerbated existing economic inequalities, with women often bearing the brunt of the negative impact. According to research from 2022, the COVID-19 pandemic set gender parity back by a generation, with weak recovery making it even more difficult. 

Notably, this decline was not limited to emerging economies. Advanced economies such as the United States, Canada, and European G20 members also recorded substantial downgrades in gender equality indicators. In these advanced economies, women faced increased unpaid domestic burdens, higher rates of unemployment, and diminished access to childcare services. Even countries with robust social safety nets and gender equality frameworks proved vulnerable to systemic shocks. This all underscores that the G20’s collective commitment to gender equality requires stronger, crisis-resistant policy instruments specifically designed to protect women’s economic security.

In 2018, the IMF noted that no advanced or middle-income economy achieved less than 7 percent in the gender labor force participation gap. Six years later, only France and Canada have managed to reduce that rate to below 7 percent within the G20.

The gap in labor force participation can reflect social and cultural norms, but it can also represent the structural barriers that women face in the labor market, including access to quality education or equitable hiring practices. Gender inclusion in the labor force is important because when a country has a more diverse pool of talent and fully taps into its available human capital, it generates better economic results for everyone, including increased GDP growth, reduced income inequality, and improved overall economic productivity.

Yet within formal employment, wage disparities between women and men have remained a persistent driver of inequality. In the United States, women earn only eighty-four cents for every dollar earned by a man, and globally, the gender pay gap is still approximately 20 percent. In fact, the United States ranks among the bottom five G20 countries when it comes to gender-based wage inequality.

On average around the world, women reinvest more of their income in their families, influenced by the care burden that many women shoulder for children or the elderly. Pay inequality directly impacts these families’ financial stability, housing options, educational opportunities, and quality of life. Progress to narrow this gap has been frustratingly slow. While equal pay has been widely endorsed in principle, implementing it effectively has proven challenging.

For the G20 specifically, addressing wage inequality represents both an economic imperative and a moral obligation. Studies consistently show that reducing gender wage gaps boosts GDP, increases tax revenue, and enhances business performance through greater diversity.

Only 12.3 percent of finance ministers and central bank governors across over 185 countries are women. This is more than 10 percent lower than the average proportion of women represented in cabinet members globally. This disparity is driven by a few factors, such as male dominance in the study of economics, barriers that prevent women from being promoted, and social perceptions of women’s abilities.

The G20 fares a little better than this global percentage with three female central bank governors and five female finance ministers. However, overall economic empowerment and security for women will be tougher to achieve when gender parity and inclusivity are still lacking in global economic leadership. The G20 should be the forum where the world’s major economies can convene and commit to achieving gender-balanced economic results.

The path forward

Addressing these gender gaps would have positive economic impacts globally. Women’s participation in the formal labor force increases economic diversification and drives income equality. Moody Analytics estimated that closing the gender gap could boost the global economy by seven trillion dollars. While there’s no silver bullet solution that would be able to fix these disparities overnight, there are a series of policies that could help, such as improving educational opportunities or equitable hiring practices.

There is a risk that women’s economic empowerment will not be a key focus for the G20. Leading the group next year, the United States has an opportunity to guide the global conversation by showing how investing in women creates resilient economies that benefit everyone.

Alisha Chhangani is an assistant director with the Atlantic Council GeoEconomics Center.

Jessie Yin is an assistant director with the Atlantic Council GeoEconomics Center.

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

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As the United States abandons international treaties and organizations, including the 2015 Paris Agreement, the World Health Organization (WHO), and the United Nations (UN) Human Rights Council, its apparent disdain for the G20 has raised concerns about the role of the United States in the group. These anxieties are especially salient with the United States scheduled to assume the G20’s presidency next year.

A G20 without the United States or its constructive engagement and leadership will be much weaker. It will struggle to sustain broad representation and multilateral cooperation, as well as effective policy coordination and resource mobilization to address pressing global challenges. Even if the rest of the member countries try to carry on, they will struggle to do so on their own.

Tension between the United States and the G20

The current Trump administration has proved to be more ideological than the purely transactional first Trump presidency. During his first term in office, President Trump used the G20 to complain about unfair trade practices by other countries vis-a-vis the United States. He promoted reciprocal dealing under threats of tariffs to rectify persistent US trade deficits as well as implementing policies of tax cuts and deregulation.

In his second term, the Trump administration has actively pushed its anti-DEI (diversity, equality, and inclusion) and anti-climate change agenda, both domestically and internationally. Furthermore, the Trump administration has suspended all its foreign aid pending review, while drastically downsizing the US Agency for International Development’s budget, operations, and staffing. In addition, other major Western countries such as the United Kingdom (UK) have also reprioritized their budgets away from international aid in favor of increased defense spending. The UK alone decided to cut its aid budget from 0.5 percent of its gross national income (GNI) to 0.3 percent by 2027. These actions have left many developing and low-income countries facing sharp funding shortfalls in their development and climate efforts, triggering a health care financing crisis in many of them.

Moreover, according to Project 2025, which the administration has faithfully implemented so far, the United States would consider withdrawing from most international organizations. Republican Senator Mike Lee has already introduced a bill to withdraw from United Nations entirely, and Project 2025 also suggests withdrawing from the International Monetary Fund and the World Bank. Each of these institutions is commonly considered as being under US influence and carrying out activities primarily consistent with US interests. The Project’s authors, instead, believe that these organizations have done more harm than good to the world and the United States.

Guided by this belief, Secretary of State Marco Rubio boycotted the G20 foreign ministerial meeting. He criticized host country South Africa for “doing bad things” by using the G20 to promote DEI and climate activities, adding that his “job is to advance America’s national interests, not to waste taxpayer money or coddle anti-Americanism.” If the United States is serious about promoting its agenda of opposing “solidarity, equality, and sustainability” and resisting mobilizing climate finance to help developing countries—among the core objectives of the G20—it would undermine the effectiveness and relevance of the group. If the United States were to withdraw from the G20, that would seriously dent the group’s aspiration to be the premier international forum for policy coordination in the interests of the global economy. If the remaining countries were to carry on despite the United States’ withdrawal, the relative influences in the G19 would change significantly. Global south countries, driven by China and the BRICS, would gain influence at the expense of the West minus the US.

The G20 without the United States?

Generally speaking, whether the United States remains in the G20 but working at cross-purposes or withdraws from it entirely, the group would struggle to fulfill its objectives. First, without the active engagement and leadership of the world’s largest economy, it would be difficult to coordinate policy actions. The group would lack the coverage and influence to deal with global crises—as it did, for example, in the 2008 global financial crisis when the G20 played a key role in forging an internationally coordinated policy response.

Second, without contributions from the United States, G20 efforts to mobilize financing to help developing and low-income countries in their development and climate endeavors would also be significantly limited. Cuts in foreign aid budgets by the United States (the largest foreign aid contributor in terms of volume at $65 billion in 2023) and UK (the fifth largest contributor at $19 billion) are significant. Those cuts will further reduce the already insufficient Official Development Aid (ODA) from developed countries—currently at 0.37 percent of their GNI compared to the UN target of 0.7 percent. 

Furthermore, the current focus on raising defense spending, along with large budget deficits and public debt in many Western countries, means that calls to increase capital for multinational development banks such as the World Bank would likely be disappointed. Developing countries will likely face growing shortages of financial assistance for development and climate efforts—which is especially worrisome given lackluster investment from the private sector in those regions. It’s important to keep in mind that the multiplier effect of public investment in developing countries to catalyze private sector investment is very low—generally less than one time, and not a multiple as many political and MDB leaders have hoped. Most importantly, US policy actions would undermine the sense of mutual trust among G20 countries, essential for any multilateral cooperation. Other countries in the group, effectively the G19, will most likely try to carry on. However, on top of the two drawbacks mentioned above, it is difficult to see how they can sustain or rebuild mutual trust in a deeply polarized world. In short, how they could continue to work together despite the United States current posturing would be an important test case of the realignment of international relationships as the post-war world order crumbles.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center and senior fellow at the Policy Center for the New South; and a former senior official at the International Institute of Finance and the International Monetary Fund.

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

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As the host country, the Netherlands is responsible for ensuring the operational independence of the Court. Under the “Headquarters Agreement” between the ICC and the Netherlands, the country must cooperate with the ICC and ensure its business continuity. However, the new US sanctions targeting ICC personnel could severely disrupt the Court’s operations—particularly if Dutch banks suspend financial services to the ICC out of fear of violating US sanctions.

In response, the Dutch government has engaged in discussions with Dutch banks to explore under what conditions they would continue processing transactions for the ICC under these new sanctions. Reports indicate that the banks are seeking substantial guarantees to maintain their business with the Court.

One proposed solution is invoking the European Union (EU)’s “blocking statute”, which prevents EU-based businesses from complying with US sanctions that have extraterritorial reach. This statute allows EU companies to resist US laws that conflict with European legal protections and provide a framework for seeking compensation if harmed by US sanctions. The blocking statute was notably used in 2018 when the EU sought to bypass US sanctions on Iran following the US withdrawal from the Iran Nuclear Deal. However, applying this legislation to protect the ICC would be an unprecedented use of this tool and likely come with unique challenges.

Nevertheless, various parties have expressed an ardent desire for the EU to invoke the blocking statute. The President of the ICC, Judge Tomoko Akane, has stressed that the EU blocking statute is one of the Court’s most essential tools for surviving any sanctions, urging, “to preserve the Court you must act now.” Dutch Justice Minister, David van Weel, also noted that “the Netherlands is too small” to protect banks on its own and that this issue needs to be addressed at a European level. In response, the Dutch Cabinet, following direction from Parliament, has agreed to advocate for the statute’s activation at the European level.

Given the EU’s longstanding support for the ICC, it is reasonable to assume that the EU will seek to protect the ICC in some form. There are a few less “nuclear” alternatives it may encourage first. Dutch banks could minimize their exposure to the ICC by restricting their services to a minimum—only holding cash and processing basic transactions for the ICC—or ICC servicing could be consolidated with one smaller bank. However, if the situation escalates, the EU may be forced to invoke the blocking statute, particularly if the US Senate revisits the previously blocked “Illegitimate Court Counter Act.” This bill sought to expand sanctions on the ICC to include not just those who “directly engaged in” unfavorable investigations but also those who “otherwise aided” the Court. While this bill was narrowly blocked due to concerns over its potential negative impact on American businesses, Democratic Minority Leader Senator Chuck Schumer indicated that a revised bipartisan version could be “very possible”.

It is therefore worth exploring what the blocking statute scenario would look like, because while it offers a strong legal defense, it may not be a panacea. Even if invoked, it could prove difficult to fully block all US sanctions, particularly when third-party countries and multinational companies with operations in both the US and the EU are involved.

The Netherlands, with its robust financial sector, faces a unique challenge, as several Dutch banks —such as ING, Rabobank, and ABN AMRO—are deeply integrated into the US financial system. While the blocking statute would shield Dutch banks operating within the EU from US sanctions, those with operations in the US remain subject to US law. This creates a dual compliance challenge: Dutch banks must balance their operations in the EU (protected by the statute) with their US operations (still subject to US sanctions).

Whichever way they turn, these banks will face unpleasant consequences. Complying with US sanctions could undermine the ICC’s financial operations, potentially halting essential payments to the Court. Additionally, compliance with US sanctions could expose these banks to long-term reputational risks, as they may be seen as aligning with US policy against the ICC, an institution widely supported by the international community. On the other hand, refusing to comply could lead to penalties or the loss of access to the US financial system. Dutch banks will need to navigate this conflict carefully, weighing the risks of becoming entangled in a geopolitical standoff.

As this situation unfolds, much remains uncertain. However, one thing is clear: US sanctions on the ICC have the potential to create significant diplomatic and economic tensions within the longstanding US-EU alliance, with the Netherlands caught in the middle. How the EU, the Netherlands, and Dutch banks respond will likely shape the future of the ICC and may have lasting implications for international diplomacy and the future of international law.

Lize de Kruijf is a project assistant with the Atlantic Council’s Economic Statecraft Initiative.

Economic Statecraft Initiative

Housed within the GeoEconomics Center, the Economic Statecraft Initiative (ESI) publishes leading-edge research and analysis on sanctions and the use of economic power to achieve foreign policy objectives and protect national security interests.

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But the campaign to tame the market’s animal spirits—call it financial market regulation with Leninist characteristics—has so far fallen short. That’s largely because of investors’ disappointment with Xi Jinping’s efforts to revive an economy beset by weak growth and deflation. And like markets around the world, Chinese equities face the growing uncertainty of US-China trade tensions.

The end result is essentially two stocks markets. Shares listed in the mainland hovered on the brink of a bear market in January after a rally sparked by the government’s supposed turn last year to economic stimulus ran out of steam. Shares of Chinese companies listed in Hong Kong and New York also suffered. However, technology stocks in Hong Kong have soared after the Chinese startup DeepSeek shook the world with its entry into the artificial intelligence competition.

Such volatility is par for the course for a country with some two hundred million retail investors—many of whom have suffered heavy losses in recent years. That’s exactly what Beijing doesn’t want. With the economy still struggling, all eyes will be on next month’s meeting of China’s National People’s Congress, which rubberstamps the government’s budget plans. If the spending taps are finally opened, the stock market could rally. But it will take much more than optimistic pronouncements to restore confidence after months of undelivered promises.

This uncertainty does not sit well with the foreign institutional investors that Beijing has courted for years. Those who pursue strategies built on long-term investments had largely abandoned the Shanghai and Shenzhen markets by late 2023, putting their money in places like Tokyo and Mumbai. Some investors with a higher tolerance for risk—especially hedge funds—stuck it out. However, once last year’s rally ran its course, many of those fund managers took profits—although some bulls continue to place heavy bets on Chinese shares. Net capital outflows from China hit a record $182 billion in 2024, with foreigners joined by Chinese investors who have been shifting money to Hong Kong and elsewhere. A Bank of America survey of 182 institutional fund managers published in late January showed that only 10 percent were optimistic about the outlook for China’s economic growth compared with 61 percent in October. However, the latest tech stock rally appears to have made some fund managers more bullish.

An added incentive to shift investments out of China has come from the currency market, where Beijing allowed the renminbi to depreciate during the autumn, further undercutting the value of foreign investments.

All of this has given Chinese officialdom greater incentive to pursue a tightly regulated, less volatile stock market—one in which the likes of insurance companies, pension funds, and other government-run behemoths hold sway over individual investors. The order of the day will be to encourage long-term investments in large companies by offering bigger dividends, share buybacks, and—ideally—steady profit growth. A recent article by Wu Qing, the chairman of the China Securities Regulatory Commission (CSRC), outlined the government’s mandate to develop  institutional investment as a response to “the problems of unstable funds and short-term investment behavior.” Or as one market analyst told Chinese media, “More long money, longer long money, and better returns.”

Share buybacks have been part of the government’s blueprint to boost the stock market from the beginning of its effort to stimulate the economy. In September, the Peoples Bank of China established a 500 billion yuan ($68.6 billion) swap facility and an 300 billion yuan relending facility to encourage institutional investors and listed companies to buy—and buy back—shares. Chinese media reported that there were over $40 billion of buybacks in 2024, with more than three hundred companies taking advantage of the easier money to finance the transactions.

In essence, the push to strengthen institutional investment expands the roster of what’s known as China’s “national team”—the large, state-controlled funds that Beijing has used over the years to intervene in the stock market. The government will now have more muscle to move the market in its desired direction. As to foreign funds, senior government officials have emphasized in meetings with Wall Street executives since President Trump’s reelection that the welcome mat remains in place. However, the flow of money out of China has continued this year as trade tensions build, and Beijing is clearly giving greater emphasis to domestic fund managers.

A directive issued in late January by the Chinese Communist Party’s Central Financial Work Commission and five government bodies provided the regulatory framework for state-owned insurance companies, the national social security fund, and other government entities to step up. The guidelines call for them to increase their presence in the market by buying shares, participating in share placements as “strategic investors,” and, where relevant, launching buybacks. The state entities will be directly assessed on their efforts to boost medium- to long-term investment. According to the People’s Daily, the market value of A-shares (stocks listed on the Shanghai and Shenzhen markets) held by public funds will be expected to increase 10 percent a year for the next three years, and insurers will invest 30 percent of their new premiums in stocks. Fund performance will be assessed over a time frame of “more than three years.” That presumably relieves the pressure for short-term returns that most private fund managers face, but such a public discussion of performance standards suggests that that they ultimately will be held to inflexible guideposts.

Apparently unwilling to leave any bureaucratic stone unturned, the CSRC also released an “action plan” in late January to promote investments in products related to the stock index. These products include dividend-rich stocks that are components of the Chinese market indexes and exchange-traded funds (ETFs) that buy those shares and related derivatives. The index ETFs are popular speculative targets for retail investors, partly because of their returns and partly because they have been among the primary destinations for national team market interventions in recent months. The action plan contains dozens of measures intended to increase the flow of money into those products. The plan also seeks to attract foreign funds to the ETFs, presumably because foreign fund managers who pursued a passive, index-focused strategy over the past year significantly outperformed managers who actively picked stocks. Many of the foreign index investments track the Morgan Stanley Capital Index for China shares, which, along with A-shares, also includes companies listed in Hong Kong and New York.

All these initiatives emphasize the carrots of the campaign to promote appropriate institutional behavior. But there are also sticks. The recent Wu Qing article called for a crackdown on various “malicious illegal activities” and called for supervisors to “catch early, catch small…but also hit big, hit evil.” The CSRC chairman may simply be reminding the market of the government’s recent detention of investment bankers and financial regulators as part of a widespread crackdown on corruption, but there could be a more sweeping threat.

The boundaries of Chinese government regulation and enforcement are never clearly defined. Witness some of the actions taken to rein in trading during a year of extreme volatility. Last February, the CSRC, as well as the Shanghai and Shenzhen exchanges, began scrutinizing the activities of computer-driven quant funds and requiring new funds to report their strategies before beginning trading. In August, the authorities ended the release of daily data on foreign fund flows into the mainland markets because some local investors were tailoring their trading to foreigners’ activities. That data is now only available on a quarterly basis. And early this year, as share prices fell sharply, the exchanges “asked” big mutual funds to sell less than they bought. Given the government’s response to this volatility, institutional investors certainly have reason to be concerned about future opaque actions.

Perhaps it is possible to mandate stability in a market known for its gyrations. Indeed, some foreign strategists now recommend buying Chinese shares based on the expectation of high dividends, share buybacks and stronger corporate earnings in the coming year. But intrusive market regulation can come at the cost of lost dynamism and damaged confidence. Witness what Beijing’s heavy hand has done to the country’s once high-flying online conglomerates over the past four years. Ultimately, a healthy stock market reflects a healthy economy. Institutional and individual investors have been skeptical about Beijing’s ability to return the economy to an even keel, and they could remain skittish until there is an effective economic stimulus—without the disruptions of US-China tensions. Whatever the short-term ups and downs, it will take more than reams of rules and action plans to change China’s market psychology.

Jeremy Mark is a senior fellow with the Atlantic Council’s GeoEconomics Center. He previously worked for the International Monetary Fund and the Asian Wall Street Journal. Follow him on Twitter: @JedMark888.

Data visualizations created by Jessie Yin, Assistant Director at the GeoEconomics Center.

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Few were surprised, therefore, when President Trump began his second term with an executive order that prioritizes stablecoins as the preferred mechanism for safeguarding both the global role of the US dollar and financial stability. The executive order also stated that CBDCs create financial stability threats. In contrast, the monetary policy minutes from the December 2024 European Central Bank rate-setting meeting took the opposite position and proposed that crypto assets could create financial stability threats for the eurozone.

The 2025 reserve currency policy landscape: Four key issues to watch

Legislation: Despite their policy differences, European Union (EU) and US policymakers all face the same hurdle. CBDCs can not be issued without legislation.  Lawmakers in Brussels, London, and Washington are each declining to move forward quickly.  The European Parliament to date has declined to schedule a vote on the digital euro package submitted by the European Commission—despite urging by the ECB.  Nor has the UK Parliament moved forward with a digital pound initiative. 

The Republican-led Congress and the White House oppose CBDCs, ensuring that no CBDC legislation will move forward in the United States in the foreseeable future.  The Federal Reserve agrees. Chairman Jerome Powell yesterday testified to Congress  that he will not propose or pursue a digital dollar during the balance of his tenure at the central bank.  Chairman Powell’s term expires in spring 2026.  All relevant policymakers in the United States (the White House, Congressional leaders, regulatory agencies, the central bank) are now united in their opposition to a domestic CBDC. Their focus now turns towards articulating a legislative and regulatory framework supporting stablecoins.

House Financial Services Committee Chairman Hill’s 2025 interview with CNBC confirms that leading US lawmakers believe expanded stablecoin adoption would help “extend the reserve currency status” of the US dollar globally. In addition, Federal Reserve Governor Christopher Waller now publicly supports stablecoins “because they are likely to propagate the dollar’s status as a reserve currency, though they need a clear set of rules and regulations.” Senate Banking Committee Chairman Tim Scott weighed in during January, pledging to craft a stablecoin “regulatory framework that…will promote consumer choice, education, and protection and ensure compliance with any appropriate Bank Secrecy Act requirements.” It remains to be seen if dollar-backed stablecoins could strengthen the dollar’s role in the global payment system.

The structure of legislation will materially impact growth trajectories for stablecoin markets domestically and internationally, with implications for US sovereign bond markets. For example, a regulatory framework could require stablecoin issuers to hold US Treasury securities to back their stablecoins, thus guaranteeing liquidity and demand for US dollar-denominated sovereign paper. Additional proposals to create a crypto asset reserve at the federal level could provide additional liquidity support to crypto markets. 

Geopolitics: President Trump campaigned on promises to safeguard the global role of the dollar. His promises included wielding tariffs as a mechanism to discipline foreign countries that undermine the global role of the dollar, presumably in addition to aggressive sanctions enforcement. The Trump administration is not alone in raising red flags regarding certain CBDC use cases. Growing concern exists internationally that non-US dollar CBDC networks could be used to evade Western sanctions. Against this backdrop, in October 2024, the Bank for International Settlements withdrew from the wholesale CBDC mBridge project, whose members include central banks from China, Hong Kong, Thailand, the United Arab Emirates, and Saudi Arabia. The BIS General Manager reiterated the policy that “…the BIS does not operate with any countries, nor can its products be used by any countries that are subject to sanctions…we need to be observant of sanctions and whatever products we put together should not be a conduit to violate sanctions.” In addition, Russia has called for a multipolar global financial system with a separate non-dollar clearing and settlement system.

Distributed free markets: Stablecoins currently occupy a tiny fraction of financial market activity. Crypto itself remains minor relative to US capital markets. Globally, the estimated stablecoin market size is $227 billion in market capitalization, as compared to $6.22 trillion for US capital markets and $3.39 trillion for global cryptocurrency markets. If current double-digit growth rates for stablecoins continue, they could constitute a considerable proportion of overall crypto market capitalization, if not capital markets themselves. More importantly, the vast majority of stablecoins are pegged to the US dollar.

Rapid adoption rates paired with speedy transaction volumes and velocity in stablecoin markets mean that today’s stablecoin and CBDC decisions may amplify ongoing shifts in reserve currency markets. Dramatic shifts in reserve currency status historically have been rare events. The more likely scenario for threats to dollar dominance involve a range of alternative currencies nibbling at the dollar’s role at the margins. While the US dollar is comfortably in the lead, accounting for 49.2 percent of international payment messaging through SWIFT, its share of global FX reserves has fallen from 71 percent in 2001 to 54.8 percent at present. Decreased demand for dollars has increased demand for non-traditional currencies, gold, and several pairs of local currencies, rather than traditional reserve currencies.

In this context, choices made by individual users can materially impact global reserve currency status. The broad adoption of US dollar-backed stablecoins could even reverse the de-dollarization trend.  Decisions made by policymakers during 2025 will thus materially impact how the stablecoin and dollar markets evolve. 

European crypto rules: EU officials promote the digital euro as a mechanism for delivering strategic and economic autonomy relative to the US dollar. At the retail level, they compete with local payments processes currently dominated by US credit card companies. Globally, they facilitate increased usage of the euro as an international transaction currency. Secondary use cases include using blockchain technology to create “ tokenized” (euro-denominated) deposits that would cement the role of commercial banks within the payment system. European policymakers have also begun experimenting with tokenized securities. Slovenia became the first eurozone sovereign country to issue a tokenized euro area sovereign bond. In December, the Bank of France became the first eurozone central bank to complete transactions in the secondary market for both sovereign fixed income and equity using an unnamed digital currency on a blockchain.

However, if a critical mass of individuals in a country holds wealth in a foreign currency stablecoin, the competitive landscape, if not the survival of other reserve currencies, requires that they provide a digital alternative. The scenario also creates incentives for other jurisdictions to make it difficult to achieve  interoperability with non-euro stablecoins, while creating economic hurdles for local users to choose US dollar-backed stablecoins—essentially preserving their economic and monetary sovereignty.

Some see the newly issued EU crypto regulatory framework—the Markets in Crypto Assets (MiCA); and specifically the 1:1 ratio of required liquid reserves for stablecoins —as a strategic tool to raise barriers to non-EU issuers of US dollar-denominated stablecoins. MiCA extends bank-like regulatory requirements to crypto asset issuers and intermediaries. We discussed that framework and its relationship to the US crypto asset policy landscape in our January 28, 2025 Econographics essay. The framework potentially provides European regulators with the time and tools to play defense by regulating local stablecoin markets to permit either a digital euro or euro-denominated stablecoins to gain market traction. Market data will provide the metric for policy effectiveness.

Barbara Matthews is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center. She is also Founder and CEO of BCMstrategy, inc., a company that generates AI training data and signals regarding public policy.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center and senior fellow at the Policy Center for the New South; a former senior official at the Institute of International Finance and International Monetary Fund.

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

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The post Central bank digital currencies versus stablecoins: Divergent EU and US perspectives appeared first on Atlantic Council.

One critical challenge for the United States in the energy security space is the sourcing of enriched uranium that fuels nuclear reactors across the country, vital for the energy transition away from fossil fuels. The United States has consistently depended on Russia for enrichment services. At the same time, the US enrichment capacity, once thriving, has dwindled, giving way to foreign imports. Nearly seventy-three percent of enriched uranium in 2023 originated abroad. Such reliance on a handful of foreign sources, and especially adversarial countries, introduces severe supply vulnerabilities. With the global demand for enriched uranium expected to rise, the United States should regain its status as a large uranium enricher capable of satisfying its domestic demand.

Russia has a consistent track record of weaponizing energy dependence to coerce other countries. Approximately twenty-seven percent of the enriched uranium used in the United States comes from Russia, which is responsible for around forty-four percent of global enrichment capacity. Although the Biden administration banned Russian uranium imports by signing the H.R.1042, Prohibiting Russian Uranium Imports Act into law, effective August 2024, the Act permits US firms to procure nuclear fuel from Russia’s state-run nuclear energy firm, Rosatom, under a waiver program until alternative suppliers are secured. These waivers, however, can only be granted until 2028 and are designed to give US energy providers sufficient time to adjust to the new conditions.

In response, in November 2024, Moscow announced “tit-for-tat” restrictions on uranium exports to the United States. According to the new rules, exemptions might be made under one-off licenses issued by the Russian Federal Service for Technical and Export Control. While it is unclear whether such licenses will be granted, this move yet again showcases the risks of relying on external fuel sources.

The pursuit of indigenous enrichment capacity is not motivated by market dynamics or elevated prices. The current price of enrichment services (measured in separative work units) is significantly lower than at any point between 2006 and 2019. Instead, the drive stems from vulnerabilities associated with overreliance on a handful of suppliers. Such concentration of supply may become vulnerable to disruptions caused by malign actors or market shocks.

Building resilient enriched uranium supply chains is a critical policy to prevent future weaponization and disruptions by malign actors. It requires more than simply halting imports from Russia. The United States should pursue a strategic policy to meet its own nuclear fuel needs while helping establish resilient and transparent supply chains to other nations. The Sapporo 5—a coalition of like-minded countries comprising Canada, Japan, France, the United Kingdom, and the United States—has pledged to collaborate on securing a reliable nuclear fuel supply chain. Achieving this objective will require a sustained increase in allied financing across all stages of the fuel cycle, including uranium enrichment.

A growing bipartisan consensus in the United States supports strengthening domestic uranium enrichment programs, even if allies and partners temporarily fill the gaps. Until recently, the United States lacked domestically owned uranium enrichment facilities. To address this, around $3.4 billion has been mobilized to jumpstart domestic enrichment efforts. These funds will benefit domestic enrichers and support firms at other fuel cycle stages, including mining.

The goal of building domestic uranium enrichment capacity to safeguard from disruptions should remain a priority. Despite the optimistic outlook, the jury is still out on whether these efforts are sustained in the long run. Such investments cannot have immediate results and require a strategic vision. Additionally, the nuclear fuel cycle, by design, is hard to sustain competitively without close public-private collaboration. Public-private partnerships and long-term demand signals to service providers are essential to building a resilient enriched uranium supply chain.

Mikael Pir-Budagyan was a Young Global Professional with the Economic Statecraft Initiative of the Atlantic Council’s GeoEconomics Center.

Economic Statecraft Initiative

Housed within the GeoEconomics Center, the Economic Statecraft Initiative (ESI) publishes leading-edge research and analysis on sanctions and the use of economic power to achieve foreign policy objectives and protect national security interests.

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Should the Trump administration choose to use the FTO designation on major Mexican cartels, it may have impacts that have not been fully evaluated. For example, US companies operating in Mexico will need to determine whether their operations may provide “material support or resources” to the cartels—a broadly defined criterion that substantially expands the scope of penalties for violations. Similarly, insurance companies providing services to those US businesses with a presence in Mexico may reconsider their premiums—and whether they wish to further provide services at all. Mexican asylees could assert they are fleeing terrorism if they feel threatened by the cartels. Absent clear guidance from the Trump administration, financial institutions may also be put in a bind as they seek to evaluate whether financial activity involving Mexico may run afoul of the material support clause. The breadth of what may be encompassed under material support, from lodging, to guns, to “expert advice or assistance” renders compliance challenging, particularly as there’s no blacklist or other mechanism against which US companies may screen to evaluate if their funds or services involve cartel members. As such, the reverberations from an FTO designation of major Mexican cartels may be broader than intended.

While the notion of using the FTO authority to designate cartels has been explored previously—by both the executive and legislative branches—prior considerations have not resulted in action pursuant to the FTO authority due to the anticipated knock-on impacts. Instead, for example, the Biden administration issued EO 14059, “Imposing Sanctions on Foreign Persons Involved in the Global Illicit Drug Trade,” which has been used to impose sanctions on over four hundred individuals and entities involved in the global illicit drug trade. Relying on this sanctions authority and other financial, health, and enforcement tools may have contributed to the decrease in fentanyl and other opioid-related overdoses and deaths.

Countering the international drug trade is a goal with which the Trump and Biden administrations seemingly align, though their methods of pursuing this objective clearly differ. Given the scope of the problem and the impact illicit drugs have on American communities, creative approaches are certainly warranted. However, new strategies—and their broader impacts—should be thoroughly evaluated prior to deployment.

Samantha Sultoon is a nonresident senior fellow with the Atlantic Council’s Economic Statecraft Initiative.

Economic Statecraft Initiative

Housed within the GeoEconomics Center, the Economic Statecraft Initiative (ESI) publishes leading-edge research and analysis on sanctions and the use of economic power to achieve foreign policy objectives and protect national security interests.

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The post Mexican cartels as foreign terrorist organizations: Impact on US businesses appeared first on Atlantic Council.

The slow growth scenario is based on the assessment that the tariffs Trump is threatening would push inflation up from the annual 3 percent in December 2024. If that happened, the Federal Reserve would be cautious about any additional easing moves. Moreover, tariffs in Trump’s first Presidency have been shown to weaken growth as well. Promised tax cuts, including next year’s extension of the 2017 Tax Cuts and Job Act, would also keep the federal budget deficit high. The deficit is currently at 6 percent of gross domestic product (GDP), which is remarkably high for an economy near full employment, with an unemployment rate of only 4.1 percent. As a result, US national debt held by the public would continue to increase from the 100 percent of GDP it has already reached. All these factors have contributed to rising bond yields. For example, ten-year Treasury yields have risen by about one hundred basis points, up to 4.5 percent since their lows around 3.5 percent in September. Moreover, deportation of undocumented immigrants could reduce the growth of the labor force—88 percent of which has been due to net increases in immigrant workers in recent years. This would weaken GDP growth. Implicit in this scenario is that labor productivity, which has grown by 2.3 percent per year from 2023 to 2024, would revert back towards its 2010 to 2022 average rate of 1.5 percent.

By contrast, the strong growth scenario is built upon President Trump’s intention to significantly deregulate the economy. He also is keen to promote investment in artificial intelligence (AI) and crypto assets, to encourage the exploration and drilling of oil and gas, and to cut corporate taxes. These steps are expected to release the “animal spirits” fueling investment spending, corporate profit, and economic growth. Labor productivity would continue to increase, reverting to the long-term (1950 to 2009) average rate of 2.5 percent, making a higher trend growth rate of up to 3 percent a reasonable estimate. Belief in this possibility has helped keep equity markets resilient, with the S&P 500 index up by more than 3 percent in the past three months, despite rising bond yields.

One way to assess which of these two scenarios is more likely is to investigate the main drivers of the recent rise in bond yields. According to J.P. Morgan, the increase in ten-year US Treasury yields of around one hundred basis points can be explained by growth expectations and uncertainty, while monetary expectations have played a much smaller role.

J.P. Morgan’s interpretation of rising bond yields seems to be consistent with other market developments. For example, ten-year yields on Treasury Inflation Protected Securities, which reflect real yields, have increased by sixty-eight basis points since late October 2024, reaching 2.23 percent today. The term premium on ten-year Treasuries, compensating holders of long-term bonds for uncertainty—including uncertainty of the path of short-term interest rates over the lifetime of the bonds—has risen significantly over the past year to 1.24 percent. However, the spread between ten-year Treasury yields and interest rate swaps has remained stable, between eighty to eight-five basis points since July 2024. This spread indicates a current lack of investor concerns about budget deficits and substantial supply of new Treasuries. Moreover, inflation expectations as measured by the Federal Reserve Bank of New York’s Survey of Consumer Expectations are stable at 3 percent at the one-year horizon. They are mixed in the longer term, increasing from 2.6 percent to 3 percent at the three-year horizon and declining from 2.9 percent to 2.7 percent at the five-year horizon.

All told, market developments behind the rise in ten-year Treasury yields seem to indicate that the strong growth scenario is more likely—but then market sentiment can change on a dime! How sustainable is this prospect from today’s perspectives?

An indication is found in the 2026 growth forecasts—which tend to show a slowdown from the 2025 estimates. For example, the US Congressional Budget Office (CBO) expected 2.3 percent in 2025 and 1.9 percent in 2026. The Organization for Economic Co-operation and Development estimated 2.8 percent this year and 2.4 percent next year. Overall, the range of 2026 forecasts has narrowed down to 1.9 percent to 2.4 percent. This seems to reflect minimal expectations for further improvement in labor productivity growth. In fact, a reversal toward a lower average once observed in the decade before the Covid-19 pandemic is possible instead.

In a nutshell, while near-term growth prospects can be supported by releasing the “animal spirits,” it may not be sustainable longer term. One obvious problem is the unsustainability of the US fiscal trajectory. The CBO has estimated a federal budget deficit around 6 percent of GDP as far as the eye can see, boosting the national debt in public hands up from 100 percent of GDP to 118 percent in 2035—surpassing its previous high of 106 percent in 1946. The only factor that could help sustain this debt trajectory is enduring improvement in labor productivity. While uncertain at present, increased labor productivity is not implausible given the surge in technological advances, especially in AI.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center and senior fellow at the Policy Center for the New South; a former senior official at the Institute of International Finance and International Monetary Fund.

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

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The post US economic outlook 2025: It’s the productivity, stupid! appeared first on Atlantic Council.

DeepSeek represents China’s efforts to build up domestic scientific and technological capabilities and to innovate beyond that. Its advanced stage further exacerbates anxieties that China can outpace the United States in cutting edge technologies and surprised many analysts who believed China was far behind the United States on AI. The export controls on advanced semiconductor chips to China were meant to slow down China’s ability to indigenize the production of advanced technologies, and DeepSeek raises the question of whether this is enough. The US-China tech competition lies at the intersection of markets and national security, and understanding how DeepSeek emerged from China’s high-tech innovation landscape can better equip US policymakers to confront China’s ambitions for global technology leadership.

Homegrown: China’s innovation ecosystem

In the past decade, the Chinese Communist Party (CCP) has implemented a series of action plans and policies to foster domestic capabilities, reduce dependency on foreign technology, and promote Chinese technology abroad through investment and the setting of international standards. In 2023, President Xi Jinping summarized the culmination of these economic policies in a call for “new quality productive forces.” In 2024, the Chinese Ministry of Industry and Information Technology issued a list in of “future industries” to be targeted. These slogans speak to the mission shift from building up domestic capacity and resilience to accelerating innovation.

Since the implementation of the industrial action plan “Made in China 2025” in 2015, China has been steadily ramping up its expenditure in research and development (R&D). From 2016 to 2024, R&D expenditure expanded by 126 percent. According to statistics released last week by the National Bureau of Statistics, China’s R&D expenditure in 2024 reached $496 billion. However, China still lags other countries in terms of R&D intensity—the amount of R&D expenditure as a percentage of gross domestic product (GDP).

Compared to other countries in this chart, R&D expenditure in China remains largely state-led. Rhodium Group estimated that around 60 percent of R&D spending in China in 2020 came from government grants, government off-budget financing, or R&D tax incentives. For reference, in the United States, the federal government only funded 18 percent of R&D in 2022. It’s a common perception that China’s style of government-led and regulated innovation ecosystem is incapable of competing with a technology industry led by the private sector. However, companies like DeepSeek, Huawei, or BYD appear to be challenging this idea.

China has often been accused of directly copying US technology, but DeepSeek may be exempt from this trend. While DeepSeek was trained on NVIDIA H800 chips, the app might be running inference on new Chinese Ascend 910C chips made by Huawei. Additionally, DeepSeek primarily employs researchers and developers from top Chinese universities. This is a change from historical patterns in China’s R&D industry, which depended upon Chinese scientists who received education and training abroad, mostly in the United States. DeepSeek also differs from Huawei and BYD in that it has not received extensive, direct benefits from the government. Instead, it seems to have benefited from the overall cultivation of an innovation ecosystem and a national support system for advanced technologies.

China’s science and technology developments are largely state-funded, which reflects how high-tech innovation is at the core of China’s national security, economic security, and long-term global ambitions. DeepSeek was able to capitalize on the increased flow of funding for AI developers, the efforts over the years to build up Chinese university STEM programs, and the speed of commercialization of new technologies.

While some AI leaders have doubted the veracity of the funding or the number of NVIDIA chips used, DeepSeek has generated shockwaves in the stock market that point to larger contentions in US-China tech competition. Chinese firms are already competing with the United States in other technologies. In 2015, the government named electric vehicles, 5G, and AI as targeted technologies for development, hoping that Chinese firms would be able to leapfrog to the front of these fields. Now, in 2025, whether it’s EVs or 5G, competition with China is the reality.

The United States, China, and global tech competition

Some AI watchers have referred to DeepSeek as a “Sputnik” moment, although it’s too early to tell if DeepSeek is a genuine gamechanger in the AI industry or if China can emerge as a real innovation leader. As far as chatbot apps, DeepSeek seems able to keep up with OpenAI’s ChatGPT at a fraction of the cost. But DeepSeek’s low budget could hamper its ability to scale up or pursue the type of highly advanced AI software that US start-ups are working on. Perhaps more importantly, such as when the Soviet Union sent a satellite into space before NASA, the US reaction reflects larger concerns surrounding China’s role in the global order and its growing influence.

Unlike the race for space, the race for cyberspace is going to play out in the markets, and it’s important for US policymakers to better contextualize China’s innovation ecosystem within the CCP’s ambitions and strategy for global tech leadership. The CCP strives for Chinese firms to be at the forefront of the technological innovations that will drive future productivity—green technology, 5G, AI. And Chinese firms are already promoting their technologies through the Belt and Road Initiative and investments in markets that are often overlooked by private Western investors.

While the United States and the European Union have placed trade barriers and protections against Chinese EVs and telecommunications companies, DeepSeek may have proved that it isn’t enough to simply reduce China’s access to materials or markets. It is uncertain to what extent DeepSeek is going to be able to maintain this primacy within the AI industry, which is evolving rapidly. However, it should cause the United States to pay closer attention to how China’s science and technology policies are generating results, which a decade ago would have seemed unachievable. DeepSeek indicates that China’s science and technology policies may be working better than we have given them credit for. For US policymakers, it should be a wakeup call that there has to be a better understanding of the changes in China’s innovation environment and how this fuels their national strategies.

Jessie Yin is an Assistant Director with the Atlantic Council GeoEconomics Center.

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

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The post Is DeepSeek a proof of concept? appeared first on Atlantic Council.

Consistent EU policy posture

When the European Union’s (EU) digital currency regulation (MiCAR) went into effect on December 30, 2024, the EU’s regulatory pillars for crypto asset oversight were completed. Together with the Transfer of Funds Regulation and the Digital Operational Resilience Act, MiCAR extends bank-like rules to stablecoins and cryptocurrencies. The policy addresses financial stability and consumer protection risks arising from cryptocurrencies, most of which are mined outside of the EU. Indeed, the European Central Bank’s (ECB) December 2024 monetary policy minutes indicated that US crypto markets create elevated financial stability risks in the EU. ECB policymakers consistently prefer Central Bank Digital Currencies (CBDC), in the form of a digital euro, over cryptocurrencies to safeguard strategic autonomy and monetary sovereignty for EU businesses and individuals. 

MiCAR applies to the issuance, marketing, and trading of crypto assets and related services. Companies seeking to engage in these activities must comply with bank-like regulatory requirements, including having adequate internal risk management and minimum capital requirements. The regulation applies to three types of coin (e-money) issuers, two of which are stablecoins. All e-money issuers must be licensed as an electronic money institution or a credit institution (i.e. a bank) under the Second Electronic Money Directive. The nascent EU crypto industry supported the new framework because it provides legal certainty.

Conflicting US policy posture

The digital currency policy path from 2021 to 2024 in the United States has not been linear. Dramatic market growth, partisan bickering, and significant fraud-based losses could trigger financial stability issues in the mainstream financial sector and concerns about illicit activity in the crypto sector in the United States. These trends saw the United States careen from supporting both crypto and CBDC in 2022, to a controversial regulation-by-enforcement policy stance in 2023 that the courts consistently invalidated, to multiple bills in Congress during 2024. Bipartisan legislation covering stablecoins passed the House of Representatives in 2024, only to languish in the Senate.

The new Trump administration has spoken decisively. A new executive order states a clear policy directly in conflict with the EU stance. The United States now charts a pro-blockchain, anti-CBDC  policy trajectory on the grounds that CBDCs “threaten the stability of the financial system individual privacy, and the sovereignty of the United States.” It also asserts that “lawful and legitimate” stablecoins support the “sovereignty of the United States dollar.” Digital finance policy formation has been elevated to the White House level through the president’s Working Group on Digital Asset Markets. The policy shift will be bolstered by parallel pro-crypto policy initiatives in Congress and among financial regulators since the November 2024 election: 

• Senate Banking Committee: 2025 legislative priorities include crypto and stablecoin legislation to ensure “compliance with any appropriate Bank Secrecy Act requirements.” 
• House Financial Services Committee: Chairman Travis Hill’s first public statement promised to “create a regulatory framework for digital assets that will protect investors and consumers while keeping innovation in America.”
• Both the House and the Senate have announced investigations and hearings into the “Choke Point 2.0” regulatory policy initiatives that constrained crypto sector access to traditional financial sector liquidity.
• Commodity Futures Trading Commission (CFTC): In November 2024, the CFTC accelerated the ability to use assets besides cash as collateral by increasing reliance on distributed ledger technology.
• Securities and Exchange Commission (SEC): Acting SEC Chairman Mark T. Uyeda formed a new task force to accelerate work on a crypto regulatory framework. The task force will be led by Commissioner Hester Peirce, who has been a leader at the SEC regarding distributed finance and crypto issues.
  

Potential tension and opportunities for alignment

Before the 2024 presidential election, many viewed the legal certainty provided by MiCAR as creating competitive advantages for nascent EU crypto asset markets. Some promoted MiCAR for crypto assets, encouraging US, UK, and other jurisdictions to converge with the EU standard.

The Trump administration’s newly issued executive order makes clear that MiCAR will not provide a template for US policymakers. Both the crypto industry and traditional banking executives support the initiative to create the first blockchain-native policy framework. attending the World Economic Forum in Switzerland underscored that legal clarity will accelerate crypto use within the traditional banking system.

Transatlantic regulatory alignment is not impossible. In particular, US initiatives that expand the regulatory perimeter to cover cryptocurrencies and require compliance with the Bank Secrecy Act could trigger transatlantic alignment merely because no such comparable financial regulatory requirements exist in the United States today. EU alignment with the new US policy is also possible. Indeed, the European Parliament has observed that the EU Commission’s digital euro CBDC initiative is now a long-term aspiration rather than a near-term priority. Differences between the EU Commission and the European Securities Markets Authority (ESMA) regarding next steps for MiCAR also suggest that more market-friendly regulation could emerge. These kinds of alignment should not be confused with transatlantic regulatory harmonization or convergence, which has been an elusive target for decades in the financial services sector.

1. Market dynamics: US crypto issuers and intermediaries currently dominate EU markets. The 2025 European Banking Authority’s and ESMA’s joint report on recent developments in crypto-assets indicates that USD-based stablecoins constitute 90 percent of market capitalization and over 70 percent of trading volume in Europe. The volume of crypto transactions in Europe, instead, has remained at 8 percent since 2022 even as digital payment volumes increase. Policy clarity could propel US crypto firms to a more dominant position globally, to the detriment of nascent crypto asset markets in Europe. EU businesses may pressure policymakers to seek harmonization with the United States as a consequence.
   
2. Market access: Many MiCAR components run counter to how crypto markets operate. For example, the distributed nature of connected computers defies traditional regulatory requirements for a local physical subsidiary. MiCAR’s local subsidiary requirements could be vulnerable to trade policy challenges as non-tariff barriers, particularly in the context of a new US government that favors using trade policy to achieve non-trade policy goals. In addition, blockchain-based counterparty anonymity does not align neatly with either MiCAR or the US Bank Secrecy Act.
   
3. Financial stability: The rapid twin insolvencies in 2023 at Silicon Valley Bank and Silvergate created liquidity pressures both for stablecoins and the traditional banking system. Addressing financial stability risks often involves official sector liquidity support in addition to precautionary regulatory oversight. Initial press reports indicate that the United States may create a strategic bitcoin reserve. TheBITCOIN Act of 2024 (S.4912) introduced by Senator Cynthia Lummis proposed a strategic bitcoin reserve to serve the same role as gold reserves. The legislation was silent on whether, or how, the reserves could be used to provide liquidity support to markets under stress. Any such reserve could create controversy and pressure for comparable strategic reserves globally.
   

The EU’s preferred crypto policy framework extends the perimeter of banking regulation designed to constrain financial stability risks arising from non-local entities while promoting a regional CBDC.  No details have yet emerged from the US regarding specific regulatory policy choices. However, US policymakers have articulated a clear set of priorities which are dramatically different from the EU. US policymakers seek to support private sector blockchain-based intermediation while declaring instead that CBDC initiatives create financial stability risks.  High level policy alignment is possible. Divergences, heated rhetoric, and drama are inevitable.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center and senior fellow at the Policy Center for the New South; a former senior official at the Institute of International Finance and International Monetary Fund.

Barbara Matthews is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center. She is also Founder and CEO of BCMstrategy, inc., a company that generates AI training data and signals regarding public policy.

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

Learn more

The post The 2025 crypto policy landscape: Looming EU and US divergences? appeared first on Atlantic Council.

With legislators favorable to the industry—including Representative French Hill as the chair of the House Financial Services Committee (watch his Atlantic Council event on stablecoins here), Senator Cynthia Lummis as the newly formed chair of the Senate Banking Committee’s subcommittee on digital assets, SEC chair pick Paul Atkins, and advisors like Elon Musk and commerce secretary nominee Howard Lutnick—confidence is growing that crypto-forward agenda is on its way. But what does success on the regulatory front actually look like? What does it mean for the rest of the world? We dive into the dozen bills under consideration in Congress and zoom in on the three big themes for crypto regulation in 2025.

The SEC vs CFTC: Finally, a truce?

One of the major disagreements between the industry and legislators has been whether the SEC or the Commodity Futures Trading Commission (CFTC) is the right regulator for crypto. As is often debated in Washington, is crypto a security or a commodity? Under the former SEC chair, Gary Gensler, the agency regularly fined crypto companies when it found them in breach of securities laws. This led to some legislators and industry favoring the CFTC as the regulator. Several bills under consideration, including the Financial Innovation and Technology for the 21st Century Act, the Digital Asset Market Structure and Investor Protection Act, the Responsible Financial Innovation Act, and the BRIDGE Digital Assets Act, address the jurisdiction of SEC and the CFTC regarding crypto.

One of the Trump campaign’s biggest promises to the industry is an end to this era of regulation by enforcement. Paul Atkins, Trump’s pick to replace Gary Gensler as SEC chair, is seen as friendly to the crypto industry. His appointment follows a wave of legal decisions over the past two years that have ruled in favor of the companies against the SEC. Atkins’ job, once he’s sworn in, will be two-fold: He will need to clarify the SEC’s jurisdiction over the crypto market and then actually enforce regulations on crypto-assets—their issuance, use, and role in the US economy. Congress will augment these efforts, and you can expect several bills rebalancing the SEC and CFTC’s jurisdiction and enforcement powers. See below for the full breakdown.

Stablecoins, ahoy! 

Stablecoins have now passed $190 billion in global circulation. They can provide much needed liquidity for the crypto market and act as conduits between crypto and non-crypto-assets. Stablecoins increasingly aim to address humanitarian aid and cross-border payments such as remittances, including in Ukraine.

While 98 percent of stablecoins are pegged to the dollar, over 80 percent of stablecoin transactions happen abroad. This makes these “digital dollars” subject to regulatory frameworks set in Europe, Asia, and Africa. Europe’s stablecoin framework, known as Markets in Crypto-Assets, came into full effect in January 2025. Implementing the framework should result in some introspection across the Atlantic over the pending stablecoin legislation in Congress. The Clarity for Payment Stablecoins Act and the Lummis-Gillibrand Payment Stablecoins Act are the two bills under consideration. The Clarity Act has been under consideration by the House Financial Services Committee for the last year, coming close to bipartisan consensus a few times. It has evolved into a discussion draft proposed by Senator Bill Hagerty. The Lummis-Gillibrand Act was introduced to the Senate in May 2024. 

The bottom line, as our cryptocurrency regulatory tracker shows, is that regulations in the United States play a key role in the future of crypto around the world. While other countries have been developing their own regulatory frameworks, the United States has lagged behind—that may finally change in the months to come. 

A trailblazing national bitcoin reserve  

With the appointment of Lummis as the chair of the digital assets subcommittee at the Senate Banking Committee, it’s likely that talks of a bitcoin reserve will continue on the Hill. The logic behind the bill is to purchase bitcoin to be able to pay back the national debt. There are some open questions about the Lummis bitcoin reserve proposal—including the convoluted funding model, which revalues gold certificates from their 1993 price to their current value. 

There are also proposals for a US Central Bank Digital Currency (CBDC). The Trump administration and Republican lawmakers have made it clear that a retail CBDC, or the digital dollar, is not going to happen in the United States. This puts the United States at odds with its peers like Europe, which is rolling out a pilot of the digital euro in 2025, and the United Kingdom, which set up a CBDC lab just last week. The executive order directs all agencies to stop any ongoing work on a CBDC.

The breakdown of all the major pieces of legislation currently being considered is below.

Ananya Kumar is the deputy director, future of money at the Atlantic Council’s GeoEconomics Center.

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

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The post What is next for crypto regulation in the US? appeared first on Atlantic Council.

We calculate that China’s property and local government-driven slowdown was far more severe in 2024 than reflected in official data, as has been the case in previous years as well. Official data is not consistent with China’s growth and its impact on the global economy. Macroeconomic data shows good news of growth consistently hitting targets: if that were the case, Beijing’s increasingly aggressive policy actions aimed at propping up the economy would not be necessary. 

Rhodium Group estimates that China’s GDP grew between 2.4 percent and 2.8 percent in 2024, well below NBS figures. Looking ahead, after three years of drag from the property crisis, China’s economy should see some cyclical improvement in 2025. This is partly because property has fallen far enough. Just as importantly, Beijing is finally acknowledging the urgent need to stimulate domestic consumption. Policy actions pledged so far are likely to boost growth to the 3 to 4 percent range in 2025, perhaps even as high as 4.5 percent—but only if everything goes Beijing’s way.

While Beijing’s claim that it made its targets in 2024 is simple, the real performance is more complex. Here is a cheat sheet for looking at the actual 2024 economic performance, and the outlook for 2025, using an expenditure-side GDP framework. 

2024 in review

Investment growth was probably flat at best. It most likely declined again in 2024, driven by the slowdown in local government investment, particularly in infrastructure. The property sector continued to decline, with new starts down by 23 percent through November and completions down by 26 percent. Private sector fixed asset investment fell even in official data.

Household consumption likely contributed somewhere between 1.3 and 1.6 percentage points to 2024 growth. According to NBS household survey data, real per capita household expenditure expanded by over 5 percent. But this is hard to square with other indicators, which show retail sales growth at half the 2023 rate, consumer confidence at rock bottom, consumer price inflation near zero, and declining e-commerce sales.

Government consumption growth was probably weakly positive. Monthly government expenditure data show meager overall spending growth of around 1 percent, dragged down by local government fund expenditure, which contracted for the fourth consecutive year. The stimulus package announced in November focuses on refinancing local government debt at lower interest rates, which is necessary from a debt sustainability perspective but will have a limited impact on government consumption.

Lastly, net exports are on track for their third-largest contribution to China’s growth this century. Exports rose 6.7 percent in value terms year-to-date through November, and falling export prices—partly a symptom of China’s industrial overcapacity—mean that real exports have been even stronger. Imports have been weak due to subdued domestic demand.

The outlook for 2025

Investment is likely to return to positive growth in 2025. Construction activity will stabilize, with new housing starts now below Rhodium estimates of long-term equilibrium demand. Local government infrastructure investment should improve as well, given more aggressive fiscal deficit spending. Private investment will likely remain weak, however, given the overall constraints on credit growth and continued deflationary pressures in producer prices.

Boosting household consumption was the top message at the December 2024 Central Economic Work Conference. However, policy support is mostly focused on expanding trade-in subsidy programs for consumer durables, which have had an unclear impact on aggregate consumption. Meanwhile, the profound negative wealth effects from the real estate crisis and fragile labor market conditions continue to depress consumer confidence.

Government consumption should contribute more to growth in 2025. The government has promised a stronger fiscal impulse, reportedly including an expanded fiscal deficit target and larger special treasury bond issuance. Still, China’s fiscal system will remain constrained by weak revenue growth. 

China’s net exports outlook is deeply uncertain, pending the scope and timing of potential US tariffs. China’s possible responses include a combination of its own tariffs, currency depreciation, and targeted export restrictions. If global markets remain open to China, growth in China’s record-high trade surplus is likely to be small but positive.

Overall, the picture for 2025 is one of near-term improvement, but this should not be mistaken for a long-term recovery. Overinvestment in manufacturing remains a serious challenge—one that will make China’s trading relationships more fraught in 2025. Rebalancing toward a consumption-led economy will require much deeper economic liberalization.   

Daniel H. Rosen is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center and a founding partner of Rhodium Group where he leads the firm’s work on China, India and Asia.

Jeremy Smith is a Research Analyst with Rhodium Group’s China practice, focusing on China’s evolving growth dynamics and economic engagement with the world.

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

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The post China’s economic performance: New numbers, same overstatement appeared first on Atlantic Council.

During his first term, President Trump issued an executive order that prohibited “U.S. persons” from engaging in certain transactions with publicly traded securities issued by “Communist Chinese Military Companies.” The executive order and companion legislation in the 2021 National Defense Authorization Act empowered the Department of the Treasury’s Office of Foreign Assets Control (OFAC) to publish and maintain a list of restricted PRC military companies. President Biden then issued his own executive order in 2021, which amended Trump’s and expanded the scope of the list to cover Chinese surveillance companies. This list—now called the Non-SDN Chinese Military-Industrial Complex Companies (NS-CMIC) List—is a powerful sanctions tool that enables OFAC to designate any PRC company that supports military-civil fusion or surveillance technology. Despite this wide authority and bipartisan congressional pressure, however, the Biden administration never updated the initial list after its publication in 2021. The incoming Trump administration should broaden the definition of covered entities and prioritize increasing the number of PRC companies on a non-SDN (Specially Designated Nationals) prohibited investment list.

The first designations on an updated list could be publicly traded PRC companies already designated on other US government blacklists, such as the Bureau of Industry and Security Entity List, Military End-User List, Uyghur Forced Labor Prevention Act Entity List, the Federal Communications Commission’s Covered List, and the Department of Defense’s 1260H list. Expanding the existing NS-CMIC List to include other blacklisted PRC companies would require updated definitions through an amended executive order or legislation. If enacted, this policy would enable the US government to close an economic security policy gap. This gap currently allows Americans to invest in blacklisted PRC military companies and human rights abusers despite the same PRC companies being subject to trade restrictions. The expansion of authorities for a revised NS-CMIC List could also include a 50 percent rule or control definition that would immediately expand the scope of the list to include majority-owned subsidiaries of named entities. The NS-CMIC List currently does not include prohibitions on subsidiaries. This is a straightforward policy already used by OFAC for other sanctions programs. A 50 percent rule for the NS-CMIC List would have an immediate chilling effect on the PRC’s military-industrial complex. Finally, the administration and Congress should expand authorities to allow Treasury to issue outbound restrictions on PRC companies that manufacture fentanyl precursors and support the Chinese Communist Party’s (CCP) ongoing genocide and human rights abuses in Xinjiang. 

While expanding the NS-CMIC List is an important first step, an effective outbound screening mechanism cannot rely exclusively on listing individual PRC entities. As history has repeatedly shown, the US government’s highly bureaucratic entity listing processes are structurally misaligned with the agile evasion strategies employed by targeted foreign entities. The incoming National Security Council and Department of Government Efficiency should examine ways to streamline the disparate policy processes used to create and maintain blacklists—a policy issue that industry has long championed. In the meantime, though, the new administration’s outbound policy must expand beyond lists to include tightly defined sectoral restrictions on the most high-risk technologies and sectors that jeopardize America’s security. These include hypersonics, quantum, advanced computing, artificial intelligence, semiconductors, and other critical defense articles and dual-use technologies on the US Munitions List and the Commerce Control List. PRC companies regularly evade US economic security restrictions. This type of sectoral approach will give the administration wider authority to crack down on CCP efforts to use US technology and capital to build a military that directly threatens the lives of American armed service members. 

The Trump administration’s outbound mechanism should also close the loopholes in the Biden executive order by including broader prohibitions on publicly trading securities issued by high-risk PRC entities. American investors and funds purchase billions of dollars of PRC securities each year, including securities issued by PRC military companies and other large PRC companies that use slave labor and help the CCP perpetuate genocide. The new outbound regime should expand the covered activities section of the Biden executive order to include prohibitions on all critical technologies subject to sectoral restrictions and securities issued by PRC companies that use and/or benefit from Uyghur forced labor.

The overall success of the Trump administration’s outbound investment screening regime depends on effective enforcement. To detect evasion and prevent American capital from directly funding our adversaries, the White House should direct the Intelligence Community (IC) and the Office of the Director of National Intelligence (ODNI) to prioritize economic security issues. A practical first step would be to expand the ODNI’s Office of Economic Security and Emerging Technology (OESET). Reallocating or adding resources for intelligence collection and analysis to support the enforcement of economic security regulations—including outbound and export controls—is needed. However, resource allocation alone is insufficient. A comprehensive review of authorities for OSINT and financial data is also necessary to ensure that the Central Intelligence Agency, National Security Agency, Federal Bureau of Investigation, and other non-IC agencies can effectively monitor global capital and investment flows associated with high-risk PRC companies. This review must also ensure the IC does not overclassify financial intelligence, a key ODNI policy issue that could undermine efforts to engage with allies on the threats posed by PRC capital flows.

To safeguard American economic and national security, the Trump administration should implement a targeted outbound investment screening regime to counter the PRC’s military-civil fusion system, slave labor, and fentanyl trade. By expanding the NS-CMIC List, introducing sectoral restrictions on critical technologies, and implementing prohibitions on publicly traded PRC securities, the Trump administration can close key loopholes exploited by PRC companies and the CCP. Enhanced Treasury enforcement and intelligence capabilities will ensure resilient measures against evasion tactics. A targeted and well-enforced outbound investment screening regime will allow the United States to increase its economic sovereignty and more adequately defend against Beijing’s increasingly complex financial and supply chain warfare.

Kit Conklin is a nonresident senior fellow at the Atlantic Council’s GeoTech Center.

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The post A policy blueprint for the Trump administration’s outbound investment screening regime appeared first on Atlantic Council.

That pattern started to reemerge last week after the Chinese leadership’s annual conclave on economic policy. Xi declared in his keynote speech during the December 11-12 conference that “the economy is stable and making progress . . . and the main economic and social development goals and tasks are about to be successfully completed.” The conference communiqué announced that the most important policy task in 2025 will be to “vigorously boost consumption” through “moderately loose monetary policy” and “more active fiscal policy.”

The reception was decidedly mixed. Echoing many other observers, investment bank Morgan Stanley called the government announcement the “most aggressive stimulus tone in a decade,” but also said that “implementation remains uncertain.” In the absence of concrete details accompanying the announcement, China’s stock markets immediately tanked. In a country that lacks other outlets for public opinion, it was a clear vote of no confidence.

This lack of confidence should come as no surprise. Amid economic problems that include weak household consumption and anemic business investment, a property market collapse, high youth unemployment and deflation, the Chinese government is not facing up to a root cause of the downturn. It has spent five years stifling the country’s once-dynamic private sector. Policies that favor state-owned enterprises and give center stage to state planning have come at the expense of a market economy hit by tight regulation and Chinese Communist Party interference. “Building entrepreneurial confidence depends primarily on the reform direction, not on the strength of monetary policy stimulus,” said Zhang Weiying, a leading Chinese professor of economics, in an August speech. “However, recent practices suggest that focusing solely on [monetary and fiscal] solutions cannot fundamentally resolve China’s economic challenges.”

There is also an important international dimension to the policy choices Xi faces. China is the largest driver of global demand, and many countries need China to sustain a high level of import demand. But imports have been falling as the economy struggles, and Beijing has relied on export growth to keep China’s manufacturers alive. As a result, trade tensions are rising as a flood of Chinese goods hits both advanced and emerging market economies. And with President-elect Donald Trump threatening new US tariffs against China, the Chinese government will need to look to domestic drivers of growth.

The government certainly can do more to boost demand. The stimulus measures taken since September have focused on increasing credit, supporting local-government purchases of China’s vast store of unfinished or unsold homes, and restructuring the massive debt of local governments. In addition, Beijing is spending heavily on developing advanced technologies and building infrastructure, but the benefits of those expenditures—especially for more roads and railways—appear to be more limited than in the past. Most importantly, corporate and household borrowing has failed to gain momentum despite the easy credit—a sign of the depressed confidence that has undercut consumption and investment. Weak November retail sales and home sales figures show that, as far as consumers are concerned, it’s not nearly enough.

The true scale of the economic downturn has recently received attention in China through widely circulated comments by private sector economists. Earlier this month, Gao Shanwen, chief economist at SDIC Securities, was quoted as saying that post-pandemic China is “full of vibrant old people, lifeless young people, and despairing middle-aged people,” and he suggested that as many as forty-seven million people are unable to find formal work in China’s cities. Gao also estimated that the country’s economic growth over the past three years may have been overstated by 10 percentage points.

Meanwhile, Fu Peng, an economist with Northeast Securities, highlighted the plight of the country’s poor, saying on December 4: “Whenever the economy contracts, it’s those at the bottom who suffer the most at first. However, that barely has any impact on the macroeconomic data.” Not long ago, such critiques would have been just a small part of a wide-ranging policy debate that used to take place in China. But now, in the country’s current climate of strict control over all policy discussions, both economists’ remarks were removed from the Chinese internet after a few days and their social media accounts were restricted.

Public criticism of government economic policies has not been limited to private sector economists. “In recent years, the lack of effective demand in China can . . . be attributed to the government failing to return income to the public while itself also not actively spending,” said Xu Gao, chief economist at the state-owned Bank of China International in a September speech.

The Chinese government’s economic policy communiqué last week does speak of a “greater focus on benefiting people’s livelihood.” But it only cited a program introduced at an earlier stage of the stimulus effort to subsidize trade-ins of cars and household appliances. There was no new reference to income subsidies or other initiatives to directly assist China’s unemployed and underemployed, especially those in the construction and real estate industries who have lost work and millions of recent university graduates who are unable to find jobs. There also has been no talk of using the government’s central bank digital currency to make direct payments to consumers.

Since China’s middle class can buy only so many refrigerators and electric vehicles—even with government subsidies—the big question is whether Beijing is prepared to consider a wider effort to support consumers. However, Xi previously has expressed skepticism about “welfarism,” and he has spoken positively of his own experience during China’s Cultural Revolution of having to “eat bitterness.” So, public assistance may prove a bridge too far for a party that rose to power nearly eighty years ago claiming to represent China’s less fortunate citizens.

Perhaps it will take another shock to the system—for example, a sharp drop in exports—to jolt China’s rulers out of their current failing approach.

Jeremy Mark is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center. He previously worked for the International Monetary Fund and the Wall Street Journal Asia. Follow him on X: @JedMark888.

The post Once again, China pushes for economic stimulus, hoping for a different result appeared first on Atlantic Council.

Underwhelming COP29

Participants at COP29 managed to reach an agreement on international carbon market standards, a key step to establishing such a market under the United Nations (UN), as envisioned in Article 6.4 of the 2015 Paris Agreement. However, COP29 became stuck on the key objective of the meeting: producing a new collective quantified goal (NCQG) as a new climate finance target for the next ten to fifteen years. This is meant to replace the current $100 billion annual figure—a pledge of financial aid to developing countries made by developed countries in 2009, but viewed as totally inadequate.

The most important issue to be settled is the quantum of the NCQG. Participating countries have disparate expectations, which are unlikely to be bridged. Developing countries have coalesced around the target of $1.3 trillion a year of international climate finance aid, based on a report by the High Level Expert Group on Climate Finance. Developed countries spearheaded by the European Union (EU) have reportedly toyed with a range of $200-300 billion, but are reportedly leaning toward $200 billion and a 2035 deadline.

The issue of the contributor base has also been important. Developing countries want to stick to the Paris Agreement, which calls for developed countries to provide climate finance to developing countries. Developed countries want to widen the contributor base to include rapidly growing emerging market countries. These countries, such as China and the Gulf countries, are able to contribute and should do so because of their high levels of emissions. Many developing countries, in particular China, have strongly objected to these demands. As part of the debate, China announced that it has voluntarily provided 177 billion yuan ($24 billion) in project financing to help other developing countries deal with climate change since 2016. This statement highlights China’s preferences for a bilateral approach. China is using climate finance as a tool to further its geopolitical agenda, instead of contributing funds to multilateral efforts. If other countries decide to follow a similar bilateral approach, they could strike another blow against the unraveling multilateral world order.

A day after the COP29 officially ended, an agreement on NCQG was reached, calling for developed countries to provide $300 billion a year by 2035 to help developing countries in their climate efforts. No one is happy with the agreement. Developing countries have criticized it as  too little. Developed countries have tried to lower expectations about official aid, emphasizing that the funding would have to come from a wide variety of sources, including the private sector. In any event, the agreements concluded at the COP29 will be overshadowed by the fact that Trump would most likely pull the United States out of the 2015 Paris Agreement for a second time—and could even withdraw from the 1992 UN Treaty that provides the framework for the COP process. This time around, Argentina could follow suit and quit the Paris Agreement. President Milei already recalled his negotiators midway through the COP29 meetings. Without the US and possibly Argentina, the rest of the world would have to struggle to come up with meaningful nationally determined commitments to achieve net zero emissions and to mobilize climate finance to help developing countries. This outlook does not augur well for the COP30 to be hosted by Brazil in 2025.

A divided G20 Summit

The G20 Summit in Rio de Janeiro has been described by media reports as chaotic and divided. Nevertheless, it managed to produce a Leaders’ Declaration, even though the debate about wording was cut short by Brazil’s President Lula—leaving a bitter taste among Western leaders. The Declaration contains watered-down language on practically all agenda items. A major result is the Global Alliance Against Hunger and Poverty, Lula’s signature project, which gathered support and was launched.

However, the facade of cooperation has been rocked by Argentina’s statement that while Milei did not want to prevent other leaders from signing the declaration, he strongly criticized key elements of the agenda. His targets included anything to do with the UN 2030 Sustainable Development Goals and strengthening the role of governments in fighting global hunger (which according to Milei should be promoted by removing the involvement of governments). At the same time, Milei stressed that he would prioritize economic development over environmental protection, having dissolved Argentina’s Environment Ministry after taking office. These arguments are in line with Trump’s views. They will likely be advanced more forcefully in future G20 meetings, undermining the chance of agreements for joint actions and weakening the G20 itself.

Prospects for international cooperation: more turbulence

President Trump will likely reverse or ignore many of Biden’s environmental and climate change initiatives. However, as several red states have seen job creation thanks to IRA programs, he may continue some programs on a case-by-case basis. Overall, Trump’s approach would weaken environmental protection home and disengage from international climate efforts.

In the vacuum created by the United States and Argentina, China has already stepped in to champion international climate efforts under the Paris Agreement and open trade, as Xi Jinping claimed in his speech at the Rio G20 Summit. China has appealed to the EU to “collaborate effectively on the COP29 agenda…(to) establish a strong foundation for re-aligning their broad green and economic initiatives and improve their bilateral relationship.” China’s approach may appeal to the EU when it’s confronted with Trump’s denial of climate change and his protectionist unilateralism. However, if the EU were to cooperate with China on climate and trade issues, it would find itself at greater odds with a Trump administration already unhappy with the EU for free riding the US security umbrella while posting a trade surplus with the United States. The EU would be in a very difficult position, as it still very much depends on Washington for security, especially against a revanchist Russia emboldened by its successes in Ukraine.

The rest of the world can find ways to deal with climate change without the US federal government, as it did during Trump’s first presidential term—including working with US states and cities still keen to promote a green agenda. But the whole exercise would be inefficient and more difficult, especially when mobilizing climate finance.

As summarized by Bloomberg, the Rio G20 Summit has shown “how quickly the guardrails are coming off the international rule-based order…(as) the looming return of Trump hung over the proceedings like the proverbial sword of Damocles.” Expect more of the same, at future summits—starting with the 2025 G20 under the presidency of South Africa.

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

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

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The post Divided COP29 and G20 Summits: A taste of things to come appeared first on Atlantic Council.

There is concern globally about what a second Trump administration will mean for Russia-related sanctions, particularly if they’ll be quickly lifted as part of a deal to end the crisis in Ukraine. Sanctions against Russia to date have been a true multilateral effort, with dozens of nations subscribing to the program and heavy coordination among Group of Seven (G7) partners and European Union teams. While President-elect Trump has not made any specific statements about the use of sanctions on Russia, he may yet act to change them. Considering that possibility, it is important to note that the president is not the sole decider.

Any next steps in an expansion or potential reduction of sanctions against Russia will largely be directed by whoever is appointed in key roles on the National Security Council and at the Treasury and State Department, as well as the US Congress. In an extraordinary bipartisan effort in 2017, during Trump’s first administration, the Countering America’s Adversaries Through Sanctions Act (CAATSA) was enacted in part to limit the president’s ability to unilaterally lift sanctions on countries such as Russia. CAATSA requires the president to submit a report to appropriate congressional committees and leadership prior to lifting Russia sanctions. This however doesn’t extend to Biden-era sanctions after the second invasion of Ukraine in 2022. While G7 partners’ concerns about the potential for the United States to lift its sanctions targeting Russia are valid, there are several procedural hoops the next administration would need to jump through to do it in order to fully lift all existing sanctions.

If the next administration decides to expand sanctions on Russia, there is one tool that was employed in a limited form in Trump’s first administration that could be considered: secondary sanctions. Secondary sanctions force countries to choose between doing business with those imposing sanctions or those that are the subject of sanctions. President Obama’s administration leveraged secondary sanctions to bring Iran to the negotiating table to form the Joint Comprehensive Plan of Action (JCPOA) in 2015, a deal that Trump ultimately abandoned in 2018. Secondary sanctions related to Russia were imposed by President Biden in December 2023 and have slowly begun to be implemented. It’s conceivable that this instrument of foreign policy could be used as another stick in a Trump 2.0 strategy to compel unaligned countries, including current US allies, to align with American objectives regarding Russia or other national security priorities, such as China. 

However, relations with China are not as tense as they were when Trump left office nearly four years ago. The Biden administration sought a reset of US-China relations after tensions reached a peak during the spy balloon incident in 2023, and has largely followed the path of export control and sanctions policy that started during the Trump administration. It notably eased, but did not pull down the Trump-era tariffs targeting China’s unfair trade practices. The Economic Working Group was formed between the United States and China in October 2023 to serve as an ongoing channel to discuss bilateral economic policy matters including climate change, capital requirements, and fentanyl trafficking. While there continues to be a tit for tat on trade and export control matters, it is on a less prominent scale than the first Trump administration. 

Given President-elect Trump’s rhetoric on the campaign trail about the importance of building relationships with your adversaries, it is still an open question of whether he will resume his tactics of trade and tariff threats against China once in office. The landscape with China has changed since Trump left the White House, including through China imposing the Anti-Foreign Sanctions Law in 2021. The law forbids compliance with foreign sanctions in China, complicating the ability of any US business to fully comply with both Chinese and US regulations. It is conceivable that, between the Anti-Foreign Sanctions Law requirements and export control bans China has put in place for rare earth minerals and precious metals, Trump 2.0 takes a more diplomatic approach toward China lest he more broadly disrupt global supply chains.

Daniel Tannebaum is a non-resident senior fellow with the Economic Statecraft Initiative at the Atlantic Council and partner in Oliver Wyman’s Finance & Risk Practice, where he leads the firm’s Global Anti-Financial Crime Practice.

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The United States has diversified its imports away from China for low value-added goods such as bedding, mattresses, and furniture. But diversification is proving far harder for higher value-added goods. 

To understand why the incoming Trump administration is going to face a dilemma on how to execute its new tariffs, see our analysis on the top goods the United States is importing from China:

Smartphones, computers, lithium-ion batteries, toys, and video game consoles together made up 27 percent of US goods imports from China in 2023. US reliance on China for these goods has hardly budged since 2017. In fact, China’s share in US battery imports has actually increased in that time. 

And even if there was more diversification, it wouldn’t solve the problem of US import reliance on China. Diversifying imports away from China doesn’t necessarily translate to lower exposure to Chinese industries. Vietnam, for example, has been among the largest benefactors of US attempts to diversify its imports. Vietnam’s share of US imports has risen steadily across several sectors where China’s share has decreased.

In response to the 2018 trade war, Chinese manufacturers moved factories to Vietnam, where they added some value to products before exporting to the United States. A strong correlation between Vietnam’s exports to the United States and Vietnam’s imports from China suggests these factories remain deeply dependent on Chinese intermediate goods and supply chains. 

Analysts have also raised concerns that some Chinese goods are first shipped to China, designated as Vietnamese-origin exports to avoid US tariffs—despite no value being added in the country—and then exported to the United States. The US Department of Commerce concluded this was the case for solar panels in 2023 before imposing new tariffs on companies engaged in that trade. 

At the same time, Chinese exporters are not as dependent on the US market for these goods. The global market for electronics produced in China is somewhat diversified:

Across-the-board tariffs that would include these goods may impact US consumers more in the short term through price increases than Chinese producers – especially if China extends support to its own companies.

There is a reason why the United States has not put tariffs on these goods already. In 2018, the Trump administration prioritized tariffs on intermediate goods to avoid direct impact on consumers. President Trump himself said in 2019 that tariffs on electronics were going to be delayed for the holiday season: “We’re doing this for the Christmas season, in case any of these tariffs would have an impact on US consumers.” The tariffs were never implemented.

What’s changed between now and 2019? Inflation is more of a concern than it was then. In fact, it is one of the reasons Trump was elected. While these five goods are insignificant within the US Consumer Price Index since consumers do not purchase phones or laptops regularly, the goods have very high public salience. The media will understandably focus on price changes on iPhones, for example. This makes it even more difficult to implement any significant new tariffs on these products. 

That doesn’t mean there won’t be new tariffs on China—the question is which products will be the target. Think about electric vehicles (EV). President Biden put 100 percent tariffs on Chinese EVs. President Trump could add another 30 percent penalty—but only two percent of all US EV imports are from China. So while such a tariff may generate headlines, it would not translate into a meaningful shift in the trade relationship.

The bottom line is that while the incoming Trump administration is serious about tariffs, actually enacting them is going to be much more complicated given the current dynamics in the global economy. 

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Mrugank Bhusari is assistant director at the Atlantic Council GeoEconomics Center focusing on trade and the international role of the dollar.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

The post The United States has trade leverage with China, but not as much as Washington thinks appeared first on Atlantic Council.

For the past several years, observers have noticed that much of China’s official economic data have gradually become less reliable. Chinese authorities have also restricted key sources of data on inward investment and foreign stock holdings. Last year, China’s biggest corporate and financial data providers and academic databases started limiting access to offshore users, and several US consulting firms were raided by Chinese authorities. Even judicial verdicts are harder to find. In a perhaps related trend, Chinese state-owned firms have increased their presence in the Chinese economy even as the number of private enterprises has grown.

This trend comes against the backdrop of the rising use of economic statecraft by the United States and its allies. No matter how many resources the US government puts behind its new authorities, the reality is that tools like sanctions and supply-chain integrity laws depend heavily on how well they are implemented by private sector actors, such as financial institutions and multinational corporations. The Department of the Treasury’s Outbound Investment Security Program, whose implementing regulations are expected to become effective in the coming months, is a perfect example. This program’s regulations impose a knowledge standard requiring US persons to undertake a “reasonable and diligent inquiry” for the very same kind of information about entities in China that is increasingly unavailable. Similar challenges await in the rapidly growing number of new programs overseen by the Office of Information and Communications Technology at the Department of Commerce. Absent the ability to verify information coming out of China, businesses may decide to abandon deals altogether. 

Moreover, the United States may be exacerbating decoupling by its responses to diminishing transparency in the Chinese economy and actions by the Chinese Communist Party that blur the line between private and state-owned firms. The US Securities and Exchange Commission has asked prospective Chinese registrants to define their exposure to the Chinese government, and the Nasdaq has increased its scrutiny of Chinese companies. US lawmakers are clamoring for more laws to force Chinese companies to disclose more information and have expressed interest in preventing “hard-to-evaluate” Chinese stocks from being included in index mutual funds. Moves like these would almost certainly drive the world’s two largest economies further apart. 

What is driving this situation from the other side of the Pacific? China understandably doesn’t want routine business information used against it. “The steady contortion of official statistics seems designed to obscure news that might embarrass the government,” according to the Economist. China learned a similar lesson in 2017, when the United States and the United Nations sought to pressure China over its coal imports from North Korea, which subsidized the North Korean regime. Once it became clear that the United Nations Security Council cited these trade records to advocate for a coal ban, China at least temporarily stopped reporting the official data. But it would be solipsistic of the West to assume that corporate governance of private firms in China is all about strategic competition. Many of the same actions that the West may interpret as attempts to obstruct corporate transparency might have far more to do with domestic legitimation and other internal dynamics. 

The West’s economic statecraft and its reliance on detailed corporate and trade data is running into an unfortunate reality that trustworthy business data is becoming less available, leaving the global business community in a lose-lose situation. De-risking may lead to a de facto decoupling, which would only drag down global economic productivity. Chinese companies also have been very willing to litigate in US courts in response to economic restrictions, occasionally exposing shoddy evidentiary claims that suffered in part from a lack of quality data. Companies are being forced to choose between the deals they want to execute and the chance that host country governments will penalize them for information they could neither have known nor reasonably obtained.

Jesse Sucher is a contributor to the Atlantic Council’s Economic Statecraft Initiative within the GeoEconomics Center.

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

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It is a mistake for the West to dismiss the power of symbolism and narratives in the geopolitical competition for global influence. The BRICS summit has also produced noteworthy results that the international community should be aware of.

First, Vladimir Putin chaired a successful summit involving thirty-six countries, most of which were represented by heads of state. In doing so, the Russian president showed that he has not been isolated in the international arena by the West following his invasion of Ukraine. Instead, he has deepened relationships with Global South countries through BRICS and other initiatives such as riding the anti-colonial wave to make headways in western Africa. Equally importantly, President Xi Jinping and Prime Minister Narendra Modi met on the sidelines of the summit. They did so mere days after announcing a pact to resolve their border conflicts, which have been a major irritant in their bilateral relationship. Their meeting helped raise the stature of the BRICS summit as a venue where important political discourse can take place.

Last but not least, with many countries reportedly wanting to join, BRICS has invited 13 thirteen nations to be partner countries-they will continue discussions with a view to formal membership. The list of partner countries—confirmed by several senior officials, but not officially specified in the Kazan Declaration—includes Algeria, Belarus, Bolivia, Cuba, Indonesia, Kazakhstan, Malaysia, Nigeria, Thailand, Turkey, Vietnam, Uganda, and Uzbekistan. It is unclear which of these countries will eventually decide to become formal members. Saudi Arabia, for example, was invited to join last year but has not yet decided, though its officials have attended BRICS meetings since then. The inclusion of priority countries for the West, such as Turkey (a NATO member) and four important ASEAN countries, should concern policymakers. Many developing countries have found BRICS a useful forum for a variety of reasons, including diversifying international relationships and expanding trade opportunities.

The Kazan Declaration, released at the end of the summit, covers a wide range of issues. The Declaration avoids any direct mention of the United States, hostile or otherwise. Some Western analysts had raised that doing so could make moderate members like India and Brazil uncomfortable, especially given the anti-Western tilt of the group’s expanded membership. The Declaration focuses on promoting multipolarity and a more representative and fairer international system. These goals remain the common denominator attracting many countries to BRICS.

The Declaration supports initiatives and groups developed to coordinate and promote the views of BRICS members and countries in the Global South in international fora, including the United Nations (UN) and the Group of Twenty. These groupings cover issues from sustainable development to climate finance, and call for settling the conflicts in Gaza and Ukraine.

In particular, BRICS will intensify ongoing efforts to promote settlements of cross-border trade and investment transactions in local currencies by establishing BRICS Clear as an independent cross-border settlement and depository infrastructure. Doing so would help facilitate the use of local currencies. It will also launch the BRICS Interbank Cooperation Mechanism to promote innovative financial practices, including financing in local currencies. Many developing countries are interested in using local currencies more frequently given their limited access to US dollar funding.

The group’s decision to form an informal consultative framework on World Trade Organization (WTO) issues to engage more actively in the debates about reforming the WTO is also noteworthy. This section of the Declaration includes opposition to the use of unilateral economic sanctions and discriminatory carbon border adjustment mechanisms. Taking advantage of the fact that BRICS members constitute the largest producers of natural resources in the world, the group also pledges to jointly promote its interests throughout the value chains of mineral production against the backdrop of increased demand for critical minerals for the energy transition. The geopolitics of the energy transition could open an opportunity for mineral-rich developing countries to coordinate their mineral policies and join the superpowers in their search for reliable supply chains of critical minerals.

Overall, BRICS has attracted interest from many developing countries—now boasting nine members and thirteen partner countries. The collective share of its members’ population and gross domestic product has surpassed that of the Group of Seven (G7). However, expansion comes at a cost. Building consensus among more diverse members is increasingly complex, and expansion plans could remain a point of contention within the group. For example, Venezuela had reportedly been kept out of the list of partner countries due to Brazil’s objection.

Despite this challenge, key members of BRICS have successfully developed common positions among Global South countries in international fora in recent years. Their joint effort to demand a loss and damages fund at COP28 in Dubai in 2023 is one example. Additionally, BRICS members have collaborated with Global South countries to work for the adoption of the UN mandate in August 2024 to negotiate a UN tax convention, which covers taxation of multinational corporations and wealthy individuals. BRICS countries also consistently promote governance reform of the Bretton Woods Institutions. The more BRICS can develop and articulate common views among Global South countries, the more it can be regarded as the counterpart of the G7 (representing developed countries) at international fora and in the public domain.

Importantly, BRICS’ flagship project—promoting the use of local currencies to settle cross-border trade and investment transactions—is gradually gathering momentum. China, for example, has increased the share of the renminbi when settling its cross-border transactions from 48 percent (surpassing the US dollar) in mid-2023 to more than 50 percent in mid-2024.

In short, BRICS—or BRICS-plus as some observers and officials have referred to the expanded group—is here to stay. Other countries, including Western ones, need to figure out how to deal with it.

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

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

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Financial partnerships between Chinese money laundering organizations (CMLO) and Mexican cartels have made it more challenging for US law enforcement agencies to track the movements of drug money. Financial sanctions have so far proven an effective tool in reducing the growth in crypto-denominated fentanyl sales and should be used more frequently by the US government to tactically disrupt the trade of fentanyl and other illicit drugs.

How the illicit fentanyl supply chain works

Key actors in the fentanyl supply chain include Mexican cartels and CMLOs. Small pharmaceutical firms based in China send mail shipments to Mexico, where transnational criminal organizations (TCOs), such as the Sinaloa Cartel, La Linea, and the Jalisco New Generation Cartel manufacture large amounts of low-purity fentanyl and package it as genuine medication. The drug is then smuggled into the United States and sold to Americans.

Fentanyl smuggling by Mexican TCOs is facilitated by CMLOs offering low commissions, faster and less traceable transactions, and near-complete anonymity for actors involved. CMLOs use a trade-based money laundering scheme and underground or informal banking systems to circumvent law enforcement. CMLOs also rely on WeChat, a Chinese messaging and payment app. This complicates matters for US law enforcement agencies because officials cannot access financial transaction data without the help of Chinese authorities, who tend to cooperate in prosecuting international money laundering cases with significant delays.

Use of cryptocurrencies in fentanyl trade

Cryptocurrency’s inherent anonymity and lack of regulatory oversight are further exploited by practices like chain hopping and the use of markets on the dark web, which together allow criminal networks to avoid detection. CMLOs and Mexican drug cartels leverage these vulnerabilities—as well as the intricate nature of cryptocurrency transactions—to source chemicals for fentanyl production. In 2023, Chinese precursor manufacturers reportedly received $26 million in cryptocurrency payments for these chemicals, a soaring 600 percent increase from 2022, indicating its growing role in the financial network. However, cryptocurrency transactions likely still comprise a significantly smaller percentage of illicit finance compared to traditional money laundering methods.

According to TRM Labs, 97 percent of the more than 120 Chinese precursor manufacturers studied, which spanned twenty-six cities and sixteen provinces in China, offered cryptocurrency as a payment option. Geographic estimates by Chainalysis identified East and Central Asia, North America, and Europe as the regional sources heavily contributing to the crypto sent to these entities.

The dominant blockchains for fentanyl-related transactions include Bitcoin (60 percent), Tron (30 percent), and Ethereum (6 percent). Notably, cryptocurrency payments to Chinese precursor manufacturers on Ethereum alone surged by 2,000 percent from 2022 to 2023, while Bitcoin and Tron transactions grew by 600 percent and 500 percent, respectively. At least twenty of these precursor manufacturers were found to have direct links to markets on the dark web, collectively receiving $1.3 million in cryptocurrency from illicit drug marketplaces. Beyond supplying fentanyl precursors, some of these manufacturers facilitate the distribution of other drugs such as MDMA (ecstasy), further enabled by cryptocurrency transactions. 

How financial sanctions can disrupt the fentanyl trade

TRM Labs—a blockchain intelligence company—reported in 2023 that financial sanctions and US law enforcement actions drove the crypto-denominated fentanyl sales growth rate down to about 60 percent. This is a marked decrease from the average growth rate of 150 percent between 2019 and 2022. Sanctions targeting fentanyl networks have steadily increased since 2018 and, in October 2023, the Department of the Treasury designated a Chinese network responsible for manufacturing fentanyl precursors. In total, Treasury’s Office of Foreign Assets Control has sanctioned over 350 foreign entities and individuals for involvement in drug trafficking. Moreover, Congress is also drawing increasing attention to sanctions and recently signed into law the bipartisan FEND Off Fentanyl Act aiming to expand sanctions targeting fentanyl traffickers in Mexico and precursor chemical manufacturers in China. 

Using financial sanctions to successfully disrupt the illicit fentanyl trade will require three elements: (1) interagency coordination between the Treasury, the Department of Justice, law enforcement agencies and others; (2) international collaboration, especially with Mexican and Chinese authorities, including through the US-PRC Counternarcotics Working Group; and (3) vigilant identification and reporting by financial institutions of suspicious behaviors flagged by Treasury’s Financial Crimes Enforcement Network. Behaviors could include customers making low-value dollar payments or using virtual currencies, and companies conducting transactions involving precursor chemicals with no legitimate ties to the pharmaceutical sector. 

Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @KDonovan_AC.

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

Mikael Pir-Budagyan is a young global professional at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center.

Grace Kim is a young global professional at the Atlantic Council’s GeoEconomics Center.

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

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Uncertainty continues to loom over Iran as Israeli officials pledge to retaliate against Tehran’s ballistic missile attack on Israel earlier this month. However, while most analysis focuses on Iran’s geopolitical objectives in the region, there has been less discussion about the severe economic constraints facing the regime. These challenges will be at the center of Iran’s priorities during its first BRICS summit. 

Iran’s economy is underperforming—and of its fellow BRICS members, it has one of the weakest economies. The chart below shows the difference in gross domestic product (GDP) growth rates amongst BRICS countries from 2023 to 2024, with Iran’s rate declining the most. The country’s  economy is expected to continue to struggle, with growth rates remaining around 2 percent and inflation hovering around 34 percent. According to local media reports, bread prices have surged by 200 percent within the last year, while other basic necessities, such as water and housing, have also seen steep price hikes.

Sanctions are a part of the story. Since initial US economic sanctions, Iran’s GDP growth has consistently remained below its 2011 high. IMF forecasts suggest that the country’s GDP will continue to lag behind that peak through 2029. But there is more to the situation than just sanctions. Iran’s gas and energy plants are rusted and outdated, operating at only 70 percent capacity. The country’s inability to modernize is a direct result of western firms pulling out of the country over the past decade. Iran’s lack of energy has already sparked significant public outrage, as frequent blackouts disrupt daily life, halt industrial operations, and force the government to partially shut down offices during periods of peak demand. This is on top of ongoing concerns of corruption and mismanagement. 

While these issues have created serious domestic challenges, the energy crisis has also taken a significant toll on Iran’s exports, particularly steel production (one of Iran’s largest non-oil exports), which declined by 50 percent last month. Ironically, despite facing persistent energy shortages and a 17,000 megawatt power deficit, Iran is also exporting electricity. Domestic energy prices are so tightly controlled that even the state-owned energy company, Tavanir, is forced to sell electricity abroad at higher rates to stay afloat. Without this export revenue, Iran would face even deeper economic losses and worsen its debt. 

The story doesn’t look much better on the international side. Trade between Iran and its largest trading partners—China, the United Arab Emirates, Iraq, Russia, India, and Turkey—declined in 2023. Iran saw a 26 percent drop in trade with India, a 17 percent decline with Russia, and a staggering 33 percent falloff with Turkey. To make matters worse, China, the main customer of Iranian oil, significantly reduced its purchases this year. Since sanctions were reimposed on Iran in 2018, independent Chinese refiners, or “teapots,” have been key buyers of Iranian crude, taking advantage of discounts from sanctioned countries such as Iran, Russia, and Venezuela. Many of these oil transactions were conducted in Chinese currency and payment systems, allowing Iran to circumvent sanctions. Last year, oil exports to China accounted for about 5 percent of Iran’s total economic output. However, China’s weakening economy and declining domestic demand for oil are now creating ripple effects for Tehran’s sales. Chinese refiners also report that Iranian sellers are attempting to raise prices by offering smaller discounts as tensions escalate in the Middle East.

Iran will likely use the BRICS summit as an opportunity to pursue more trade and financial partnerships with its allies, as a part of the country’s “Look to the East” policy. Pezeshkian’s goal will be to attract domestic investment and secure technology transfers to address Iran’s energy shortages and boost production in key sectors like steel. Iran’s central bank governor, Mohammad-Reza Farzin, has already announced plans to seek membership in the BRICS-led New Development Bank. With this membership, Iran hopes to advance its development goals independently of the World Bank and other Western financial institutions—an agenda that, according to Farzin, will be a key focus at the summit.

While conflict in the Middle East continues to dominate headlines, Iran’s economic and energy crises also poses a significant threat to the regime’s long-term stability. Even as the country’s leadership navigates international isolation, internal corruption and mismanagement, and rising domestic frustration, resolving these internal economic challenges will be just as crucial. The reality is that Pezeshkian will show up to the BRICS leaders meeting and look for support across the BRICS not only in the military domain, but also for his country’s economy.

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Alisha Chhangani is an assistant director with the Atlantic Council GeoEconomics Center.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

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This emergence of bilateral swap lines and regional financing arrangements to supplement IMF lending was a crisis response, not a political one. However, in the emerging era of global fragmentation, the world can expect these newer insurance mechanisms to increasingly be used as political footballs. To be clear, a broader set of insurance providers could support a more robust system if they are underpinned by greater international cooperation. Yet this year’s Annual Meetings, held October 21 through October 26, will likely highlight just how difficult the current political constraints to such international coordination are.

Not your mother’s safety net

Collectively, these insurance mechanisms for countries facing crises are referred to as the global financial safety net (GFSN). The GFSN—which comprises international reserves, bilateral swap lines, regional financing arrangements, and IMF resources—provides liquidity to countries who struggle to meet their balance of payments needs and supports a robust global economy. In the years leading up to the GFC, the IMF was the largest component of the safety net. It made up anywhere between 76 to 95 percent of the GFSN’s total resources, excluding reserves. Following the crisis, the IMF’s share of resources has waned to 28 percent. Bilateral swap lines and regional financing arrangements have become the largest elements, collectively making up between 72 to 74 percent of total resources.

Unlike IMF programs, bilateral and regional arrangements are often extended with domestic political motivations in mind. For example, the People’s Bank of China swap lines are extended with the intent to support the internationalization of the renminbi and to strengthen Chinese diplomatic ties. Federal Reserve swap lines are extended to countries that pose spillover risks to US financial stability. India’s $760 million of support to the Maldives is the latest example of such politically motivated lending.

Rising geopolitical tensions threaten to expose vulnerabilities in this evolved, and increasingly complex, safety net. The IMF’s diminished role as lender of last resort could result in a less equitable system where geopolitically relevant countries receive outsized bilateral support—as was the case when Egypt narrowly avoided a crisis situation earlier this year. Developing countries who do not fit this description may be required to default on their obligations and rely on the IMF’s less timely support, which would have real developmental impacts. All in all, the shifting composition of the safety net could lead lending arrangements astray from their core purpose, which is to support global financial stability, and place domestic politics in the driver’s seat.

Ensuring robust support in an era of fragmentation

Expanding the safety net to include diverse financial insurance mechanisms is not, in its own right, a bad outcome. Introducing new support lines can provide more effective and tailored funding for countries facing different types of crises. Federal Reserve swap lines, for example, are effective insurance for countries who face acute dollar shortages but don’t exhibit structural imbalances that would be better addressed through an IMF program. A diversified GFSN can also provide support when IMF resources are constrained—as is currently the case with the Poverty Reduction and Growth Trust, the IMF’s main vehicle for providing concessional lending to low-income countries.

Yet international cooperation is essential to ensure that all components of the GFSN are working towards the same goal. The proliferation of bilateral and regional arrangements introduces differing incentives which reflect local, rather than global interests. Consensus is needed at the global level to align incentives across GFSN components. Agreement could, and should, be achieved through an explicit discussion of the costs and benefits of different relief measures.

Conclusions

The IMF/World Bank Annual Meetings present an opportunity for finance ministers and central bank governors to engage with one another and assess whether the Bretton Woods institutions are adequately performing their core duties. Geopolitical dynamics will inevitably influence many of these discussions, whether over the merits or flaws of industrial policy or in relation to IMF policies such as the quota formula. The IMF has a role to play in breaking through this impasse. A first step toward facilitating more productive debate would be for the IMF to acknowledge that it is too polite, as recently emphasized by US Treasury Assistant Secretary for International Finance Brent Nieman. While Assistant Secretary Nieman’s remarks were made in the context of the IMF choosing not to recognize political dynamics in country lending and surveillance operations, the IMF would also do well to acknowledge rising geopolitical influences and how they could impact the GFSN.

Revisiting the effectiveness of the GFSN is needed now more than ever, as ballooning external debt stocks in low- and middle-income countries inhibit their ability to achieve climate and development goals. A frank discussion about political influences in crisis support would mark a meaningful step towards greater cooperation and begin a process of reimagining the role of the IMF in the evolved GFSN.

Patrick Ryan is a Bretton Woods 2.0 Fellow at the Atlantic Council GeoEconomics Center.

Amulya Natchukuri is a Next Gen Fellow at the Atlantic Council GeoEconomics Center and an undergraduate student at Rutgers University studying math and economics.

The views expressed in this article are the authors’ and do not reflect that of any employer.

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

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Japan’s experience during its lost decades proves a useful example. In response to the country’s economic crisis, only significant fiscal support managed to sustain Japan’s economy when it was burdened with a balance sheet recession triggered by a collapsing property sector, plummeting stock markets, increased savings rates, and decreased consumption. This is a lesson China should pay attention to.

Monetary easing policies

The recent monetary easing package impacts all key aspects of monetary policymaking in China. The list of announced measures is as follows:

1. Cut the benchmark seven-day reverse repo rate—considered the most important PBOC policy rate to manage liquidity conditions and influence other lending rates—from 1.7 percent to 1.5 percent. Reducing the rate by twenty basis points, instead of by the usual ten basis points, is a significant change.
2. Reduce the existing mortgage rates by fifty basis points, on average, and lower interest payments by homeowners by 150 billion yuan ($21.4 billion). This measure, it should be noted, is of limited helpfulness because the net transfer to the household sector will be offset by planned reductions in bank deposit rates.
3. Lower banks’ required reserves ratios by fifty basis points to achieve 6.6 percent on average for the banking sector. This step will allow commercial banks to reduce the amount of cash they must keep at the PBOC, which earns a low rate of return.
4. Reduce the down payment ratio on second home purchases from 35 percent to 15 percent—similar to the move for first home purchases announced in May.
5. Enhance support for a 300 billion yuan ($42.5 billion) fund set up in May to lend to local governments money to buy unsold homes and convert them to publicly subsidized housing units. Support can include increasing the share of such loans from 60 percent to 100 percent of the price of each unsold home.
6. Establish a 500 billion yuan ($70.5 billion) structural monetary policy facility to provide liquidity to securities firms, asset management, and insurance companies when purchasing stocks by a swap line pledging their assets for high quality assets.
7. Establish a 300 billion yuan ($42.5 billion) facility with an interest rate of 1.75 percent to encourage banks to support listed companies’ share buybacks.

The announcement of these measures has helped improve market sentiment, especially by raising expectations of additional fiscal measures to come. Chinese equity markets and the exchange value of the Chinese yuan have risen since the policies were made public, with positive spillover effects on international financial markets. Chinese equities have risen by more than 20 percent since the announcements—technically entering a bull market. However, while helpful at this moment, these measures will not be enough to maintain improvements to China’s lackluster economic growth going forward.

The need for forceful fiscal interventions

China’s household sector has experienced a balance sheet slowdown milder than Japan’s balance sheet recession, but with similar underlying dynamics. The slowdown has been triggered by the property slump and sustained falls in stock markets, which destroyed a sizable portion of China’s household wealth and undermined consumer confidence. Specifically, the prices of existing homes in China’s large cities are down nearly 30 percent from 2021 levels according to the Japanese investment bank Nomura. Chinese stocks have lost six trillion dollars in value in the past three years—or more than 45 percent as compared to 2021 levels. Even factoring in the 20 percent rebound triggered by the recent policy announcements, Chinese equities are still more than 30 percent lower than in 2021. In response, Chinese households are visibly curbing personal spending. According to the PBOC’s Urban Depositors Survey Report, 61.5 percent of respondents wanted to increase their bank deposits in the second quarter of 2024, a big jump relative to 2021. Chinese households’ bank deposits rose to $40.9 trillion (or more than twice the country’s GDP) in July 2024, increasing by more than $2 trillion from the previous July.

Consequently, Chinese household consumption growth has slowed since 2021. It is only expected to grow by 3 to 4 percent in real terms per year in the next five to ten years (compared to the 10 percent growth rate prior to 2018)—contributing around an underwhelming 1.5 percentage points to annual real gross domestic product (GDP) growth. The trend could curtail overall GDP growth to 3 percent per year, after accounting for expected headwinds of strong growth in investment and net exports.

As demonstrated by Japan’s experiences during its own lost decades, it takes forceful fiscal actions involving large deficit spending to sustain and stimulate economic growth. Doing so will compensate for slowing personal consumption until households can repair their balance sheets. This process has been shown by Japan to be slow and lengthy. It takes time for property and stock prices to recover their losses, during which period households would prefer to save. Households will be less tempted by lower interest rates to borrow and consume more—weakening the effect of monetary easing.

In an effort to avoid falling into a balance sheet recession, the Chinese political leadership has promised more fiscal spending to support the economy. It needs to promptly deliver on these promises, implementing concrete and significant fiscal measures. For example, it should invest in new digital and green infrastructures, which promise higher returns compared to traditional infrastructure like bridges and roads. In short, China needs to go beyond the limited steps taken so far—such as the plan to issue two trillion yuan ($284 billion) of government bonds or a rare one-off cash handout to those living in extreme poverty.

With one quarter left in 2024, China needs to move expeditiously and forcefully if it hopes to meet its growth target of around 5 percent this year. International economists, such as those from Goldman Sachs and Citigroup, have just downgraded their full-year estimates for China’s GDP growth to 4.7 percent. Beyond this year, the economic prospects for China remain as challenging as ever. Even slower growth is expected in 2025 by many international economists. More significantly, with its long-term government bond yields poised to fall below those of Japan, China faces a growing risk of “Japanification” with decades of slow growth ahead unless it can match its softer monetary stance with proper fiscal intervention.

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

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

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Among the two institutions, the World Bank is the more straightforward case. After last year’s leadership change, the Bank is back to the business it does best—supporting global development as well as fighting the effects of climate change and preparing for future pandemics, among other tasks. The issue here is providing the Bank with the financial means to conduct its operations, as well as ensuring efficient project selection and execution. The tasks may have become more complex, but the fundamental business of the Bank has not changed, nor have the interests of its shareholders.

With the IMF, the issues are more complicated. The institution saw a major shift of its activities into climate and development lending in recent years, partly in response to the COVID-19 pandemic and partly because major shareholders got impatient with the slow embrace of climate initiatives by the previous World Bank president. The IMF embarked on several rounds of fundraising to increase its basic capital (or quotas) and build up trust funds to provide for subsidized loans to lower-income members. These efforts are now running into budget constraints in richer countries, but a decision to reduce interest rate surcharges for certain borrowers is still expected to take place prior to this month’s meetings.

Lending needs better results

As a result of these changes, the IMF is now engaged on a large number of relatively small programs with developing countries, many of which are mired in (Chinese-held) debt and have difficulties making ends meet. In principle, the IMF should insist on more thorough debt restructurings before concluding programs with the latter group, a condition that often remains unfulfilled because creditors are either unwilling or exceedingly slow to act. Still, as the supposed “lender of last resort,” the IMF is under pressure from well-meaning shareholders (who are also competing with China’s Belt and Road Initiative) to proceed, storing up financial trouble for its borrowers and itself down the road.

Larger countries have by and large eschewed IMF lending in recent years. The exceptions are countries such as Argentina, Egypt, and Pakistan that would have difficulties borrowing money from financial markets at reasonable rates. These countries are among the most frequent IMF customers in recent history and are known to quickly forget the promises made at the time their lending programs were concluded. Yet, they  tend to regain access to IMF programs because of their geopolitical relevance or other considerations relevant to key IMF shareholders. Their preferential treatment carries financial risks and serves as a major disincentive for other countries to fulfill their program obligations.

The IMF’s leadership has a key role to play in this regard. The IMF’s statutes have endowed its managing director and staff with considerable independence. It is their role to negotiate programs and assess the conditions under which disbursements can move to the board for approval. They should use that prerogative to design programs that leave countries and their populations better off over the medium to long term, rather than burying them under highly senior multilateral debt that will have to be repaid before claims by other creditors. The message sent by IMF management to shareholders should be: “Let us negotiate sensible program conditions and help us by providing recipient governments with additional incentives, financial or otherwise, to fulfill their obligations.” Anything else might be convenient in the short term but detrimental to the long-term standing of the IMF, which is still a major geopolitical asset of the West.

Unfortunately, the signs go in the opposite direction. For example, the recent news that Rodrigo Valdés, the director of the IMF’s Western Hemisphere department, had to recuse himself from the IMF’s negotiations with Argentina runs diametrically opposed to this principle. His withdrawal follows weeks of pressure from Argentina’s President Javier Milei, who said that he could not work with Valdés because of his policies as Chile’s finance minister.

This is where larger shareholders should get worried. If Valdés was the one to caution about Argentina’s unbalanced policies and failure to adjust the peso to market conditions, then he should have enjoyed the full backing of his management. The United States and other Group of Seven (G7) countries, as the main creditors of the IMF, have the most to lose if the institution continues to extend loans that put its own balance sheet at risk.

Policy messages need sharpening

Another concern relates to the IMF’s role in economic surveillance, which has moved to the background in recent years. The semi-annual World Economic Outlook (along with seven other reports in its orbit) still attracts interest, and the IMF also publishes regular country reports as well as select pieces, for example, on geopolitical fragmentation. These papers reveal the technical expertise of staff, but its policy conclusions often disappoint, mindful of the interests of board directors whose job security partly rests on shielding their home authorities from divergent policy recommendations out of Washington, DC.

A case in point is a recent blog post by several IMF department heads that appeared to downplay the importance of Chinese subsidies for global trade tensions. The article laid out well-reasoned arguments against broad-based tariff and other trade remedies to be applied against China, based on the (correct) insight that growing global current account imbalances are primarily the result of domestic developments in the two largest global economies, including large fiscal deficits in the United States and Europe and weak demand growth in China.

Where the blog post got it wrong, however, was in downplaying the structural and geopolitical impact that Chinese subsidies and trade practices have in the current global environment, a point just emphasized by US Treasury Under Secretary for International Affairs Jay Shambaugh at the Atlantic Council Transatlantic Forum. With its current trade policies, China pursues interests that go well beyond the traditional economic mainstay, including to achieve economic dominance in certain sectors that China holds of strategic importance. The effects of this policy will only become evident over time, most likely during a further intensification of geopolitical tensions when it would be too late for the West to react. One would have wished the IMF to take a clearer line on these policies, as would behoove an institution that counts mostly democracies among its largest members.

The lack of a deft geopolitical posture also revealed itself in an own goal that the IMF shot by announcing (and then canceling) a visit to Moscow for the 2024 Article IV Consultation, a regular surveillance exercise that all IMF members are required to undergo. Given the increasing lack of economic statistics published by Russia, the visit could have been an excellent opportunity to assess the true state of its economy, as well as identifying any Potemkin constructs in the country’s national accounts. Unfortunately, the IMF seems to have been swayed by member countries that focused on the perceived political significance of the visit, with some even accusing the institution of contributing to the Russian war effort. The IMF could have easily made the opposite case, showcasing its much-needed financial support for Ukraine. Instead, through unfortunate timing and bad communications, it missed a serious opportunity to demonstrate its value and explain its mission to the wider public.

Use it responsibly

The IMF’s main shareholders should use the Annual Meetings to lean on the IMF to refocus its resources on where they could be most useful at this time—freeing up its excellent staff to analyze economic trends and develop useful policy solutions in an environment of geopolitical rivalry. The IMF is neither a climate nor a development institution, nor is it a fund for geopolitically convenient bailouts. It is dedicated to enabling open trade and maintaining global financial stability, as laid down in its Articles of Agreement eighty years ago. Democratic countries around the world need its work, and its independent voice, more than ever.

Martin Mühleisen is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and a former IMF official with decades-long experience in economic crisis management and financial diplomacy.

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

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Despite a sharp increase in Chinese purchases of sophisticated foreign-made electronics and a buildup of strategic stockpiles of commodities, sales to China in 2023 fell by about $150 billion, or 6 percent, and so far this year have only rebounded marginally. That slowdown accompanied a deceleration of export growth from record levels reached during the Covid-19 pandemic and its aftermath, although exports have shown greater resilience this year.

China’s tepid economic growth has been the key driver of falling import demand. But there are other factors at work. Beijing is emphasizing import substitution as US-China tensions rise. Foreign direct investment in China is declining, and Chinese companies are increasing outbound investment. In addition, China is providing state subsidies for money-losing manufacturers, whose failures in a market economy would be part of a country’s ascent of the value-added ladder.

All this has economic and geopolitical implications in a world that has grown increasingly reliant on China’s engine of growth and increasingly concerned about its trade practices. Foreign governments are grappling with—and building defenses against—escalating Chinese exports, as my colleague Mrugank Bhusari recently explored in Sinographs. And some countries that have crossed Beijing—notably Australia and South Korea—have faced coercive Chinese trade retaliation. China’s economic partners soon could be crying foul if their sales to China don’t recover and trade surpluses continue to balloon.

Important economies—including the United States, Japan, South Korea, Taiwan, and the members of the Association of Southeast Asian Nations (ASEAN)—have experienced weakening demand for non-electronics manufactured goods. US exports to China fell sharply last year and through July of this year despite burgeoning orders for sophisticated electronics not yet subject to Biden administration export controls. Other countries experienced more significant declines. For example, South Korea’s exports to China dropped 20 percent last year.

As a result, since late 2023 the more vibrant US economy has eclipsed China as the largest export market for most major Asian exporters. Beginning in December 2023, South Korea’s shipments to the US overtook exports to China for the first time in 20 years, while for Taiwan that occurred beginning in March after 21 years as exports to the US have soared. And the same phenomenon has occurred for ASEAN’s major economies this year. This turn of events could present an opportunity for Washington to strengthen economic ties with Asian partners at China’s expense. However, if former President Donald Trump returns to the White House in 2025 and calls for tariffs on all imports to the United States, that opportunity would be squandered.

China’s seemingly endless demand for imports hit an all-time high of $3.137 trillion in 2022 as the global economy rebounded from the COVID-19 pandemic. But the collapse of the country’s real estate bubble, weak corporate investment, and evaporating consumer confidence dampened the appetite for everything from timber to cosmetics. Real estate development may not revive for years and Beijing’s efforts to spur domestic demand have so far fallen flat. If the Chinese engine of growth remains in low gear, the ripple effects will continue to be felt around the world.

Even if China’s economy revives, there are other changes underway that will likely limit its import demand. Most important are China’s heightened concerns about national security, especially amid increasingly fraught relations with the United States. Since the Trump administration stepped up restrictions on technology sales to China Beijing has accelerated its efforts to limit the use of foreign inputs in its priority supply chains.

The highest priorities are semiconductors and the equipment and materials needed to make them. With the United States orchestrating a multinational effort to block China’s access to these technologies, Beijing has undertaken a massive initiative to import as much as it can before the barriers are raised even higher. Meanwhile, it is spending hundreds of billions of dollars to reproduce that technology in its own factories, while localizing its sources of materials and other inputs. But the real impact on imports is largely still to come. For example, Taiwanese producers of less-sophisticated “legacy” chips will likely see Chinese orders dry up as more mainland semiconductor factories come online.

But import substitution is already affecting demand in less-advanced industries. Petrochemical companies around the Pacific Rim that have supplied China throughout its economic rise are seeing orders disappear as Chinese producers have invested heavily in expanding capacity in recent years. Since 2019, China’s imports of petrochemical feedstocks have dropped drastically.

Meanwhile, China’s emergence as a major producer of components and other intermediate goods means that exports of inputs to Chinese assembly plants have stagnated. South Korea and Taiwan still ship sophisticated parts, especially those containing semiconductors, but many other industries have been affected, especially among ASEAN countries.

That problem has become more severe for developing countries, which ship much less sophisticated products produced by labor-intensive industries. In June, the Rhodium Group reported that Chinese provincial and local governments have sought to stave off rising unemployment in the current economic downturn by subsidizing production at “low-end” factories that no longer can compete with goods produced more cheaply in other countries. That means, according to the Rhodium Group report, that “China provides fewer opportunities as an export market for emerging countries while competing head-on with them in the low-tech and mid-tech space.” That could have serious implications for economies that seek to duplicate China’s success in building manufacturing capabilities from the ground up.

Another factor contributing to declining imports is falling foreign direct investment into China—which is down more than 28 percent in the first five months of 2024—and the move of some foreign companies out of China altogether. Some of this is explained by manufacturers seeking cost advantages in other countries, including to avoid US tariffs. But it is also the result of strategic business decisions to de-risk exposure to China amid geopolitical tensions, and a response to the increasingly unattractive climate for doing business in China. Former South Korean Trade Minister Han-Koo Yeo wrote earlier this year that Chinese retaliation against Korean companies for deploying a US-made anti-missile system in 2016 “shattered Korean business confidence in China as a reliable business partner, accelerating diversification by Korean business as a hedging strategy.”

Many Chinese manufacturers are mirroring their foreign counterparts by shifting factories abroad, a trend reflected in record Chinese outbound investment numbers. Taken together, this rising tide of departures will have an impact on exports to China as non-Chinese suppliers follow their customers to other countries. And ironically, it may also show up in Beijing’s trade statistics as a faster decline in imports because of an official practice of listing as “imports” the goods that foreign companies produce in China for sale in China.

Many Chinese suppliers are building factories abroad as their customers shift to new production bases outside China. And that means that non-Chinese competitors will remain on the outside looking in, even in their own countries. Of course, China sees the situation differently. As the Global Times, one of Beijing’s mouthpieces, insisted ambiguously in January: While imports of Chinese intermediate goods by Southeast Asia “mean more trade deficits,” they bring “opportunities for industrialization, rather than substitutes for manufacturing products in the local market.”

After electronics, China’s two most important categories of imports are oil and ores, which together represented nearly 30 percent of its overseas purchases last year. Along with grains and any number of raw materials, these commodities help fuel China’s economy, and countries from Russia to Brazil to Malaysia to Zambia profit from this trade. In recent years, China has stockpiled commodities to ensure a steady supply: It has acquired some 90 percent of the world’s known copper stockpiles, nearly 25 percent of crude oil reserves, and over half of the world’s wheat and corn.

However, those purchases have slowed over the past year, and many countries are seeing prices fall along with Chinese demand. Some of Africa’s most important commodity producers are especially feeling the pinch. Total African exports to China in 2023, which are overwhelmingly from extractive industries, fell 6.7 percent. The Democratic Republic of the Congo—a major source of cobalt and copper—saw its sales tumble nearly 14 percent. To make matters worse, China has been shifting its purchases of crude oil from Africa to Persian Gulf and Southeast Asian suppliers. As a result, Nigeria’s oil exports to the Chinese market last year plummeted 61 percent and Angola’s were down by one-fifth. Both of those countries rely on oil revenue to help repay foreign debts, including to China.

The bottom line: China’s economic rise has been accompanied by a profound deepening of economic and political ties across the globe, based first and foremost on trade. But those ties are bound to fray—as is beginning to occur in response to the latest jump in Chinese exports—if countries continue to see diminishing sales to China.

Jeremy Mark is a senior fellow with the Atlantic Council’s GeoEconomics Center. He previously worked for the International Monetary Fund and the Asian Wall Street Journal. Follow him on X: @JedMark888.

The post China’s sputtering engine of growth leads its imports to downshift appeared first on Atlantic Council.

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Transatlantic Forum on GeoEconomics

SEPTEMBER 30, 2025 BRUSSELS, BELGIUM The Transatlantic Forum on GeoEconomics is an annual conference convening economic and financial leaders from both sides of the Atlantic.

Daleep Singh, US deputy national security advisor for international economics, emphasized on Thursday, September 26, that we are in the “most intense period of geopolitical competition since the Cold War,” with Russia and China seeking to disrupt the US-led order. He argued during the Transatlantic Forum on GeoEconomics in New York that economic and technological competition will dominate future conflicts because nuclear powers will try to avoid direct military conflict.

On the issue of immobilized Russian assets, Singh underscored that “political will” should ensure the G7 follows through on its commitment to bring the interest revenue forward into a $50 billion aid package for Ukraine by year’s end. “We are going to get to the finish line on Russia’s reserves.” He highlighted the historical significance of this multilateral effort, stating that “never before in history has a multilateral coalition frozen the assets of an aggressor country… and found a way to harness the value of those frozen assets to fund the aggrieved party.”

He acknowledged technical challenges but, when referring to Russian President Vladimir Putin, emphasized that “the choice is ours, not his.” Singh named Hungary’s Prime Minister, Viktor Orban, as the only European Union leader obstructing the legal changes the United States is asking for to unlock its participation—but suggested that Orban “doesn’t have as much leverage as he may perceive.”

Regarding economic statecraft, Singh advocated for a balanced approach, warning that restrictive tools like “sanctions, export controls, [and] tariffs” don’t “win hearts and minds.” He emphasized the need for positive tools that promote “supply chain resilience,” “technological preeminence,” and “energy security.” This aligns with the GeoEconomics Center’s expertise in the matter, with research from last year’s Transatlantic Forum in Berlin and Nonresident Senior Fellow Nicole Goldin’s recent issue brief, “Toward a financial inclusion agenda for the global majority.”

He also expressed concern over the lack of financial firepower for large-scale investments, arguing that the private sector lacks the incentive to invest in long-term, high-risk projects. Singh called for initiatives like a “strategic resilience reserve” or public authorities with more flexibility and scope to fill this gap. More highlights from his conversation with Atlantik-Brücke CEO Julia Friedlander are below.

Industrial policy and global competition

• Singh argued that industrial policy is crucial because the private sector alone cannot address major challenges like the “loss of supply chain resilience,” “fading technological preeminence,” and the “hollowing out of our industrial base.”
• He highlighted the positive results from recent government interventions, such as tax incentives and research and development investments, which have driven “sustained above-trend growth” and a resurgence in “innovation and productivity.”
• Singh noted that the delay in adopting a more active government role was due to policy muscles which had “atrophied” over the past forty years. It has taken time to “course correct” from a laissez-faire approach.
• On global competition, Singh stressed the need for a “multiplayer, multistage game theory” approach, especially regarding China, which “floods the market” with state-backed overcapacity in key sectors like steel, solar, and semiconductors.
• He outlined the US strategy to strengthen domestic capacity, form alliances with countries that “play by the same rules,” and use “restrictive measures” like tariffs to prevent unfair competition and safeguard national security.

China’s role in Russia’s war machine

• Singh emphasized that Russia has turned its economy into a “war machine” and is now relying on rogue states like Iran and North Korea, which have become “witting cogs in this arsenal of autocracy” to sustain its military capabilities.
• Singh found China’s actions over the last years particularly baffling, questioning why a country that claims to seek “better relations with Europe” and wants to be seen as a “responsible stakeholder” is now supporting the biggest threat to European security and aiding Pyongyang’s nuclear program.
• Singh noted China’s deflationary slump and reliance on external demand but questioned why it continues to “antagonize all the major sources of external demand,” calling Beijing’s role in the war a “strategic wedge” rather than a win.
• Singh stated that sanctions aren’t about shock and awe but about “stamina,” pointing out that there are signs of China pulling back from financing Russian military inputs.
• He suggested that China has the power to “pull the plug tomorrow on the factory to the war machine” and warned that failure to act would result in “profound reputational damage” for Beijing.

Humility, creativity, and structural reform

• Singh emphasized the importance of humility in addressing global challenges, especially in light of “the uncertainties of our domestic political climate, geopolitical backdrop, and global macroeconomic regime,” which are all intensifying and feeding on one another.
• He called for a cultural shift in national security, advocating for “bottom-up creativity” and less top-down hierarchy. Singh stressed the need for individuals to “speak up, take risks, admit when you’re wrong,” and challenge assumptions to avoid risk management failures.
• Singh underscored the importance of historical perspective, drawing parallels between the current era and the early twentieth century. He cited examples including the first US-led wave of globalization (1870–1913), emphasizing structural reforms like the creation of the Federal Reserve and income tax to address inequality, as relevant lessons today.
• Singh highlighted the need for modern structural change, pointing to recent legislation like the Inflation Reduction Act, CHIPS and Science Act, and infrastructure bills as good steps, while also urging policymakers to focus on repairing the social contract at home and rebalancing global leadership.

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Transatlantic Forum on GeoEconomics

SEPTEMBER 30, 2025 BRUSSELS, BELGIUM The Transatlantic Forum on GeoEconomics is an annual conference convening economic and financial leaders from both sides of the Atlantic.

“If we were to root out all fraud across the banking system in the United States, our calculation is that the GDP of the United States would be fifty basis points higher than it is today,” President and CEO of Nasdaq Adena Friedman said on Thursday, September 26.

Friedman’s interview, in which she explained how money laundering and fraud represent “a 3 percent drain on the US economy,” was part of a series of panels and fireside chats hosted by the Atlantic Council and Atlantik-Brücke at the Transatlantic Forum on GeoEconomics in New York.

Friedman also discussed the critical role of the banking system when managing risks and combating financial crime globally. “Banks cannot tackle these challenges alone” because criminal networks leverage advanced technology and exploit multiple banking systems, making it a global issue.

To enhance anti-financial crime efforts, Friedman advocated for improved data sharing capabilities among banks, as well as a feedback loop to evaluate the effectiveness of submitted reports. This approach would leverage artificial intelligence to identify potential criminal activities, “making banks and regulators more efficient and effective in solving these problems.”

Friedman noted that Nasdaq currently employs advanced models to identify potential criminal transactions and that the institution “provides this technology to 2,500 banks… pooling data across those banks.” Below are more highlights from her conversation with Bloomberg anchor David Westin, which touched on the technological race against financial crime, the need for regulatory cooperation and smarter regulations, the risks of companies staying private, and the importance of ensuring everyday citizens have access to investment opportunities in public markets.

Technology’s impact on financial markets

• Friedman acknowledged that financial markets have become increasingly complex over the past thirty years due to technological advancements, but that technology also “opens up accessibility.” She stated that “billions of people [now have] access to real-time information about markets,” which promotes economic growth and empowers individual investors.
• Friedman highlighted that technology is an “unstoppable force” in financial markets. She stressed the importance of leveraging technological advancements to enhance market efficiency, transparency, and integrity, stating, “if we can use technological innovation…to drive the markets into a state of high liquidity, high integrity, and high transparency, then we will be able to combat those actors that are trying to take advantage of technology.”
• Addressing the cost of technology, Friedman noted a disparity between larger institutions and smaller banks. She explained that while larger banks can afford to invest substantially in technology, it’s crucial to create efficiencies that allow smaller banks to compete, stating, “our job is to try to balance that scale by creating efficiency in the market to make it…more accessible.”
• Friedman discussed the impact of economies of scale in the financial system, suggesting that those who adopt technology quickly will succeed, while those who resist may lose ground. She mentioned that by partnering with hyperscalers, firms can lower data costs and enhance competitiveness, noting, “the cost of data… has come down 80 percent in the last ten years.”

Comparing global financial markets

• Friedman highlighted Nasdaq’s operations in various regions, stating, “we own and operate… the markets here, of course, in the United States and also in Canada,” as well as in the Nordic and Baltic regions emphasizing Nasdaq’s need to adapt to different economic ecosystems.
• She described the Nordic countries as a “beautiful shining star of the capital markets.” She attributed this success to government engagement with retail investors through “tax advantage accounts,” resulting in 47 percent of citizens owning equities, compared to 18 percent in Europe.
• Friedman also noted that Nordic countries balance strong social safety nets with capitalism. Their approach allows small to medium companies to access public markets while fostering a robust investment culture, “creating something really special” in that region.
• Nasdaq aims to share its expertise globally by advising markets about how to engage retail investors and improve policies pertaining to innovation, bankruptcy, or tax, stating, “we do advise the exchanges and the governments on how to engage more retail… to make the markets more technologically advanced, but also safer.”

Challenges of private market growth

• Friedman stated that “vibrant capital markets are the underpinning of economic growth,” suggesting that a trend toward keeping companies private could undermine economic stability and growth.
• She noted that while “there’s risk, of course, in bringing companies to the public markets,” there is also significant potential for “enormous amounts of wealth creation across the country” when more people have access to these investments.
• Friedman went on to emphasize that “if you choke off access to these great growth companies to the everyday citizen, then you are creating an economic distortion,” which limits wealth creation opportunities for individuals who could benefit from investing in these companies.
• She called for a reassessment of the regulatory framework underpinning capital market, advocating for “smart regulation” to achieve “the right balance between private and public,” as the current landscape is “definitely skewed towards private.”

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1. Policy coordination to ensure a global soft landing

Major countries’ economies, including those of the United States, China, and many in Europe are in similar, negative cyclical circumstances. They share a common interest to engineer soft landings for their economies as headline inflation rates slow despite persistent services inflation, and employment growth weakens while unemployment rates rises. China has been particularly mired in deflation. Its gross domestic product (GDP) price deflator—a comprehensive measurement of price changes—has remained in negative territory for five consecutive quarters, amid a balance sheet slowdown triggered by a property sector crisis. All the major countries could benefit from coordinating their stimulative policy measures to generate positive feedback effects.

Doing so would be an opportune moment for the Group of Twenty (G20)—which will gather during the annual meetings—to deliver on their mission as the premier forum for international policy coordination. They could start by agreeing on a set of measures—such as coordinated easing moves—to ensure a soft landing for the global economy. In particular, interest rate cuts announced by major central banks, especially the US Federal Reserve (the Fed), would revive bond flows to emerging, developing economies. The IMF can play a catalytic role in this endeavor by providing analytical support for coordinated monetary easing coupled with appropriately supporting fiscal policy measures. At the same time, it should safeguard government debt sustainability where necessary. After all, a soft landing is the base case scenario in the IMF’s latest growth estimates, which show global GDP growing at 3.2 percent and CPI slowing to 5.9 percent in 2024.

2. Additional measures to support low income countries in debt distress

The IMF recently outlined its latest proposals to strengthen its support for low-income countries at risk of, or already in, debt distress. These countries are increasingly vulnerable—the external debt stock of low- and middle-income countries, excluding China, has more than doubled since 2010 to $3.1 trillion. The IMF has pointed out that the G20 Common Framework has already made progress to address this challenge. The framework has produced a debt restructuring agreement for Zambia and brought together all major stakeholders in sovereign debt to discuss and clarify key restructuring issues in the Global Sovereign Debt Roundtable.

The IMF has focused on three sets of additional measures. First, it is promoting fiscal reform to mobilize domestic resources, including improved tax revenues and spending. Second, the IMF is driving international support to facilities giving grants or loans with low interest rates—including a generous contribution to the International Development Association’s IDA21 replenishment drive, as well as support for the IMF’s Poverty Reduction and Growth Trust. Third, the IMF is encouraging measures to relieve liquidity pressures on highly indebted low-income countries—including credit enhancement and risk sharing to lower costs associated with their debt, especially to private creditors.

Those measures would help at the margin, but the IMF should be more ambitious in its reform ideas. For example, the coverage of the Common Framework should be widened to include vulnerable middle-income countries like Sri Lanka and Pakistan. The current debt restructuring negotiation process also needs to be improved to expedite the restructuring exercise—for example, Zambia took three years to complete its debt restructuring. The improved format should include both official and private sector creditors negotiating at the same time. They could do so all together in a comprehensive setting or in parallel, with timely communication. This arrangement will help avoid delays arising from the current sequential negotiation format, which has developed based on official financing procedure. In the current process, official creditors first negotiate among themselves to provide financing assurances to the IMF to conclude a program with the member in distress. They then negotiate with private bondholders, whose outcomes are subject to official creditors’ approval on grounds of comparability of treatment.

3. How to improve WB/IMF financing support for climate action

The World Bank and the IMF have pledged to deepen their cooperation to provide analytical, technical assistance and financing support to country-driven climate mitigation and transition programs. The WB has promised to allocate 45 percent (up from 35 percent) of its lending to climate actions by 2025—a significant jump, with its potential lending having increased by $50 billion over the next ten years thanks to balance sheet optimization measures. The IMF has promoted its Resilience and Sustainability Trust (RST), which has received financial contributions from twenty-three countries and has $30 billion available to lend. So far, eighteen countries have received support by the RST. Those steps are welcome, but are nowhere near enough to meet the climate funding needs of emerging and developing countries—estimated to be $2.4 trillion per year till 2030. More needs to be done by international financial institutions to mobilize climate financing for developing and low-income countries—including calls for a significant capital increase from the World Bank.

4. Complete IMF quota formula and surcharge policy reviews

The IMF completed the 16th General Review of Quota by approving a 50 percent increase in quota contributions on an equiproportional basis—raising the Fund’s permanent lending capacity to $960 billion. It has also created the twenty-fifth executive directorship at the IMF Board for Sub-Saharan Africa. Both of these measures will become effective in November 2024. It also mandated Fund management to review and recommend changes in the IMF quota formula and quota/vote distribution to better reflect the relative weights of member countries in the global economy by June 2025. In addition, the Fund will review how to reform its surcharge policy, which has outlived its usefulness—to be considered in the October annual meetings. The IMF should complete these reviews expeditiously to strengthen its legitimacy in the eyes of its many developing country members.

5. Navigating the geopolitical conflict and geoeconomic fragmentation

Finally, the IMF must navigate the rising mistrust engendered by geopolitical disputes, which make it difficult build the consensus necessary for smooth operations. Fund management and staff have approached these challenges in a practical manner, leveraging its universal membership and mandate. The IMF has analyzed the increasing costs of geoeconomic fragmentation in trade and investment flows, leading to efficiency losses in the global economy and disproportionately hurting low income countries. It has raised alarm about the proliferation of trade protectionist measures, urging major countries to limit negative impacts on developing and low-income countries. Since the multilateral approach has failed to move the World Trade Organization forward, the IMF has recommended a plurilateral approach—getting a small group of like-minded countries to reach new trade agreements, which would be open for others to join later on. As many major countries begin to favor industrial policy, the Fund has examined the policies implemented so far to differentiate between them. Some are designed well and focused on addressing market failures, while other measures aim to promote national and economic security, supply chain resiliency, and climate mitigation and transition. The latter includes goals which may not be defined well and could produce unintended harmful effects. The IMF has tried to limit the distortive effects of industrial policy through greater transparency, data sharing, and policy dialogue by way of its bilateral and multilateral surveillance and consultation with members.

If the G20 seizes the opportunity to coordinate economic policies and ensures a global economic soft landing, it could create the momentum necessary for progress in the other important issues at the October annual meetings—and in future ones—despite ongoing geopolitical conflict. Pushing for these outcomes would reaffirm the important roles of the IMF and WB in the current period of geopolitical turmoil. Progress on climate financing and navigating geopolitical conflict would be an especially important legacy, which leaders of those institutions would like to build.

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

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

Learn more

The post The IMF-World Bank Annual Meetings in 2024: Five important issues to be addressed appeared first on Atlantic Council.

While the EU has taken important steps toward solidifying its strategic compass, as well as strengthening its defense industrial base and common defense funding, it remains a nascent defense actor. It’s difficult for Europe to build out a common strategy and properly fund common defense projects when member states not only have individual national defense priorities, but disagree on the usefulness of common funding at all. Consequently, European unity on defense hinges not only on political will, shared strategy, and the readiness to act collectively, but also on decisions about funding.

In order to bring the European Defense Union to life, EU institutions and heads of state must recognize that economic and industrial policies can lead to effective defense cooperation. The European Commission appears to be in favor of such a strategy. Spearheading this effort is the European Defense Industrial Strategy (EDIS). EDIS aims to enhance defense industrial readiness across EU member states by promoting coordinated investment, joint research and development, synchronized production, collective procurement, and shared ownership of defense assets within Europe. This strategy seeks to bolster strategic autonomy and reduce reliance on non-EU suppliers, ensuring that Europe can independently meet its defense needs. Additionally, there are significant comparative advantages and benefits from a Europe-wide division of labor in the defense sector.

Joint procurement is a key priority for EDIS because it promotes collaborative investment and fiscal savings, which would lead to purchasing economies of scale and more effective allocations of defense budgets. Recently, member states indicated a willingness to cooperate with the Commission to combat the surge in wildfires with the joint order for purchasing Canadair DHC-515 water tankers. The funding structure consists of a hybrid approach, with orders to purchase the tankers placed by both the EU and individual member states. The size of the order achieved purchasing economies of scale, leading to a much more competitive purchase price.

The EU has already begun utilizing joint procurement to solve its fractured landscape of military equipment and defense systems. The European Peace Facility (EPF), off-budget funding mechanism, was used to oversee the approval of funding of military equipment for the Ukrainian Defense Forces. This success should be built upon to reach a more efficient system of procurement across the board. EDIS guidelines suggest that member states procure at least 40 percent of defense equipment collaboratively by 2030. Indications show that joint procurement could increase savings by up to 30 percent.

Another area for improvement relates to targeted multinational investment in the EU defense industry. Leveraging resources from the European Investment Bank’s (EIB) €550 billion pool of funds can significantly upgrade the EU’s defense capacity and innovation. Traditionally, the EIB was restricted by its statutes to funding any defense initiative apart from certain dual-use equipment. However, this past May, the EIB Board of Directors endorsed the Eurogroup’s Action Plan for Security and Defense, adapting its lending policy to expand the definition of dual-use equipment, such as drones, and “to open its dedicated SME credit lines to companies active in security and defense”, therefore allowing the direct funding of such dual-use tools.

Despite their significance, however, joint procurement and increased EIB financing cannot cover the preexisting investment gap in Europe’s defense capabilities. Between 2009 and 2018, member state cuts amount to an aggregated underinvestment of around €160 billion, compared to the 2008 spending level. Given the changing attitude of governments and EU financial institutions, formulating an equitable funding model remains a pivotal challenge. While straightforward and aligned with each country’s ability to pay, a simple GDP-based approach may generate resistance from wealthier nations that could feel burdened by disproportionately high contributions relative to their needs and may bear public backlash. This challenge is also preventing further talks surrounding a recovery fund specifically for defense. Joint borrowing, proposed by Spain, France, and Belgium, aims to build on the €800 billion joint debt to tackle the challenges of COVID-19. This proposal has already ignited negative reactions from more fiscally conservative member states.

A more sophisticated model that adjustsfinancial contributions to a joint investment fund or other funding structure based on strategic priorities could address these concerns by increasing buy-in from countries with heightened security risks, such as Greece and Poland, two countries with a high percentage of defense spending. However, this model’s complexity and potential disputes over threat assessments make its implementation challenging. Hybrid models of mandatory and voluntary contributions are another possibility, offering flexibility and ensuring a baseline of collective action tailored to specific security challenges.

In any case, robust governance mechanisms will be required to ensure efficient resource use and avoid duplication with NATO efforts. The success of any funding model depends on clear strategic objectives, robust oversight, and the political will to transcend national differences for collective security.

Overall, to properly improve the European defense industry it is key to incentivize European defense firms to raise their level of investment in new capacity to achieve economies of scale and lower unit costs. The creation of a bigger European defense market, coupled with increased official financing through national funds, incentivizes higher research and development activity and a stronger drive for increased production efficiency to gain market shares in a growing market. These provide incentives for increased start-up and merger and acquisition activity. This, coupled with a strategy to integrate more European firms into the supply chain of the European defense industry and higher political coordination in identifying and pursuing common defense needs, could establish a European market where member states enjoy lower prices per unit and priority service. Moving forward, the harmonious cooperation of the public and the private sector, under more coordinated political oversight, could transform Europe’s defense capabilities.

Konstantinos Mitsotakis is a former Young Global Professional at the Atlantic Council’s Geoeconomics Center.

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

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In the past, tariffs, coupled with the United States’ hegemonic heft, were enough to bring economic disputes to a resolution. The most notable example was the backlash to Japanese auto and steel imports in the 1980s. Within the span of five years, Japan acquiesced to US and European tariffs, agreed to joint ventures and technology transfer, voluntarily cut back auto exports (chart 1), and—most importantly—allowed the yen to appreciate significantly as part of the 1985 Plaza Accord.

Today, a multitude of export bans and tariffs have yet to force China to address the West’s concerns over its trade practices. Instead, Chinese leadership continues to expand the scope of critical technologies for exports, whether in EVs and batteries—where China has clear dominance—or in semiconductors—where it does not despite decades of investment.

From tariffs to export controls, the West’s measures have only sharpened China’s awareness that technology is fundamental to a great power’s sovereignty. China’s response to allegations of unfair trade practices has thus been combative. Its representatives have retorted that China’s record trade surplus (chart 2) is merely a byproduct of its comparative advantage and asserted that it is “offering Chinese wisdom and solutions to a common problem facing humankind.”

However, given China’s already advantageous position in global trade, Beijing’s adversarial approach may be counterproductive to its economic interests and standing in the world. China’s pivot to the “new quality productive forces” (chart 3a) has clearly paid off. However, an economic strategy that treats citizens as labor rather than consumers has led to rock-bottom household confidence (chart 2b) and subpar domestic economic growth.

By implementing policies that reboot confidence within China, the government can revive overall growth, generate more organic demand for imports, and alleviate some of the West’s concerns over widening trade imbalances.

Some argue that encouraging people to spend is ideologically inconsistent with Xi Jinping’s China. But the reality is that Chinese officials are now turning to policy options they once despised, as the latest indicators show worsening deflation and slowing manufacturing activity. A case in point is the People’s Bank of China’s quiet foray into debt monetization in August. The monetary policy is one widely adopted by developed countries, but historically rejected by top Chinese policymakers as one that risks inflating asset bubbles and endangering financial stability.

China need not look far for policies that are more philosophically palatable than monetizing its debt. Education subsidies and childcare support were provided to support households after the 2008 financial crisis. Similar measures to stimulate household spending would unlock some internal demand and appetite for imports. They would also be well-suited to an aging population with high ambitions for developing critical technologies.

The United States could also use a recalibration of strategy.

Just as China is locked in an uncompromising stance, American politicians from both parties have increasingly sought to fend off advanced Chinese technologies across the board. That seems to be the case even for technologies like EV batteries that may not pose the same level of national security threat as AI and semiconductors. In contrast, countries in Europe have adopted a more measured approach to trade restrictions, balancing between Chinese technology transfer and safeguarding national security more pragmatically.

In a similar vein, the United States could strategically loosen restrictions on selective Chinese technologies which, on balance, bolster America’s economic resilience. China has worked tirelessly for decades to acquire technologies to outpace the West. It is perfectly reasonable for the United States to do the same.

For example, the Inflation Reduction Act excludes EVs made with made-in-China battery components from qualifying for the full $7,500 tax credit—a requirement that very few EVs will meet when the rule is fully implemented in 2025. Similar restrictions on developing battery manufacturing through Chinese investments or joint ventures further complicate efforts to jumpstart US production capacity.

The United States set an ambitious goal of ensuring that EVs account for half of all new vehicle sales by 2030. Finding win-win outcomes with Chinese technologies increases the United States’ chance of achieving a goal, solidifying Washington’s global leadership.

Expanding the bargaining scope could also help stabilize the cycle of escalation between the United States and China. However tenuous de-escalation is, it should be a priority for both sides.

Upholding the liberal international order in a multipolar world increasingly requires strategic empathy with partners and adversaries alike. The United States and its allies no longer wield the kind of unparalleled dominance that facilitated straightforward solutions to Japan’s trade imbalances in the 1980s. Nevertheless, the United States can still demonstrate leadership by strategically integrating a rival’s technology for its own benefit. “Immature poets imitate, mature poets steal.” The great American poet T.S. Eliot’s wisdom remains relevant.

Andrea Wong is a macroeconomist with PGIM Fixed Income where she’s responsible for connecting the dots between global macro trends and analyzing their impact on asset prices.

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

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The post Stabilizing the US-China trade conflict appeared first on Atlantic Council.

Former US President Donald Trump has made it clear that Powell would not serve another term under his administration. Debates also continue about whether President Trump could invoke the Federal Reserve Act to remove Powell as chair before the end of his term. If US Vice President Kamala Harris wins the presidential election, it is unclear if Powell would wish to serve a third term and become the longest serving Chair since Alan Greenspan.

As the Fed prepares to cut interest rates next week and declare victory on inflation, it’s not too early to begin to consider Powell’s legacy. Appointed in 2018 by Donald Trump, he has navigated a global pandemic, a major surge in inflation, labor market upheavals, banking failures, supply chain shocks, and the geopolitical tremors of Russia’s invasion of Ukraine. He’s also heard calls, for the first time in decades, that challenges central bank independence. Throughout these challenges, Powell faced constant tradeoffs between the Fed’s dual mandate to promote maximum employment and maintain stable prices.

Extraordinary circumstances required bold responses. In the spring of 2022, Powell expanded the Fed’s balance sheet to a record $8.9 trillion through large-scale quantitative easing purchases, including bonds and mortgages. The chart below illustrates the peak balance sheet expansion under the four most recent Fed chairs, highlighting the unparalleled magnitude of the Fed’s intervention during Powell’s tenure.

While the scale of interventions was unmatched, the tools deployed were familiar. Powell’s policy approach during times of crisis drew from a playbook developed by former Fed Chair Ben Bernanke during the 2008 financial crisis. Large-scale asset purchases and quantitative easing are not novel monetary policy innovations, but Powell used them at a historic scale.

He was not acting alone. Monetary policy was complemented by ambitious fiscal policy under the Biden administration. The American Rescue Plan, the Inflation Reduction Act, the CHIPS and Science Act, and other spending bills provided fiscal stimulus that matched the Fed’s monetary expansion. While Powell provided liquidity, Congress and the administration provided the spending roadmap.

Over the same period, the United States experienced some of the highest inflation in decades. The consumer price index in the United States reached a record 9.1 percent in June 2022, a level not seen since 1981. But the United States wasn’t alone in massive inflation spikes. How does Powell’s leadership compare to his peers?

The chart below shows that large central banks around the world similarly expanded their balance sheets over the past several years.

Looking at the data, the US economy weathered the storm better than most of its advanced economy peers. Even with similar inflation levels, US gross domestic product growth is triple that of each of these economies. Powell is not the only actor in that story, but he did play a decisive role.

What comes next?

Powell likely will be the first of his peers to step down after overseeing a massive balance sheet expansion. European Central Bank President Christine Lagarde’s term will end in November 2027, while Bank of England Governor Andrew Bailey’s and Bank of Japan Governor Ueda Kazuo’s terms will end in the spring of 2028. They will remain to see through the difficult task of unwinding these interventions while ensuring inflation doesn’t return.

In the 1940s, the legendary Fed Chair Marriner Eccles (the Fed’s building bears his name) was questioned about wartime spending and monetary policy. He was asked whether the United States could ever return to a system where the Fed couldn’t just “create credit.”

Eccles replied, “Not in your lifetime or mine.”

One can imagine Powell saying something similar today. Perhaps that’s because the two men, separated by seven decades, understood that their job was to do whatever it took to stabilize an economy in crisis. Even if there was a cost.

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Benjamin Lenain is an assistant director with the Atlantic Council GeoEconomics Center.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

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The post It’s not too early to start grading Jerome Powell’s historic tenure appeared first on Atlantic Council.

The IMF imposes surcharges if its loan to a member exceeds a certain level or persists longer than the agreed duration. Level-based surcharges of two-hundred basis points are added on top of the basic charge associated with IMF borrowing for member countries with high debt levels owed to the IMF General Resources Account (exceeding 187.5 percent of a member’s quota). Time-based surcharges of one hundred basis points are applied to loans lasting longer than thirty-six months (under a regular standby loan) or fifty-one months (under an extended funding facility loan). The basic IMF charge rate is one hundred basis points above the Special Drawing Rights (SDR) interest rate. The IMF Special Drawing Right (SDR) rate is determined by the weighted average of the interest rates of the five major currencies (the US dollar, euro, pound sterling, yen, and renminbi) making up the SDR—currently at 3.8 percent. As a consequence, such surcharges would bring the total lending rate of IMF loans subject to surcharges to 7.8 percent at present—quite onerous for countries already in deep economic distress and short of hard currency.

The IMF says its surcharge policy intends to incentivize borrowing countries to repay the IMF in a timely manner and to contain their borrowing. The IMF also needs surcharges to build up its precautionary balances to safeguard its capital base against potential credit losses. In reality, surcharges have been found an insignificant factor in deterring countries from borrowing more from the IMF. The conditions that come along with borrowing from the IMF already deter many countries from relying on the institution until their situation deteriorates to the point that they have no alternatives. Concerns about conditionality also disincentivize members from asking for too big a loan unless driven by the magnitude of the crisis. The bigger the loan, the more stringent the conditionality. By and large, countries would try to repay the IMF to regain sovereignty away from the Fund’s scrutiny of their compliance with loan conditions.

The fact that some countries let their IMF loans remain outstanding longer than originally agreed usually results from a protracted crisis making timely repayments difficult. For example, multiple crises in recent years have led the number of countries paying surcharges to rise from eight—before the Covid pandemic—to twenty-two. The surcharges did not deter this increase. Finally, the IMF will achieve its target of SDR 25 billion ($33.2 billion) for its precautionary balances by the end of FY2024. Its balances will likely continue to grow, even without the surcharges.

Surcharges have substantially increased the payment burdens on countries in economic distress, especially depleting their dwindling foreign exchange reserves. Total surcharges will amount to $13 billion between 2024 and 2033. Surcharges will be a significant financing burden for low- and middle-income countries, which have been spending more to service their debts to external official and private creditors than they receive in new funds.

Five countries have borrowed the most from the IMF—Argentina, Ecuador, Egypt, Pakistan, and Ukraine. They paid $5.1 billion combined in surcharges between 2018 and 2023 and will pay an additional $7.2 billion between 2024 and 2028. Ukraine alone paid $621 million between 2018 and 2023 and will have to pay $1.6 billion between 2024 and 2028. Such surcharges sharply increase the cost of interest payments to the IMF, bringing IMF financing close to market rates—well above the concessional rates typically offered to countries in need by international financial institutions.

Ukraine, in particular, has a four-year IMF program under the Extended Funding Facility worth $15.6 billion (445 percent of its quota), signed in March 2023. Ukraine also has an outstanding loan of $10.5 billion from the IMF. In the next four years, Ukraine will probably repay to the IMF as much as it will receive in new loans. Its debt service payment (principal and interest) to the IMF will reach between $1.1 and $1.2 billion in 2025, as estimated by the Wilson Center. This is a financial burden the country can ill afford. It is important to note that from 2018 to 2022, Ukraine was a net payer to the IMF, paying back $7.2 billion while receiving $4.2 billion in new loans.

Many observers have criticized the surcharges as unfair and unreasonable. They can be procyclical, increasing financing costs precisely when countries are in economic distress and short of hard currencies. In 2022, several members of the US House of Representatives proposed legislation asking the IMF to review its surcharge policy with a view to abolish it. At a recent House Financial Services Committee hearing, Treasury Secretary Janet Yellen said the United States supports a review of the IMF surcharge policy, but qualified that by repeating IMF rational for surcharges.

In response, at the IMF/World Bank Spring Meetings in April 2024, the IMF decided to review the surcharge policy. The review started in early July this year and is expected to produce recommendations to be discussed at the Annual Meetings in October. The Group of Twenty-Four—representing developing countries at the IMF—issued a statement at the Spring Meetings asking the IMF to suspend its surcharge policy as soon as possible, pending changes (including the elimination of surcharges, reducing the surcharge spreads, and relaxing the thresholds that trigger surcharges) to be discussed and approved by the IMF Board. Such a decision requires 70 percent of the votes.

The IMF should seriously consider these requests and move expeditiously to significantly reform its surcharge policy, ideally abolishing it. This policy has not served its purposes, is no longer needed to build the Fund’s precautionary reserves. Instead, it imposes unnecessary financing burdens on low-income countries in debt distress—the very countries that need all the help they can get. Dropping the surcharge would help relieve some of the financial burdens on Ukraine, especially, which has experienced extraordinary hardship and sacrifice fighting against Russia’s war of aggression.

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

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

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The post The problems with the IMF surcharge system appeared first on Atlantic Council.

The declining share of the USD in global reserves

The IMF conducts a regular survey of Currency Composition of Official Foreign Exchange Reserves (COFER). Its latest COFER report shows that in the first quarter of 2024, the share of USD sits at $6.77 trillion—54.8 percent of the total official foreign exchange (FX) reserves of $12.35 trillion, or 58.9 percent of allocated FX reserves where currency breakdowns having been reported to the IMF. This is a noticeable fall from the 71 percent share for USD in 2001. Basically, the decline in the USD share has been driven by efforts by central banks to diversify their reserves into a wider range of currencies—a move facilitated by improvements  in financial markets and payment infrastructures in many countries. It is important to note that the share of USD would be lower if gold were included in global reserves.

Since the global financial crisis in 2008, the world’s central banks have increased their gold purchases in an attempt to manage heightened financial system uncertainty. Doing so has pushed gold prices up by 138 percent over the past sixteen years to reach the current record highs of over $2,600 per ounce. Gold buying has accelerated further in recent years as part of a growing popular demand. In 2022 and 2023, central banks purchased more than one thousand tons of gold per year, more than doubling the annual volume of the previous ten years. Purchases have been spearheaded by the central banks of China and Russia, followed by several emerging market countries including Turkey, India, Kazakhstan, Uzbekistan, and Thailand. In particular, the People’s Bank of China has raised the share of gold in its reserves from 1.8 percent in 2015 to a record 4.9 percent at present. At the same time, it has cut its holding of US Treasuries from $1.3 trillion in the early 2010s to $780 billion in June 2024.

Gold holdings, valued at market prices, account for 15 percent of global reserves. As a consequence, the share of the USD in total global reserves including gold would fall to 48.2 percent—instead of 54.8 percent of global foreign exchange reserves. The declining USD share suggests that while the USD is still the preferred currency most used by central banks for their reserves, it has been losing market share. It is not as dominant in the global reserves arrangement as it still is in trade invoicing, international financing, and FX transactions, according to the Atlantic Council’s Dollar Dominance Monitor.

Implications of the declining share of the USD in global reserves

Several reasons have been advanced to explain the growing demand for gold. For the general public, factors including hedging against inflation and/or against political and geopolitical risks, as well as positioning for expected US Federal Reserve rates cuts, appear reasonable. The central banks buying gold have also mentioned their desires to diversify their reserves portfolios, de-risking from vulnerability to sanctions risk from the United States and Europe. This sense of vulnerability has become acute for some countries in conflict or potential conflict with the US/Europe, after the West imposed substantial sanctions on Russia following its invasion of Ukraine. Decisions to immobilize overseas reserve assets of the Bank of Russia, subsequently appropriate the interest earnings of those assets, and threats to seize assets outright to help pay compensation to Ukraine proved especially unsettling.

In response, central banks have moved into gold in a way to diminish sanction risks. They can take physical possession of the gold they have bought and kept it in domestic vaults—instead of leaving it at Western financial institutions such as the US Federal Reserve, the Swiss National Bank, or the Bank for International Settlements, where gold is subject to Western jurisdiction. If the likelihood of geopolitical confrontation heightens, it follows that the declining trend in the share of the USD in global reserves will persist. This is consistent with the de-dollarization trend whereby a growing number of countries have developed ways to settle their cross-border trade and investment transactions in local currencies. Doing so chips away at the USD’s dominant role in the international payment system, as well as motivating countries to hold some reserves in each other’s currencies.

While the declining share of the USD in global reserves could continue to unfold gradually, as in the past two decades, central banks’ demand for USD for their reserves would eventually fall to a critical threshold. The US national saving rate is also likely to stay low and remain insufficient to cover domestic investment, leading to persistent US current account deficits. The combined effect of these trends in addition to falling foreign central bank demand for USD would constrain the US government’s ability to issue debt to finance its budgetary needs.

This constraint could become binding, a turning point heralded by sharp reductions in foreign official demand for US Treasuries. In that case, USD exchange rates would have to fall and interest rates to rise, simultaneously and in sufficient magnitude, to improve the risk-return prospects of US government debt and attract international investors. Any increase in US interest rates would be very problematic as interest payments on government debt have already become a burden, and are estimated to take up more than 20 percent of government revenue by 2025. They are threatening to crowd out other necessary public priorities including national defense, dealing with climate change, infrastructure, and human services. These developments would make the political fight over budgetary resources for competing needs even more antagonistic, and the important task of getting government deficits and debt under control more intractable. Both factors would ultimately put the US fiscal trajectory on an unsustainable path and threaten global financial stability—a risk not easily addressed given the deepening geopolitical contention.

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

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

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The post Going for gold: Does the dollar’s declining share in global reserves matter? appeared first on Atlantic Council.

The 2018 US tariffs primarily targeted Chinese intermediate inputs and capital equipment. In 2025, far more countries will share concerns over the impact of an expansion of Chinese exports. This time, however, they are likely to target final consumer goods to shield domestic industries and avoid imposing costs on their own supply chains. 

In 2023, 150 countries had a goods trade deficit with China. As the chart below shows, bilateral goods trade deficits for economies across the world and income levels have widened in 2023 as compared to 2017.

Bilateral trade deficits can be harmless and simply reflect macroeconomic dynamics of supply, demand, and savings between countries. However, persistently large and deepening deficits could indicate that employment lost to more competitive imports may not be equally offset by employment in new tradable sectors. In the case between the United States and China, the countries even disagree over the numbers. The reported numbers diverge considerably since the imposition of tariffs in 2018 as US importers were incentivized to under-report the value of Chinese imports while Chinese exporters were incentivized to over-report exports due to changes in tax incentives. The US Federal Reserve itself believes the discrepancy is mostly explained by the former. 

In China’s case, rapid export growth is behind the widening global trade deficit with it over the last six years. As more people worked from home during the pandemic in 2021, Chinese shipments of electrical machinery, phones, and office equipment surged.

But that is not all. As part of its strategy to unleash “new quality productive forces,” Beijing has shifted its focus to technology-led growth. Since 2017, China has more than doubled its exports of high value-added products, such as electric vehicles, batteries, semiconductors, and solar panels. Weak domestic demand means this increased production is redirected to foreign markets while strengthened domestic capacity to build high-tech products has reduced China’s need for importing them. 

All things being equal, the aggregate global trade deficit with China will therefore continue increasing. But things most likely won’t stay the same. Governments are intervening proactively to shield their industries from a surge in Chinese goods. 

Governments are increasingly concerned by what they consider unfair Chinese subsidies in the form of tax breaks, direct transfers of funds, or the public provision of goods or services below market prices. These subsidies could allow Chinese enterprises to continue exporting large quantities even when they are loss-making, becoming unresponsive to global demand signals. 

The cutthroat prices that Chinese firms can offer are making it difficult for emerging markets to move up the global value-added supply chains themselves. During the first “China shock,” many emerging markets rode the wave of China’s growth by supplying it with the food and energy commodities it needed to sustain its rise as the world’s factory. They are unlikely to benefit similarly from China’s move up the value chain this time. This new transition will demand advanced technology such as semiconductors, auto parts, batteries, and 5G infrastructures—among other products that emerging markets typically don’t produce. Though some countries have large deposits of critical minerals, the bulk of value-added processing and refining is dominated by China. 

Furthermore, China’s move up the value-added chain was expected to create demand for low-value-added goods from low- and middle-income economies. But weakness in China’s domestic demand and Beijing’s emphasis on retaining low-tech manufacturing jobs has not only reduced export opportunities to China, but also intensified Chinese firms’ competition in low- and mid-tech sectors.

Advanced economies have already seen this story play out once and worry that China’s entry into high-tech sectors will overwhelm employment in its industries just as it did in the 2000s. Consider the European Union (EU), for instance. Its attempts to remain an industrial powerhouse for the low-carbon economy in domestic and global markets could be stymied by China’s rapid ascent in high-value-added industries. Chinese firms could allay employment concerns by investing in manufacturing plants within the EU that would give products a “Made-in-EU” stamp. But this would only address part of the issue—the goods would still saturate domestic markets while the profits would be repatriated to China. 

The EU is not alone. Governments within the Group of 20 (G20) and beyond are becoming wary of a “China shock 2.0.” Policy interventions targeting imports from China of electric vehicles, batteries, and solar panels have surged in the last four years. Since 2023 alone, Argentina, Brazil, India, Vietnam, and the EU have launched anti-dumping and anti-subsidy investigations against China. Brazil, Canada, Indonesia, Mexico, South Africa, Turkey, the United States, and the EU have all imposed tariffs on certain high-value-added Chinese imports, including but not limited to electric vehicles. 

While many countries share concerns regarding China’s expanding exports, divergent priorities around trade with China will mean they struggle to coordinate a shared response. 

Advanced economies such as the EU, for example, are already taking measures to maintain their market shares in high-value-added markets where they have traditionally enjoyed a comparative advantage within Europe and beyond. Whether the United States pursues blanket tariffs against Chinese goods or favors domestic subsidies to counter Chinese subsidies largely depends on who enters the White House in January. 

Emerging markets will be more cautious. They aim not only to protect existing domestic industries, but also to onshore new Chinese manufacturing in light of Western friendshoring policies. Companies leaving China often want to retain supply chains in China for key inputs, at least in the short term—as India has learned. Several low-income countries that rely on Chinese intermediate inputs to expand their own manufacturing production will also prefer to remain integrated in its value chains. Low- and middle-income countries are also vulnerable to Chinese retaliation. These priorities call for distinct sets of incentives and barriers that will not align neatly. 

Since 2018, the United States has increasingly used tariffs to try to balance its trade with China, and 2025 may well see a new wave of tariffs imposed. The difference this time, however, will be that other advanced economies—and indeed, most of the G20—agree that a response is needed to China’s manufacturing overcapacity.

Mrugank Bhusari is assistant director at the Atlantic Council GeoEconomics Center.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

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

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The post Why the next trade war with China may look very different from the last one appeared first on Atlantic Council.

That tailspin has ended almost as quickly as it started, and new inflation data today is making the Fed’s upcoming interest rate decision much more straightforward. But it’s worth revisiting what exactly happened in the markets over the past ten days and the lessons we should take heading into a consequential fall.

On August 5, markets in the United States fell 13 percent, in part thanks to Japan’s decision but also based on signals of a cooling US labor market. Global markets have experienced jolts in recent years; In 2023 Silicon Valley Bank (SVB) collapsed, marking one of the largest bank failures since 2008.

Below is a market reaction comparison for SVB and the recent “Summer Selloff.”
Click the arrow to see more.

While the recent shock differed in many ways from the one in March of last year, two key factors set the Summer Selloff apart: the state of the US economy and the situation with Iran.

One of the main reasons the VIX (the stock market’s expectation of volatility, sometimes called the fear gauge) spiked to historic highs last week was the risk of Iran’s retaliation and a wider war in the Middle East. As more serious talks of a ceasefire deal emerged during the week, markets started to recover quickly. But the situation is shifting day-to-day.

In the United States, markets were worried that the Fed was reacting too slowly to what was happening in the jobs market. In February 2023, right before SVB, the United States was adding 300,000 jobs a month, beating all expectations. But last month’s report was under 115,000 jobs. 

The Fed typically convenes eight times a year, but the summer schedule means there will be a notably long seven-week break before interest rates are revisited (absent a highly unlikely, and based on current conditions unnecessary, emergency meeting). This time gap could heighten market anxiety that the Fed is falling behind the curve and further erode confidence among businesses and consumers. While the Fed has signaled that it is preparing to cut rates in September, it is also aware that the meeting takes place six weeks before the presidential election, putting even more scrutiny than usual on its decision making. Federal Reserve Chair Jerome Powell has been clear that the election will in no way impact the Fed’s decision making. 

This morning, the Fed’s decision was made easier. The consumer price index increase data came in lower than expected, at 2.9 percent, which strengthens the argument for a rate cut when the Fed meets next month. In fact, some market participants think the Fed will cut by 50 basis points (bps), or half a percentage point, not its more standard 25 bps move. 

Compare the situation in the US economy now to the one during SVB’s collapse.

When SVB was unfolding, countries around the world knew they could rely on US growth to  stabilize the global economy. Forecasts for the economy were high and labor data was strong. Today, US growth is slowing (forecasted to be under 2 percent in 2025), China’s economy is stalling, and Europe remains stagnant. 

That explains why the market reacted the way it did last week—but what about the rapid recovery? All of last week’s losses have since been recoupled. In short, markets came to their senses. 

True, the Fed does not meet for another month, but Powell will be giving one of his biggest speeches of the year at the Jackson Hole Economic Symposium in a little over a week. The annual central banker retreat brings together financial leaders from across the world’s largest economies to discuss the ongoing economic issues and policy challenges. Powell’s speech is the perfect opportunity to signal the Fed’s intentions to cut rates and cool markets.

Meanwhile markets realized that while the United States is indeed slowing, it is still growing and far from a recession. Today’s inflation data confirms that the Fed—and the broader US economy—still have a very real chance of sticking the “‘soft landing” by hiking rates enough to tame inflation without causing a recession, an outcome that would be far outside the historical norm.

The bottom line is that between an election, the threat of conflict, and a slowing economy, there is likely to be more volatility in the months ahead. But volatility doesn’t necessarily equate to a downturn—it just means there’s more uncertainty than usual. 

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Alisha Chhangani is an assistant director with the Atlantic Council GeoEconomics Center.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

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

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The post Get ready for a volatile fall in the financial markets—but not necessarily a downturn appeared first on Atlantic Council.

Kenya is a prime example: In 2007, a local telecommunications provider launched a form of mobile money called M-PESA, which enabled peer-to-peer money transfers between mobile phones and became wildly successful. Within five years, it grew to fifteen million users, with a deposit value approaching almost one billion dollars. To address rising security concerns, in 2013, the Kenyan government implemented a law requiring every citizen to officially register the SIM card (for their cell phone) using a government identification (ID). The measure was enforced swiftly, leading to the freezing of millions of SIM cards. Over ten years later, SIM card ID registration laws have become common across Africa, with over fifty countries adopting such regulations. 

But that is not the end of the story. In parallel, a practice called third-party SIM registration has become rampant, in which cell phone users register their SIM cards using someone else’s ID, such as a friend’s or a family member’s. 

Our recent research at Carnegie Mellon University, based on in-depth user studies in Kenya and Tanzania, found that this phenomenon of third-party SIM registration has both unexpected origins and unintended consequences. Many individuals in those countries face systemic challenges in obtaining a government ID. Moreover, some participants in our study reported having privacy concerns. They felt uncomfortable sharing their ID information with mobile money agents, who could repurpose that information for scams, harassment, or other unintended uses. Other participants felt “frustrated” by a process that was “cumbersome.” As a result, many users prefer to register a SIM card with another person’s ID rather than use or obtain their own ID.

Third-party SIM registration plainly undermines the effectiveness of the public policy and has additional, downstream effects. Telecommunications companies end up collecting “know your customer” information that is not reliable, which can impede law enforcement investigations in the case of misconduct. For example, one of our study subjects shared the story of a friend lending their ID for third-party registration, and later being arrested for the alleged crimes of the actual user of the SIM card. 

A core implication of our research is that the Kenyan government’s goals did not fully take into account the realities of the target population—or the feasibility of the measures that Kenya and Tanzania proposed. In response, people invented their own workarounds, thus potentially introducing new vulnerabilities and avenues for fraud.

Good policy, bad consequences 

Several other case studies demonstrate how even well-intentioned regulations can have unintended consequences and practical problems if they do not appropriately consider security, privacy and usability together. 

• Uganda: Much like our findings in Kenya and Tanzania, a biometric digital identity program in Uganda has considerable unintended consequences. Specifically, it risks excluding fifteen million Ugandans “from accessing essential public services and entitlements” because they do not have access to a national digital identity card there. While the digitization of IDs promises to offer certain security features, it also has potential downsides for data privacy and risks further marginalizing vulnerable groups who are most in need of government services.
  
• Europe: Across the European Union (EU), a landmark privacy law called General Data Protection Regulation (GDPR) has been critical for advancing data protection and has become a benchmark for regulatory standards worldwide. But GDPR’s implementation has had unforeseen effects such as some websites blocking EU users. Recent studies have also highlighted various usability issues that may thwart the desired goals. For example, opting out of data collection through app permissions and setting cookie preferences is an option for users. But this option is often exclusionary and inconvenient, resulting in people categorically waiving their privacy for the sake of convenience.
  
• United States (health law): Within the United States, the marquee federal health privacy law passed in 1996 (the Health Insurance Portability and Accountability Act, known as HIPAA) was designed to protect the privacy and security of individuals’ medical information. But it also serves as an example of laws that can present usability challenges for patients and healthcare providers alike. For example, to comply with HIPAA, many providers still require the use of ink signatures and fax machines. Not only are technologies somewhat antiquated and cumbersome (thereby slowing information sharing)—they also pose risks arising from unsecured fax machines and misdialed phone numbers, among other factors.
  
• Jamaica: Both Jamaica and Kenya have had to halt national plans to launch a digital ID in light of privacy and security issues. Kenya already lost over $72 million from a prior project that was launched in 2019, which failed because of serious concerns related to privacy and security. In the meantime, fraud continues to be a considerable problem for everyday citizens: Jamaica has incurred losses of more than $620 million from fraud since 2018.
  
• United States [tax system]: The situation in Kenya and Jamaica mirrors the difficulties encountered by other digital ID programs. In the United States, the Internal Revenue Service (IRS) has had to hold off plans for facial recognition based on concerns about the inadequate privacy measures, as well as usability concerns—like long verification wait times, low accuracy for certain groups, and the lack of offline options. The stalled program has resulted in missed opportunities for other technologies that could have allowed citizens greater convenience in accessing tax-related services and public benefits. Even after investing close to $187 million towards biometric identification, the IRS has not made much progress.
  

Collectively, a key takeaway from these international experiences is that when policymakers fail to simultaneously balance (or even consider) usability, privacy, and security, the progress of major government initiatives and the use of digitization to achieve important policy goals is hampered. In addition to regulatory and legislative challenges, delaying or canceling initiatives due to privacy and usability concerns can lead to erosion in public trust, increased costs and delays, and missed opportunities for other innovations.

Policy as product design

Going forward, one pivotal way for government decision makers to avoid pitfalls like the ones laid out above is to start thinking like product designers. Focusing on the most immediate policy goals is rarely enough to understand the practical and technological dimensions of how that policy will interact with the real world.

That does not mean, of course, that policymakers must all become experts in creating software products or designing user interfaces. But it does mean that some of the ways that product designers tend to think about big projects could inform effective public policy.

First, policymakers should embrace user studies to better understand the preferences and needs of citizens as they interact digitally with governmental programs and services. While there are multiple ways user studies can be executed, the first often includes upfront qualitative and quantitative research to understand the core behavioral drivers and systemic barriers to access. These could be complemented with focus groups, particularly with marginalized communities and populations who are likely to be disproportionately affected by any unintended outcomes of tech policy. 

Second, like early-stage technology products that are initially rolled out to an early group of users (known as “beta-testing”), policymakers could benefit from pilot testing to encourage early-stage feedback. 

Third, regulators—just like effective product designers—should consider an iterative process whereby they solicit feedback, implement changes to a policy or platform, and then repeat the process. This allows for validation of the regulation and makes room for adjustments and continuous improvements as part of an agency’s rulemaking process.

Lastly, legislators and regulators alike should conduct more regular tabletop exercises to see how new policies might play out in times of crisis. The executive branch regularly does such “tabletops” in the context of national security emergencies. But the same principles could apply to understanding cybersecurity vulnerabilities or user responses before implementing public policies or programs at scale.

In the end, a product design mindset will not completely eliminate the sorts of problems we have highlighted in Kenya, the United States, and beyond. However, it can help to identify the most pressing usability, security, and privacy problems before governments spend time and treasure to implement regulations or programs that may not fit the real world.

Karen Sowon is a user experience researcher and post doctoral research associate at Carnegie Mellon University.

JP Schnapper-Casteras is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and the founder and managing partner at Schnapper-Casteras, PLLC.

Giulia Fanti is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and an assistant professor of electrical and computer engineering at Carnegie Mellon University.

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

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First, what is a strategic reserve? A strategic reserve is a stock of a systemically important input, which can be released to manage serious disruptions in supply. The most well known example—the strategic petroleum reserve (SPR)—was created as a response to the 1973-74 Arab oil embargo, as well as to meet the reserve obligations of the international energy program. Since the 1970s, the SPR has been tapped more than two dozen times for a range of reasons: from providing critical petroleum supply after natural disasters, to most recently reducing inflationary pressures on energy prices after Russia’s invasion of Ukraine. In addition, if managed well, drawdowns of the reserve can occur when the United States is able to sell the crude oil at high prices and buy it back when prices are low.

What purpose would a strategic bitcoin reserve serve? Proponents of the idea think of bitcoin as a national and economic security asset like oil or gold. However, in economic security terms,  bitcoin clearly does not serve the same function in the US economy as petroleum. Oil is one of the basic inputs that powers our economy and daily living—crypto is not. Holding a bitcoin reserve would be the equivalent of the government holding a lot of iPhones in case it needed to intervene to reduce iPhone prices in the future. It is not a crucial commodity or input in our economy.

Moreover, as this week has made clear, bitcoin price is impacted by macroeconomic factors and recovers slower, even as markets are settling down this week. As the one-two punch of an unexpectedly weak jobs report and a surprising rate hike in Japan came in over the weekend, markets all over the world reacted strongly. A bigger, mirrored dip was seen in crypto prices after Friday. What we saw is a sell-off of crypto—an exchange of a liquid asset to pay off debts and higher borrowing costs—incurred by rising uncertainty in the markets as they begin to price in a possible conflict in the Middle East, in addition to the macroeconomic data. Compare this with gold—another reserve asset—which stayed relatively stable over this period. This volatility of crypto is persistent and makes it an ineffective hedge against inflation. 

Additionally, bitcoin is only one type of crypto asset. In the case of a strategic petroleum reserve, we don’t just use one provider of crude oil, regardless of its market share. Moreover, a large majority of the US government’s seized crypto assets are in the form of tether and other assets. It’s still an open question if they would become a part of the strategic reserve.  

Since it’s not about the resilience of bitcoin during a period of macroeconomic uncertainty, or its strategic importance in our economy—what is the idea of strategic bitcoin reserve actually about? Both critics and proponents have talked about how this proposal could make bitcoin and crypto more institutionalized and  enmeshed with traditional finance, raising its popularity and use for commercial purposes. For the last five years, the crypto industry has wanted to shed its outsider status and enter the mainstream of global finance. It has been somewhat successful with the introduction of BlackRock’s bitcoin ETF this year, in addition to increased interest in tokenization experiments. This sort of institutionalization has helped, largely because it has been realistic about crypto’s capabilities and importance in global markets. 

The biggest drawback of the strategic bitcoin reserve proposal is that it prescribes crypto values it does not have, at least for now. This proposal is at best, premature, and at worst, out of touch with the reality of markets and US national security objectives. Bringing bitcoin into mainstream use is not reason enough to create a strategic bitcoin reserve. 

Ananya Kumar is the deputy director, future of money at the Atlantic Council’s GeoEconomics Center.

Data visualization created by Alisha Chhangani.

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

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Mere moments after the announcement, Macron declared that he would not name a prime minister until after the conclusion of the Olympic Games in August. Until then, a caretaker government under Prime Minister Gabriel Attal will remain in place. Still, the potential of an NFP prime minister spooked the markets, as the party’s economic policies would trigger even more deficit spending. The spread of France’s ten-year bond yield against Germany’s increased by five basis points, reflecting a loss in confidence in the French government’s finances. 

But even after the Olympics, Castets is unlikely to be tapped to form a government. Instead, the parties of the center, center right, and center left will have to endure a tedious drill from which France’s constitution has spared them for decades: negotiations. 

The moderate “Republican Right” (DR) appears ready to play ball and recently put forward a set of policy proposals complete with two red lines that will inform the negotiations. But a deal including the Republicans would not be enough: The centrists would need the more moderate forces from the NFP (read: excluding the far left) to support—or at least not oppose—a government for the time being.

The negotiations behind an arrangement that would bring Communists, Gaullist Republicans, Greens, and centrists under the same banner is likely to be every bit as complicated as one would imagine. But in the likely case that the NFP fails to clear the bar for government formation, this would become the only option. The question then becomes: What could this political hodgepodge compromise on? 

Synchronized steering

Despite having lost the legislative election, the Macron-supporting center block will not concede much on any of its policy laurels. Reversing the controversial and hard-won increase of the retirement age from sixty-two to sixty-four, for example, will be off the table. 

The center right has also set explicit red lines: that there be no tax increases and that fiscal reform not hurt pensioners. 

Taking into account these constraints and the need to manage France’s strained fiscal situation, there is not much negotiating flexibility left. Nevertheless, the centrist coalition must consider some concessions and secure certain inducements if they hope to bring the Republicans, Socialists, and Greens onside. 

1. Green reindustrialization

The adoption of the Inflation Reduction Act (IRA) in the United States prompted pushback from many European states. French Finance Minister Bruno Le Maire and his German counterpart Robert Habeck claimed the legislation was not compatible with World Trade Organization principles and called for the “defense” and green reindustrialization of the European Union (EU). 

In July 2023 the French National Assembly unanimously agreed on the creation of a “national strategy” for green industry, which lays out a plan for the 2023-2030 period. One week later, a Green Industry Law was approved at first reading and later adopted in October 2023. Like the IRA, France’s Green Industry Law seeks to meet environmental objectives (reducing forty-one million tons of CO2 by 2030, or 1 percent of France’s total footprint) and economic ones (positioning France as a leader in green and strategic technologies, while reindustrializing the country). As part of the law, the Green Industry Investment Tax Credit (C31V) was established to encourage companies to carry out industrial projects involving batteries, wind power, solar panels, and heat pumps. The C31V is expected to generate €23 billion in investment and directly create forty thousand jobs by 2030. 

While in opposition, the Socialists and Greens voted against the law and other left parties abstained. All cited the lack of specificity and actual green commitments in the industrialization-centered bill. However, if the centrist bloc offered to revisit the bill or introduce new, more targeted standards and legislation, it could serve as a powerful inducement to win the Greens and Socialists’ support. Given that this French counter to the IRA involves private-sector mobilization and promises reindustrialization, it has the added benefit of being (just about) fiscally feasible and acceptable to the right. 

2. Rewarding effort

The thirty-five-hour work week was first introduced into French law by Lionel Jospin’s Socialist-led government in 2000, and it has since become a cornerstone of the left’s platform. However, the fact that most employees still work above the legal thirty-five-hour limit has led to a system where they can take half days or full days off to compensate for extra hours. 

In August of 2022, Macron’s government successfully passed an amendment that allowed firms to buy these hours back from their employees, essentially transforming them into paid overtime. 

As part of the center right’s current proposal, the group is seeking additional flexibility in the thirty-five-hour work week by reducing taxation on overtime, on top of cutting overall social charges paid by employees. The center right has been fairly nonspecific about how much these would be cut, most likely to avoid alienating the left. However, the main way the Republicans propose to fund this—a cap on unemployment benefits at 70 percent of the minimum wage—would be a red flag for the parties which could otherwise be lured out of the NFP.

3. Balancing budgets

France’s large budget deficit, which in 2023 soared to 5.5 percent of gross domestic product (GDP), raises the stakes. In May, S&P Global Ratings downgraded the country’s long-term credit rating from “AA” to “AA-” and the European Commission reprimanded France for exceeding the EU’s deficit cap of 3 percent of GDP. Today, the Commission formally opened proceedings against France and six other violating countries, directing them to immediately take corrective measures to rectify their fiscal deficits or else face financial sanctions from Brussels. 

Both S&P and the Commission forecast positive economic growth, but emphasize the urgent need for France to address its public finances. Growth alone will not be enough to overcome the fiscal hurdles ahead. 

Reconciling the center right’s rejection of any tax hikes and the need to provide parties of the left with guarantees on social spending for them to abandon the NFP will be very challenging indeed. But there is some room for compromise. 

Shortly after Macron’s arrival at the Élysée Palace for his first mandate in 2017, he moved to slash France’s contentious wealth tax, replacing it with a real estate tax. A flat tax of 30 percent on capital gains was also introduced. The decision came as part of Macron’s pro-business platform in a bid to curb the flight of French millionaires from the country, and it drew sharp criticism from political opponents who labeled him “president of the rich.”

The centrist bloc could offer to reintroduce a progressive taxation scheme on capital gains. In the spirit of France’s goal of green reindustrialization, the centrists could move to keep the favorable 30 percent flat tax for green technologies to encourage investment, while introducing a progressive scheme in other sectors. If they do decide to favor green industrial investment, the tax benefit would have to apply to capital gains accrued throughout the EU—not only France—so as to not violate single market rules. 

Sticking the landing

Negotiations will be more of a marathon than a sprint. Macron is unable to call for new elections for at least the next twelve months, so until then, this parliament will have to find a way to work together. 

After the formation of a government—which Macron has indicated will not begin until after the Olympics—the next major challenge facing French policymakers is to pass the yearly budget by December. This grueling event will be made all the more difficult by today’s unprecedentedly divided National Assembly.

Whichever government emerges from current negotiations will risk having its spending plan voted down immediately. Fortunately for France, the constitution contains a proviso that would allow the state to carry on. Essentially, if the Assembly cannot agree on a new budget, the plan approved for the previous fiscal year will roll over. 

However, recycling this year’s budget would still create a projected deficit of 4.4 percent. This would again violate the EU’s 3 percent cap and fall well short of the deficit reduction the markets—the ultimate referees of how France is faring—are hoping to see. 

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

Gustavo Romero is an intern with the Atlantic Council’s GeoEconomics Center.

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

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The post What French economic policy may look like after the Olympics appeared first on Atlantic Council.

Innovation, according to the communiqué, will be driven by further development in education, science and technology, as well as talent cultivation. China has done well in adopting, refining, and rolling out existing technologies; the open question is whether it can foster endogenous breakthrough innovations to stimulate growth and become self-sufficient in high tech in the face of US controls.

China’s green energy sector has seen much progress in the manufacturing of electric vehicles (EVs), batteries, and solar and wind energy products. China has achieved global dominance in the supply chains of these products, which have increasingly contributed to its economic growth and posed a threat to Western competitors in world markets by creating overcapacity which has increased trade tensions. The communiqué doesn’t seem to take this overcapacity problem seriously.

Promoting consumption will likely be implemented the “Chinese way”: strengthening social safety nets, such as insurance schemes and public provisions for unemployment, healthcare and retirement needs of an aging society. The intention of such measures is to induce households to save less and spend more, instead of raising Chinese citizens’ disposable income. After all, the share of China’s labor compensation to gross domestic product (GDP) is about 58.6 percent, just a touch less than 59.7 percent for the United States. Any increase in wages would risk worsening China’s competitive position against regional producers. Moreover, cutting personal taxes or subsidizing consumption would aggravate already stretched public finances: the International Monetary Fund expects China’s government debt-to-GDP ratio to rise from 83.6 percent in 2023 to 110.1 percent in 2029 under current policies.

The communiqué also highlights other important goals and approaches.

• Giving a bigger role to market mechanisms in the context of strengthening the CCP’s guidance and control of economic activities. This approach has been viewed as self-contradictory sloganeering by Western analysts, but China apparently regards it as the key to success in its decades-long reform efforts. One example of this strategy is the public support, including tax and regulatory preferment and favorable credit provisions, to the EV sector more than a decade ago as part of the “Made in China 2025” campaign. This support helped launch hundreds of startups in China. Since then, those companies have been subject to fierce competition to win customers in the marketplace. Steeply falling EV prices have caused profits to plummet and many companies to go out of business. The dozen or so remaining enterprises—BYD, Li Auto, Nio, and XPeng, among others—have become efficient, able to turn out good-quality products at reasonable prices and win international market shares. This has dismayed Western governments, which have resorted to tariffs to stem the flow of Chinese EV imports.
• Implementing fiscal and taxation reform to ensure sustainable funding for local governments. This is taking place against the backdrop of an ongoing recession in the real estate sector, which is reducing land sale revenues for local governments. Some local governments are reaching crisis levels of debt. The reform will try to better match the fiscal revenues and expenditures assigned to local governments, including widening their revenue bases and bigger fiscal transfers from the central government. The recent policy of issuing long-term central government bonds to gradually replace local government debt will continue.
• Persisting in gradually de-leveraging the (still) highly indebted real estate, local government financing vehicles, and small- and medium-sized financial institutions sectors in a way that minimizes the risk of a financial crisis. This will take time to accomplish. Keep in mind that Japan’s real estate bubble in the 1990’s took more than a decade to deflate.
• Unifying the national market by abolishing internal barriers to commerce. This can unlock potential for domestic production, distribution, and consumption. In the context of developing a domestic single market for labor, reforms of the strict hukou system (family registration system) can promote a rational allocation of labor nationally, improving labor productivity.
• Deepening land reform to give farmers more access to increased land values to promote urban-rural integration. This could help reduce the urban-rural income gap: As of 2023, the average annual per capita disposable income in rural areas is only 40 percent of that in urban areas, according to Statista.
• Continuing to open up to the outside world, but presumably more on Chinese terms and less on Western terms. For example, the share of the renminbi in overseas lending by Chinese banks has risen to more than 35 percent from around 10 percent ten years ago. More importantly, many Belt and Road Initiative loans have been concluded using Chinese laws and dispute settlement mechanisms instead of Western ones, such as British laws traditionally used in international bank lending.

A more in-depth document of the meeting is expected to be released soon. It remains to be seen if China’s leadership will follow up with concrete policy measures to implement those long-term goals. At the same time, Beijing still needs to address the present challenge of weakening growth due mainly to lackluster private consumption. Retail sales rose only 2 percent, pulling down China’s second quarter 2024 GDP growth to a lower-than-expected 4.7 percent.

The heady growth rates of well above 7 percent per year, common a decade ago, are over. China’s leaders face difficult and important decisions in the months and years ahead to execute concrete measures to turn the long-term goals re-affirmed at the Third Plenum into reality.

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

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

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The post Key takeaways from China’s Third Plenum 2024 appeared first on Atlantic Council.

Since their inception in July 1944, they have played central roles in global finance and built the world’s economic architecture as the norm-setters, knowledge-producers, convenors, and actors in the international development and finance landscape.

In 2024, the BWIs are facing multi-faceted existential challenges, posing serious risks for their relevance and effectiveness. The rapidly changing nature of the global economy, commerce, and finance and the increasing challenges triggered by the emergence of new players, technologies, and crises—especially in the past two decades—are forcing these institutions to take a renewed look at their governance structure and mandates. This is not the first time they have had to do so.

A reformed Bretton Woods system already emerged nearly five decades ago in 1976 through the Jamaica Accords. In 1971, the Nixon administration created a shock when it canceled the direct convertibility of the US dollar to gold and rendered the old Bretton Woods system inoperative as currency exchange rates became more volatile. The new rules stabilized the international monetary system by permitting floating exchange rates and formally abolishing the gold standard, which the United States was already no longer underpinning.

This time, meaningful reform for the BWIs will require a genuine acknowledgment of the following developments in the global political economy:

1. Economies that are not part of the high-income club are playing an increasingly large role in global trade and finance. However, the BWIs’ voting, leadership, and governance structures do not reflect this shift in the global economy and the IMF and WBG remain US-, Group of Seven (G7)-, and European Union (EU)-centric institutions. Together, the EU and the United States still maintain about 40 percent of votes in the World Bank and the IMF even as their relative prominence in the global economy has eroded.
   
   
   
   
2. The global economy is facing a growing number of challenges that have stretched the resources of BWIs and tested their effectiveness in bringing together the right stakeholders. One can point to unsustainable levels of sovereign debt, weather-related extreme events, increasing risk of pandemics, and aging populations as only some of these multifaceted challenges. Moreover, tariffs, subsidies, currency wars, protectionism, industrial policies, sanctions, geoeconomic fragmentation, and decoupling have become commonplace hurdles to globalized trade. The emergence of heightened geopolitical tensions between some of the world’s largest economies has undermined global financial stability and has also introduced significant difficulties for the BWIs to adhere effectively to their mandates of effective global governance, shared prosperity, and international monetary cooperation. This is eroding gains made through globalization in the past few decades.
3. The emergence of state-led development finance institutions and the growing number and influence of regional multilateral development banks and financial institutions, sovereign wealth funds, and pension funds have drastically altered the global landscape of development finance, calling for a more active collaboration between BWIs and the following parallel institutions:
   • Nearly 160 countries are signatories to China’s Belt and Road Initiative (BRI) and/or the G7’s Partnership for Global Infrastructure and Investment.
   • More than forty multilateral development banks and financial institutions—such as the Asian Development Bank, the Inter-American Development Bank, the African Development Bank, the Islamic Development Bank, and the Asian Infrastructure Investment Bank—are active in the global development finance landscape.
   • More than fifty national development banks such as Qatar Development Bank, Korea Development Bank, and Development Bank of Nigeria are offering a wide range of financing products to international public and private entities.
   • More than 130 sovereign wealth funds boast around $12 trillion in assets globally.
   • Public and private pension funds have over $24 trillion and $42 trillion in global assets, respectively.
4. Several multinational corporations (MNCs) command economic and technological might larger than many countries and are increasingly shaping the future of global economy through innovation and by influencing policy debates. MNCs are estimated to account for nearly one-third of global gross domestic product (GDP) and a quarter of global employment, and the revenue of Walmart alone was larger than the GDP of more than 170 countries in 2023. Environmental, social, and governance standards have been put in place to create a framework where MNC activities are not detrimental to environmental and social objectives but are based on best governance practices. However, the BWIs have played too minor a role and influence in these conversations. 
5. The emergence of digital currencies and assets and the increasing role of technology (artificial intelligence, machine learning, and fintech) in economic and monetary policy offers challenges and opportunities for the efficiency and stability of the global economy. Alternative finance championed by non-state actors has moved faster than international and domestic supervisory and regulatory bodies, including the BWIs, which have not kept up with the rapid pace of change. For example, the IMF in collaboration with the Bank for International Settlements could play a significant role in coordinating the global efforts in standard-setting for central bank digital currencies and new cross-border payment systems.
6. New debates and policies are altering global economic, monetary, and trade policies. Modern monetary theory, universal basic income, quantitative easing and tightening, modern central banking, global minimum taxation, fair trade, and human rights considerations in global supply chains are some of the issues BWIs need to be more proactive about.

Acknowledging the gravity of the risks facing effectiveness and relevance of BWIs, our Bretton Woods 2.0 Project has conducted in-depth policy research on the rising challenges facing BWIs’ governance and operations and has put forth feasible policy recommendations for their consideration in their reform journey. Substantive reforms are never easy, especially for multilateral organizations with such long and complex histories and intractable geopolitical rifts between their members. Difficult decisions, especially regarding the governance and leadership structure of these institutions, must be made, however. As Axel van Trotsenburg, senior managing director at the WBG recently acknowledged, for the IMF and WBG to remain true to their mandates and still relevant at their one hundredth anniversary in twenty years, they must embark on reforms that heed the issues highlighted above.  

Amin Mohseni-Cheraghlou is a macroeconomist with the GeoEconomics Center and leads the Atlantic Council’s Bretton Woods 2.0 Project. He is also a senior lecturer of economics at American University in Washington, DC. Follow him on X (formerly known as Twitter) at @AMohseniC.

The post The Bretton Woods institutions need revitalizing. Luckily, they are no strangers to reform. appeared first on Atlantic Council.

This surge in defense spending follows Russia’s full-scale invasion of Ukraine in February 2022. The war in Ukraine has prompted an unprecedented 18 percent increase in defense spending this year among NATO allies across Europe and Canada. In total, NATO countries now meet the 2 percent target, together spending 2.71 percent of their GDP on defense. This creates positive momentum and success to build on for the Washington summit, which is expected to highlight the Alliance’s collective strength and focus on deeper integration with Ukraine. 

Poland stands out as the biggest spender, allocating 4.12 percent of its GDP to defense. Sweden has also increased its defense spending dramatically since the 2022 Russian invasion of Ukraine. The Washington summit will witness Sweden’s first participation in a NATO summit as an official NATO member, following its accession in March.  

As NATO celebrates its seventy-fifth anniversary, the large increase in defense spending can help renew the Alliance’s unity and strength to continue supporting Ukraine and be prepared for the future. 

Clara Falkenek is an intern with the GeoEconomics Center.

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

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The high rate of dropouts ahead of the second round make the number of three-way races favoring National Rally much lower and a hung parliament more likely. An absolute majority for National Rally cannot be fully ruled out yet, but an absolute majority for the New Popular Front already can. This shift in probabilities has led to diverging reactions in bond yields, which have remained slightly higher than before the first round, and stock prices, which have rallied.  

Following Macron’s announcement of the snap election on June 9, French ten-year bond yields increased more than in any other week since 2011. In other words, it was the worst week for the rate at which France borrows from markets since the heart of the eurozone crisis. 

While he was admittedly in campaign mode, French Finance Minister Bruno Le Maire’s warning of a possible “Liz Truss-style” event if National Rally wins—referring to the 2022 bond market meltdown in the United Kingdom that forced the then-prime minister to reverse course on her fiscal plans—was more than a mere talking point. Increased yields arise from falling demand for government loans, reflecting a diminished faith in a government’s finances. The market could see both the extreme right and the extreme left promising to reverse cost-saving measures taken by the incumbent government (such as pensions reform) without offsetting these with new sources of income. 

This graph shows that the “spread” with German bonds has yet to fall significantly despite the greater likelihood of a hung parliament. Why? 

France’s finances are already fragile. Two weeks ago, the European Commission named France as one of seven countries in violation of its new fiscal rules due to high debt levels and no expected reduction in spending. With no tradition of broad coalitions in France, the assumption at this point is that no government will be able to conduct more cost-cutting or efficiency measures. 

Still, France’s bond yield increases thus far remain far less severe than the UK gilt crisis in 2022. 

On the other hand, the results of the first round prompted stock market prices to rally from their initial steep drop following the announcement of the snap election. France’s private sector seems to have taken comfort from the central scenario of a hung parliament and the elimination of a New Popular Front majority scenario. The likelihood of punitive taxes and other major economic changes businesses would need to contend with is now much lower, but not gone.

While France’s CAC 40 index noticeably increased on Monday and Tuesday, it hasn’t fully recovered the losses made following Macron’s decision to dissolve parliament. Clearly, investors are still waiting to see how the second round and its aftermath play out. In a hung parliament scenario, Macron’s party would have to negotiate with all parties that reject the far right. The strongest bloc among these will be the left. This is enough for investors to remain in wait-and-see mode for now.

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

Sophia Busch is an assistant director with the Atlantic Council GeoEconomics Center.

Clara Falkenek contributed research to this piece.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email
SBusch@atlanticcouncil.org.

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In December 2023, Chinese leader Xi Jinping visited Vietnam and agreed on building “shared future” between the two countries, three months after US President Joe Biden announced the US-Vietnam Comprehensive Strategic Partnership. In addition to private companies expanding their manufacturing bases to Vietnam as a de-risking strategy, the two major powers are also doubling down on courting Vietnam on an official level.

Registered investment from China and Hong Kong combined exceeded $8.2 billion in 2023, accounting for 6,688 projects, in contrast with $500 million from the United States. China’s integration in trade with Vietnam has steadily grown over the past decade—reaching $171 billion in 2023, bolstered by the free trade agreement between China and the Association of Southeast Asian Nations (ASEAN) and the Regional Comprehensive Economic Partnership (RCEP) that reduced tariffs and harmonized rules of origin and intellectual property protection. Meanwhile, Biden’s pledges of more investments and easier trade have significant ground to cover. In the first ten months of 2023, the United States invested just $500 million in foreign direct investment (FDI), while exports from the United States plunged by 15 percent to $79.25 billion.

China is positioning itself to prioritize innovation and research and development (R&D), aiming to ascend the value chain and achieve self-reliance in alignment with Xi’s strategy for “high-quality development.” Against the backdrop of the changing economic priorities, the State Council of China published a policy document in December 2023 that supported “core firms in the supply chains” to expand overseas production and leverage global resources. Responding to the “unreasonable trade restrictions” imposed by foreign governments, China is initiating a friendshoring strategy of its own.

The key is electronics. The persistent dominance of China in the critical supply chains of the United States is most evident in the Information and Communication Technology (ICT) sector, supplying 30 percent of US imports by April 2023. Thus, as global scrutiny over China’s manufacturing overcapacity intensifies, electronics companies are figuring out coping strategies. Vietnam’s rules of origin stipulate that if a product includes at least 30 percent of local value content or change to a different Harmonised System (HS) classification, it qualifies as “Made in Vietnam,” which provides a workaround for the trade barriers erected by the US government since the 2017 trade war. As multinational technology firms like Apple diversify their supply chains as part of their “China plus one” strategies, its Chinese suppliers are following this trend. For instance, Apple’s contractor, Luxshare Precision Industry Co., has announced plans to double its investment in Bac Giang, Vietnam to $504 million, responding to a trend of “internationalization of industrial chains.” Goertek, another Apple supplier, is also investing up to $280 million to establish a new subsidiary in Vietnam to serve Apple’s demands.

Since as early as 2013, nine out of the top ten Chinese electronic component and assembly companies have been making greenfield investments in Vietnam, with the capital influx accelerating since 2018. These expansions not only cater to Apple’s appetites, but also aim to broaden their market reach within ASEAN. For instance, BYD plans to open a plant in Vietnam to produce car parts, with the aim to export components to its factory in Thailand that serves mainly the expanding Southeast Asian electric vehicle market.

China accounted for 39 percent of Vietnam’s electronics imports in 2022, with a below-average annual growth rate of 1.3 percent among all sources. Considering that 33.21 percent of Vietnam’s total imports come from China, the electronics sector is not an outlier of particular concern. Vietnam’s electronics supply chain, intermediary and finished combined, remains diversified, with substantial contributions from South Korea (27 percent), Taiwan (9 percent), and Japan (7 percent). Despite recent increases in Chinese FDI, there has not been a corresponding surge in demand for Chinese intermediary goods, challenging the “re-routing” argument that these enterprises mislabel Chinese goods as Vietnam-made to evade tariffs.

Although Vietnam’s sourcing of electronic goods is not overly reliant on China, China can still influence on how Chinese-based companies operate there. When then US President Donald Trump placed an executive order to force TikTok to sell or close in 2020, the Chinese Ministry of Commerce expanded the “Catalogue for Prohibited and Restricted Export Technologies” and prohibited tech transfers relating to big data software. Currently, the ICT section of the catalogue only includes integrated circuits and robotics. Should China decide to include core electronics technologies in this catalogue, plants in Vietnam might face challenges in maintaining production.

As China’s intensifies its strategy of friendshoring in the electronics sector, Vietnam’s industries could be more entangled with China. In response, Washington should proactively bolster its anti-dumping and anti-subsidy enforcement. In a 2019 case, the United States imposed duties of 456.23 percent on steel imports from Vietnam, attributing the decision to the mislabeling of products from South Korea and Taiwan to evade the levies. The United States also has the option of lifting overall duties for products from key industries. Although the Biden administration waived trade duties on solar modules from Vietnam until June 2024, the exemption depends on renewals every two years and companies’ compliance of related trade rules.

The United States remains well-positioned to provide Vietnam with the right incentives to reduce its dependence on China and maintain it as a dependable supply chain partner. Under the CHIPS Act, the United States can allocate a portion of the $500 million of International Technology Security and Innovation Fund to enhance Vietnam’s semiconductor ecosystem. The United States has a strength in mobilizing private investments: it has initiated workforce development initiatives in Vietnam with two million dollars in “seed funding” to incentive the private sector to join. In contrast to Chinese firms, which primarily focus on manufacturing, US companies, including Qualcomm, NVIDIA, and fifteen other companies are planning to establish R&D centers and nurture local talent in technology, aligning with Vietnam’s goal to ascend the value chain and fostering a balanced approach amidst US-China tensions. By portraying itself as a good partner, the United States offers a prospect that Vietnam has every reason to embrace.

Stanley Zhengxi Wu is a former young global professional with the Atlantic Council GeoEconomics Center.

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

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The post China and the US both want to ‘friendshore’ in Vietnam appeared first on Atlantic Council.

As countries from the BRICS group and regions including the Middle East and Asia increase the use of local currencies for cross-border payments, there is a growing perception that the dollar’s importance in international finance is ebbing, particularly in global oil markets and the use of the petrodollar.  

What exactly is the petrodollar? In short, it’s a commitment by Saudi Arabia to use dollar revenues from oil sales to the United States to buy US Treasuries. But the history is more complicated.  

America and Saudi Arabia in 1974

Let’s take a look back to the Nixon administration. The United States was beset by high inflation and large current-account deficits amid an ongoing war in Vietnam, putting downward pressure on the dollar and threatening a run on US gold reserves. In 1971, the United States ended the dollar’s convertibility to gold which had been the lynchpin of the Bretton Woods international monetary system of fixed exchange rates. Major currencies began to float against each other in 1973. Then came the oil shock that fall, when the Organization of Petroleum Exporting Countries (OPEC) cut oil production and embargoed shipments to the United States during the Yom Kippur war. 

Against a backdrop of great economic and political uncertainty, as the Watergate hearings pushed toward their close, the Nixon administration embarked on a diplomatic mission that would cement an economic partnership with Saudi Arabia that has been central to the global energy trade. To encourage Riyadh’s use of the dollar as the medium of exchange for its oil sales,(and thereby funnel those dollars back into Treasury bond markets to help finance US fiscal deficits), Washington promised to supply military equipment to Saudi Arabia and protect its national security. Despite the tumult and instability in the United States at that time, the deal showed that it retained the power to set the international agenda. In addition to keeping demand for the dollar stable, the agreement promoted its use in oil and commodities trading, while creating a steady source of demand for US Treasuries. This helped to strengthen the dollar’s position as the world’s key reserve, financing and transactional currency. 

A brave new world

Fast-forward fifty years, and the dominant global position once enjoyed by the United States has comparatively weakened. Its share of world gross domestic product has declined from 40 percent in 1960 to 25 percent. China’s economy has surpassed the United States in purchasing power parity terms. It now has to vie for influence with an increasingly assertive Beijing, while facing pushes even by allies such as Europe and elsewhere that want to become more autonomous from Washington in financial and foreign policy matters. Specifically, many countries have tried to develop alternative cross-border payment arrangements to the dollar to reduce their vulnerability to Washington’s increasing use of economic and financial sanctions. 

At the same time, the United States has become far less dependent on Saudi oil. Thanks to the shale revolution, in fact, the United States is now the largest oil producer in the world and a net exporter. It still imports oil from Saudi Arabia but at a significantly lower volume. By contrast, China has become Saudi Arabia’s largest oil customer, accounting for more than 20 percent of the kingdom’s oil exports. Beijing has established close, trade-driven relationships throughout the Middle East, where US influence has waned. 

Saudi Arabia’s willingness to diversify the currencies used in selling its oil aligns with a larger strategy that requires the county to increase its international relations beyond the United States and Europe. The Kingdom’s willingness to join the BRICS club of emerging nations and partner with China and other countries in the mBridge project to explore the use of their respective central bank digital currencies (CBDCs) for cross-border payments should not be surprising.  

The dollar’s global dilemma

Saudi Arabia’s interest in currency diversification marks a small but symbolic step down the road toward de-dollarization. Increasingly, countries are using their own currencies in cross-border trade and investment transactions. The arrangements necessary to do so exist entirely outside the influence of any major power. These include currency-swap lines agreed between participating central banks and the linking of national payment and settlement systems. Using local/national currencies for cross-border payments currently entails an efficiency cost, as it relies on less liquid local foreign exchange, money, and hedging markets to directly exchange pairs of local currencies without the dollar as a vehicle. Many countries mentioned above appear to have accepted this cost as necessary to reduce their reliance on the dollar. Advances in digital payment technology, such as tokenization, would greatly reduce such costs. 

Over the past few years, the digital payment ecosystem has progressed significantly toward what is known as “tokenization” units of exchange such as CBDCs or stablecoins pegged to the dollar or any major currencies, a cryptocurrency designed to be fixed to a reference asset, etc. These tokenized units can be exchanged instantaneously and directly without having to be processed through the accounts of intermediaries such as commercial banks. Tokenized currencies are still a long way off from widespread adoption, but such an ecosystem would significantly reduce the need for participants to hold reserves to ensure adequate liquidity, weakening the role of the deep and liquid US Treasury securities market as a key pillar of support for the dollar’s dominant position in international finance. In fact, the share of the dollar in global reserves has already fallen from 71 percent in 1999 to 58.4 percent at present—in favor of several secondary currencies. 

In the foreseeable future, the dollar’s dominance will remain. But a gradual democratization of the global financial landscape may be underway, giving way to a world in which more local currencies can be used for international transactions. In such a world, the dollar would remain prominent but without its outsized clout, complemented by currencies such as the Chinese renminbi, the euro, and the Japanese yen in a way that’s commensurate with the international footprint of their economies. In this context, how Saudi Arabia approaches the petrodollar remains an important harbinger of the financial future to come as its creation was fifty years prior. 

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

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

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Dollar Dominance Monitor

The Dollar Dominance Monitor analyzes the strength of the dollar relative to other major currencies across the world. The project presents interactive indicators to track China’s progress in developing an alternative financial infrastructure.

The post Is the end of the petrodollar near?  appeared first on Atlantic Council.

What’s driving the decision? The RBI has been consistently increasing its gold reserves since December 2017 to diversify its foreign currency assets and mitigate inflation pressures. However, this recent, heightened pace of gold accumulation suggests a strategic shift in response to geopolitics. 

Indeed, that is exactly what RBI Governor Shaktikanta Das alluded to in his recent press conference in April; when he was asked about the volatility in reserves, he pointed directly to the war in Ukraine and the uncertainty that followed. That same day, the chief economist of one of India’s largest public banks, Madan Sabnavis, said, “While the US dollar has historically been a stable currency, its reliability has diminished following the Ukraine conflict.”

Countries such as India have looked at the West’s response to Russia’s invasion and have reconsidered the reliability of holding reserves in traditional currencies, since these assets could be blocked or immobilized by other governments and banks. 

What about the rest of the G20? Since 2021, most countries have kept their gold reserves stable. The fluctuation in the chart above is mostly driven by Turkey, which has bought and sold its own gold to manage local market dynamics and address economic challenges such as high inflation and trade deficits.

It’s not only in pace of purchases where India is leading. The RBI is also leading in gold as a percentage of its reserves among the G20 Asian countries. In 2024, India now holds twice as much gold as a percentage when compared to China.

However, it is important to note that, like China and most other economies, India still holds only a small percentage of its reserves in gold. According to our Dollar Dominance Monitor approximately 59 percent of all foreign exchange reserves are still held in dollars.

Nonetheless, when an important partner of the United States such as India begins seeking alternatives to the world’s reserve currency, it warrants careful attention.

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Alisha Chhangani is a program assistant with the Atlantic Council GeoEconomics Center.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

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

Learn more

The post India outpaces the rest of the G20 in gold purchases appeared first on Atlantic Council.

How today’s policymakers decide to balance freedom and security in the digital landscape will have massive consequences for the future. US digital policy must be aimed at improving national security, defending human freedom, dignity, and economic growth while ensuring necessary accountability for the integrity of the technological bedrock.

Digital economy building blocks and the need for strategic alignment

Digital policymakers face a host of complex issues, such as regulating and securing artificial intelligence, banning or transitioning ownership of TikTok, combating pervasive fraud, addressing malign influence and interference in democratic processes, considering updates to Section 230 and impacts on tech platforms, and implementing zero-trust security architectures. When addressing these issues, policymakers must keep these core building blocks of the digital economy front and center:

• Infrastructure: How to provide the structure, rails, processes, standards, and technologies for critical societal functions;
  
• Data: How to protect, manage, own, use, share, and destroy open and sensitive data; and
  
• Identity: How to represent and facilitate trust and interactions across people, entities, data, and devices.

How to approach accountability—who is responsible for what—in each of these pillars sets the stage for how future digital systems will or will not be secure, competitive, and equitable.

Achieving the right balance between openness and security is not easy, and the stakes for both personal liberty and national security amid geostrategic competition are high. The open accessibility of information, infrastructure, and markets enabled by the internet all bring knowledge diffusion, data flows, and higher order economic developments, which are critical for international trade and investment.

However, vulnerabilities in existing digital ecosystems contribute significantly to economic losses, such as the estimated $600 billion per year lost to intellectual property theft and the $8 trillion in global costs last year from cybercrime. Apart from direct economic costs, growing digital authoritarianism threatens undesirable censorship, surveillance, and manipulation of foreign and domestic societies that could not only undermine democracy but also reverse the economic benefits wrought from democratization.

As the United States pursues its commitment with partner nations toward an open, free, secure internet, Washington must operationalize that commitment into specific policy and technological implementations coordinated across the digital economy building blocks. It is critical to shape them to strengthen their integrity while preventing undesired fragmentation, which could hinder objectives for openness and innovation.

Infrastructure

The underlying infrastructure and technologies that define how consumers and businesses get access to and can use information are featured in ongoing debates and policymaking, which has led to heightened bipartisan calls for accountability across platform operators. Further complicating the landscape of accountability in infrastructure are the growing decentralization and aggregation of historically siloed functions and systems. As demonstrated by calls for decentralizing the banking system or blockchain-based decentralized networks underlying cryptocurrencies, there is an increasing interest from policymakers and industry leaders to drive away from concentration risks and inequity that can be at risk in overly centralized systems.

However, increasing decentralization can lead to a lack of clear lines of responsibility and accountability in the system. Accountability and neutrality policy are also impacted by increasing digital interconnectedness and the commingling of functions. The Bank of the International Settlement recently coined a term, “finternet,” to describe the vision of an exciting but complexly interconnected digital financial system that must navigate international authorities, sovereignty, and regulatory applicability in systems that operate around the world.

With this tech and policy landscape in mind, infrastructure policy should focus on two aspects:

• Ensuring infrastructure security, integrity, and openness. Policymakers and civil society need to articulate and test a clear vision for stakeholders to coordinate on what openness and security across digital infrastructure for cross-economic purposes should look like based on impacts to national security, economic security, and democratic objectives. This would outline elements such as infrastructure ecosystem participants, the degree of openness, and where points for responsibility of controls should be, whether through voluntary or enforceable means. This vision would build on ongoing Biden administration efforts and provide a north star for strategic coordination with legislators, regulators, industry, civil society, and international partners to move in a common direction.
  
• Addressing decentralization and the commingling of infrastructure. Technologists must come together with policymakers to ensure that features for governance and security are fit for purpose and integrated early in decentralized systems, as well as able to oversee and ensure compliance for any regulated, high-risk activity.

Data

Data has been called the new oil, the new gold, and the new oxygen. Perhaps overstated, each description nonetheless captures what is already the case: Data is incredibly valuable in digital economies. US policymakers should focus on how to surround how to address the privacy, control, and integrity of data, the fundamental assets of value in information economies.

Privacy is a critical area to get right in the collection and management of information. The US privacy framework is fragmented and generally use-specific, framed for high risk sectors like finance and healthcare. In the absence of a federal-government-wide consumer data privacy law, some states are implementing their own approaches. In light of existing international data privacy laws, US policy also has to account for issues surrounding harmonization and potential economic hindrances brought by data localization.

Beyond just control of privacy and disclosure, many tech entrepreneurs, legislators, and federal agencies are aimed at placing greater ownership of data and subsequent use in the hands of consumers. Other efforts supporting privacy and other national and economic security concerns are geared toward protecting against the control and ownership of sensitive data by adversarial nations or anti-competitive actors, including regulations on data brokers and the recent divest-or-ban legislation targeted at TikTok.

There is also significant policy interest surrounding the integrity of information and the systems reliant on it, such as in combating the manipulation of data underlying AI systems and protecting electoral processes that could be vulnerable to disinformation. Standards and research are rising, focused on data provenance and integrity techniques. But there remain barriers to getting the issue of data integrity right in the digital age.

While there is some momentum for combating data integrity compromise, doing so is rife with challenges of implementation and preserving freedom of expression that have to be addressed to achieve the needed balance of security and freedom:

• Balancing data security, discoverability, and privacy. Stakeholders across various key functions of law enforcement, regulation, civil society, and industry must together define what type of information should be discoverable by whom and under what conditions, guided by democratic principles, privacy frameworks, the rule of law, and consumer and national security interests. This would shape the technical standards and requirements for privacy tech and governance models that government and industry can put into effect.
  
• Preserving consumer and democratic control and ownership of data. Placing greater control and localization protections around consumer data could bring great benefits to user privacy but must also be done in consideration of the economic impacts and higher order innovations enabled from the free flow and aggregation of data. Policy efforts could pursue research and experimentation for assessing the value of data
  
• Combating manipulation and protecting information integrity. Governments must work hand in hand with civil society and, where appropriate, media organizations to pursue policies and technical developments that could contribute to promoting trust in democratic public institutions and help identify misinformation across platforms, especially in high-risk areas to societies and democracies such as election messaging, financial services and markets, and healthcare.

Identity

Talk about “identity” can trigger concerns of social credit scores and Black Mirror episodes. It may, for example, evoke a sense of state surveillance, criminal anonymity, fraud, voter and political dissident suppression, disenfranchisement of marginalized populations, or even the mundane experience of waiting in line at a department of motor vehicles. As a force for good, identity enables critical access to goods and services for consumers, helps provide recourse for victims of fraud and those seeking public benefits, and protects sensitive information while providing necessary insights to authorities and regulated institutions to hold bad actors accountable. With increasing reliance on digital infrastructure, government and industry will have to partner to create the technical and policy fabric for secure, trustworthy, and interoperable digital identity.

Digital identity is a critical element of digital public infrastructure (DPI). The United States joined the Group of Twenty (G20) leaders in committing to pursue work on secure, interoperable digital identity tools and emphasized its importance in international fora to combat illicit finance. However, while many international efforts have taken root to establish digital identity systems abroad, progress by the United States on holistic domestic or cross-border digital identity frameworks has been limited. Identity security is crucial to establish trust in US systems, including the US financial sector and US public institutions. While the Biden administration has been driving some efforts to strengthen identity, the democratized access to sophisticatedAI tools increased the threat environment significantly by making it easy to create fraudulent credentials and deepfakes that circumvent many current counter-fraud measures.

The government is well-positioned to be the key driver of investments in identity that would create the underlying fabric for trust in digital communications and commerce:

• Investing in identity as digital public infrastructure. Digital identity development and expansion can unlock massive societal and economic benefits, including driving value up to 13 percent of a nation’s gross domestic product and providing access to critical goods and services, as well as the ability to vote, engage in the financial sector, and own land. Identity itself can serve as infrastructure for higher-order e-commerce applications that rely on trust. The United States should invest in secure, interoperable digital identity infrastructure domestically and overseas, to include the provision of secure verifiable credentials and privacy-preserving attribute validation services.
  
• Managing security, privacy, and equity in Identity. Policymakers must work with industry to ensure that identity systems, processes, and regulatory requirements implement appropriate controls in full view of all desired outcomes across security, privacy, and equity, consistent with National Institute of Science and Technology standards. Policies should ensure that saving resources by implementing digital identity systems also help to improve services for those not able to use them.

Technology by itself is not inherently good or evil—its benefits and risks are specific to the technological, operational, and governance implementations driven by people and businesses. This outline of emerging policy efforts affecting digital economy building blocks may help policymakers and industry leaders consider efforts needed to drive alignment to preserve the benefits of a global, interoperable, secure and free internet while addressing the key shortfalls present in the current digital landscape.

Carole House is a nonresident senior fellow at the Atlantic Council GeoEconomics Center and the Executive in Residence at Terranet Ventures, Inc. She formerly served as the director for cybersecurity and secure digital innovation for the White House National Security Council, where Carole will soon be returning as the Special Advisor for Cybersecurity and Critical Infrastructure Policy. This article reflects views expressed by the author in her personal capacity.

The post Designing a blueprint for open, free and trustworthy digital economies appeared first on Atlantic Council.

Since Modi became prime minister in 2014, the Indian economy has grown by an average annual real rate of 6 percent to the latest fiscal year ending in March 2024—quite impressive against the backdrop of a slowing down of many major economies, especially China’s, since the COVID-19 pandemic. With annual GDP at around four trillion dollars, the Indian economy has become the fifth largest in the world, poised to overtake Japan and Germany in the foreseeable future to rank third after the United States and China. That growth has been attributed to the Modi economic model—heavy promotion of the information and communications technology (ICT) sector, in particular IT services and other service exports, and the “Make in India” campaign to encourage more manufacturing activity by streamlining administrative tasks, building up infrastructure, and improving banking and payment services.

However, it is important to keep in mind that the 2014-2024 period experienced a slowdown from the previous decade under Prime Minister Manmohan Singh, which had enjoyed an average annual real growth rate of almost 7 percent. The slight slowdown under Modi has preserved the basic features but exacerbated the fundamental weaknesses of the Indian economy. For several decades, the ICT industry has been the most dynamic. But although this sector represents 13 percent of India’s GDP, it relies on a very small number of highly skilled workers—accounting for less than 1 percent of India’s labor force of 594 million (according to the World Bank). And even within this privileged group, slow salary increases have been a cause of frustration for more junior workers.

Under the “Make in India” plan and its recent $24 billion of subsidies to chosen sectors, manufacturing employs 35.6 million workers, or about 6 percent of the labor force—even less than the United States. More importantly, the ratio of foreign direct investment to GDP has fallen to the lowest level in sixteen years. Private sector investment has also declined from more than 25 percent of GDP in the mid-2000s to less than 20 percent. Those declines have contributed to the fact that the share of manufacturing value added in Indian GDP has decreased from 17 percent in 2010 to 13 percent in 2022.

Essentially, even including the impact of consumption spending by workers in the ICT and manufacturing sectors on consumer-related businesses, the contribution of these two sectors to overall employment is relatively small. This could become even smaller if the declining trend in the manufacturing-to-GDP ratio cannot be reversed soon.

The Modi economic model has clearly spurred GDP growth. But its fruits have tended to accrue to a small percentage of the population, raising the number of billionaires to 271 in the process. Income inequality is considered worse than under British colonial rule, according to a new report from the World Inequality Lab. The pace of non-farm job creation has fallen from an average of 7.5 million new jobs a year in the decade prior to Modi’s premiership to about half of that during his time in office. Perversely, employment in the agricultural sector has risen by 56 million workers in the past five years—driven by COVID-related distress. This poor employment performance has thus failed to absorb nearly 12 million new entrants to the labor market each year. As a result, the unemployment rate remains high at more than 8 percent—and much higher at 17.8 percent for young workers compared with the world average of 14.3 percent. The economic and social ramifications for India are even worse than those unfavorable numbers appear to suggest.

India faces a double-edged sword of being the most populous country on earth with more than 1.4 billion inhabitants—75 percent of whom are of working age (15 to 64 years)— but with a labor force participation rate at 51 percent. The Asian average is 63 percent and China’s is 76 percent. Furthermore, only 23 percent of the workforce are salaried workers. The rest work in agricultural and informal sectors. This has made the goal of strong and inclusive growth intractable and difficult to achieve.

India’s huge working-age population can fuel strong growth if adequately and properly employed. However, if job creation cannot keep pace with labor force growth, what could have been a tremendous demographic dividend will turn into an economic and social crisis. The challenge to Modi in the next five years is to carry out a balancing act between maintaining the recent growth momentum and making it more inclusive by providing regular employment, especially for the millions of young entrants to the labor force. This probably means switching government priorities from supporting a few conglomerate national champions to helping the multitude of micro-, small-, and medium-sized enterprises, which provide the bulk of employment in India. Furthermore, government attention should be widened from a focus on advanced technological areas such as semiconductors and artificial intelligence to basic manufacturing and processing, which can create many jobs. Policy announcements in the weeks ahead will tell us how Modi intends to deal with this challenge.

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

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

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The post Low employment: The Achilles’ heel of Modi’s economic model appeared first on Atlantic Council.

In 2017, the Trump administration imposed sanctions on Gertler, accusing him of “opaque and corrupt mining and oil deals” that cost the DRC more than $1.36 billion in revenues from 2010 to 2012 alone. Gertler has repeatedly denied any wrongdoing and, through a representative, said that he would abide by sanctions. The news that the Biden administration may ease these sanctions should be viewed positively, as an indication that US sanctions can achieve both economic and geopolitical goals.

Eased sanctions, whether a formal delisting or the issuing of a general license to Gertler, would allow for the sale of currently sanctioned entities. Following the easing of sanctions in this case, US firms could gain access to new investment opportunities by investing in mining projects that currently have links to Gertler, leading to economic growth in the United States and the DRC. In addition, the DRC has an opportunity to showcase the improvements that the country is making in the fight against money laundering and terrorist financing. While some senior officials, human-rights defenders, and anticorruption fighters have valid concerns about easing sanctions on Gertler, the decision could be a win for the DRC and the United States.

The choice—and the history behind it

Both the Trump and Biden administrations have gone back and forth over the tightening and easing of sanctions on Gertler. That has drawn much attention, but what hasn’t is the fact that the United States has quietly used sanctions effectively in this case to get its way.

In 2019, The Sentry—an investigative organization that aims to hold to account predatory networks that benefit from violent conflict, repression, and kleptocracy—conducted a six-month-long study on the effectiveness of sanctions in Africa in the twenty-first century. The study found that better strategies for achieving identified goals in each sanctions program must be developed if sanctions effectiveness was to improve. The Sentry study set the stage for the Treasury 2021 Sanctions Review, which drew conclusions on how to modernize US sanctions and make them more effective. Treasury recommended a “structured policy framework” that “links sanctions to a clear policy objective.” The Biden administration has made no secret of its desire to improve access to critical minerals, diversify its supply chains, and work with US partners to achieve those goals. Since 80 percent of the DRC’s cobalt output is owned by Chinese companies, US policymakers should be seeking ways to reduce barriers to entry in the DRC’s mining sector and to actively promote investment there. 

As the United States seeks to gain greater access to critical minerals and diversify its supply chains away from Chinese influence, Biden administration officials hope that granting Gertler a general license to sell his holdings in the DRC would increase US or Western firms’ willingness to invest in the country. That’s because those firms have been largely boxed out as Gertler, according to the US Treasury, used his closeness with government officials to secure below-market rates for mining concessions for his companies. Beyond Gertler, the business environment of the DRC ranks 183 out of 190 on the World Bank’s Doing Business indicators. Easing sanctions, through a coordinated US government effort that seeks to maximize this move, could send an important signal to Western investors that the DRC is open for business. Western firms could lift their bottom lines while stimulating the DRC economy by paying market rates.

The potential delisting of Gertler and his companies is a good example of an instance in which sanctions—or, in this case, the easing of sanctions—are being used in support of a specific policy objective.

Delisting would be good—but more must be done

Building on a potential delisting, the Biden administration should work with Congress to expeditiously pass the bipartisan BRIDGE to DRC Act—which helps the United States secure access to critical-mineral supply chains and sets human-rights and democracy benchmarks for strengthening the US-DRC relationship. These moves could be further timed or calculated to magnify the impact of ongoing foreign assistance programs led by the United States Agency for International Development or other US government agencies.

The United States should coordinate additional moves to support the DRC. In October 2022, the Financial Action Task Force, the standard-setting international organization that seeks to strengthen the global financial system, placed the DRC on its list of jurisdictions under increased monitoring—also known as the “grey list”—for the country’s dismal record in fighting money laundering and terrorist financing. While many African countries are on the grey list, the impact is considerable, as it limits capital inflows, makes investors wary of doing business, and leads to reputational damage and a reduction of correspondent banking relationships, among other consequences. The US Treasury should look to bolster the DRC government’s approach to anti-money laundering and combating the financing of terrorism (AML/CFT) by equipping the country with the knowledge, know-how, and capacity that it needs.  

Regardless of whether the delisting happens or whether the BRIDGE Act becomes law, the DRC must do more to help itself. News of a failed coup attempt in Kinshasa on May 19 certainly does not help, especially since—according to local reports—the assailants were linked to exiled DRC politician and US citizen Christian Malanga, who was killed by the country’s security forces in a firefight. Three US nationals were allegedly also involved in the attempt to overthrow the government of President Felix Tshisekedi.

The DRC must continue to take concrete steps to improve the business environment and reduce its political and economic risk factors. Since 2022, the DRC built on its high-level political commitments to improve its AML/CFT regime, finalize its three-year national AML/CFT strategy, and improve its macroeconomic performance—boosting its credit rating. The DRC has an opportunity to continue to make progress in its fight against corruption, money laundering, and terrorist financing that threaten the stability of the country from Matadi on the Atlantic seaboard to Goma in the Great Rift Valley.

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A win in the heart of Africa

Delisting Gertler would not only help the United States get its way, but it would show that its sanctions policy in Africa can be effective; its industrial and national security policies can be successfully implemented; and that all of this can be done in a manner that can help an African partner generate greater economic growth, jobs, and the foreign investment it seeks.

The United States can’t do it alone. It must also partner with the DRC in a serious manner to help strengthen the DRC’s framework to combat money laundering and terrorist financing, improve Kinshasa’s image, and reduce barriers to investment such as perceived political and economic risk.

The DRC occupies a central role on the African continent and with its economic potential could serve as a future hub for transportation, logistics, mineral processing, and more. If the DRC wins, all of Africa benefits—as do the United States and the West.

Benjamin Mossberg is the deputy director of the Atlantic Council’s Africa Center. He previously served in the US Treasury Department and US State Department with a focus on Africa policy.

The post In a Congolese mining case, Biden can secure a win for US sanctions policy in Africa appeared first on Atlantic Council.

According to the administration, there are two major motivations behind these tariff increases: 1) Protect and stimulate US clean energy industries and supply chains, and 2) Counter a flood of Chinese goods, as Beijing turns to exports to compensate for weak internal demand.

The challenge with the second objective is that, as was evident in the 2018 trade war, tariffs are not likely to change Chinese behavior. The question with this new wave of tariffs is if there will be a more united strategy with G7 allies, as Secretary Yellen called for in her speech yesterday in Frankfurt en route to the G7 finance ministers meeting.

A shared strategy among allies would not only communicate shared concern, but may also make China’s export-driven growth strategy less viable if important markets use tariffs and other barriers to reduce imports on rapidly growing industries like EVs. 

This is easier said than done. The United States can impose high electric vehicle tariffs because China only represents 1-2 percent of the US EV imports. By contrast, EVs from China already comprise over 20 percent of Europe’s EV imports, making tariffs more likely to raise costs for consumers. Then there’s European exports to China. Over the last seven years, the EU’s share of China’s auto imports has been more than double the US’ share, at 45.5 percent compared to 20.2 percent.

The Biden Administration’s decision also means that Chinese manufacturers may further ramp up their exports to non-US destinations. That could put enormous pressure on US partners, especially Brussels. As G7 leaders meet this weekend in Stresa, Italy, from May 24 to 25, they’ll discuss the potential for a shared strategy on Chinese overcapacity.

Europe’s year-long anti-dumping investigation is wrapping up this month, and a decision is due by July 4. Will the EU impose anything close to the US policy on Chinese EVs? Unlikely. The potential retaliatory strike on European auto exports to China is just too costly to stomach. 

The highest the EU may go is 30 percent, but as Rhodium Group has pointed out, a move like that would still not have a major impact on European demand given China’s subsidies and competitive pricing. 

Then there’s Japan. Japan has no auto tariffs, but maintains many non-tariff barriers to auto imports to help ensure the success of its car companies. Last year, however, the top electric vehicle in Japan wasn’t made by Toyota or Honda—it was BYD’s Dolphin. 

Still, Japan’s import market for electric vehicles is small, importing only 22,848 electric vehicles in 2023. Fully electric vehicles made up only 1.8 percent of total auto sales last year, as Japanese car manufacturers have gravitated towards hybrid models like the Toyota Prius. Japan’s primary concern is not China dominating its domestic import market—but rather holding on to its place as the top global exporter of vehicles. 

In fact, China exported more cars than Japan for the first time last year, many of which went to Japan’s neighbors. In response, Japan and its ASEAN neighbors announced on May 20 that they will develop a joint strategy on auto production by September this year to compete with China, especially on electric vehicles. 

The bottom line? In this sector, tariffs, working in isolation, can’t fully achieve all the objectives—no matter how high they go. It’s only when tariffs are relatively aligned across countries and then matched with positive inducements, new trade arrangements, and, ultimately, a better product, that the trajectory could change. 

Josh Lipsky is the senior director of the Atlantic Council GeoEconomics Center and a former adviser to the International Monetary Fund.

Sophia Busch is an assistant director with the Atlantic Council GeoEconomics Center where she supports the center’s work on trade.

Ryan Murphy contributed research to this piece.

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org

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The post Biden’s electric vehicle tariff strategy needs a united front appeared first on Atlantic Council.

The reality is that Beijing’s measures are a mere drop in an ocean of empty or unfinished apartment buildings, moribund developers who have defaulted on at least $124.5 billion of dollar debt, and hundreds of millions of homeowners who once bet on a now-collapsed property bubble. It also is bad news for an economy that over the past two decades came to rely on the property sector—and the industries like construction that it turbocharged—to provide between 20 and 30 percent of the growth that fueled China’s economic “miracle.”

Even if the Chinese government eventually comes to grips with the current crisis, it is extremely unlikely that the property engine will end up firing on more than a few cylinders. The combination of a declining population, slowing urbanization, and market changes that have made new homes less attractive than existing housing stock means that frothy property development will be a thing of the past.

None of this is good news for the global economy. The downsizing of China’s housing demand will be felt by natural resource suppliers across the developing world. But of far greater concern will be the implications of China’s growing reliance on low-priced exports to fuel growth—a surge that already is sparking trade tensions with the United States, Europe, and emerging market countries. This dependence on factory output will be a constant now that the property bubble has collapsed, taking with it a big chunk of Chinese domestic demand.

The impact of the real estate downturn has been reflected for months in China’s economic indicators. Sales of new and existing homes fell at a record pace in April, and property investment plummeted nearly 10 percent year on year. Home prices posted their sharpest decline in nearly ten years. The impact on employment in the property sector has been severe: an estimated half million real estate jobs have disappeared since 2020.

The carryover to the larger economy has been severe. Consumer spending has been hit especially hard, with many small businesses failing to recover from China’s strict Covid-19 shutdowns. Automobile sales posted their largest one-month drop in nearly two years in April, and overall retail sales rose at an anemic pace. Youth unemployment is a lingering problem, although the government’s recent recalculation of that number after it rose to an embarrassing 21 percent has masked the true extent of the problem.

The damage from the property collapse is virtually everywhere in China, with the possible exception of mega-cities like Shanghai and Beijing. Unoccupied and uncompleted buildings are ubiquitous, especially in smaller provincial cities that hosted the final stages of the building boom. Housing statistics compiled by Bloomberg and Chinese researchers estimate that the current stock of unsold housing in 100 major cities totaled 511.8 million square meters at the end of February, down from a peak of 530.6 million at the end of 2022. That is roughly ten times the total office space in Manhattan.

Goldman Sachs estimated last month that it will cost 7.7 trillion yuan to buy up enough apartments to return China’s inventory of empty homes to 2018 levels—and that assumes a 50 percent discount on current market prices. That figure is roughly 25 times the amount in the central bank’s bailout plan. The same study calculates that Chinese developers need $553 billion to complete housing that they pre-sold to buyers, and then failed to finish, in what amounted to a nationwide Ponzi scheme. Even that is far more than the $42 billion allocated in the new plan.

The core problem that China faces in dealing with the remains of its property bubble is the sector’s interlocking financial obligations of private and government developers, financial institutions ranging from state banks to shadow institutions, and local governments (many of which set up financing vehicles to buy land that the governments themselves put up for sale). With the market’s collapse, that foundation now has become profoundly unstable.

While developers have defaulted on their dollar-denominated bonds issued overseas—leaving foreign investors with little recourse but to file suit in Hong Kong courts—Beijing so far has tried to forestall defaults and restructuring of yuan debts. To mishandle the situation could have destabilizing consequences that would further damage the economy and undermine the legitimacy of Xi Jinping’s government. The result so far has been incremental steps: funding for some developers to complete pre-sold apartments, interest rate cuts to encourage buyers, and the release of funding like last week’s central bank initiative.

But buyers remain cautious, in part because prices so far are not coming down significantly. More importantly, banks are very hesitant to lend the cheaper money that’s been made available. For example, when the central bank last year made available $27 billion of interest-free funding developers to complete apartments, banks lent only a tiny proportion. They worry that they will be left holding the bag when defaulters eventually default.

On the other hand, history suggests that a bailout delayed only becomes an ever-larger bailout. The IMF, which has considerable experience helping countries address property crises has recommended that China pursue “more market-based adjustment in home prices and quickly restructur[e] insolvent developers to clear the overhang of inventories and ease fears that prices will continue to gradually decline.”

But it is not clear whether Beijing is willing to commit the trillions of yuan—and the political capital—that will be required to do this. The government has begun issuing what is slated to amount to $138 billion of ultra-long-term bonds this year and has announced plans for $539 billion of local government bonds. But it remains to be seen how much will go to relieve the property crisis. With local governments and their financing vehicles overloaded with more than 100 trillion yuan of debt, Beijing is facing many difficult decisions.

It may just end up trying to muddle through while repeating its declaration of the need “to urgently build a new model of real estate development,” as the Politburo stated on April 30. In that case, it will continue to widen the divide between weak domestic demand and expanding exports—with all the international political tensions that inevitably will result.

Jeremy Mark is a senior fellow with the Atlantic Council’s GeoEconomics Center. He previously worked for the International Monetary Fund and the Asian Wall Street Journal. Follow him on Twitter: @JedMark888.

The post There’s less to China’s housing bailout than meets the eye appeared first on Atlantic Council.

While the SWIFT report confirms the preeminent position of the dollar in the global payment system, it has over-reported the relative share of the Euro and under-estimated that of the RMB—basically due to the design (measuring trades between nations regardless of whether some belong to a monetary union) and coverage (only counting transactions within SWIFT) of its reporting system.

Over-reporting the Euro’s share

Regarding the use of the Euro in international payments, a recent analysis by the European Central Bank (ECB) shows that most Euro transactions (57 percent of the total) take place between banks situated within the Euro Area (EA)—where the Euro should be considered a domestic currency by virtue of the European Monetary Union. Truly international transactions using the Euro—where at least one initiating or receiving bank is located outside of the EA—account for only 43 percent of total Euro transactions. Consequently, excluding Euro transactions within the EA, the share of the Euro in truly international transactions is only 9.4 percent (equal to 43 percent of the 21.93 percent share reported by SWIFT). This puts the Euro on top of a group of secondary currencies including the GBP, RMB, the yen, CAD, SFR etc., but not as a peer in a position to compete against the dollar.

The relative shares of Euro transactions within and without the EA are not quite in line with those of intra- and extra-EA trades—accounting for 47 percent and 53 percent, respectively, of the combined trades of EA countries. However, as the EA trades a lot with the rest of the European Union (EU) thanks to the Single Market, intra-EU trade accounts for about 60 percent of total EU trade. As a measure of the EA and EU trade with the rest of the world, instead of the ratio of trade/GDP of 103 percent (for the EA) and 106 percent (for the EU), the true ratio of extra-EA trade/GDP is around 55 percent, and extra-EU trade/GDP around 42 percent—still ahead of the United States at 27 percent and China at 38 percent. However, the gap is less pronounced than thought.

The relatively modest position of the Euro in international payments, after a quarter century in operation and backed by the EA economy accounting for 12 percent of the global economy relative to the United States at 15.5 percent (both on a PPP basis) as well as an open capital account and pretty sophisticated financial markets with well-developed regulations reflects the unique strength of the dollar.

Underestimating the international use of the RMB

Against this backdrop, China appears to have embarked on a different path in promoting the international use of the RMB, taking advantage of the desire of many countries to reduce their reliance on the dollar which has been increasingly used by the United States in financial sanctions to promote its strategic goals. The challenges facing the Euro would be even more formidable in the case of the RMB. For various reasons, China wants to keep control of capital account transactions, making it difficult for the RMB to be freely transferable. Its financial markets are still not well developed and regulated in a transparent and predictable way.

Instead of trying to tackle these problems, China has leveraged its strength as the top partner to most countries in the world in trade and investment transactions, to promote the use of local currencies in settling those transactions, mostly on a bilateral basis. China has fostered this payment mechanism by signing bilateral currency swap lines with forty-four countries worth more than $500 billion to help provide each other’s currencies to importers, exporters as well as investors in both countries. It has developed a modern RTGS for high-value domestic payments using the China National Advanced Payment System (CNAPS), and for international payments using China Cross-border Interbank Payment System (CIPS)—using both to facilitate the clearing and settlement of RMB transactions outside of China. It has also made much progress in developing its Central Bank Digital Currency (CBDC)—called eCNY—for domestic and cross-border payments.

As a result of those efforts, China has been able to settle about 53 percent of its cross-border trade and investment transactions in RMB, while the dollar’s share has dropped to 43 percent from 83 percent in 2010. More generally, in a recent study, the IMF found that in a sample of 125 countries, the median usage of RMB in cross-border payments with China has increased from 0 percent in 2014 to 20 percent in 2021. In a recent update, the IMF reported that the yuan’s share of all cross-border transactions between Chinese non-banks with foreign counterparts has risen from close to zero fifteen years ago to 50 percent in late 2023, while the dollar has fallen from around 80 percent to 50 percent. In particular, during his recent visit to China, Russian President Vladimir Putin again confirmed that 90 percent of Russia-China trade (reaching a record $240 billion in 2023) has been settled in ruble and RMB. Uses of the RMB in cross-border payment, mainly in a bilateral setting, will likely grow in the future, reflecting the huge footprint of China in world trade and investment flows. These transactions are outside the SWIFT framework—by design, so as to avoid vulnerability to Western financial sanctions—so SWIFT data will under-estimate the true international use of the RMB in cross-border payments. And the under-estimation will get worse as uses of local currencies—of which the RMB usually takes one side of bilateral transactions—grow in future.

Furthermore, a portion of international RMB payments has gone through CIPS directly instead of using SWIFT messaging—CIPS can accommodate both forms of communication. According to a 2022 Bank of France report, about 80 percent of RMB payments use SWIFT messaging as many non-Chinese institutions have yet to install translators for CIPS messaging. Presumably, as CIPS has grown in membership and volume of transactions (having increased by 24 percent in 2023 over the previous year to an average daily volume of 482 billion yuan or $67 billion), it seems reasonable to expect that more institutions would have installed translators to participate fully in the CIPS network as they handle more RMB transactions. In any event, the portion of RMB payments going directly through CIPS will not be captured in SWIFT data, giving rise to another instance of under-estimation of the RMB share in international payments.

Conclusions

The global payment landscape is fragmenting. On a multilateral basis, the dollar is entrenched as the premier currency in payment transactions. However, several secondary currencies, of which the Euro is in the lead, and including the RMB, are being used for up to half of total international payments. Besides that, a growing number of cross-border payment arrangements using local currencies mostly on a bilateral basis has further fragmented the global payment system. Given China’s huge footprint in world trade and investment activities, the RMB will feature prominently in these bilateral cross-border payments. Such a fragmented payment system, especially growing uses of local currencies, entails a loss of efficiency compared to the use of a common means of payment in international transactions. However, the revealed preference of many countries seems to be an acceptance of efficiency loss in search for less vulnerability to US and Western financial sanctions in times of heightened geopolitical tension.

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

The post The Euro’s share of international transactions is likely smaller than it looks  appeared first on Atlantic Council.

After Russia’s illegal full-scale invasion of Ukraine in February 2022, Western partners imposed unprecedented financial sanctions and export controls against Russia. These measures aim to achieve three objectives:

1. Significantly reduce Russia’s revenues from commodities exports;
2. Cripple Russia’s military capability and ability to pursue its war;
3. Impose significant pain on the Russian economy.

The Atlantic Council’s Russia Sanctions Database tracks the restrictive economic measures Western allies have placed on Russia and evaluates whether these measures are successful in achieving the stated objectives.

The Database also centralizes the financial designations of more than five thousand Russian entities and individuals sanctioned by the Group of Seven (G7) jurisdictions, Australia, and Switzerland. The Database is updated quarterly and can be queried to determine if an individual or entity is designated. Please refer to the appropriate designating jurisdiction’s websites and platforms for additional information and confirmation. The data provided in the Database is intended for informational purposes only.

Objective 1: Significantly reduce Russia’s revenues from commodities exports

Russia’s total commodity exports declined by 28 percent in 2023. To reduce Russia’s revenues from commodities exports, Western authorities have imposed financial sanctions on major Russian banks that process payments going to Moscow from exports. They also put a ceiling of $60 on the price of Russian crude oil per barrel. Russia was able to mitigate the effects of these measures by reorienting oil exports to Asia—mainly China and India—and transacting in national currencies. However, in February 2024, the Federal Customs Service (FCS) of Russia reported a 28.3 percent drop in total exports in 2023 compared to the previous year, although it should be noted that in 2022, Russian exports were the highest since 2012. As Russian media outlets report, sanctions were the reason for this decline, and more specifically the EU ban on Russian crude oil sold above the price cap that went into effect on December 5, 2022.

The only commodity that experienced export growth was agricultural products. Russia may be diversifying its exports and increasing the share of products that generally fall under humanitarian exemptions to sanctions, such as grain. Notably, Russia has been actively working on replacing Ukraine as the top supplier of grain to Africa by blocking the exports of Ukrainian grain through the Black Sea. Russia also stole around six million tons of Ukrainian grain in 2022 alone. Western authorities should work on securing Ukraine’s grain exports to Africa in close coordination with international financial institutions.

The United States is increasing pressure on third country jurisdictions. Despite the $167 billion drop in commodity exports, Russia still made $425 billion from exporting commodities ($260 billion from oil and other mineral products), which was enough to continue financing Russia’s war on Ukraine. To increase pressure, US President Joe Biden issued a new executive order at the end of 2023, providing the Treasury’s Office of Foreign Assets Control (OFAC) the authority to apply secondary sanctions on foreign financial institutions transacting with US- designated Russian entities or individuals. While the Treasury has not yet issued designations under this authority, secondary sanctions have created a chilling effect as banks from China, United Arab Emirates (UAE), Turkey, Central Asia, and the Caucasus are cutting financial links with Russia.

Russian banks are struggling to collect oil payments from China, Turkey, and the UAE. Following the Biden administration’s launch of the Russia secondary sanctions authority, banks in the UAE, Turkey, and China have started asking clients to provide written guarantees that the recipient of the payment is not on OFAC’s Specially Designated Nationals (SDN) List. Consequently, payments from these countries to Russia are either being delayed or suspended. Three out of the four largest Chinese banks have stopped accepting payments from sanctioned Russians, and a major Turkish terminal stopped importing oil from Russia. UAE state-owned bank Emirates NBD, which had created a department for managing Russian wealth and Russian oil transactions in 2022, closed down the department and cut off ruble transfers. Oil revenue, especially from China, is a lifeline to the Russian economy, and hurdles in collecting oil payments could significantly hit Russia’s war chest.

Russia has found a solution to keep transacting with Chinese banks. The current scheme for processing payments between Russia and China is to open an account at a Russian bank’s branch in China and trade in rubles. The problem is that VTB is the only Russian bank with a functioning branch in China, and the branch itself is not very big, resulting in up to six-month delays while processing documents. Sberbank was planning to open a new branch in China by the end of 2023 but has not yet succeeded. Alfa-Bank also plans on opening two new branches in China but is still at an early stage. VTB, Sberbank, and Alfa-Bank are sanctioned by the West.

If Russia’s solution of using foreign subsidiaries of Russian banks to continue transacting with China finds success, it is likely that Russia will seek to open more subsidiaries of Russian banks abroad, and encourage trade settlement in rubles. To address this challenge, Western partners could consider sanctioning Russian subsidiaries abroad or delivering a diplomatic message to third country jurisdictions that they should prohibit the growth in size or number of Russian bank subsidiaries in their countries.

India continues to trade with Russia. While others are cutting ties with Russian banks, India appears to be conducting trade with Russia as usual. The two countries are trading in national currencies, which allows India to work around Western sanctions. As such, Russia has developed a similar economic relationship with India as it has with China: Russia exports oil to India and imports machinery, and this trade is denominated in national currencies. As the Indian external affairs minister stated, India needs Russian oil to make up for the Middle Eastern oil that has been rerouted to Europe since the price cap went into effect. Meanwhile, Russia is desperate for machinery, as the West has imposed export controls on Western technology. Indian engineering exports to Russia, including auto parts, electrical equipment, and machinery, increased by 88 percent year-on-year in December 2023. The United States and its allies should deepen diplomatic engagement with India on this issue and ensure that no dual-use technologies are being exported to Russia that could help its war effort, potentially leveraging the secondary sanctions authority as well.

OPEC+ decisions are undermining Western measures on Russian oil. It remains to be seen how secondary sanctions will impact Russia’s oil revenues in 2024, but for now, Russia is likely to hit its revenue targets. Russia’s energy revenues have increased due to a spike in prices for Urals, Russia’s main blend, and one-time tax payments from oil companies. If global oil prices remain high, which seems likely given the OPEC+ decision to limit global oil supplies, Russia will continue filling its coffers. The West should engage more with the OPEC+ group, considering that OPEC’s decisions seem to be undermining Western measures by increasing Russia’s oil revenues.

The West is taking steps to reduce dependence on Russian enriched uranium

Russia dominates the global market of enriched uranium. Russia supplies over 40 percent of enriched uranium to the world, which is used as a fuel for nuclear reactors. Even more concerning, Russia has a complete monopoly on the production of advanced nuclear fuel, which is used by the next generation of nuclear reactors. Russia’s State Atomic Energy Corporation, Rosatom, is not sanctioned by the West and supplies some 440 nuclear plants in many of the thirty countries in the world generating nuclear energy. As Western countries increase reliance on nuclear power as an alternative to fossil fuel for electricity generation, they are also heading towards increasing reliance on Russian nuclear fuel. This dependence has not yet been emphasized in the sanctions and economic statecraft context because Russia has never weaponized enriched uranium exports, unlike oil and gas.

Western countries plan on boosting capacity to enrich uranium. To address this vulnerability, the United States, along with the United Kingdom and France have announced plans to expand their own capacity to enrich uranium. On May 13, Biden signed a bipartisan bill to ban the import of Russian uranium. Members of Congress have argued for reviving US uranium production in states such as Wyoming and New Mexico. The law will gradually phase out Russian uranium exports, with a full ban in place by 2028, and also free up some $2.7 billion to support the US domestic uranium industry. This is a welcome step in reducing US dependence on Russian energy exports, but its success will depend on coordination between the government and private players in the US uranium industry.

Objective 2: Cripple Russia’s military capability and ability to pursue its war

Months of delayed US funding provided Russia with an opportunity to capitalize on Kyiv’s shortage of artillery ammunition and air-defense systems and make advances in eastern Ukraine.

Russia’s partnership with Iran, North Korea, and China enables its military resilience. The January 2 attack on Kyiv and Kharkiv was carried out with weapons featuring technology from China, missiles from North Korea, and drones from Iran, revealing deep interconnections between these countries. In 2023, Beijing supplied 90 percent of Russia’s micro-electronics imports for military equipment, along with M-17 military helicopters, jamming technology, fighter jet parts, and defense systems components. A Chinese shipyard in eastern Zhejiang province also provided moorage to the US-sanctioned Russian vessel Angara, facilitating arms transfers from North Korea, which has already supplied Moscow with ballistic missiles and over 2.5 million rounds of ammunition. Throughout the conflict, Iran has supported Moscow with more than 3,700 drones, including Shahed 131, Shahed 136, Mojaher 6, and other models that use commercial off-the-shelf components.

Russia is drawing on its Cold War-era military stockpile. Eighty percent of Russia’s tanks and other armored fighting vehicles result from upgrades and renovation of surplus military inventory. However, this stockpile may soon be depleted, as most available stocks of vehicles are expected to be exhausted by 2026.

The primary military vulnerability of Russia lies in its ammunition manufacturing. The Russian Ministry of Defense (MoD) forecasts that around 4 million 152mm artillery shells and 1.6 million 122mm shells need to be manufactured or procured by 2024 to secure significant territorial gains in Ukraine by 2025. According to the MoD, the current capacity imposes limitations on achieving this target, highlighting Russia’s ongoing reliance on Western components.

The United States and its Western partners should continue to target Russia’s military-industrial base and its facilitators in China, Iran, and elsewhere with sanctions. These sanctions have a disruptive effect and make it more difficult for Russia to procure the military equipment, materiel, and dual-use items it desperately needs to fight its war in Ukraine. Further, the US threat of secondary sanctions on foreign financial institutions doing business with these designated individuals and entities expands the reach of sanctions and increases the risk of doing business with Russia.

Objective 3: Impose significant pain on the Russian economy

Western measures have encountered mixed success imposing pain on the Russian economy. Measured by gross domestic product (GDP) growth, Moscow continues to surpass expectations. The IMF’s World Economic Outlook (WEO), released in April, now predicts the Russian economy to grow by 3.2 percent in 2024, up from the previous forecast of 2.6 percent. Notably, this is faster growth than all advanced economies. While GDP growth may not be the best indicator of economic resilience to sanctions, the significant upward revision still confounds expectations of a prolonged recession at the beginning of the conflict.

The Russian economy is doing well enough to support its war against Ukraine. How has it continued to grow, and what challenges does it still face?

Economic growth has been largely driven by war-related spending. Nearly a third of the Russian budget is now directed toward national defense, representing about 6 percent of GDP, and defense is expected to overtake social spending this year. Despite sanctions on the Russian arms industry, manufacturing production has boomed in war-related sectors such as computers, electronics, and optics, finished metal goods, and vehicles. The Economy Ministry has joined the Central Bank in warning that there are signs of overheating, including high inflation which is still at almost double the 4-percent target and a rapid acceleration of lending.

For now, Russia has sufficient fiscal resources to sustain its war effort. Higher oil and gas export revenues have temporarily narrowed the budget deficit, which two months ago had reached 1.5 trillion rubles—nearly the entire deficit planned for 2024. The new budget projects spending to increase by 25 percent over the next three years. However, its forecast of revenues, which rests on the optimistic assumption of higher global oil prices, is still vulnerable to the tightening of sanctions, decreased global demand, and lower prices. Despite this risk, Moscow can seek new tax increases to sustain its invasion and continue to draw from its National Wealth Fund to cover shortfalls. Notably, the liquid pillar of the National Wealth Fund would last for one or two years if the price of Russian oil were below fifty dollars per barrel.

Conclusion

Sanctions have succeeded in reducing Russia’s revenues from commodities exports and had mixed results in crippling Russia’s military capabilities and imposing significant pain on the Russian economy. One of the challenges in evaluating the success of sanctions in achieving objectives is that desired outcomes have never been articulated. For example, a 28 percent drop in exports seems significant, but policymakers never stated how much of a decline the West was aiming for when sanctions were put in place.

We can no longer analyze the effectiveness of sanctions against Russia without factoring in the role other sanctioned regimes and China play in sustaining Russia’s wartime economy and military capabilities. Western partners should continue to pressure Russia and continue draining its resources while identifying its financial linkages with other sanctioned regimes, and targeting them.

Authors: Kimberly Donovan, Maia Nikoladze, Ryan Murphy, Alessandra Magazzino

Contributions from: Charles Lichfield

Data source: Castellum.AI

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The ransomware problem is multi-dimensional. Ransomware is both a cyber and a financial crime, exploiting vulnerabilities not only in the security of digital infrastructure but also in the financial system that have enabled the rise of sophisticated Ransomware-as-a-Service (RaaS) economies.  It is also inherently international, involving transnational crime groups operating in highly distributed networks that are targeting victims, leveraging infrastructure, and laundering proceeds without regard for borders.  As with other asymmetric threats, non-state actors can achieve state-level consequences in disruption of critical infrastructure.

With at least $1 billion reported in ransomware payments in 2021 and with incidents targeting critical infrastructure like hospitals, it is not surprising that the debate on ransomware payments is rising again. Ransomware payments themselves are problematic—they are the primary motive for these criminal acts, serving to fuel and incentivize this ecosystem.  Many are also inherently already banned in that payments to sanctioned actors are prohibited. However, taking a hardline position on ransomware payments is also challenging because of its potential impact on victims, visibility and cooperation, and limited resources.

Cryptocurrency’s role in enabling ransomware’s rise

While ransomware has existed in some form since 1989, the emergence of cryptocurrencies as an easy means for nearly-instantaneous, peer-to-peer, cross-border value transfer contributed to the rise of sophisticated RaaS economies. Cryptocurrencies use largely public, traceable ledgers which can certainly benefit investigations and disruption efforts. However, in practice those disruption efforts are hindered by weaknesses in cryptocurrency ecosystems like lagging international and industry compliance with anti-money laundering and countering financing of terrorism (AML/CFT) standards; growth of increasingly sophisticated methods of obfuscation leveraging mixers, anonymity-enhanced cryptocurrencies, chain-hopping, and intermixing with off-chain and traditional finance methods; and insufficient steps taken to enable real-time, scaled detection and timely interdictionof illicit cryptocurrency proceeds.

Despite remarks by some industry and policymaker advocates, RaaS economies would not work at the same level of scale and success without cryptocurrency, at least in its current state of compliance and exploitable features. Massively scaled ransomware campaigns targeting thousands of devices could not work by asking victims to pay using wire transfers and gift cards pointing to common accounts at regulated banks or widely publishing a physical address. Reliance on traditional finance methods would require major, and likely significantly less profitable, evolution in ransomware models.

The attraction of banning ransomware payments

Any strategy to deal with ransomware needs to have multiple elements, and one key aspect is the approach to ransomware payments. The Biden Administration’s multi-pronged counter-ransomware efforts have driven unprecedented coordination of actions combating ransomware, seen in actions like disrupting the ransomware variant infrastructure and actors, OFAC and FinCEN designations of actors and financial institutions facilitating ransomware, pre-ransomware notifications to affected companies by CISA, and a fifty-member International Counter-Ransomware Initiative.

However, ransomware remains a significant threat and is still affecting critical infrastructure. As policymakers in the administration and in Congress consider every tool available, they will have to consider the effectiveness of the existing policy approach to ransomware payments. Some view payment bans as a necessary action to address the risks ransomware presents to Americans and to critical infrastructure. Set against the backdrop of the moral, national security, and economic imperatives to end this destabilizing activity, bans could be the quickest way to diminish incentives for targeting Americans and the significant amounts of money making it into the hands of criminals.

Additionally, banning ransomware payments promotes other Administration policy objectives like driving a greater focus on cybersecurity and resilience. Poor cyber hygiene, and especially often poor identity and access management, are frequently exploited in ransomware. Removing payments as a potential “escape hatch” is seen by some as a way to leverage market forces to incentivize better cyber hygiene, especially in a space where the government has limited and fragmented regulatory authority.

Those who promote bans typically do not come to that position lightly but instead see them as a last resort to try to deter ransomware.  The reality is that we have not yet been able to sufficiently scale disruption to the extent needed to diminish this threat below a national security concern—driven by insufficient resourcing, limits on information sharing and collaboration, timeliness issues for use of certain authorities, and insufficient international capacity and coordination on combating cyber and crypto crime. When policymakers are in search of high-impact initiatives to reduce the high-impact threat of ransomware, many understandably view bans as attractive.

Challenges with banning ransomware payments

However, taking a hardline position on ransomware payments can also present practical and political challenges:

• Messaging and optics of punishing victims:A ban inherently places the focus of the policy burden and messaging on the victims, potentially not stopping them from using this tool but instead raising the costs for them to do so. Blaming victims that decide to pay in order to keep their company intact presents moral and political challenges.

• Limited resources that need to be prioritized against the Bad Guys:  For a ban to be meaningful, it would have to be enforced. Spending enforcement resources against victims to enforce a ban—resources which could have been spent on scaling disruption of the actual perpetrators—could divert critically limited resources from efforts against the ransomware actors.

• Likelihood that payments will still happen as companies weigh the costs against the benefits:  Many feel that companies, if faced between certain demise and the costs of likely discovery and legal or regulatory action by the government, will still end up making ransomware payments.

• Disincentivizing reporting and visibility:  A ban would also make companies less likely to report that they have been hit with ransomware, as they will aim to keep all options open as they decide how to proceed. This disincentivizes transparency and cooperation from companies needed to drive effective implementation of the cyber incident and ransomware payment reporting requirements under the Cybersecurity Incident Reporting for Critical Infrastructure Act (CIRCIA) regulations to the Cybersecurity and Infrastructure Security Agency (CISA). Diminished cooperation and transparency could have a devastating effect on investigations and disruption efforts that rely on timely visibility.

• Asking for permission means the government deciding which companies survive:  Some advocates for bans propose exceptions, such as supplementing a presumptive ban with a licensing or waiver authority, where the government is the arbiter of deciding which companies get to pay or not.  This could enable certain entities like hospitals to use the payment “escape hatch.” However, placing the government in a position to decide which companies live and die is extremely complicated and presents uncomfortable questions.  It is unclear what government body could be capable, or should be endowed with the authority of making that call at all, especially in as timely a fashion as would be required.  Granting approval could also place the government in the uncomfortable position of essentially approving payments to criminals.

Additional policy options that can strike a balance for practical implementation

In light of the large-scale, disruptive threat to critical infrastructure from ransomware, policymakers will have to consider other initiatives along with its ransomware payment approach to strike a balance on enhancing disruption and incentivizing security measures:

• Resource agencies and prioritize counter-ransomware efforts: Government leadership must properly resource through appropriations and prioritize disruption efforts domestically and internationally as part of a sustained pressure campaign against prioritized ransomware networks.

• International cyber and cryptocurrency capacity building and pressure campaign: Agencies should prioritize targeted international engagement, such as capacity building where capability lags and diplomatic pressure where political will lags, toward defined priority jurisdictions.  Capacity building and pressure should drive both cybersecurity and cryptocurrency capacity, such as critical infrastructure controls, regulatory, and law enforcement capabilities. Jurisdictional prioritization could account for elements like top nations where RaaS actors and infrastructure operate and where funds are primarily laundered and cashed out.

• Enhance targeting authorities for use against ransomware actors: Congress should address limitations in existing authorities to enable greater disruptive action against the cyber and financial elements of ransomware networks. For example, Congress could consider fixes to AML/CFT authorities (e.g., 311 and 9714 Bank Secrecy Act designations) for better use against ransomware financial enablers, as well as potential fixes that the defense, national security, and law enforcement communities may need.

• Ensure government and industry visibility for timely interdiction and disruption of ransomware flows: Congressional, law enforcement, and regulatory agencies should work with industry to ensure critical visibility across key ecosystem participants to enable disruption efforts, such as through: Enforcing reporting requirements of ransomware payments under CIRCIA and US Treasury suspicious activity reporting (SAR) requirements; Mandating through law that entities (such as digital forensic and incident response [DFIR] firms) that negotiate or make payments to ransomware criminals on behalf of victims, including in providing decryption services for victims, must be regulated as financial institutions with SAR reporting requirements; Driving the evolution of standards, like those for cyber indicators, to enable real-time information sharing and ingestion of cryptocurrency illicit finance indicators for responsible ecosystem participants to disrupt illicit finance flows.

• Prioritize and scale outcome-driven public-private partnerships (PPPs): Policymakers should prioritize, fund, and scale timely efforts for PPPs across key infrastructure and threat analysis actors (e.g., internet service providers [ISPs], managed service providers [MSPs], cyber threat firms, digital forensic and incident response [DFIR] and negotiation firms, cryptocurrency threat firms, cryptocurrency exchanges, and major crypto administrators and network-layer players [e.g., mining pools and validators]) focused on disruption of key ransomware activities and networks.

• Incentivize and promote better security while making it less attractive to pay ransoms: Policymakers could leverage market and regulatory incentives to drive better security measures adoption to deter ransomware and make it less attractive to pay.  For example, legislation could prohibit cyber insurance reimbursement of ransomware payments. Regulatory action and legislative authority expansion could also drive implementation of high-impact defensive measures against ransomware across critical infrastructure and coordination of international standards on cyber defense.

While attractive for many reasons, banning ransomware payments presents challenges for limiting attacks that demand a broader strategy to address. Only this kind of multi-pronged, whole-of-nation approach will be sufficient to reduce the systemic threats presented by disruptive cybercrime that often targets our most vulnerable.

Carole House is a nonresident senior fellow at the Atlantic Council GeoEconomics Center and the Executive in Residence at Terranet Ventures, Inc. She formerly served as the director for cybersecurity and secure digital innovation for the White House National Security Council.

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The deep-seated reservations held by large European Union (EU) member states and institutions like the ECB about seizing the reserves are well publicized. Irrespective of whether we think these are justified, they are a key constraint to how the funds might be utilized in the short term to help Ukraine win the war. To win, it is necessary to restore the defense capabilities of Ukraine and the EU, including their ability to produce weapons and ammunition jointly. As we fight, Europe is a deep rear that can provide us Ukrainians with uninterrupted supplies of weapons for a joint victory.

The problem is that the EU27’s current proposals on using the interest income from the blocked assets cannot provide enough funds to meet our needs. Their estimate is $3.6bn per year, which in no way solves the problem. Even more so now that it seems clear they won’t apply this retroactively to profits accumulated in 2022 and 2023.
The EU is now facing a serious challenge to increase defense spending to at least 2 percent of GDP, if not more. We Ukrainians also need them to keep supporting us to have any chance of winning a war which is existential for them too. There are only two ways to do this quickly and efficiently: cut social spending or borrow the missing resources. Both make it challenging for the European leaders which have supported Ukraine to win re-election, and are therefore against our interest too. It remains challenging to sell the idea of “belt-tightening” to a fed-up European electorate, which has grown accustomed to a comfortable life over the past thirty years since the threat from the Soviet Union disappeared. So we need to get creative.

This is where $280 billion of Russian reserves can be used more intelligently—and more lucratively in the short term—without crossing red lines which our European partners are afraid of. To boost macrofinancial support and military assistance to Ukraine, the European Commission needs to start working on a “confiscation without confiscation” project.

In order to implement this, the EU27 should decide that a significant share of the blocked assets of the Russian Federation be reinvested in a safe financial instrument, long-term EU defense bonds maturing in thirty years. The raised funds, as part of the agreed strategy to reform the European military-industrial complex, can be distributed on a grant basis among the countries that agree to participate in this program. Weapons producers in France, Germany, Poland, other EU Member States, and even Ukrainian regions further from the front can all receive money to ramp up capacity and production of the weapons we need to defeat the common enemy.

With such a model, everyone wins. EU leaders restore the defense industry of their countries without having to divert funds from social spending. Moreover, they increase the number of jobs in their economies. Ukraine receives the necessary funds for waging war and strengthening its own military-industrial complex, laying the foundation for victory against our aggressor.

You may ask what will happen once the money is spent. Indeed, won’t the EU owe this money to Russia thirty years from now? Giving Ukraine the chance to push back the aggressor now makes it much more likely that, in the meantime, the EU can negotiate the lifting of sanctions with a weakened Russia. One of its demands can be that Russia relinquish its claim on this money given the damage it has wrought in Ukraine. The scheme does involve risk, but I believe it is manageable and worth taking to prevent Russia’s invasion from succeeding.

I hope that the June G7 summit in Italy will set the stage for a solution to the Russian asset question that works for everyone while rising to the challenge. Besides the EU, our other allies—the United States, Great Britain, Australia and Japan—could implement similar schemes of for the smaller amounts of Russian Central Bank assets blocked on their shores.

Oleg Dunda is a Member of Parliament of Ukraine.

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The EU’s economic weight in the world has declined substantially in the past few decades and its strategic position has weakened seriously as the geopolitical rivalry between the United States and China intensifies. Against that backdrop, one of the report’s main recommendations is to transcend the Capital Market Union to promoting a Savings and Investments Union instead. The aim is to mobilize savings and investments in EU countries, and the report proposes launching a variety of investment vehicles to facilitate retail and institutional investments in the EU economy and especially its green energy transition efforts. These include an EU-wide auto-enrollment Long Term Savings Product leveraging tax incentives by member states; enhancing the Pan-European Personal Pension Product; a European Long-Term Fund; as well as a European Green Guarantee facility to support bank lending to green energy projects. Unfortunately, this well-meaning proposal fails to tackle the underlying causes of the EU’s fragmented capital markets.

While the proposed funds and products may be worthwhile, it is difficult to assess their contributions to reviving EU economic growth until more operational details are forthcoming. Meanwhile, by emphasizing the use of tax incentives and guarantees, the report has downplayed the unglamorous but crucial tasks of harmonizing laws, regulations, market structures, and practices in twenty-seven member countries to forge a seamless European capital market where savings can flow to the best opportunities without internal barriers. The harmonization job is far more complicated than it sounds—involving the development of common rules or at least common and consistent standards for corporate laws. That includes bankruptcy and reorganization provisions, creditors’ ease in seizing and liquidating loan collaterals, tax procedures, supervision of markets and entities, accounting standards, trading rules including for shorting, investment rules for institutional investors such as pension funds, insurance companies and mutual funds, listing requirements including the languages used for prospectuses, etc. Turning all these national rules and regulations into a common EU rules book has run into strong resistance from vested interests in various countries, explaining the slow progress to date in advancing the Capital Market Union. However, without making much more headway in these nuts-and-bolts issues, the proposed European Savings and Investments Union will likely be slow in taking shape as well.

The report also singles out practices which hinder the channeling of savings to investments in the EU but does not get to the root causes of the problems or suggest ways to overcome the impediments.

Firstly, the report bemoans the fact that while the EU is home to €33 trillion ($35.4 trillion) of private savings, annually €300 billion ($321 billion) are being diverted to overseas financial markets, primarily to the United States, due to internal fragmentation. However, it does not recognize, and does not suggest ways to rectify, the fundamental factor attracting European savings to the much larger US stock market, which accounts for 54.5 percent of world market capitalization compared to large European markets at 15.7 percent. Investment flows to the United States primarily because of superior returns on American equity markets compared to those of the EU. Specifically, for the period 1900-2020, the average annual nominal return on US equities was 9.6 percent compared to 7.2 percent for Europe. So long as this remains the case, savings from the EU and the rest of the world will continue to be attracted to the United States, where foreign investors own 40 percent of the stock market. So the EU need both reforms and investment: structural reforms to make the EU economy more productive and its corporations more profitable will create more investment opportunities to deploy European savings at home—while more investment now could help improve EU productivity and growth prospects. Thus, while it is wise to find ways to increase investment in the EU, the problem is more fundamental than just the efficiency of capital markets.

The Letta report also points out the fact that EU households keep 34.1 percent of their savings in bank deposits, not investing those in stock and bond markets. It is important to realize that this behavior of European households reflects their cultural and traditional preference for loss avoidance over capital gains with risk.  As such, a more developed Capital Market Union may encourage somewhat more allocation from bank deposits to portfolio or direct investments, but that would not substantially change the loss-avoiding investment behavior in the near term. Instead, it is more useful for policy makers in the EU to find ways to create a business environment for EU banks which receive an important part of its funding from retail depositors to invest the proceeds more productively.

Relative to US peers, EU banks have posted very low returns on assets (ROA) (of 0.4 percent vs. 1.4 percent for the United States) as well as low returns on equity (ROE) (fluctuating between 2-6 percent, about half of the US level). Consequently, market valuation of EU banks has been much lower than that of US banks: the price to book ratio of EU banks in 2014-2021 averaged 0.79x compared to 1.53x for US banks. In short, helping EU banks become more efficient and profitable—for example by launching the European Deposit Insurance Scheme (EDIS) to complete the Banking Union—would probably do more to support EU economic growth than trying to get EU households to change their investment behavior from bank deposits to market investments.

In conclusion, in highlighting the inefficiency of EU capital markets and proposing several products and policies for improvement, the Letta report has focused attention to the need to complete and upgrade the Capital Market Union, and the Single Market in general, to help the EU improve its economic performance in an era of geopolitical rivalry. However, much of the work requires attention to the detailed harmonization of economic and financial rules and regulations across the membership to promote a seamless market for savings and investments. These are unglamorous and painstaking tasks, but they need to be done.

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

The post The Enrico Letta Report and the state of the EU’s Capital Market Union appeared first on Atlantic Council.

The European Union (EU) has made some progress on its conservative plan to tap into the interest income but its own estimates say this will provide about $3.5 billion a year. However, Ukraine’s needs are much greater. The first tranches of the Ukraine Facility Platform agreed by the EU—the $7.9 billion direct financial aid planned in the supplemental and aid from other supporters—all combine to provide enough for 2024. But Kyiv cannot afford to again face cash flow issues similar to what it endured earlier this year.

As Ukraine continues to fight for its survival now, bringing the value of the staggered interest income into the present would at least provide much-needed visibility for funding in 2025. In late March, reports surfaced that the United States was pushing the G7 to consider a sovereign loan of $50 billion to Ukraine which would be repaid using the interest income.

Where does this $50 billion figure come from? Given that we know many of the parameters the White House is working with—from interest rates to the regular income stream they create—our team dusted off our corporate finance textbooks and tried to retrace their steps.

Scenario 1 is the current EU workstream. If we use today’s interest rates and the amount Russia’s reserves are gaining in overnight lending, Ukraine could expect to receive around $3.6 billion in 2025 as part of “windfall profits.” Of course, as interest rates fall in the Eurozone, future earnings may shrink.

Scenario 2 is what the United States is pushing for ahead of the June G7 Leaders’ Summit in Italy. Daleep Singh, Deputy National Security Advisor, has asked: Why only give Ukraine this year’s profits when you could, in fact, pull forward future interest earnings? How much money would that mean for Ukraine in 2025? We think it would look something like this:

You can quibble with our annuity formula, but the bottom line is that $50 billion dollars is an incredible influx of cash that would guarantee payments to the entire military and civil service, help with recruiting efforts, ensure financial stability, and catalyze private investment. Plus, as far as Ukraine is concerned, it would be given as a grant, not a loan.

Like everything with these assets, the idea is controversial. It requires believing that the reserves will continue to be blocked for twenty years or given over to Ukraine. Otherwise, the G7 is on the hook for repayment. Remember, the block on the assets has to be unanimously renewed every six months by the 27 member states of the EU.

That’s all the more reason this approach may be the best option to get Ukraine a significant amount of money in 2025. It’s not seizing all of the $280 billion, which the Europeans and Japanese remain opposed to, but it’s almost fifteen times more than what’s on the table from the current EU proposal, which is still far from operational. Expect to hear more on this debate as the June G7 Summit in Apulia, Italy, draws closer.

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

Mrugank Bhusari is assistant director at the Atlantic Council’s GeoEconomics Center

Sophia Busch contributed to this piece

This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email
SBusch@atlanticcouncil.org

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The post Understanding the plan to create a $50 billion Ukraine bond from Russia’s blocked assets appeared first on Atlantic Council.

Without proactive changes to how we invest in and develop our current staff and attract new talent, we are undercutting our country’s ability to cultivate the innovation that drives our economy and defends our national security. We cannot expect to compete on the world stage without equipping the US civil service with the skills and experience needed to understand and harness the technological trends that will define the future.

The first problem is we do not create enough opportunities for current national security officials to become more proficient in novel technologies. Rotations and educational opportunities away from headquarters—while broadening and essential experiences for well-rounded officers—often delay promotions. As a result, the incentive structure dissuades current government officials from taking time off to learn. But there are steps that can shift this dynamic:

• Institutionalize knowledge exchange between the US government and the private sector in critical industries. Create career-enhancing formal externships, rotational opportunities, and other short-term learning experiences that give civil servants the ability to work directly in private industry and develop practical experience with innovative technologies like blockchain, artificial intelligence, and quantum computing. The national security community’s venture and innovation arms, like In-Q-Tel, DIU, and AFWERX, can play a key role in this effort, identifying promising US companies in which to embed government employees. These opportunities could also help fight attrition within the civil service by allowing more fluidity between the public and private sectors, rather than forcing people to “go private” if they want outside experience.
• Establish advisory councils and encourage working-level staff to consult with these councils regularly on policy matters. Give agencies and departments the ability to convene advisory councils made up of industry stakeholders and empower both senior officials and career staff to engage with these councils to inform and develop policy on new technologies.
• Create more connectivity between agencies and departments centered around defense and national security on the one hand (the intelligence community and Department of Defense), and economics and trade (the Department of Commerce, the Department of the Treasury, etc.) on the other. Although the Office of the National Cyber Director advises the President specifically on US cybersecurity policy and strategy, expertise on a broader set of emerging technology issues is distributed across a constellation of federal departments and agencies in different disciplines. Standing up informal and formal channels, such as working groups or even a centralized umbrella organization, would encourage more cross-pollination among interagency players. The last thing the government needs is more bureaucracy, but other countries, including Israel, Singapore, Ukraine, and the United Arab Emirates, have created dedicated entities to coordinate policy on specific emerging technology trends—a strategy that has paid dividends in different ways.

The second impediment is that we are not proactive enough in attracting the right talent to government service. The problem set is complex. In some instances, there aren’t enough open spots. In other cases, it takes far too long to select and onboard the best candidates. Yet a series of targeted recruitment and hiring measures—some of which Congress could incorporate into legislation—would have a profound impact on human capital development in the civil service:

• Require a minimum level of technical expertise on staff. Obligate entities with examination, rulemaking, and supervisory authorities to ensure that at least 10 percent of full-time staff have a background in a relevant technical field, such as engineering, computer science, or software development.
• Expedite the hiring process. Allow US government agencies and departments to use excepted service hiring authority—which allows them to bypass traditional hiring processes—to accelerate hiring of individuals with technical skills and backgrounds.
• Modernize ethics restrictions. Existing ethics rules prevent civil servants from directly engaging with some innovative technologies. For example, current ethics guidance at many regulatory agencies categorically prohibits employees who own cryptocurrency from working on issues related to digital assets. Just as career staff with bank accounts and stock market investments are not precluded from working on financial policy and regulation, nor should individuals who own cryptocurrency be restricted from working in this space.
• Expand short-term opportunities for tech talent. Develop new fellowship programs and enhance existing ones, like those that came out of the Biden Administration’s National Cyber Workforce and Education Strategy, to give experts at big tech companies, startups, and academia the ability to work in the US government for a limited period—six to 24 months. This approach would institutionalize a pipeline of tech talent to send into government to gain first-hand exposure to the policymaking process and bring their experience in-house to drive product development. The CIA in 2022 announced a program that does just this: it allows those in the tech sector to take on short-term roles in public service. And if the CIA can make this program work, there’s no reason the rest of the US government can’t follow suit.

Our final point is philosophical. The mission of government is a powerful pull. But that alone is not always enough. As many of us have seen, there are ways to serve the public interest that don’t require a .gov email address. If we want our best and brightest—our most ambitious and innovative—women and men to pursue federal service, we have to do a better job of proactively making the case why. And one way is showing that the US government is a place where creativity and dynamism can thrive, and where cutting-edge talent isn’t just sought after, it’s celebrated.

Lesley Chavkin is a Nonresident Senior Fellow with the Atlantic Council’s GeoEconomics Center. She is currently Global Head of Public Policy at Paxos, and previously served in senior roles within the US Department of the Treasury, including financial attaché to Qatar and Kuwait.

Eitan Danon is an adjunct senior fellow in the Middle East Security program at the Center for a New American Security (CNAS). Eitan works at Chainalysis, where he focuses on the nexus of geopolitics, economic statecraft, and cryptocurrency. He was formerly a senior policy advisor at the US Department of the Treasury and an analyst in the US intelligence community.

Sigal Mandelker is Co-Chair of the CNAS Task Force on FinTech, Crypto, and National Security, and joined Ribbit Capital in 2020. She previously served as Under Secretary for Terrorism and Financial Intelligence and as Acting Deputy Secretary at the US Department of the Treasury.

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

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The saga illustrates the global ramifications of US interest rates and a strong dollar. Basically, pro-dollar fundamental factors include resilient economic activity and sticky inflation data in the United States keeping interest rates high for long—pushing the expected first rate cut by the Fed to later this year. In this context, statement by Fed Chairman Powell after the Federal Open Market Committee (FOMC) meeting on May 1 will be scrutinized for clues of the Fed’s intentions. This will keep FX markets on tender hooks until then. By contrast, the BOJ has been reluctant to raise rates much, even though it has brought Japan out of the long period of negative interest rates. This was due to the fact that the BOJ has revised downward its estimate for Japan’s GDP growth for fiscal 2024 to 0.8 percent from 1.3 percent in fiscal 2023. It was therefore not willing to tighten monetary policy in response to FX movements. As a consequence, government bond yield differentials in favor of the United States have hovered near 400 basis points—the widest spread since 2000—and the yen has kept weakening.

Moreover, in an unusual reversal of historical relationship, the dollar’s strength has been associated with elevated oil prices, imposing a double whammy on many countries, especially those having to import oil. The firming trends in both the dollar and oil prices are likely to have benefited from heightened geopolitical tension, including military conflicts in Ukraine and the Middle East.

As a consequence, besides the yen most of the world’s currencies have been under pressure from the dollar, which has been on a rising trend, having appreciated by 30 percent over the past decade. The dollar’s strength is also likely to be sustained as many other countries, including the Euro Area, have been looking for opportunities to cut interest rates to support their economic recoveries since their inflation performances have been better than that of the United States. That would help to keep interest rate differentials in favor of the US dollar.

In Asia, the Korean won (-7 percent against the dollar year-to-date) and China’s RMB (-2 percent) have also been burdened by domestic problems. Specifically, Korea has been hurt by elevated oil prices, the unresolved real estate project financing defaults and uncertainties over government policies after the April general elections. Meanwhile, China has a struggling economy trying to cope with an unfolding property crisis and a host of other structural impediments including high debt levels, an aging population, and slowing productivity growth.

Going forward, the dollar strength will be checked only when fundamentals change. Most importantly, this means upcoming US economic data, starting with the April non-farm payrolls report on May 3. Those numbers will be scrutinized to see if the lower-than-expected 1.6 percent GDP growth for the first quarter of 2024 implies a softening of economic activity and inflation rates in the foreseeable future. If so, expectations of Fed easing can be brought forward again.

In addition, signs of policy coordination among G20 countries could help prevent disorderly fluctuations in foreign exchange markets. In this context, the G20 and the International Monetary and Financial Committee (IMFC) might have missed a good opportunity during the IMF-World Bank Spring Meetings two weeks ago to show that they can rise to the occasion to reassure financial markets. Realistically, the G20 may not be able to reach any agreement on policy coordination given the increase in the level of mutual distrust among members as a result of geopolitical rivalry. If the G20’s inability to cooperate persists, leaving many countries in the world struggling to cope with the dollar’s strength on their own, that will be adding to the growing economic costs of geopolitical rivalry.

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

The post The yen’s travails in an era of geopolitical rivalry appeared first on Atlantic Council.

Times are changing and the IMF’s Fiscal Monitor released earlier this month documented this in detail. Policymakers are increasingly turning to subsidies to achieve a variety of objectives. The Fiscal Monitor documented the proliferation of industrial policy and, notably, offered a partial endorsement. The report also illustrates how economists’ views of industrial policy are evolving and where there is still disagreement.

What’s the IMF-approved version of industrial policy? In short, the IMF cautiously endorsed sector-specific interventions as a way to promote innovation, but remains skeptical of measures that get in the way of free trade.

The IMF’s case for industrial policy starts with the acknowledgement that innovation doesn’t happen under ideal market conditions. New ideas and inventions have positive spillovers (externalities) which means that the market, left to its own devices, won’t provide sufficient innovation.

That opens the door to policies like research grants or R&D tax credits that subsidize new research and inventions. Those economy-wide measures are known as “sector neutral” or “horizontal” industrial policy, and they tend to have more buy-in from economists. But the IMF’s Fiscal Monitor went further, outlining when and why “vertical” or sector-specific industrial policies can be worthwhile, too. The key, according to the IMF’s researchers, is to target sectors that either have especially high spillovers—where a breakthrough would improve productivity in lots of other arenas—or where there are other unresolved market failures at work. They cite clean energy and health care as examples.

“This Fiscal Monitor shows that well-designed fiscal policies to stimulate innovation and the diffusion of technology can deliver faster productivity and economic growth across countries,” the report concludes.

The IMF’s endorsement comes with a lot of caveats, which the researchers summarize:

They also note that larger, less open economies like the United States benefit more from such policies—because they capture more of the benefits of innovation subsidies.

The IMF is not the only international organization recognizing the case for industrial policy. The OECD’s researchers published an extensive and largely positive evaluation in 2022.

However, the IMF’s version of industrial policy isn’t necessarily the one most in vogue. Most notably, the Fiscal Monitor warns that “policies discriminating against foreign firms can prove self-defeating and trigger costly retaliation.” In a paper published in January, IMF researchers found that two-thirds of industrial policies enacted in 2023 distorted trade. So while the IMF may be warming to industrial policy in theory, it remains skeptical in practice.

Walter Frick is chief editor of the Atlantic Council’s GeoEconomics Center

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What is a CBDC?

CBDC is a digital form of a country’s fiat currency that is a liability of the central bank. A country’s central bank issues a CBDC. 

Is CBDC the same as cryptocurrency?

CBDC is different from cryptocurrency. Unlike CBDC, cryptocurrency is not issued and backed by a central bank, they are usually issued by private companies. Cryptocurrencies, such as Bitcoin or Ethereum, are decentralized. This means that control and decision-making in a transaction are transferred to many different entities, instead of relying on intermediaries.

Both cryptocurrencies and CBDCs can run on distributed ledger technology, meaning that hundreds of devices all over the world are responsible for carrying out and verifying transactions. One form of cryptocurrency, a stablecoin, can be pegged to a fiat currency.

How is this different from other forms of digital money?

CBDC is also different from digital money held in bank accounts or payment apps. Digital forms of money held in these apps or accounts are a liability of the commercial bank; CBDC is a liability of the central bank. CBDC is usually intermediated, meaning that it is distributed through banks, payment service providers, and digital wallets. Even in this case, CBDC is still a liability of the central bank. 

Are there different types of CBDC?

There are two types of CBDC: retail CBDC (rCBDC) and wholesale CBDC (wCBDC). rCBDC is used by the general public for commercial and peer-to-peer transactions. rCBDC would be used to buy a cup of coffee, for example. wCBDC is used by financial institutions to settle interbank and securities transactions. Its use is comparable to that of interbank transactions with central bank reserves. 

Why are countries exploring CBDC? 

There are many motivations for researching and developing CBDC, and each country’s motivation will determine whether they explore rCBDC or wCBDC. The motivations for rCBDC include promoting financial inclusion, increasing payment efficiency, lowering transaction costs, and improving safety. The primary motivation for wCBDC is reducing cross-border friction in interbank and securities transactions. 

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 130 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

Will CBDC replace cash?

CBDC will complement existing payment methods, not replace them. In its 2023 report, A stocktake on the digital euro, the European Central Bank clarified that a digital euro would “provide an additional payment option to complement cash and current
private digital payment solutions (rather than replace them).” The Federal Reserve and the Bank of England have also stated that CBDC will not replace cash.  

Are there any risks in pursuing CBDCs?

As countries explore the benefits and development of CBDC, there are several challenges that arise. If citizens pull too much money too quickly out of commercial banks to purchase CBDC, it could result in a bank run–creating instability in the financial market. This is a challenge in volatile economic conditions. 

Another challenge is creating a secure and resilient infrastructure for holding and using a CBDC. Cyber attacks, internet connectivity issues, and interoperability with existing payment systems are challenges for the efficiency of CBDC. 

Finally, central banks must also ensure the privacy and safety of a CBDC, which are necessary for gaining public trust and protecting citizen’s rights.

What are the national security implications of CBDC?

The introduction of new payment systems could impact the daily lives of citizens but also potentially compromise a country’s national security objectives. For instance, CBDC can allow countries to build linkages and networks outside of the dollar, which can create opportunities to evade sanctions. Therefore, cross-border collaboration is necessary on issues of CBDC governance, privacy, and security. Private and public entities have already begun to work together to set standards and ensure interoperability. Yet more can be done to ensure that the issuance of CBDC does not jeopardize the national security objectives of a country.

Alisha Chhangani is a program assistant at the Atlantic Council’s GeoEconomics Center. Follow her at @alisha_chh

Leila Hamilton is a young global professional at the Atlantic Council’s GeoEconomics Center. Follow her at @leilathamilton

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

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Despite the headwinds, Brazil’s non-aligned, cooperative, and practical approach holds out the promise of a constructive outcome for this year’s G20 meetings—especially if progress is not being measured by joint communiques (which have become irrelevant) but by agreements on concrete global initiatives. Under the overarching theme “Building a Just World and a Sustainable Planet”, Brazil has worked with countries in the Global South as well as developed countries to build consensus in launching a variety of global initiatives by the time of the G20 Summit. These initiatives reflect the key concerns of the Global South but have built on previous international agreements and include practical proposals for implementation.

Brazil’s proposed initiatives

First is the push to reform the United Nations system and the Bretton Woods institutions like the IMF, World Bank, and World Trade Organization. Reforms to the UN Security Council—where five permanent members (P5) have veto power—have been on the international agenda for a long time. While widely acknowledged in principle, no specific proposal has gained any traction. Brazil has put forward the idea that a P5 member should not be allowed to use its veto power in cases directly relating to itself—somewhat similar to the Western judiciary practice of reclusion of judges in cases of conflicts of interest. This would have meant that Russia would not have been able to use its veto power when the Security Council discussed the war in Ukraine. Such a proposal will not get the backing of the P5, especially amid the current geopolitical rivalry. But it could gather support from many countries, and not only within the Global South—keeping pressure on P5 members to respond with counter-proposals.

Calls for reform of the IMF and World Bank have been widely shared by the Global South, reiterated most recently by China demanding a redistribution of quota and voting shares to “better reflect the weight a country carries.” The G24, representing developing countries at the IMF and World Bank, has circulated a paper proposing specific reforms. These and other ideas about quota reform are scheduled be discussed by the IMF in the year ahead.

Second, another of Brazil’s linchpins for this year is launching a Global Alliance Against Hunger and Poverty as a tool for reaching the UN Sustainable Development Goals by 2030. That initiative leverages Brazil’s position as the second biggest food-exporting country. Specifically, the alliance will not be about initiating new funds or programs but finding ways to coordinate numerous existing funds and programs to make them more useful to recipient countries and easier to solicit contributions from developed countries. It also will compile a basket of best practices in anti-hunger and anti-poverty policies to help other countries develop their own programs. In this context, Brazil will showcase its acclaimed Bolsa Familia family welfare program, which has helped significantly reduce the country’s poverty rate and has been adapted in almost twenty other nations.

Third, Brazil will launch a Task Force for the Global Mobilization Against Climate Change to spur the G20 to help create a conducive political environment for a new and robust goal on climate finance to be agreed at this year’s COP 29 in Azerbaijan as well as for countries to present their renewed and more ambitious Nationally Determined Commitments (NDCs) to reach net zero emissions at the 2025 COP30 under Brazil’s chairmanship. Brazil will also advance its proposed Global Bioeconomy Initiative to bring together science, technology, and innovation on the use of biodiversity to promote sustainable development. This initiative will also try to expand developing countries’ access to various fragmented climate funds including the Green Climate Fund, the Climate Investment Fund, the Adaptation Fund, and the Global Environment Facility.

Fourth, leveraging the momentum of the global corporate minimum tax (effective at the beginning of this year), Brazil wants to propose a global initiative to impose a minimum tax on the super-rich which France has endorsed. This will help Brazil rally support from Global South countries as well as others to advance the proposal.

Last but not least, in September 2023 Brazil and the United States signed an MOU for a Partnership for Workers’ Rights (in particular in the gig economy). They pledged to pass necessary national legislation to achieve that goal and hope to use it as an example to get other countries to join.

The themes across these initiatives are practicality, leading by example, and a willingness to bypass time-consuming, top-down international negotiations.

While Brazil’s proposals will not all be adopted at the G20 Summit, especially in their original versions, most probably will be with some modifications. This outcome, with or without a joint communique, would represent a serious contribution by a key member of the Global South to the global reform agenda. And it comes after the achievements of India in its Presidency of last year’s G20. If South Africa keeps up this track record when assuming the G20 Presidency in 2025 (when Brazil will chair the BRICS-10 and COP30), an important step forward will be made in establishing the leadership roles of the major countries in the Global South. They are showing the ability to rally their members and to reach out to developed countries to shape global reform efforts. And if those countries, working with their partners, can sustain the implementation of the initiatives they sponsored, that would begin to make meaningful changes in the current international political and economic system. The main risk, of course, is that geopolitical rivalry will derail cooperative efforts to address pressing global problems. It remains to be seen to what extent that will happen.

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

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

Learn more

The post Brazil’s approach to the G20: Leading by example appeared first on Atlantic Council.

The issues Yellen raised reflect real concerns in the United States and Europe—in particular about hi-tech and clean energy sectors like electric vehicles (EVs), lithium batteries, and solar panels. However, it is not a straightforward matter pushing back against China on grounds of overcapacity. The EU has initiated anti-dumping investigation of Chinese EVs—imports of which have surged in many European countries threatening domestic producers—but evidence of overcapacity in that sector is weaker than in solar panels and batteries. Measures to restrict import of these products would simply raise their prices, as Western companies are not in a position to replace Chinese products.

More importantly, the West needs to recognize that overcapacity is intrinsic to China’s economic model—and therefore that calls to end it amount to wishful thinking. In other words, while the complaints about overcapacity are justified  from a Western perspective, they will not change the situation any time soon—despite platitudes about US-China relationship being on a “more stable footing” expressed at Yellen’s meeting with China’s Premier Li Qiang.

Chinese EVs pose different challenges than batteries and solar panels

China does have overcapacity problems. Overcapacity is typically measured using utilization rates, the rate of industrial capacity in a sector that is being used for production—low rates imply surplus capacity. Companies with a lot of surplus capacity tend to lower prices to generate demand, hurting the profitability of the whole sector. China has low utilization rates—which have fluctuated around 75 percent, well below the 80 percent considered to be normal. At the end of 2023, China’s capacity utilization rate has recovered to almost 76 percent—a few percentage points higher than the pre-Covid low in 2016 and a few percentage points lower than those of other major countries including the United States (whose utilization rate fell below 80 percent in 2023).

However, behind the aggregate low utilization rate of 76 percent is a very wide dispersion among different sectors. EVs have a high utilization rate, whereas China has very low-capacity utilization rates in low tech sectors such as cement and glass—which are being pulled down by the property construction slump—as well as in lithium batteries and solar panels.

In automobiles, producers of internal combustion engine (ICE) vehicles have suffered from very low capacity utilization rates—in many cases well below 50 percent—as consumers have been shifting from ICE vehicles to EVs. By contrast, EV producers, especially large ones like BYD, SAIC and Li Auto, have high utilization rates, exceeding 80 percent. These companies have increased their production and export of EVs significantly in recent years, arguably because they are quite efficient in terms of prices and quality. Even Elon Musk admitted that Chinese EV companies “are extremely good…and the most competitive in the world.” The smaller and less efficient EV producers have been weeded out relentlessly from the more than 400 companies launched more than a decade ago to about fifty having some degree of recognized name brands. This consolidation process has accelerated after China ended its subsidy program for EVs at the end of 2022—putting huge pressure on less efficient producers. (While past subsidies supported Chinese EV companies, the fact that this subsidy has been ended could be used by China in its defense against the EU investigation.)

Furthermore, China is not as dependent on the export of automobiles including EVs as some other major car manufacturing countries. Specifically, its export rate is quite low, at 15 percent compared with 48 percent in Japan, 72 percent in South Korea, and 79 percent in Germany. As a result, possible EU and US tariffs may blunt China’s EV export growth in those regions but can hardly be expected to alter the overall growth trajectory of the country’s EV sector.

In the first two months of 2024, China experienced an 8 percent increase in total EV export in volume terms, having been able to shift EV sales in the EU (which has declined by 20 percent) to Asia (export to RCEP countries has increased by 36 percent). These two regions account for 30 percent each of China’s EV export. Furthermore, China can boost domestic demand by raising the target for the share of EVs in new car sales from 45 percent by 2027 (rather low relative to the target of 65 percent by 2030 in the EU). Such a move would be helped by the fact that China has rolled out 2.7 million charging stations across the country at the end of 2023–compared with only 64,187 in the United States.

In contrast to the EV sector, lithium battery and solar panel producers have suffered from very low capacity utilization rates—in many cases below 50 percent. In particular, China’s annual production of solar panels is more than twice the global demand. This huge overcapacity has significantly driven down the prices of these products, benefiting all importing countries in their green transition efforts. Raising tariffs on these products will increase their prices to users and delay many countries’ green transition targets, especially as Western companies are not in a position to replace Chinese products. It is instructive to note that President Biden has vetoed a Congressional resolution to reinstate tariffs on cheap solar panel imports from South East Asian countries—for fear of delaying the pace of solar installations necessary to meet his administration’s target of 100 percent clean electricity by 2035.

Overcapacity is intrinsic to China’s economic system

The West should focus its complaints on the sectors where Chinese overcapacity is most egregious—for example in wind power turbines on which the European Commission has just launched an anti-subsidy probe. As it does so, it must also recognize that the long cycle of overcapacity build-up and correction is generic to China’s economic system of state capitalism. Strategic decisions by leaders the Communist Party of China (CCP) will mobilize resources to invest in chosen sectors. That leads to overcapacity, which comes with unfavorable side effects, which eventually cause the leadership to undertake corrections. This process usually takes far longer than the prompt market-driven resolution of inefficient and unprofitable companies in the West. In China, grossly inefficient companies have been liquidated or absorbed by more efficient units, but in a managed and gradual consolidation process to minimize undesirable social impacts such as rising unemployment or hollowing out manufacturing communities.

A clear example of China’s overcapacity cycle can be found in the huge stimulus program unleashed by Beijing in response to the 2008 Global Financial Crisis—offering abundant and cheap credit to spur construction in infrastructure and housing. The resulting overcapacity in coal, steel, and other construction materials was quite severe, depressing producer price inflation, keeping it in negative territory for more than fifty consecutive months. In addition, overcapacity in the steel industry caused bitter complaints by other steel producing countries. By 2015, China launched a wide-ranging Supply Side Structural Reform to reduce overcapacity  by encouraging a consolidation process in those sectors, cushioned by measures to boost demand. China’s Belt and Road Initiative (BRI), launched in 2013, could have been designed partly with the goal of exporting the country’s surplus capacity in construction in mind. These measures were able to bring the overcapacity problem under some degree of control.

In another example, China has had significant overcapacity in the shipbuilding sector, which is 232 times greater than that of the United States, posing a threat to competitors like South Korea and Japan. China has addressed that problem in a strategic way by using its abundant capacity to build modern warships to catch up with the US Navy.

At present, CCP leadership seems to be aware of the industrial overcapacity problem which has caused producer price inflation to be negative continuously since late 2022. In presenting the government work program at the National People’s Congress meeting last month, Premier Li Qiang said that “China wanted to reduce industrial overcapacity” but flagged more resources for tech innovation and advanced manufacturing to develop “new productive forces.” It appears that, like in the 2015 episode, China will spur the consolidation of the sectors having significant surplus capacity. However, the result could be more efficient and competitive enterprises, continuing to pose a challenge to producers in the West and a few developing countries aspiring to develop their manufacturing industry.

A realistic path forward

The United States and EU, together with other manufacturing nations, have wrestled for some time with the overcapacity problem in various industries, caused by China’s economic system of state support to its enterprises. So far, the major remedy to this challenge has been countervailing duties on China, either sanctioned by the World Trade Organization (WTO) after a lengthy and difficult process or imposed unilaterally by former President Trump and maintained by President Biden. However, raising tariffs has not been a totally satisfactory solution. It has given some protection to impacted sectors in importing countries at the cost of higher prices to consumers. But it has not been a game changer in terms of ensuring a level playing field for all countries.

Based on historical experience, it’s safe to say the current phase of China’s overcapacity in hi-tech and green industries like lithium batteries and solar panels will be impacting the rest of the world for some time to come. It is reasonable to criticize and complain to China, but policymakers should remember that an end to overcapacity would mean a major shift in China’s economic model, which is exceedingly unlikely. They must therefore be prepared for a sustained period of heightened trade tension during which Beijing will eventually take some measures to reduce industrial overcapacity when its domestic impact becomes unacceptably negative—but in China’s own way and on its own timeline.

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

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