Trade
Russian oil price cap accelerates global economic decoupling
Author: Suryaputra Wijaksana, Bank Central Asia
The oil ‘price cap’ of US$60 per barrel for Russian oil is a controversial move by the European Union and G7. The price cap prohibits Western insurers and shipping companies, which account for more than 90 per cent of the marine insurance industry, from servicing vessels that carry Russian oil above US$60 per barrel.
The intention is lofty — prevent Russia from profiting from high global oil prices, but provide enough incentive for Russia to continue supplying oil, especially to vulnerable countries in Africa and Asia. Yet the price cap can be destabilising and have unforeseen consequences.
Current buyers of Russian oil, namely India and China, can demand even steeper discounts on shipments because they know Russia has limited options. In addition to weakening global demand, this may push global oil prices down in the short run, putting Russia in a tight spot. If its oil prices fall below production costs, estimated at US$35–40 per barrel, Russia may temporarily suspend oil exports or stop production completely. It does not have enough oil storage units left to store excess supply.
Another important player is OPEC, the global oil cartel, which is the main competitor to Russian crude oil. The alliance would push for higher oil prices to maximise profits, cutting supply and increasing global oil prices rapidly.
Restarting Russia’s oil operations after a temporary halt is also difficult and time-consuming, delaying supply of Russian oil into the market. Even if Russian oil reaches global markets, additional sanctions will reduce its effectiveness in lowering prices. Other countries may also seek to further disrupt the oil market, such as Turkey or Azerbaijan — both of which could block Russian oil routes. It is likely that global oil prices will escalate in the mid to long run.
A destabilised oil market could be disastrous for the global economy. It would permanently reduce global oil supplies, pushing energy prices higher and driving up inflation. This would undermine the global fight against inflation and prompt the US Federal Reserve and other global central banks to continue their aggressive monetary stances.
Higher interest rates also increase financing costs for new technologies that decrease reliance on fossil fuels. It is predicted to cost US$3.5 trillion in investment every year for the world to have any chance of reaching net zero carbon emissions by 2050. Yet weaning Europe off Russian gas will cost an estimated US$314 billion by 2030. Worse, higher financing costs also increase the cost of servicing government debt, which is already reaching all-time highs due to the COVID-19 pandemic.
But the most important and worrying impact of the price cap is an accelerated global economic decoupling that could lead to worsening living standards. Other oil-producing countries will be drawn into the US–China rivalry, each weighing in on the advantages of joining the respective blocs and further disrupting global oil supplies.
Meanwhile, Chinese access to Russian crude oil and other energy sources, such as natural gas and uranium, will reduce costs for Chinese manufacturing. The Western drive for more green investment will further increase Chinese dominance in green technologies, as it increases economies of scale. More trade barriers between the West, China and Russia force manufacturers to relocate to multiple or geographically closer countries, increasing production costs.
The price cap may also accelerate decoupling in the financial sphere. The complete embargo on Western insurers and shipping companies in shipments of Russian crude oil will create momentum for an alternative non-US dollar financial ecosystem. This would be in line with Chinese President Xi Jinping’s push for renminbi-denominated settlement of oil and gas trade with Middle Eastern gulf countries in his last visit to Saudi Arabia. Widespread internationalisation of the renminbi would increase its liquidity overseas and produce a more efficient financial system, enabling the growth of expensive maritime insurance and renminbi-denominated cross-border lending.
This accelerated decoupling could push the global economy closer to a ‘tipping point’ of transition from a US dollar-based financial system to a non-US dollar one, likely a multi-currency financial system. If history were to repeat, the transition will not be smooth and will involve higher inflation and a financial crisis. For emerging economies, an accelerated decoupling in the financial sphere can be significantly…
Trade
Self-Reliance and Openness: Core Principles of China’s Third Plenary Session
The Third Plenum communique from the CCP indicates a prioritization of stability and compromise in response to China’s economic challenges. It highlights the concept of Chinese-style modernization and establishes political guidelines for balancing regulation and market forces.
The CCP’s Third Plenum communique signals a focus on stability and compromise in the face of China’s economic challenges. It emphasises Chinese-style modernisation and sets political directions for balancing regulation and market forces. While not as groundbreaking as previous plenums, it acknowledges the importance of market mechanisms and technological self-reliance, aiming to address issues like high youth unemployment and private sector uncertainty. The communique seeks to navigate the complexities of global competition and domestic innovation, potentially reshaping global supply chains and trade dynamics. Overall, it presents a pragmatic blueprint for China’s economic future.
Source : Self-reliance and openness central pillars of China’s Third Plenum | East Asia Forum
Trade
Trade Prevails Over Political Persuasions in China-Germany Relations
China and Germany maintain a strong bilateral relationship, rooted in economic cooperation despite ideological differences. Recent visits and agreements focus on expanding trade and addressing mutual concerns, navigating challenges while nurturing ties.
Evolving Bilateral Ties
China and Germany share a strong bilateral relationship, rooted in history since 1972. This connection has seen moments of cooperation intertwined with periods of tension. German Chancellor Olaf Scholz’s April 2024 visit underscores Germany’s commitment to fostering this partnership, reflecting a mutual interest in maintaining economic ties despite ideological differences.
Economic Pragmatism
As the second and third largest global economies, China and Germany’s economic interdependence is crucial. Germany emerged as China’s primary trading partner in 2023, with trade values reaching €254.4 billion (US$280 billion). In response to global scrutiny, Germany has taken a balanced approach, emphasizing economic stability over political discord. This was evident during Scholz’s prior visit in November 2022, where his diplomatic tone contrasted with broader EU sentiments.
Facing Challenges Together
Despite increasing public skepticism in Germany regarding China’s global influence and human rights issues, both nations continue to seek common ground. Their October 2023 Joint Statement highlights intentions to pursue cooperation in areas like carbon neutrality and open markets. To navigate these complex terrains, Germany can utilize its institutional frameworks to enhance dialogue, while also considering supply chain diversification to reduce dependency on China. The intertwining nature of their economies suggests that, despite challenges, both countries will continue to prioritize their substantial trade relations.
Source : Trade trumps political persuasions in China–Germany relations
Trade
Fixing fragmentation in the settlement of international trade disputes
Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.
Fragmentation in Global Trade
Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.
Challenges with WTO Dispute Settlement
The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.
The Path Forward for Global Trade
Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.
Source : Fixing fragmentation in the settlement of international trade disputes
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