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Inflation, rising interest rates, and developing economies

Published 01 November 2022

Will interest rate hikes trigger a debt crisis in developing countries? How is the US industrial policy pivot perceived? How will China’s leadership changes affect the US-China economic relationship? Our new reading list covers the latest developments in global trade.

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Inflation-induced monetary policy

As central banks raise interest rates to tackle inflation, increased costs of borrowing exacerbate food and energy crises. US interest rate hikes trample on developing countries, explains Nischal Dhungel in the East Asia Forum. The latest UNCTAD Trade and Development Report provides all of the details and analysis of the current state of affairs for developing economies. The World Bank contributes its analysis of how currency depreciation contributes to the brewing crisis.

Mentioned publications

US interest rate hikes trample on developing countries – Nischal Dhungel, East Asia Forum, 18 August 2022
Interest rate hikes can put developing countries in danger of a debt crisis.
Trade and Development Report 2022: Development Prospects in a Fractured World – United Nations Conference on Trade and Development, October 2022
The global economic slowdown will have the greatest impact on developing regions.
Currency Depreciations Risk Intensifying Food, Energy Crisis in Developing Economies – The World Bank, 26 October 2022
Currency depreciations in developing economies may deepen food and energy crises.

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Industrial policy’s unintended consequences

Subsidies in recent US legislation mean that the adoption of a global minimum corporate tax will not end tax competition, according to Gary Clyde Hufbauer of the Peterson Institute for International Economics. Local sourcing requirements may force CATL, the world’s largest electric vehicle battery maker, to rethink manufacturing in the US, per Reuters. Subsidies for clean energy in the US may distort renewable energy supply chains, notes Henry Sender in the Financial Times.

Mentioned publications

The global minimum corporate tax will not end forces that drive tax competition – Gary Clyde Hufbauer, Peterson Institute for International Economics, 25 October 2022
Industrial policy may undermine efforts to adopt a global minimum corporate tax.
Exclusive: China's CATL slows battery investment plan for U.S., Mexico – Reuters, 21 October 2022
The world’s largest EV battery maker rethinks North American investments given local sourcing requirements.
Joe Biden’s $369bn climate push ripples through developing countries – Henry Sender Op-ed, Financial Times, 29 October 2022
Subsidies and tax incentives designed to promote clean energy may make clean energy more expensive for developing countries.

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China’s new era of competition

China’s new guard bodes change for interactions with the West, says Lingling Wei in the Wall Street Journal. China has summoned its semiconductor companies to assess the damage of US export controls, per Bloomberg, as the Biden Administration decides whether to apply similar rules to other advanced technology sectors, according to the New York Times. These moves tell us that Biden is all in on taking out China, writes Jon Bateman in Foreign Policy.

Mentioned publications

China’s New Guard Bodes Change for Beijing’s Interaction With the West – Lingling Wei, The Wall Street Journal, 24 October 2022
China’s new leadership appears to be composed largely of party loyalists, rather than economic pragmatists.
China Summons Chip Firms for Emergency Talks After US Curbs – Bloomberg News, 20 October 2022
China assesses the extent of the damage to their semiconductor industries from the latest US export controls.
The Biden administration is weighing further controls on Chinese technology – Ana Swanson, The New York Times, 27 October 2022
The US may extend export control measures to other advanced technologies that China is seeking to develop.
Biden Is Now All-In on Taking Out China – Jon Bateman, Foreign Policy, 12 October 2022
The US signals its intent to stymie China’s efforts to become an advanced technological power.

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Globalization and decoupling

Globalization isn’t dead, argues Ian Bremmer in Foreign Affairs. Are the US and China de-coupling? Yes and no, responds Chad P. Bown of the Peterson Institute for International Economics. In any event, trade seems to be taking a back seat to national security concerns, per the Washington Post. One American company under pressure to leave China describes how de-coupling is hard to do, reports the Wall Street Journal.

Mentioned publications

Globalization Isn’t Dead – Ian Bremmer, Foreign Affairs, 25 October 2022
Globalization is changing but not extinct, as trade measures demonstrate.
Four years into the trade war, are the US and China decoupling? – Chad P. Bown, Peterson Institute for International Economics, 20 October 2022
Are the US and China indeed de-coupling? Yes and no, and it’s complicated.
Trade takes a back seat to national security in Beijing and Washington – David J. Lynch and Ellen Nakashima, The Washington Post, 29 October 2022
National security takes priority over trade and economic ties in US and Chinese policy making.
An American Helped Build a Business Inside China. Clients Want Him to Leave – Jason Douglas and Stella Yifan Xie, The Wall Street Journal, 29 October 2022
Companies that want to manufacture outside of China discover the costs and benefits.

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A UK-India FTA?

Will the UK and India conclude a free trade agreement? Only time will tell. The Financial Times provides a nice summary of the drivers toward agreement and obstacles remaining.

Mentioned publications

UK-India trade talks chug ahead despite political ructions – John Reed, Financial Times, 24 October 2022
India has long been reluctant to negotiate market-opening agreements. Is this posture changing?

Lessons from COVID

How should governments respond in times of crisis in order to fix market failures and incentivize redirecting resources to address the crisis? Lessons can be learned from the experience of developing Covid vaccines, writes Chad P. Bown of the Peterson Institute for International Economics.

Mentioned publications

The WTO and Vaccine Supply Chain Resilience During a Pandemic – Chad P. Bown, Peterson Institute for International Economics, September 2022
The experience of developing and distributing COVID vaccines teaches us valuable lessons.

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