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Economic relations between Russia and China remain high. Beijing has become Moscow's most important trading partner, and in the context of Western sanctions, it has also become an alternative source of industrial and consumer goods, as well as the largest market for Russian energy and other raw materials. At the same time, external political factors may have a growing influence on Russian-Chinese economic relations. These include the trade war between China and the United States, a possible escalation of US sanctions against Russia, and the expansion of secondary sanctions by the European Union against Chinese companies. The trade war, in the form of increased import duties on imported goods, has become one of the calling cards of Donald Trump's second term in office. The executive order he issued on April 2, 2025, provided a detailed conceptual justification for such a policy. The main goal is the reindustrialisation of the United States through the return or transfer of industrial production to the territory of the US, as well as an equalization of the trade balance with foreign countries. The basic part of Trump's order concerned all countries throughout the world and assumes a tariff increase of 10%. It goes on to determine individual duties on the goods of more than 70 countries, with its own sets for each. China became one of the few countries which decided to mirror the tariff increases. This led to a short-lived and explosive exchange of increases in duties. While it was suspended by negotiations between the two countries in Geneva, it was not removed from the agenda. In the US trade war “against the whole world”, China remains a key target. This is determined by the high level of the US trade deficit in relations with China, which has persisted for more than 40 years. Apparently, it remained comfortable for the US until China made a noticeable leap in the field of industrial and technological development. Such a leap allowed China to gradually overcome its peripheral place in the global economy, displace American and other foreign goods from the domestic market, and occupy niches in foreign markets. Despite the critically important role of American components, patents and technological solutions in a number of industries, China has managed to reduce its dependence on them. The growing industrial and technological power of the PRC is becoming a a political problem for the US. It was clearly identified during the first term of Trump's presidency. Even then, the US pursued a course toward the technological containment of China. Despite the temporary respite in the trade war, US pressure on China will remain. The tariff policy may be supplemented by restrictive new measures (sanctions) in the field of telecommunications and other industries. During the new term of Donald Trump's presidency, the politicisation of issues that the Biden administration avoided putting at the forefront of US-Chinese relations began again. These include the problem of Hong Kong autonomy and the issue of ethnic minorities in the Xinjiang Uyghur Autonomous Region of China. Both issues received a high level of politicisation during Trump's first term. The US-China trade war has so far had little effect on Russian-Chinese relations. The increase in US tariffs has had virtually no effect on Russia. Russia is already facing a significant number of restrictive measures, and the volume of trade with the United States has been reduced to near zero since the start of Moscow’s Special Military Operation in 2022. However, Russia may feel the effects of the trade war. For example, the United States may require China to purchase American energy resources as a measure to correct the trade balance. Obviously, such a measure is unlikely to solve the imbalance. However, it has the potential to affect the volume of Russian oil supplies to China in one way or another. In addition, the trade war as a whole may affect oil prices downwards, which is also disadvantageous for Russia. On the other hand, Russia is a reliable supplier of energy resources for China, which will not politicise them. Even in the context of new aggravations of the trade war, China is unlikely to refuse Russian supplies. Another factor is US sanctions against Russia. After the start of Russian-American negotiations on Ukraine in 2025, Washington avoided using new sanctions, although all previously adopted restrictive measures and their legal mechanisms are in force. However, Donald Trump failed to carry out a diplomatic blitzkrieg and achieve a quick settlement. The negotiations have dragged on and may continue for a long time. If they fail, the United States is ready to escalate sanctions again. Existing legal mechanisms allow, for example, for an increase in the list of blocked persons, including in relation to Chinese companies cooperating with Russia. This practice was widely used by the Biden administration. It was Chinese companies that became the key target of US secondary sanctions targeting Russia. They fell under blocking financial sanctions for deliveries of industrial goods, electronics and other equipment to Russia. However, there was not a single large company among them. We were talking about small manufacturing companies or intermediary firms. At the same time, the Biden administration managed to significantly complicate payments between Russia and China through the threat of secondary sanctions. US Presidential Executive Order 14114 of December 22, 2023 threatened blocking sanctions against foreign financial institutions carrying out transactions in favour of the Russian military-industrial complex. In practice, such sanctions against Chinese financial institutions were practically not applied, except for the blocking of several Chinese payment agents in January 2025. However, the very threat of secondary sanctions forced Chinese banks to exercise a high level of caution in transactions with Russia. This problem has not yet been fully resolved. New legal mechanisms in the field of sanctions, which are being worked on in the United States, may also affect Russian-Chinese relations. We are talking about the bill introduced by US Senator Lindsey Graham and several other senators and members of congress. Their bill assumes that in the event of failure of negotiations with Russia on Ukraine, the US executive branch will receive the authority to impose 500% duties on countries purchasing Russian raw materials, including oil. China may be among them. This threat should hardly be exaggerated for now. The passage of the bill is not predetermined. Even if it is signed into law, the application of 500% tariffs against China will be an extremely difficult matter. Recent rounds of the trade war have shown that China is ready for retaliatory measures. However, the emergence of such a norm will in any case increase the risks for business and may negatively affect Russian suppliers of raw materials. Another factor is EU sanctions policy. Unlike the US, the EU continues to escalate sanctions against Russia despite the negotiations on Ukraine. Brussels is expanding the practice of secondary sanctions, which also affect Chinese companies. In the context of a deepening economic partnership between China and the EU, this factor seems significant. However, in reality, it will play a peripheral role. The EU's practice of secondary sanctions is still significantly more limited than the American one. It does not affect any significant Chinese companies. Problems may be created by the expansion of EU bans on the provision of financial messaging services for Russian banks—this will affect their relations with Chinese counterparties. But such bans stimulate the acceleration of the use of the Chinese CIPS payment system by Russians, which has the functionality of transmitting financial messages. Compared to the US, the EU policy factor remains secondary. First published in the Valdai Discussion Club.

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском I. Introduction On 13 June 2025, Israel attacked more than a dozen locations across Iran in the largest assault on the country since the Iran-Iraq war of the 1980s. Beginning on the evening of 13 June, Iran retaliated by launching ballistic missiles and drones at Israel. Conflicts between the two countries have intensified. Amid intensified conflicts between Israel and Iran, the US attacked Iran by bombing three Iranian nuclear sites on 22 June 2025. In retaliation for these attacks from the US and Israel, Iran may consider closing or blocking the Strait of Hormuz. In fact, Iran’s parliament has reportedly approved of the closing of the Strait of Hormuz on 22 June 2025. However, on 24 June 2025, President Trump announced a ceasefire between Iran and Israel, thereby reducing the possibility of the blockage of the Strait of Hormuz by Iran. Nonetheless, there is still a possibility that conflicts between Iran and Israel continue and then Iran may reconsider the closing of the Strait. This is because the ceasefire is so fragile that the conflicts between Israel and Iran can take place at any time. If the closing of the Strait of Hormuz happens, it will have significant impacts on global economy, in particular on Asian economies, because 84% of the crude oil and condensate and 83% of the liquefied natural gas that moved through the Strait of Hormuz went to Asian markets in 2024. This paper analyzes the impacts of Iran’s closure or blockage of the Strait of Hormuz on the global economy with a focus on Asian economies. II. Examples of Geopolitics Impacting Energy Prices Crude oil remains the world's most geopolitically charged commodity. Despite robust supply growth and growing energy transitions, as Figure 1 shows, turmoil in oil-producing regions such as Russian invasion of Ukraine in 2022 continues to ripple through prices.   Figure1: Examples of Geopolitics Impacting Crude Oil Prices As Figure 2 shows, in June 2025, global oil price surged into the mid‑$70s per barrel amid escalating Iran–Israel tensions and threats to the Strait of Hormuz. In mid‑June 2025, Israeli airstrikes on Iranian nuclear infrastructure led to an immediate 7–11% increase in the Brent crude oil price. The market reacted swiftly to the geopolitical risk, particularly over fears of supply disruption through the Strait of Hormuz. Iranian lawmakers, who threatened to close the Strait of Hormuz, finally approved of closing the Strait on 22 June 2025. While tanker traffic continued, the Brent crude oil price briefly climbed to $79.50 and then dropped to $74.85.   Figure 2: Movements of crude oil (WTI) and Brent oil prices III. The importance of the Strait of Hormuz 1. Location of the Strait of Hormuz As Figure 3 shows, the Strait of Hormuz, located between Oman and Iran, connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. The strait is deep enough and wide enough to handle the world's largest crude oil tankers, and it is one of the world's most important oil chokepoints.  Figure 3: Picture of the Strait of Hormuz 2. Oil flows through the Strait of Hormuz As Table 1 shows, large volumes of oil flow through the Strait of Hormuz, and very few alternative options exist to move oil out of the strait if it is closed. In 2024, oil flow through the strait averaged 20 million barrels per day (b/d), or the equivalent of about 20% of global petroleum liquids consumption. In the first quarter of 2025, total oil flows through the Strait of Hormuz remained relatively flat compared with 2024.  Table 1: volume of crude oil, condensate, petroleum transported through the Strait of Hormuz Although we have not seen maritime traffic through the Strait of Hormuz blocked following recent tensions in the region, the price of Brent crude oil (a global benchmark) increased from $69 per barrel (b) on June 12 to $74/b on June 13, 2025. This fact highlights the importance of the Strait to global oil supplies. Chokepoints are narrow channels along widely used global sea routes that are critical to global energy security. The inability of oil to transit a major chokepoint, even temporarily, can create substantial supply delays and raise shipping costs, potentially increasing world energy prices. Although most chokepoints can be circumvented by using other routes—often adding significantly to transit time—some chokepoints have no practical alternatives. Most volumes that transit the Strait of Hormuz have no alternative means of exiting the region, although there are some pipeline alternatives that can avoid the Strait. 3. Destinations Flows through the Strait of Hormuz in 2024 and the first quarter of 2025 made up more than one-quarter of total global seaborne oil trade and about one-fifth of global oil and petroleum product consumption. In addition, around one-fifth of global liquefied natural gas trade also transited the Strait of Hormuz in 2024, primarily from Qatar. Based on tanker tracking data published by Vortexa, Saudi Arabia moves more crude oil and condensate through the Strait of Hormuz than any other country. In 2024, exports of crude and condensate from Saudi Arabia accounted for 38% of total Hormuz crude flows (5.5 million b/d). As Figure 4 shows, 84% of the crude oil and condensate and 83% of the liquefied natural gas that transported through the Strait of Hormuz went to Asian nations in 2024. China, India, Japan, and South Korea were the top destinations for crude oil moving through the Strait of Hormuz. Asia accounted for a combined 69% of all Hormuz crude oil and condensate flows in 2024. These Asian markets would likely be most affected by supply disruptions at Hormuz.  Figure 4: volume of crude oil and condensate transported through the strait of Hormuz In 2024, the United States imported about 0.5 million b/d of crude oil and condensate from Persian Gulf countries through the Strait of Hormuz, accounting for about 7% of total U.S. crude oil and condensate imports and 2% of U.S. petroleum liquids consumption. In 2024, U.S. crude oil imports from countries in the Persian Gulf were at the lowest level in nearly 40 years as domestic production and imports from Canada have increased. IV. Economic Effects of the Blockade of the Strait of Hormuz Iran has repeatedly threatened to block the Strait of Hormuz, notably during crises with the United States in 2011, 2018 and 2020. So far, these threats have never materialized into a total closure, but the mere mention of them is enough to provoke crude oil price rises. According to many economists and energy experts, a blockade of the Strait of Hormuz would have significant economic impacts, including sharp increases in oil prices, disruptions to global supply chains, and potential economic sanctions. These effects could ripple through various sectors, affecting businesses, consumers, and global economies alike. The 2021 Suez Canal blockage provides a relevant, if smaller-scale, precedent. The six-day disruption in the Suez Canal caused approximately $9.6 billion per day in global trade delays according to Lloyd's List Intelligence. A Strait of Hormuz closure would likely generate significantly larger economic impacts given the strategic importance of the energy resources involved. 1. Short-term Impacts of the blockade of the Strait of Hormuz Main short-term effects of the blockage of the Strait of Hormuz are as follows:· Increased Oil Prices:A blockage would likely lead to temporary spikes in global oil prices, potentially above $100 per barrel, due to supply disruptions and increased demand. · Disrupted Supply Chains:The Strait of Hormuz is a vital transit point for oil and LNG, and any disruption could cause significant delays and disruptions to global supply chains. · Higher Shipping Costs:With increased demand and reduced supply, shipping costs, including insurance premiums, would rise. · Energy Costs:Higher oil prices would translate to higher energy costs for consumers and businesses, impacting various sectors.  2. Long-term Impacts of the blockade of the Strait of Hormuz Main long-term effects of the blockage of the Strait of Hormuz are as follows:· Reduced Oil Production:Oil exporters might reduce production to conserve resources or diversify export routes, potentially leading to long-term supply shortages. · Economic Sanctions:In response to a blockade, major oil buyers might exert pressure on oil-producing states to increase supply, potentially leading to economic sanctions against Iran. · Diversification of Trade Routes:Oil-producing states and major oil importers might explore alternative trade routes to reduce reliance on the Strait of Hormuz, potentially shifting trade patterns. · Geopolitical Instability:The Strait of Hormuz is a strategic chokepoint, and any disruption could lead to increased geopolitical tensions and conflicts.  3. Overall Economic Consequence  Overall economic effects of the blockage of the Strait of Hormuz are as follows:· Increased inflation:Higher energy costs would contribute to inflation in various countries, impacting consumers and businesses.· Global economic slowdown:Disruptions to supply chains and increased costs could lead to a slowdown in global economic growth.· Regional economic instability:The Strait of Hormuz is a key economic artery for the Middle East, and any disruption could lead to significant economic instability in the region.  V. Analysis of Economic Effects of the Blockade of the Strait of Hormuz According to several Western banks, a complete closure of the Strait could cause crude Oil prices to soar above $120 to $150 a barrel, or even more if the conflict between Israel and Iran is prolonged. According to Deutsche Bank, the scenario of a total closure of the Strait, causing an interruption of 21 million barrels a day for two months, could push oil price to over $120 a barrel, or even beyond if global supplies are permanently disrupted. Analysts from Rabobank, a Dutch multinational banking and financial services company, even mention a spike towards $150 a barrel, recalling that in 2022, after Russia invaded Ukraine, the Brent crude oil price briefly touched $139. But the difference here is major: Persian Gulf oil is geographically concentrated and trapped in a single access point, they note. TD Securities, a Canadian multinational investment bank, points out that the oil market is currently in a situation of oversupply, but if the Strait of Hormuz are blocked, even temporarily, no production capacity - neither from OPEC nor the United States - can immediately compensate for a shortfall of 17 to 20 million barrels/day. According to analyses from these Western banks, consequences of the shutdown of the Strait of Hormuz are below: • Energy inflation: Crude oil and gas prices would soar, affecting household bills, industrial costs and overall inflation. An oil price surge above $120 would trigger a drop in global growth, similar to 1973, 1990 or 2022, claims Deutsche Bank. • Energy shock in Europe and Asia: Europe is still largely dependent on Qatari LNG, which transits through Hormuz. And for Asia, the closure of the Strait would be a major blow, particularly for China, India and South Korea, according to ING, a Dutch multinational banking and financial services corporation. • Disruption of supply chains: Beyond energy, Hormuz is also a key axis of global maritime trade. A prolonged closure would increase marine insurance premiums, impacting the prices of imported goods, and delaying many imports. According to JP Morgan, the situation remains fluid, and the magnitude of potential economic impact is uncertain. However, the impact is likely to be uneven globally.S&P Global projects substantial economic consequences across multiple regions if disruptions through the Strait of Hormuz take place:· Middle East: Direct production and export disruptions would immediately impact regional economies dependent on energy revenues.· Asia-Pacific: The region’s high energy dependency creates a multiplier effect, where initial price shocks trigger broader economic impacts.· Europe: While less directly dependent on Gulf oil than Asia, Europe would face secondary supply chain bottlenecks and inflationary pressures. The Asia-Pacific region faces severe vulnerability, with approximately 84% of its crude oil imports transiting through the Strait of Hormuz according to International Energy Agency data from 2025. This dependency creates a significant economic exposure that extends far beyond immediate energy price effects. For example, nearly 90% of Iran’s oil exports go to China. China has relatively diversified oil import sources and large reserves. However, markets such as India, South Korea, Japan, and Indonesia, which rely heavily on Middle Eastern oil, will be more vulnerable. Higher sustained oil prices would have far-reaching economic consequences in Asia, including China. India, South Korea, and Japan. Even China, with their high dependence on Middle Eastern oil, would see their inflation rates accelerate, their economic growth drop and the price of goods rise because of an increase in energy prices. If rising fuel costs continue, they could be even more devastating for emerging markets in Southeast Asia. Specifically, India is highly exposed to Middle East energy. More than 60% of its oil comes via Hormuz. A $10 hike in global crude will cuts India’s GDP growth by 0.3% and raises inflation by 0.4%, according to India’s Ministry of Finance. Shipping insurers have already raised premiums by 20%. Cargo rerouting around the Cape of Good Hope adds 15–20 days and significant costs. Indian refiners are holding prices for now, but margins are tightening. According to Brig Rakesh Bhatia, an India security expert, it’s not just about energy. India’s trade with Iran, especially Basmati rice exports worth ₹6,374 crore in FY 2024–25, faces disruption due to insurance issues and port uncertainty. According to Amitendu Palit, a Senior Research Fellow and Research Lead (trade and economics) in the Institute of South Asian Studies (ISAS) at the National University of Singapore, the impacts of closing of the Strait of Hormuz or its disruptions on India are below: •  India, which imports about two-thirds of its crude and nearly half of its LNG through the Strait of Hormuz, stands to lose significantly in case of disruption. A closure or disruption in the Strait of Hormuz would spell trouble for India. Nearly 70% of its crude oil and almost 40% of its LNG imports pass through this route, with Qatar alone supplying nearly 10 million tonnes of LNG in 2024. Any blockage could severely impact energy security and prices.• Energy prices: Surging oil and gas costs could spike domestic inflation, especially in transport and food.• Currency pressure: Rising import bills would widen the current account deficit and weaken the rupee.• Sectoral impact: Aviation, logistics, tyres, and manufacturing sectors could face cost surges.• Though India holds strategic oil reserves, experts caution these are built for short-term supply shocks—not sustained disruption from a regional war. According to Palit, the major impacts on India result from the escalation in crude oil prices. India is one of the largest importers of crude oil in the world after China, Europe and the United States (US). However, unlike China, which is the largest global buyer of Iranian crude oil, India’s main sources of crude oil are Iraq, Saudi Arabia and Russia, followed by the United Arab Emirates and the US. Crude oil price rises will impact India’s overall import bill. Though many Indian refiners have long-period forward contracts to purchase crude oil at previously agreed prices, future such contracts entered into now will have to factor in the prevailing higher prices. Needless to say, spot purchases of crude oil, based on immediate requirements, will be at much higher prices. Higher crude prices will impact domestic prices across the board. Refiners are unlikely to absorb these prices and will pass them on to consumers. Liquefied petroleum gas, diesel and kerosene – all of which are refined petroleum products for common household use, including by low-income families – will become costlier. The multiplier effects of higher prices will be noticeable as energy demand is high during peak summer. Higher prices will also be experienced by civil aviation. Air travel is set to become more expensive as aviation turbine fuel prices go up. Apart from domestic air travel, international air travel will also become costlier. Air India and other Indian carriers are already taking longer routes by avoiding the Pakistani airspace. Now, more international airlines, particularly the Middle Eastern carriers, will be rerouting their flights to avoid Israeli and Iranian airspace, leading to longer routes and higher prices. This is certainly not good news during the peak tourist season, with Indians travelling to the West, especially to holiday spots in Europe. Apart from flying costs, there are major disruptions for travel agents and tour planners as they will be forced to rework itineraries. Domestic inflation prospects in India will be aggravated by the sharp escalation in gold prices. Geopolitical volatility never fails to trigger the urge to invest in ‘safe havens’. The tendency is visible through a sharp rise in the prices of the US dollar, and gold and silver. Unless there is a quick resolution of the Iran conflict, precious metal prices will remain high into the festive season, which commences in India in about three months. Consumer pockets and household budgets will feel the squeeze from the cumulative higher costs. For much of India, high prices from exogenous shocks such as the Iran conflict, is clearly not great news in a year when the overall prospects for economic growth are more subdued than in the previous years Unlike India, China appears more insulated. China has been over-importing crude for months, building strategic reserves of more than 1 billion barrels. Its diversified supply lines from Russia, Venezuela, and the Gulf provide flexibility. However, China has significant Belt and Road investments in Iran and Iraq, including infrastructure and power plants, thereby damaging China. Taiwan Minister of Economic Affairs Kuo Jyh-huei estimated on 23 June 2025 that if Iran moves to block the Strait of Hormuz, it would cause crude oil prices to rise and subsequently impact Taiwan's fuel prices and consumer price index (CPI). Currently, less than 20 percent of Taiwan's crude oil and natural gas import pass through the Strait of Hormuz. If the strait were to be blocked, ships would be forced to take longer alternative routes, delaying deliveries, causing oil prices to rise, Kuo claims that a 10 percent increase in oil prices would raise the CPI by approximately 0.3 percent. The ripple effects are already hitting Southeast Asia. As Al Jazeera reports, energy-importing nations like Indonesia, Malaysia, and Vietnam are facing higher shipping costs and insurance surcharges. Bangladesh and Sri Lanka, already under economic strain, are especially vulnerable to energy supply delays and inflation. For Southeast Asia, this situation would result in escalating costs across various sectors. Energy-dependent industries, including manufacturing, transportation, and logistics, would face soaring operational expenses, which could reduce output and increase consumer prices. The manufacturing sector in Southeast Asia, a pivotal component of regional economic growth, would be particularly adversely affected by rising fuel costs, thereby diminishing its competitiveness in the global market. Additionally, inflationary pressures would undermine consumer purchasing power, dampening domestic consumption and subsequently slowing GDP growth throughout the region.  Iran itself would not escape unscathed. Closing the Strait would choke its own oil exports, which account for 65% of government revenue, risking economic collapse and domestic unrest for Iran. On the other hand, Europe’s demand for LNG has increased since the Russia-Ukraine Conflict, although reliance on the Middle East has fallen as Europe imported more from U.S. However, Europe remains highly sensitive to energy prices. Conversely, the U.S., as a net energy exporter, could be less impacted compared to previous oil crises when it relied more on oil imports. However, the U.S. is entering this period from a vulnerable state of increasing risks of inflation and an economic slowdown. It is estimated that a USD 10 increase in oil prices could add 0.3-0.4% to inflation, exacerbating current stagflationary risks given the surge in tariffs. This also complicates the Federal Reserve's (Fed) decision-making. Economic experts still expect the Fed to be slow to cut interest rates, as inflation risks remain larger than unemployment concerns for now.  VI. Conclusion This paper showed that the blockage of the Strait of Hormuz will increase oil & other energy prices, inflation, and shipping costs, while it reduces economic growth in the world. This paper claimed that these negative impacts will be largest in Asian countries because 84% of the crude oil and condensate and 83% of the liquefied natural gas that transported through the Strait of Hormuz went to Asian markets in 2024.

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском Abstract The global development initiative proposed by China aims to promote global sustainable development and has received support from many Latin American countries. At present, green cooperation between China and Latin America has achieved positive results in multiple fields such as clean energy, green agriculture, and green transportation. Latin American countries can become important partners for China to promote the Global Development Initiatives. However, in terms of green cooperation, China and Latin America also face some challenges. Both sides must strengthen consensus and achieve coordinated development in various fields. Sustainable Development and the Global Development Initiative The current international situation is turbulent and constantly changing, with a global economy that remains stagnant, while challenges such as geopolitical conflicts, climate change, and the food crisis are becoming increasingly intertwined and exacerbated. In this context, all countries around the world face the important task of promoting sustainable development and maintaining healthy economic and social growth. On September 21, 2021, Chinese President Xi Jinping officially launched the Global Development Initiative at the United Nations, outlining a path toward a new stage of global development that is balanced, coordinated, and inclusive (Ministry of Foreign Affairs of China, 2021). The Global Development Initiative is aligned with the 2030 United Nations Sustainable Development Goals and places climate change and sustainable development as key areas of cooperation, emphasizing the idea of harmonious coexistence between humanity and nature. Its goal is to promote stronger, more sustainable, and healthier global development, and to build a global community for development. The 33 countries of Latin America and the Caribbean are a fundamental part of the Global South and, in general, place great importance on sustainable development, which has allowed them to achieve notable successes in the field of sustainable cooperation. In a context of great power competition and ongoing regional conflicts, the strengthening of sustainable cooperation between China and Latin American countries presents numerous opportunities, creating ample space to jointly advance in sustainable development. The concept of a sustainable economy evolved from the idea of sustainable development, with harmony between humanity and nature at its core and the goal of achieving long-term sustainability. This approach maintains that economic growth is not an unlimited or uncontrolled process but rather must be conditioned by the ecological environment’s capacities and the resource carrying capacity. The concept of a sustainable economy emerged in the late 1980s when British environmental economist David Pearce introduced it in his work “Blueprint for a Green Economy”, published in 1989. However, it was not until the United Nations Conference on Sustainable Development, held in Rio de Janeiro in 2012, that the sustainable economy began to receive greater attention and became a central concept in global development strategies. According to the United Nations Environment Programme (UNEP), a sustainable economy is driven by public and private investments that reduce carbon emissions and pollution, improve energy and resource efficiency, and prevent the loss of biodiversity and ecosystems. A sustainable economy has always promoted development goals that integrate economic, social, and environmental aspects. This respect for the environment and nature is closely linked to traditional Chinese worldviews. Since ancient times, the Chinese have developed ideas about following the laws of nature and protecting the ecological environment. In the classical text “Yi Zhou Shu Ju Pian”, it is recorded: "During the three months of spring, no axes are used in the mountains and forests, to allow plants to grow; during the three months of summer, no nets are placed in rivers and lakes." These ideas have been a fundamental part of the spiritual thought and culture of the Chinese people for over five thousand years, and through them, they have envisioned humanity and nature as an organic and indivisible whole. They represent the basic understanding of the relationship between humans and nature in ancient Chinese agricultural society, where coexistence and mutual promotion between people and the ecological environment reflected a dialectical relationship of unity. These ideas, full of deep wisdom, constitute an essential component of China’s rich cultural tradition. Consensus Base for Green Cooperation In 2021, the Global Development Initiative, aligned with the United Nations Sustainable Development Agenda, established eight key areas of cooperation: poverty reduction, food security, industrialization, connectivity, pandemic response, development financing, climate change, and the digital economy. It also proposed key principles such as “prioritizing development,” “people-centered focus,” “universal inclusion,” “innovation-driven efforts,” “harmony between humanity and nature,” and “action-oriented approaches.” Latin American countries also place great importance on sustainable development and share numerous points of consensus with China on these principles. Currently, several countries in the region, including Peru and Colombia, have joined the “Group of Friends of the Global Development Initiative.” This shared commitment to sustainable development between China and Latin America provides an important foundation for advancing sustainable cooperation. Particularly, China and Latin American countries have broad consensus in the following areas: 1. Prioritizing national development. Both China and many Latin American countries are developing nations and consider the promotion of sustainable development a crucial goal. President Xi Jinping emphasized in the report presented at the 19th National Congress of the Communist Party of China (CPC): “The fundamental fact that our country is still and will long remain in the primary stage of socialism has not changed; our international status as the largest developing country in the world has not changed.” (Xi, 2017) China’s fundamental national situation determines that its main task is to advance along the path of socialism with Chinese characteristics and to focus its efforts on socialist construction. The Global Development Initiative also highlights “prioritizing development” as one of its core pillars. Latin America, for its part, faces the challenge of progressing in development. Although it was one of the regions in the Global South to achieve national independence and begin economic development relatively early, some Latin American countries have experienced stagnation in their economic transformation and have not managed to overcome the so-called “middle-income trap.” Affected by factors such as low global economic growth, fiscal constraints, and limited policy space, Latin America’s economy has shown a weak recovery in recent years, with some countries facing serious inflation and debt problems. Therefore, promoting sustainable development has become a top priority for governments in the region. In 2016, Latin American countries promoted the creation of the Forum of the Countries of Latin America and the Caribbean on Sustainable Development, as a regional mechanism for implementing the 2030 Agenda for Sustainable Development (ECLAC, 2016). By the end of 2023, six successful conferences had been held, and the Latin America and the Caribbean Sustainable Development Report had been published annually to assess the region’s progress in meeting the Sustainable Development Goals (SDGs). 2. Addressing welfare issues as a central task Since the 18th National Congress of the CPC, the Party’s central leadership, led by Xi Jinping, has promoted a people-centered development approach, insisting that everything should be done for the people and depend on the people, always placing them in the highest position. During the centennial celebration of the CPC’s founding, General Secretary Xi emphasized: “To learn from history and forge the future, we must unite and lead the Chinese people in a tireless struggle for a better life.” In contrast, Latin America is one of the most unequal regions in the world. The unequal distribution of wealth, along with gender and racial discrimination, are persistent issues that have been worsened by the COVID-19 pandemic and the global economic slowdown. According to data from the Economic Commission for Latin America and the Caribbean (ECLAC), in 2023 the region’s poverty rate was 29.1%, and extreme poverty was 11.4%, both slightly higher than in 2022 (29% and 11.2%, respectively) (France24, 2023). As a response, many Latin American governments — such as those in Brazil, Mexico, Chile, and Cuba — have incorporated attention to welfare issues and improving their citizens’ quality of life as key pillars in their public policy agendas. 3. Embracing inclusion and shared benefits as a guiding principle Following the end of the Cold War, the world experienced a trend toward multipolarity and continued economic globalization. However, in recent years, there has been a resurgence of protectionism in various forms, accompanied by a rise in unilateralism and hegemonic policies. These “deglobalization” practices not only fail to resolve internal problems, but also disrupt global supply chains, hinder healthy economic development, and harm the interests of countries. In response, developing nations such as China and Latin American countries advocate for multipolar development and oppose unilateralism and power politics. In December 2023, China’s Central Conference on Foreign Affairs Work emphasized the importance of inclusive and mutually beneficial economic globalization. Similarly, Latin America has maintained a diversified foreign policy and has worked toward building a new, fair, and equitable international political and economic order. Amid rising tensions among major powers, most Latin American countries have chosen not to take sides, maintaining a non-aligned policy. Moreover, countries in Latin America are increasingly focused on inclusive development both within their nations and across the region, striving to address internal development imbalances. In 2010, the Andean Development Corporation (predecessor to the Development Bank of Latin America and the Caribbean) released the “Latin America Vision Plan 2040”, which highlighted the need to strengthen economic inclusion in order to achieve truly sustainable growth (CAF, 2010). In January 2023, the Community of Latin American and Caribbean States (CELAC) Summit in Argentina approved the “Buenos Aires Declaration,” which stressed the importance of promoting inclusive development in the region and fostering inclusive dialogue with other regions (CELAC, 2023). 4. Embracing innovation as a key driver Marx pointed out that “science is also part of the productive forces” and that “the development of fixed capital shows the extent to which the general knowledge of society has become a direct productive force.” In 1988, at the National Science Conference, Deng Xiaoping declared, “science and technology are the primary productive forces.” Since the 18th CPC Congress, China has firmly pursued innovation-led development. It launched the National Innovation-Driven Development Strategy, issued the Medium- to Long-Term Science and Technology Development Plan (2021–2035), and rolled out the Technological Innovation Blueprint under the 14th Five-Year Plan. Thanks to this framework, China has made significant progress in accelerating emerging technologies such as artificial intelligence, big data, quantum communication, and blockchain. Latin American countries are also intensifying their focus on technological innovation. In 2023, CELAC’s Buenos Aires Declaration underscored the importance of innovation for enhancing regional competitiveness and job quality, while encouraging scientific exchanges among nations and subregional organizations. Furthermore, the President of Brazil, Luiz Inácio Lula da Silva, committed to increasing investment in technological development. To that end, he announced at the 28th Conference of the Parties to the United Nations Framework Convention on Climate Change an investment of approximately 21 billion reais (around 4.28 billion U.S. dollars) in sustainable economy, innovative technologies, and low-carbon economy. In the 2023 Global Innovation Index, Brazil ranked 49th out of 132 countries, improving by five positions compared to the previous year. The President of Chile, Gabriel Boric, pledged to increase public funding for research and to finance the work of universities and research institutions. In 2019, the Colombian government established the “International Mission of Wise People,” a body composed of 46 national and international academic experts to promote production diversification and automation, with the goal of doubling the share of manufacturing and agriculture in the country’s Gross Domestic Product (GDP) by 2030. The current president of Colombia, Gustavo Petro, has committed to transforming the country into a “knowledge society” and to continuing this initiative. 5. Making harmony between humans and nature a central goal Developing countries — including China and Latin American nations — prioritize climate issues and actively contribute to global climate governance. Since ancient China during the Spring and Autumn and Warring States periods, philosophical schools such as Confucianism and Taoism had already proposed concepts about the “unity between Heaven and humankind.” Similarly, Indigenous cultures in Latin America also share related cultural traditions. The Quechua peoples of Peru, Ecuador, and Bolivia promote the concept of “’Buen Vivir’” (“Good Living”), which emphasizes harmony between human society and nature. The Aymara of Peru and Bolivia, the Guaraní of Brazil, Argentina, Paraguay, and Bolivia, the Shuar of Ecuador, and the Mapuche of Chile all have similar philosophical expressions. So far in the 21st century, China and Latin American countries have intensified their focus on sustainable development. In August 2005, during a visit to Anji in China’s Zhejiang Province, Xi Jinping, then Secretary of the Communist Party of China in Zhejiang, put forward the principle that “lucid waters and lush mountains are as valuable as mountains of gold and silver,” highlighting the idea that economic growth should not be achieved at the expense of the environment. China’s Global Development Initiative includes climate change and sustainable development as key cooperation areas, aiming for stronger, healthier global progress. Simultaneously, Latin American countries value sustainability highly. Ten nations in the region have officially submitted carbon-neutrality timelines and developed emissions-reduction plans. Several governments have taken significant measures to accelerate energy transition, restore ecosystems, and enhance international cooperation. Notably, Brazil, Chile, Costa Rica, and Uruguay have made substantial strides in renewable energy: in Q1 2023, more than 90 % of Brazil’s energy came from renewables — the highest level since 2011. Progress of Green Cooperation between China and Latin America 1. High-level design for sustainable cooperation between China and Latin American countries has been continuously strengthenedAs comprehensive cooperation between China and Latin America progresses, sustainable collaboration has also become integrated into the strategic high-level planning. At the third Ministerial Meeting of the China-CELAC Forum in 2021, the "Joint Action Plan for Cooperation in Key Areas between China and CELAC Member States (2022–2024)" was adopted. This plan emphasizes the continuation of cooperation in areas such as renewable energy, new energy, civil nuclear energy, energy technology equipment, electric vehicles and their components, as well as energy-related geological and mineral resources. It also outlines the expansion of cooperation in emerging industries related to clean energy resources, support for technology transfer between companies, and the respect and protection of the natural environment. Joint declarations between China and countries such as Brazil, Mexico, and Argentina on establishing and deepening comprehensive strategic partnerships mention strengthening cooperation in areas such as climate change and clean energy. During the sixth meeting of the Sino-Brazilian High-Level Commission for Coordination and Cooperation in May 2022, the Chinese Ministry of Commerce and the Brazilian Ministry of Economy agreed to sign a Memorandum of Understanding on Promoting Investment Cooperation for Sustainable Development, aimed at promoting investment in clean and low-carbon technologies in both countries. In April 2023, during Brazilian President Luiz Inácio Lula da Silva's visit to China, the two countries issued the “China-Brazil Joint Declaration on Combating Climate Change” and signed several cooperation agreements related to the sustainable economy. For example, Article 3 mentions “expanding cooperation in new fields such as environmental protection, combating climate change, the low-carbon economy, and the digital economy,” while Article 10 notes the aim to “strengthen cooperation on environmental protection, climate change, and biodiversity loss, promote sustainable development, and accelerate the transition to a low-carbon economy.” In the same month, the “China-Brazil Joint Declaration on Combating Climate Change,” the “Memorandum of Understanding on Research and Innovation Cooperation between the Ministries of Science and Technology of China and Brazil,” and the “Memorandum of Understanding on Promoting Investment and Industrial Cooperation between China and Brazil” identified key areas of future cooperation, including sustainable infrastructure, the development of sustainable industries, renewable energy, electric vehicles, sustainable technological innovation, and green financing. 2. Clean energy cooperation has deepened The development and use of clean energy are essential means for achieving green development. In recent years, clean energy cooperation between China and Latin America has shown the following main characteristics. The scope of clean energy cooperation is becoming increasingly broad. Currently, cooperation between China and Latin America in the fields of clean energy — such as hydropower, solar energy, wind power, nuclear energy, biomass energy, and lithium batteries — has reached a certain level of breadth and depth. At the same time, both sides have also initiated cooperation efforts in emerging areas such as green hydrogen and smart energy storage. China is constantly diversifying its target countries and modes of investment in clean energy in Latin America. In 2015, China began increasing its investment in the renewable energy sector in the region. Between 2005 and 2020, China’s main investment targets in renewable energy in Latin America included countries such as Brazil, Mexico, Peru, Argentina, and Bolivia. Investments in projects, mergers and acquisitions, and greenfield investments have gone hand in hand. 3. Green cooperation in the transportation sector has yielded outstanding results. Chinese companies continue to cooperate with Latin American countries in the field of public transportation infrastructure and electric vehicles, promoting the low-carbon development of the transport sector in Latin America. First, cooperation in public transportation infrastructure is advancing. In recent years, Chinese companies have actively participated in the construction of public infrastructure such as railways, roads, and bridges in Latin American countries, aiming to promote interconnectivity and green travel across the region. Bogotá Metro Line 1, in the capital of Colombia, currently under construction with Chinese investment, is to date the largest public-private partnership (PPP) project in individual transportation infrastructure in Latin America. Second, trade in electric vehicles is developing rapidly. China’s electric vehicle industry has extensive experience in large-scale production and a relatively complete industrial supply chain, making it a new growth area in China–Latin America trade. Electric buses and cars from independent Chinese brands such as BYD, JAC, and Dongfeng are favored in Latin America due to their good quality and low price. Third, cooperation in battery and tram production is also improving. China and Latin America have also begun bold attempts in green capacity cooperation within the manufacturing sector. Currently, BYD is carrying out a range of production activities in Brazil, including the assembly of bus chassis and the production of photovoltaic modules and batteries. 4. Green agricultural cooperation is on the rise. Latin America has vast and fertile land, and agricultural cooperation is an important component of China–Latin America trade. In recent years, Chinese companies have paid increasing attention to using advanced technologies to strengthen environmental protection and actively promote the green transformation of agricultural cooperation. COFCO (‘China National Cereal, Oil & Foodstuff Corporation’) and its Brazilian partners conducted risk assessments of more than 1,700 soybean suppliers in the Amazon and Cerrado ecological zones, and mapped over 1.1 million hectares of soybean fields using remote sensing satellites, which has raised farmers' awareness of sustainable development. By the end of 2021, COFCO had achieved 100% traceability for all direct soybean purchases in Matopiba, a major soybean-producing region in Brazil. At the same time, China and several Latin American countries are promoting cooperation in green agricultural research and development. The Chinese Academy of Tropical Agricultural Sciences has established cooperative relationships with nine Latin American countries, including Colombia, Panama, Ecuador, and Costa Rica. It has achieved progress in exchange and cooperation in areas such as the innovative use and protection of germplasm resources, efficient transformation and comprehensive utilization of biomass energy, green pest and disease prevention and control technologies, and efficient cultivation techniques. 5. Cooperation on green financing plays an important bridging role. The Global Development and South-South Cooperation Fund and the China-United Nations Peace and Development Fund are key financial platforms through which China supports project cooperation under the Global Development Initiative. In addition to the above-mentioned platforms, current green financial instruments between China and Latin America include the Asian Infrastructure Investment Bank, the China–Latin America Cooperation Fund, the China–Latin America Development Finance Cooperation Mechanism, and subsidies provided by China’s Ministry of Commerce and Ministry of Foreign Affairs. Currently, all three financing projects of the Asian Infrastructure Investment Bank in Brazil are related to the green economy. Challenges facing Sino–Latin American green cooperation Although green cooperation between China and Latin America has gradually achieved results and presents many development opportunities, the risks and challenges of cooperation should not be ignored. Most Latin Americans expect that foreign cooperation will promote social well-being, eliminate poverty, and reduce inequality in their countries. They place great importance on the social benefits of projects and pay close attention to the environmental impact of projects on local ecosystems. Currently, the process of extracting lithium from brine places high demands on water resources and carries the risk of air and water pollution. As a result, lithium mining has also faced opposition from Indigenous communities in some Latin American countries. In 2023, Indigenous peoples from Argentina’s Jujuy Province staged several protests against the exploitation of a lithium mine (Reventós, 2023). To reduce pollution in lithium extraction, further scientific and technological research is needed. The integration of Chinese companies into Latin America also faces many obstacles. The official languages of most Latin American countries are Spanish and Portuguese, which are deeply influenced by European and U.S. cultures. In addition to geographical distance, there is limited mutual understanding between the peoples of China and Latin America, and transportation and logistics costs are high. Most Chinese companies lack personnel fluent in Spanish or Portuguese and familiar with local laws and regulations. Currently, the U.S. government continues to view China as a strategic competitor. Latin America has also become a battleground for strategic competition between China and the United States. The U.S. has increasingly turned its attention to China’s cooperation with Latin American countries. In 2019, the U.S. House Committee on Foreign Affairs published an article stating that “China’s green investment in Latin America cannot offset local environmental damage” (Cote-Muñoz, 2019). In general, green cooperation between China and Latin America will face a more complex environment in the future. Final considerations In recent years, China has put forward the Global Development Initiative to promote international cooperation for sustainable development. Latin America, one of the regions with the most developing countries in the world, actively promotes the implementation of the Sustainable Development Agenda and has a solid green economic foundation. In this sense, the region can be an important partner for China in achieving the goals of the 2030 Agenda and building a shared future for humanity. China must continue to build consensus on development priorities with Latin American countries, plan key areas of cooperation according to their conditions and needs, promote connections between governments, businesses, universities, and media in China and Latin America, and jointly advance the green cooperation to a new level. China and Latin America have achieved multidisciplinary coverage in green cooperation. It is necessary to further improve the quality of cooperation in the future and achieve coordinated development across various sectors. For example, in the long term, the development of renewable energy will require greater energy storage capacity and wider electric grid coverage. Additionally, Chinese companies need to integrate more into local societies and generate greater social benefits while ensuring economic returns. They can strengthen cooperation with Latin American companies in order to quickly become familiar with local laws, regulations, and market conditions. Furthermore, more research — including environmental assessments and social consultations — should be conducted before launching projects. References CAF (2010). "Corporación Andina de Fomento, Visión para América Latina 2040 Hacia una sociedad más incluyente y próspera". https://scioteca.caf.com/bitstream/handle/123456789/496/latinamerica_2040_summary_esp.pdf?sequence=1&isAllowed=yCELAC (2023). "Declaración de Buenos Aires". https://www.cancilleria.gob.ar/userfiles/prensa/declaracion_ de_buenos_aires_-_version_final.pdf CEPAL (2016). "El Foro de los Países de América Latina y el Caribe sobre el Desarrollo Sostenible y el Seguimiento Regional de la Agenda 2030". https://www.cepal.org/es/temas/agenda-2030-desarrollo-sostenible/ foro-paises-america-latina-caribe-desarrollo-sostenible-seguimiento-regional-la-agenda-2030Cote-Muñoz, N. (2019). "China's Green Investments Won't Undo Its Environmental Damage to Latin America". Council on Foreign Relations. https://www.cfr.org/blog/chinas-green-investments-wont-undo-its-environmental-damage-latin-americaFrance24 (2023). "Tasa de pobreza se mantiene en 29 % en América Latina en 2023". https://www.france24.com/es/minuto-a-minuto/20231125-tasa-de-pobreza-se-mantiene-en-29-en-am%C3%A9rica-latina-en-2023-dice-cepalMinistry of Foreign Affairs of China (2021). "Global Development Initiative-Building on 2030 SDGs for Stronger, Greener and Healthier Global Development". https://www.mfa.gov.cn/eng/zy/jj/GDI_140002/wj/202406/ P020240606606193448267.pdfReventós, B. y N. Fabre (2023). "Los grupos indígenas en Argentina que se oponen a la extracción del litio". BBC. https://www.bbc.com/mundo/articles/cevzgv0elp9o Cuadernos de Nuestra América. No. 014 | Nueva Época 2025, Centro de Investigaciones de Política Internacional (CIPI). Under CC BY-NC 4.0

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском China’s strategy to internationalise the renminbi (RMB) is about building resilience and influence through selective, state-managed global integration. Beijing is not seeking to elevate the RMB to the status of a global reserve currency on par with the dollar, nor is the strategy solely about insulating China from the geopolitical risks of dollar dependence, although this is an important component. Rather, it represents a pragmatic response to an increasingly fragmented global economy—one marked by rising geopolitical tensions, growing weaponisation of the dollar, and accelerating financial and technological innovation. China is pursuing a targeted, state-managed form of internationalisation that involves building an alternative web of financial relationships and infrastructures facilitating transactions outside the US-dominated system. These include currency swap lines with strategic partners, the establishment of RMB clearing banks, bilateral trade settlement mechanisms, and payment infrastructures such as the Cross-Border Interbank Payment System (CIPS), which serves as a partial alternative to SWIFT. While these efforts help reduce exposure to potential disruptions from dollar weaponisation, they are part of a broader strategy to embed the RMB in key transactional domains like trade, investment, and energy. In these spheres, China seeks to expand its influence and establish rules and mechanisms conducive to its own strategic and financial interests. Building functional alternatives to the US dollar China’s RMB internationalisation strategy is multi-layered, spanning bilateral currency swaps, RMB clearing arrangements, development finance, and payment system alternatives. Instruments such as RMB-denominated oil trades (referred to as the “petroyuan”) and the digital yuan illustrate this approach. The petroyuan enables sanctioned countries like Russia and Iran to settle oil trades in RMB, while China’s growing financial ties with Gulf states suggest that broader adoption may follow. Similarly, the digital yuan, though originally intended primarily for domestic use, is now being piloted for cross-border transactions, potentially laying the groundwork for an international digital payments network. Technological innovations are facilitating this shift by enabling the creation of central bank digital currencies, alternative financial messaging systems, and blockchain-based settlement tools—all of which can support secure transactions that operate outside traditional dollar-clearing infrastructure. In the long run, such developments could gradually reduce global reliance on the dollar. These initiatives are less about achieving global reach and more about securing strategic autonomy and expanding influence in key domains. China’s aim is to reduce vulnerability to US sanctions and dollar volatility, while gradually expanding the RMB’s role in trade, energy, and infrastructure finance, especially in the Global South, where demand for alternatives is growing. BRICS+, the BRI, and the strategic reach of the RMB Platforms like the Belt and Road Initiative (BRI) and BRICS+ play an important role in China’s RMB internationalisation strategy. They provide the geopolitical and institutional scaffolding for RMB usage in trade and investment, particularly in politically aligned or dollar-constrained contexts. For instance, RMB settlements with BRI countries reached 5.42 trillion yuan in 2021, and China has concluded dozens of currency swap agreements with its partners. While the lion’s share of these transactions is still conducted in US dollars, RMB usage is growing steadily. These arrangements point to a shift toward a multipolar and domain-specific currency landscape—one where the RMB gains traction in selected spheres, even if it remains marginal in global reserves and FX markets. Currency swap agreements, RMB clearing banks, and trade invoicing in local currency are all being promoted among China’s partners, especially those looking to reduce reliance on Western financial systems. The result is a modest but growing network of RMB-based interaction shaped by political alignment and strategic institutional design, rather than spontaneous market demand. While dollar dominance persists, de-dollarisation gains momentum The US dollar still dominates global finance. It accounts for nearly 90 percent of FX transactions and more than half of global reserves. However, that dominance increasingly rests on geopolitical foundations that are showing signs of strain. Trump 2.0’s chaotic tariffs combined with the US’s aggressive use of financial sanctions in recent years have made allies and adversaries alike question the long-term reliability of the dollar-based system. For countries exposed to US foreign and economic policy swings, whether through sanctions, interest rate volatility, or trade frictions, China’s RMB-based alternatives offer a way to diversify. In this sense, de-dollarisation is not a revolution but a structural recalibration: a rebalancing of risk rather than a zero-sum rivalry with the dollar. What China offers is not a wholesale exit from the dollar system, but an incremental hedge—a monetary space in which RMB-denominated transactions gain traction in contexts where diversification and reducing dollar dependence are prioritised. This logic underpins a broader push within the BRICS+ grouping to reduce reliance on the dollar in trade and finance. The group has floated proposals for a shared reserve currency, possibly backed by a basket of member currencies or commodities like gold, as part of its effort to foster a more multipolar monetary system. While such proposals face significant practical challenges, they reflect a clear political intent to diversify away from dollar-dominated structures. China plays a central role in these efforts, not by promoting the RMB as a global hegemonic currency, but by embedding it in alternative financial arrangements. In doing so, China contributes to a monetary order where the dollar remains dominant but increasingly contested. Why RMB leadership is not only unlikely but unnecessary Despite growing cross-border use of the RMB, significant structural constraints remain. China’s capital account remains closed, its financial markets lack transparency and depth, and its central bank operates under the authority of the party-state and, as such, lacks institutional independence. Unlike the US, which issues dollars globally through persistent trade and capital account deficits, China runs a trade surplus. This further limits the global supply of RMB and restricts its viability as a reserve currency. Central banks are unlikely to adopt the RMB as a core reserve asset under such conditions, and China has little interest in changing that right now—Beijing’s RMB internationalisation strategy is designed to work within, not against, these constraints. Indeed, the party-state’s emphasis on control and stability sits uneasily with the financial liberalisation required for global monetary leadership. In Beijing’s view, this is not a contradiction. The goal is not to supplant the dollar, but to achieve selective integration: a system in which China and its partners can transact securely, predictably, and independently of Western pressure. This approach enables China to expand its influence within specific domains, without challenging the broader dollar-centric monetary order. Adapting to a divided global economy RMB internationalisation is neither a bid for currency supremacy nor a mere act of self-defence. It is a tool of pragmatic adaptation—part of China’s effort to build resilience and exert influence through selective financial integration and institutional alternatives. As the world moves further into geopolitical and economic uncertainty, especially with the return of a Trump administration bent on upending the global trade system, China’s efforts may accelerate. The RMB won’t displace the dollar anytime soon, but its growing role in alternative trade, finance, and payment systems signals the slow but significant emergence of a more layered, fragmented, and contested global monetary order. This work has received funding from the European Union’s Horizon Europe coordination and support action 101079069–EUVIP–HORIZON-WIDERA-2021-ACCESS-03. Views and opinions expressed are however those of the author(s) only and do not necessarily re ect those of the European Union or the European Research Executive Agency (REA). Neither the European Union nor the granting authority can be held responsible for them. This article is published under a Creative Commons License and may be republished with attribution.

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском AbstractPurpose The purpose of this paper is to analyse the international political economy of Korea and its effects due to geopolitical tension between China and the USA. Design/methodology/approach Economic war between China and the USA has prolonged longer than expected. Aftermath of the COVID-19 pandemic, reforming the supply chain has been the centre of economic tension between China and the USA. Quite recently, with the rapid expansion of Chinese e-commerce platforms, distribution channels come upon a new economic tension between the two. And now is the time to pivot its pattern of conflict from competition into cooperation. In this end, economic diplomacy could be a useful means to give a signal of cooperation. From the view of economic diplomacy, this paper tries to analyse the projected transition of economic war between China and the USA with its implication on the trade policy of Korea. Findings As an implementation of economic diplomacy, China suggested the Belt and Road Initiative (BRI), enhancing trade logistics among related countries to gain competitiveness. In 2023, the Biden administration suggested the India-Middle East and Europe Economic Corridor as a counter to BRI, which will be a threshold for changing trade policy from economic war into economic diplomacy. As a result, it is expected China and the USA will expand their economic diplomacy in a way to promote economic cooperation among allied states, while the distribution channel war would continue to accelerate the economic tension between China and the USA. Korea has to prepare for and provide measures handling this geopolitical location in its trade policy or economic diplomacy. Originality/value This research contributes to the awareness and understanding of trade environments from the perspective of economic diplomacy. 1. Introduction The advent of globalisation has led to widespread economic integration, creating global production networks and markets. However, the COVID-19 pandemic has acted as a significant setback to this trend. In the wake of COVID-19, an economic war has arisen between China and the USA, centred on the restructuring of global supply chains following widespread disruptions. International political economy (IPE) examines the power dynamics between states and the structures of influence within regional economies. Consequently, economic diplomacy has gained unprecedented attention. Economic diplomacy focuses on government actions regarding international economic issues, distinct from political diplomacy through its market-oriented approach in foreign policy. Putnam (1988) categorises economic diplomacy into two levels: unilateralism and bilateralism. Unilateral economic diplomacy (or unilateralism) often relies on hard power, involving decisions on trade liberalisation or market protection without negotiation. Bilateral economic diplomacy (or bilateralism) or multilateral economic diplomacy (or multilateralism), by contrast, involves negotiation among trade partners, resulting in agreements such as regional or global free trade agreements (FTAs). A vast range of state or non-state actors engage in economic diplomacy, navigating the complex interplay between international and domestic factors. Defining economic diplomacy is extremely challenging, but one useful definition is “the broad concept of economic statecraft, where economic measures are taken in the pursuit of political goals, including punitive actions such as sanctions” (Blanchard and Ripsman, 2008).  Figure 1 Recent trend of economic diplomacy To exert influence internationally, ministers and heads of government strive to demonstrate their capacity for national security through two primary approaches, as shown in Figure 1 (above): economic war (or competition) and economic diplomacy (or international cooperation). In the context of global supply chain restructuring, the economic conflict between China and the USA has intensified, marked by threats of supply chain disruptions. This has led to emerging strategies aimed at “crowding out” the USA from global supply chains (去美戰略) or excluding China through alliances such as the Allied Supply Chain and Chip 4. While economic war is inherently “temporary” due to its painstaking nature, economic diplomacy or international cooperation offer a more “long-term” approach because it is gains-taking. This paper analyses the factors contributing to the prolonged nature of this economic war and explores potential outcomes of the supply chain tensions between China and the USA from the perspectives of IPE or geo-economics. In conclusion, it highlights the importance of preparing for trade policy adjustments and strategic economic diplomacy. 2. International trade war and strategic items2.1 Supply chain The supply chain encompasses a network of interconnected suppliers involved in each stage of production, from raw materials and components to the finished goods or services. This network can include vendors, warehouses, retailers, freight stations and distribution centres. Effective supply chain management is a “crucial process because an optimised supply chain results in lower costs and a more efficient production cycle” [1]. Within the supply chain, a leading company typically holds governance power, enabling it to coordinate scheduling and exercise control across the interconnected suppliers, resulting in reduced costs and shorter production times (Gereffi et al., 2005) [2]. Since the 2000s, forward and backward integration have been key strategies for managing time, cost and uncertainty in supply chains. For example, Toyota’s Just-In-Time (JIT) system demonstrated the efficiency of locally concentrated supply chains until disruptions from the 2011 East Japan Earthquake and the Thailand flood. Following supply chain shutdowns in 2020, many businesses shifted from local to global supply chains, utilising advancements of the information technology (IT) and transportation technologies to geographically diversify operations. As the need for a systematically functioning global supply chain has grown, a leading nation, much like a leading company, often assumes governance power in international trade and investment, as illustrated in Figure 2 (below), by aligning with the leadership of a dominant market competitiveness, which makes this leadership valuable.  Figure 2 Supply chain The COVID-19 pandemic dealt a severe blow to the global supply chain, causing sudden lockdowns that led to widespread supply chain disruptions. To mitigate the risks of future global disruptions, supply chains have begun restructuring to operate on a more regionally segmented basis. In this shift toward regional supply chains, China and the USA are at the centre, drawing allied countries within their spheres of influence. This alignment helps explain why the economic war between China and the USA has lasted longer than anticipated. 2.2 Strategic items China has restricted exports of two rare metals, gallium and germanium, which are critical to semiconductor production. Kraljic (1983) highlighted the importance of managing “strategic items” within the framework of supply chain management, as shown in Figure 3. Kraljic emphasises the need to strengthen and diversify critical items. The Kraljic matrix provides a valuable tool for identifying essential items that require focused management within the supply chain.  Figure 3 Kraljic matrix Kraljic identified the importance of managing “bottleneck items” in strategic supply chain management – items that present high supply risk but have relatively low business value. Due to the potential costs associated with non-delivery or compromised quality of strategic items, these must be closely monitored and controlled. From a risk management perspective, establishing medium-term business relationships and collaboration with suppliers is essential. For example, South Korea imports over 90% of its urea for agricultural and industrial purposes from China [3]. Heavily dependent on China for urea supplies due to pricing factors, Korea faced challenges when China imposed export controls on urea, underscoring Korea’s vulnerability within China’s sphere of influence. The European Union (EU) also faces challenges with critical raw materials (CRMs). China remains the EU’s sole supplier of processed rare earth elements, while Chile supplies 79% of its lithium. In response, the EU introduced the CRM Act (CRMA) to support projects aimed at increasing “the EU’s capacity to extract, process, and recycle strategic raw materials and diversify supplies from the third countries” [4]. 2.3 Resilient supply chain alliance In contrast to China’s approach of leveraging supply disruptions to strengthen its influence, the Biden administration in the USA has adopted a cooperative approach focused on building resilient supply chains (Pillar 2) through the Indo-Pacific Economic Framework (IPEF), which includes 14 member countries [5]. The need for resilient supply chains has been further underscored by the Russia–Ukraine crisis. The IPEF aims to address supply chain vulnerabilities by fostering global efforts to reduce risks associated with concentrated, fragile supply chains [6].  Figure 4 Resilient supply chain alliance In Figure 4, the EU Commission presented the Single Market Emergency Instrument (SMEI) in September 2022, a crisis governance framework designed to ensure the availability of essential goods and services during future emergencies. The SMEI operates on three levels: contingency planning, vigilance and emergency. The contingency planning phase focuses on collaboration among member states to mitigate supply chain disruption and monitor incidents. The vigilance phase can be activated when a significant disruption is anticipated, enabling specific measures such as mapping and monitoring supply chains and production capacities. Finally, the emergency phase is activated in cases of severe disruption to the functioning of the single market [7]. Establishing a resilient supply chain through international cooperation may be appealing, yet the reality often falls short of the ambition. In South Korea, the IPEF took effect on 17 April 2024, after an extended negotiation process, marking the first multilateral agreement on supply chains. As a result, during non-crisis periods, the 14 member countries will collaborate to strengthen international trade, investment and trade logistics. In times of crisis, member countries will activate a “crisis response network”. Conversely, opportunities for negotiation with China, South Korea’s largest trading partner, are essential for building supply chain resilience [8]. China has pursued an industrial policy focused on enhancing its supply chain management capabilities. In the semiconductor sector, the decoupling between China and the USA has become increasingly evident. Contrary to expectations, China has adopted a policy of internalising its supply chains, returning to the integration strategies of the 2000s rather than furthering globalisation. A promising opportunity for transformation between the two countries has emerged recently. Since 2015, China and South Korea have maintained bilateral FTA, and with the second phase of FTA negotiations currently underway, there is an opportunity to strengthen trade and investment ties, fostering positive progress through international cooperation. 2.4 China manufacturing exodus During the COVID-19 pandemic, China imposed sudden lockdowns without prior notice or preparation, halting production and logistics cycles. This “zero COVID” policy may have triggered a shift towards “de-risking” China from supply chain disruptions. Although China still offers significant advantages as “the factory of the world,” with vast market potential, prolonged trade tensions with the USA, intensified during the Trump administration, have prompted global manufacturers with substantial USA market bases to relocate operations amid rising geopolitical uncertainties. For example, Nike and Adidas have shifted much of their footwear manufacturing to Vietnam, Apple has begun iPhone production at a Foxconn in Chennai, India, and AstraZeneca has contracted production with India’s Serum Institute. In the pre-globalised era, defining the Rule of Origin (ROO) was straightforward, as a product’s components were usually manufactured and assembled within a single country. However, with the complexity of global supply chains, particularly since 2012, determining ROO has become a time-consuming and subjective process. ROO are classified as either non-preferential or preferential. The USA applies non-preferential ROO to restrict imports from countries like Cuba, Iran and North Korea, while offering trade preference programmes for others. Preferential ROO are used to determine duty-free eligibility for imports from approved countries [9], whereas non-preferential ROO play a crucial role in “country of origin labelling, government procurement, enforcement of trade remedy actions, compilation of trade statistics, supply chain security issues.” [10] China manufacturing exodus may negatively impact capital inflows into Hong Kong, traditionally seen as the Gateway to China. In 2023, Hong Kong’s initial public offering volume fell to a 20-year low of $5.9bn [11]. While China-oriented business remains in Hong Kong, which returns fully to Chinese control in 2047, non-China-oriented businesses have migrated to Singapore. As the certainty of contract and ownership rights forms the foundation of capitalism, this capital flight from Hong Kong is likely to persist. 3. Trade logistics and economic corridors Globalisation has allowed supply chains to leverage interdependence and interconnectedness, maximising efficiency. However, while these efficiencies have been beneficial, they have also created a fertile ground for friction between trade partners due to a “survival of the fittest” mindset and the principle of “winner takes all.” This interdependence has also highlighted vulnerabilities; the global supply chain struggled to manage the disruptions caused by COVID-19, prompting a shift towards regional integration initiatives, such as Association of Southeast Asian Nations, Regional Comprehensive Economic Partnership, United States–Mexico–Canada Agreement and Comprehensive and Progressive Agreement for Trans-Pacific Partnership. As the global economy seeks stability, collaboration over competition has become increasingly essential, with economic diplomacy emerging as a priority. The prolonged economic war between China and the USA arguably needs to shift towards economic diplomacy. The global supply chain is restructuring into regional supply chains, building resilience by operating in regional segments that can withstand crises. Michael Porter introduced the concept of value chain as “a set of activities that a firm performs to deliver a valuable product or service to the market.” [12] Complex finished goods often depend on global value chains, traversing multiple countries. As shown in Figure 5, the value chain consists of supply chain and trade channel components. While the focus has traditionally been on which country holds lead status within a regional supply chain, the emphasis is now shifting to how these regional segments can be interconnected and relayed. In this context, the supply chain competition may evolve into a “channel war” in international trade, where trade logistics will centre on the internal flow of goods, standardising channel processes and establishing authority over these channels.  Figure 5 Supply chain v. trade channel 3.1 Trade logistics It is natural for governments to seek environments that enhance competitiveness within in their countries. In terms of trade, effective trade logistics are essential for maintaining competitive advantage. As a prerequisite, a strong IT management infrastructure is indispensable. As shown in Figure 6, trade logistics encompass the internal flow of goods to market, integrating physical infrastructure with operating software – such as transport hubs, warehouses, highways, ports, terminals, trains and shipping vessels. Key areas of conflict in trade logistics involve the standardisation of channel processes and determining who holds governance over operation of these logistics systems. This is equally relevant within the digital economy. Recently, Chinese e-commerce – often referred to as C-commerce – has aggressively sought to gain control over digital distribution channels, interconnected delivery networks and trade logistics via digital platforms. Chinese platforms such as Taobao, Temu and AliExpress are actively working to increase their monthly active users (MAUs), positing themselves as counterweights to USA-based platforms such as Amazon and eBay in digital trade [13].  Figure 6 Trade logistics When the agenda of establishing international trade logistics is introduced to relevant trade members across various countries, initial progress and effective responses are often achieved. However, efforts soon encounter obstacles related to standardising logistics processes and establishing operational governance. Greater reliance on international institutions could help resolve these issues (Bayne, 2017). Yet governments frequently prioritise domestic interests, and after prolonged negotiations, the risk of international agreements failing increases. Amid the economic war between China and the USA, China launched a trade logistics initiative known as the Belt and Road Initiative (BRI), or One Belt One Road, in 2013. Often referred to as the New Silk Road, the BRI aims to establish economic corridors for trade logistics. The World Bank estimates that the BRI could boost trade flows by 4.1% and reduce trade costs by 1.1% [14]. In response, the Biden administration proposed the India-Middle East and Europe Economic Corridor (IMEC) in September 2023 to strengthen transport and communication links between Europe and Asia as a countermeasure to China’s BRI. IMEC has been well received by participating countries, with expectations of fostering economic growth, enhancing connectivity and potentially rebalancing trade and economic relations between the EU and China [15]. Both BRI and IMEC are ambitious projects aimed at boosting international trade through substantial investments in trade logistics infrastructure. Each seeks to assert governance over international trade channels, signalling that the supply chain war may soon evolve into a trade channel war between China and the USA. 3.2 Economic corridors Economic corridors are transport networks designed to support and facilitate the movement of goods, services, people and information. These corridors often include integrated infrastructure, such as highways, railways and ports, linking cities or even countries (Octaviano and Trishia, 2014). They are typically established to connect manufacturing hubs, high-supply and high-demand areas, and producers of value-added goods. Economic corridors comprise both hard infrastructure – such as trade facilities – and soft infrastructure, including trade facilitation and capacity-building measures. The Asian Development Bank introduced the term “economic corridor” in 1998 to describe networks connecting various economic agents within a region [16]. Economic corridors are integrated trade logistics networks, providing essential infrastructure for connecting regional segments of supply chains. As supply chains increasingly operate in regional “chunks,” linking these segments becomes ever more important. Economic corridors typically include a network of transport infrastructure, such as highways, railways, terminals and ports. Initiatives like the BRI and IMEC use economic corridors as instruments of economic diplomacy, shifting strategies from hard power to soft power, as shown in Figure 7. Because less-developed or developing countries often lack sufficient funding to invest in trade logistics, they tend to welcome these initiatives from developed countries, which offer international collaboration and support. However, these initiatives usually come with the condition that participating countries must accept standardised trade processes and governance led by the sponsoring developed country.  Figure 7 Economic corridor initiatives as economic diplomacy To succeed, economic corridors must meet three key conditions [17]. First, government intervention is essential, as economic corridor initiatives primarily involve public infrastructure investments beyond the scope of the private sector. In realising these projects, governments must reconcile three tensions to ensure their policies are mutually supportive: tensions between politics and economics, between international and domestic pressures and between governments and other stakeholders. Second, intermediate outcomes should be measured and demonstrated as results of economic corridors, allowing participants to experience tangible benefits throughout these longer-term projects. Finally, economic corridors should deliver broader benefits. Participants need incentives to utilise the infrastructure sustainably. These benefits may extend beyond economic welfare, such as wages and income, to include social inclusion, equity and environmental gains, which support the long-term viability of the infrastructure. 4. BRI vs IMEC4.1 Belt and Road Initiative (BRI) - Silk Road The BRI can be a modern-day realisation of the Silk Road concept, connecting Europe as a market base with China as a production base. Unlike the ancient Silk Road, which connected trade routes across Eurasia, the BRI poses potential challenges due to its extensive connectivity. Firstly, there are social and environmental externalities, such as increased congestion and accidents from concentrating traffic flows through limited links and nodes within trade networks. Secondly, while the connectivity may benefit the production and market bases at either end, regions situated between these hubs, through which highways and railways pass, may gain minimal advantage. Thirdly, there is often a mismatch between where costs and benefits are realised. Transit regions that facilitate network traffic often see fewer direct benefits compared to high-density nodes within the network. 4.2 India-Middle East and Europe Economic Corridor (IMEC) - The Spice Road The ancient Spice Roads once connected the Middle East and Northeast Africa with Europe, facilitating the exchange of goods such as cinnamon, ginger, pepper and cassia, which, like silk, served as a form of currency. The IMEC proposes a modern route from India to Europe through the United Arab Emirates (UAE), Saudi Arabia, Israel and Greece. Since its announcement in September 2023, some regional experts have expressed reservations about its feasibility, particularly regarding the connection between the Middle East and Israel. The project has faced delays due to the Israel–Hamas war. Despite these challenges, IMEC holds potential to drive economic growth and strengthen connectivity, especially as countries like Vietnam and India emerge as alternative manufacturing bases for companies relocating from China. For Saudi Arabia and the UAE, IMEC is not viewed as a challenge to China but rather as an opportunity to diversify their economies and solidify their roles within the Middle East region [18]. 5. Conclusion A new trade war between China and the USA has begun, with the Biden Administration’s introduction of IMEC as a counter to China’s BRI. This shift could soon transform the nature of economic war from a focus on supply chains to one on trade channels. The China manufacturing exodus was further accelerated by supply disruptions during the COVID-19 pandemic. Amidst the economic tensions between China and the USA, the restructuring of global supply chains into regional networks has made significant progress. With China maintaining its stance on export controls for strategic items, South Korea must prepare for resilient supply chain management. In relation to China–Korea FTA, which is currently undergoing its second phase of negotiation, South Korea should seek clarity on the transparency of China’s strategic item controls. The Committee on Foreign Investment in the United States (CFIUS) plays a key role in monitoring the quality of inbound investments; similarly, South Korea is experiencing increased inbound investment due to the manufacturing shift from China and should apply similar standards to evaluate investment quality. This emerging economic war between China and the USA is now marked by the competing initiatives of the BRI and IMEC. The BRI can be viewed as a modern Silk Road, linking China with Europe, while the IMEC seeks to establish a trade logistics corridor connecting Saudi Arabia, the UAE, Israel and Greece. The South Korean Government should take proactive steps to prepare for the evolving dynamics of the trade war between China and the USA. CitationOh, J.S. (2025), "International trade war - Spice Road against Silk Road", International Trade, Politics and Development, Vol. 9 No. 1, pp. 2-11. https://doi.org/10.1108/ITPD-06-2024-0031  Notes 1. https://www.investopedia.com/terms/s/supplychain.asp2. According to Gary Gereffi et al, 5 governance types of a lead company could be categorised as market, modular, relational, captive and hierarchy.3. Korea imports urea from 12 countries including Qatar, Vietnam, Indonesia and Saudi Arabia, in addition to China.4. https://single-market-economy.ec.europa.eu/sectors/raw-materials/areas-specific-interest/critical-raw-materials/strategic-projects-under-crma_en5. IPEF was launched on May 23,2022 at Tokyo. 14 member countries are Australia, Brunei, Fiji, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, Vietnam and the USA. 4 Pillar of IPEF are Trade (Pillar 1), Supply Chain (Pillar 2),Clean Economy (Pillar 3) and Fair Economy (Pillar 4).6. Critics say “lack of substantive actions and binding commitments, instead focusing on process-driven framework building.” https://www.piie.com/blogs/realtime-economics/its-time-ipef-countries-take-action-supply-chain-resilience7. https://ec.europa.eu/commission/presscorner/detail/en/ip_22_54438. As of 2023, the first-largest trade partner of Korea is China (Trade volume of $267.66bn), the second is the US ($186.96bn) and the third is Vietnam ($79.43bn)9. As preferential ROO contain the labour value content requirement in the USMCA, it could increase compliance costs for importers. https://crsreports.congress.gov/product/pdf/RL/RL3452410. USITC(1996), Country of Origin Marking: Review of Laws, Regulations and Practices, USITC Publication 2975, July, pp. 2–411. https://www.barrons.com/articles/hong-kong-financial-center-china-46ba5d3612. Porter identifies a value chain broken in five primary activities: inbound logistics, operations, outbound logistics, marketing and sales and post-sale services. https://www.usitc.gov/publications/332/journals/concepts_approaches_in_gvc_research_final_april_18.pdf13. MAU is a metric commonly used to identify the number of unique users who engage with apps and website. MAU is an important measurement to the level of platform competitiveness in the digital trade logistics or e-commerce industry.14. https://home.kpmg/xx/en/home/insights/2019/12/china-belt-and-road-initiative-and-the-global-chemical-industry.html15. https://www.bradley.com/insights/publications/2023/10/the-india-middle-east-europe-economic-corridor-prospects-and-challenges-for-us-businesses16. The Asian Development Bank (ADB), which first used the term in 1998, defines economic corridors as important networks or connections between economic agents along a defined geography, which link the supply and demand sides of markets. http://research.bworldonline.com/popular-economics/story.php?id=350&title=Economic-corridors-boost-markets,-living-conditions17. Legovini et al. (2020) comments traditional cross border agreements of transport investment focuses only on a narrow set of direct benefits and cost. However, economic corridors can entail much wider economic benefits and costs such as trade and economic activity, structural change, poverty reduction, pollution and deforestation.18. Arab Centre Washington D.C. https://arabcenterdc.org/resource/the-geopolitics-of-the-india-middle-east-europe-economic-corridor/ References Bayne, N. (2017), Challenge and Response in the New Economic Diplomacy, 4th ed., The New Economic Diplomacy, Routledge, London, p. 19.Blanchard, J.M.F. and Ripsman, N.M. (2008), “A political theory of economic statecraft”, Foreign Policy Analysis, Vol. 4, pp. 371-398, doi: 10.1111/j.1743-8594.2008.00076.x.Gereffi, G., Humphrey, J. and Sturgeon, T. (2005), “The governance of value chain”, Review of International Political Economy, Vol. 12 No. 1, pp. 78-104, doi: 10.1080/09692290500049805.Kraljic, P. (1983), “Purchasing must be supply management”, Harvard Business Review, Vol. 61 No. 5, September.Legovini, A., Duhaut, A. and Bougna, T. (2020), “Economic corridors-transforming the growth potential of transport investments”, p. 10.Octaviano, B.Y. and Trishia, P. (2014), Economic Corridors Boost Markets, Living Conditions, Business World Research, Islamabad, October.United States International Trade Commission (USITC) (1996), “Country of origin marking: Review of Laws, Regulations, and Practices”, USITC Publication, Vol. 2975, July, pp. 2-4.Further readingPorter, M. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press.Putman, R.D. (1988), “Diplomacy and domestic politics; the logic of two-level games”, International Organization, Vol. 42 No. 4, pp. 427-600.USITC (2019), “Global value chain analysis: concepts and approaches”, Journal of International Commerce and Economics, April, pp. 1-29.

I. Introduction Since October 7, 2023, when the Hamas attacked Israel, the Gaza war has entered its third year. Palestinians continue to endure an unprecedented level of violence, trauma, economic hardship, and uncertainty. The war has resulted in a staggering number of casualties and widespread displacement, in addition to massive destruction of physical assets in Gaza, significant reduction of economic output, increased violence in the West Bank, and widespread collapse of basic service provision across the entire Palestinian territories.  As of May 7, 2025, according to Wikipedia and Gaza’s Ministry of Health, 55000 fatalities (53,253 Palestinians and 1,706 Israelis) and more than 110,00 injuries have been reported in Gaza. More than half of the casualties are women, children, and the elderly. An estimated 1.9 million people, approximately 90 percent of Gaza’s population, are currently internally displaced. Seventy percent of Gaza’s Road network, more than 80 per cent of commercial facilities, and close to 90 percent of housing units in Gaza have either severely damaged or have been destroyed.  Since October 7, 2023, the UN has documented over 1,500 clashes between Israeli settlers and Palestinians in the West Bank, resulting in property damage, casualties, and displacement. Over 1,600 Palestinians, half of whom are children, have been displaced due to increased settlers’ violence and access restrictions. Additionally, existing fiscal constraints and growing security concerns have disrupted service provision in the West Bank.  On the macroeconomic front, the Gaza and West Bank face a collapse, which is unmatched in recent memory. The Palestine economy has faced significant contraction, evidenced by a reduced production, sharp decline in gross domestic product (GDP), and soaring unemployment rates. On the other hand, the Gaza war has had significant negative impacts on Israel. The economic and financial costs of war consist of the direct cost of military operations as well as the indirect losses that extend over the medium and long term. One of the most direct costs of the Gaza war was the recall of about 300,000 reservists in the early days, which meant that the Israeli government would bear the cost of conscription, and the Israeli economy would bear loss of output due to their absence from the workforce.Given these situations, this paper analyzes the economic effects of the Gaza war on Palestine and Israel. II. Literature on the Effects of Wars Wars have the potential to alter the parties and “transform the future” of belligerents (Ikle 1991) and they also bring about fundamental changes to the international system (Gilpin 1981).  Scholars in Economics have provided considerable analysis of the macroeconomic effects of a conflict across spatial levels: locally, nationally, regionally, and internationally. Some studies have examined the effects of specific wars such as the Syrian civil war (Kešeljević and Spruk, 2023) or the Iraq war (Bilmes and Stiglitz 2006). For example, an analysis estimated that the Russian invasion of Ukraine had an economic cost of 1% of global GDP in 2022 (Liadze et al. 2023) Others have examined the effects of war in general. For instance, Reuven Glick and Alan Taylor (2010) examine bilateral trade relations from 1870 to 1997 and find large and persistent negative impacts of wars on trade and hence on national and global economic welfare. Similarly, Vally Koubi (2005) investigates the effects of inter- and intrastate wars on a sample of countries and finds that the combined prewar, contemporaneous, and postwar effects on economic growth are negative.  A “war ruin” school emphasized that the destruction caused by wars is accompanied by higher inflation, unproductive resource spending on the military, and war debt (Chan 1985; Russett 1970). By contrast, a “war renewal” school argued that there can be longer-term positive economic effects from war because war can lead to increased efficiency in the economy by reducing the power of rent-seeking special interests, triggering technological innovation, and advancing human capital (Organski and Kugler 1980).  III. Economic Effects of the Gaza War1. Casualties  As Table 1 shows, since the Hamas attacked Israel on October 7, 2023, 55,000 people (as of May 7, 2025, 53,253 Palestinians and 1,706 Israelis) have been killed in the Gaza war according to the Gaza Health Ministry. Scholars have estimated that 80% of Palestinians killed are civilians. A study by OHCHR (The Office of the United Nations High Commissioner for Human Rights) found that 70% of the Palestinians killed in residential buildings or similar housing were children and women.  The majority of casualties have been found in the Gaza Strip. The Gaza Health Ministry’s total casualty count is the number of deaths directly caused by the war.  The 7 October attacks of the Hamas on Israel killed 1,195 people, including 815 civilians. A further 806 Palestinians have been killed in the occupied West Bank (including East Jerusalem).  2. Economic Effects of the Gaza War on Palestine  As Figure 1-1 shows, since October 7, 2023, Palestine’s economy has significantly contracted as a result of continued warfare. As Figure 1-2 shows, economic downturn started from the fourth quarter of 2023. In 2024, Palestine's GDP contracted by 27% compared to the previous year. The decline was driven by a 27% drop in industrial output in the Gaza Strip due to the ongoing Israeli occupation and attack. Especially, economic contractions were recorded in construction (-14.5%), services (-11.0%), financial and insurance activities (-5.3%), information and communication (-3.2%). However, Palestine’s economy began to recover in the fourth quarter of 2024, although it still marked a negative growth.   Figure 1-1: Palestine economic growth rate  Figure 1-2: Palestine economic growth (quarterly) As Figure 2 shows, industrial production in Palestine significantly decreased in 2024 as war has continued between Israel and Hamas. Industrial production in Palestine has been low, averaging -7.62 percent from 2012 until 2025. However, it reached a record low of -29.77 percent in June of 2024. Then industrial production in Palestine increased to 2.1 percent in March of 2025 over the same month in the previous year.   Figure 2: Industrial production in Palestine As Figure 3 shows, inflation rate in Palestine has significantly increased in 2023 and 2024, reaching all time high of 88.93 percent in November of 2024. High inflation resulted from resource shortages as a result of continued warfare and significant production decline. And then inflation rate in Palestine dropped to 1.88 percent in March and -2.51 percent in February of 2025. Inflation rate in Palestine averaged 4.95 percent from 1998 until 2025.   Figure 3: Inflation rate in Palestine As Figure 4-1 shows, unemployment rate in Palestine significantly increased after October 7, 2023, as economy continued to shrink and industrial production fell. Unemployment rate in Palestine increased to 35.20 percent in the first quarter of 2024 from 24.1 percent in the third quarter of 2023. It then dropped to 31.1 percent in the second quarter of 2024 and 28.8 percent in the fourth quarter of 2024. Unemployment Rate in Palestine has been remarkably high, averaging 24.07 percent from 1995 until 2024, reaching an all-time high of 35.60 percent in the third quarter of 2002 and a record low of 8.80 percent in the second quarter of 2000.    Figure 4-1: Unemployment rate in Palestine As Figure 4-2 shows, youth unemployment rate in Palestine increased from 38.40 percent in the first quarter of 2023 to 45.70 percent in the first quarter of 2024 and then slightly dropped to 42.60 percent in the third quarter of 2024 and 38.6 percent in the fourth quarter of 2024. Youth unemployment rate in Palestine has been remarkably high, averaging 41.85 percent from 2009 until 2024, reaching an all-time high of 49.90 percent in the second quarter of 2018 and a record low of 32.90 percent in the first quarter of 2011.   Figure 4-2: Youth unemployment rate in Palestine As Figure 4-3 shows, full-time employment in Palestine plunged to 628000 persons in the first quarter of 2024 from 1143800 persons in the third quarter of 2023. Then it increased to 705700 persons in the fourth quarter of 2024. Full-time employment in Palestine averaged 888133 persons from 2010 until 2024, reaching an all-time high of 1143800 persons in the third quarter of 2023 and a record low of 67900 persons in the first quarter of 2010.   Figure 4-3: Full-time employment in Palestine Despite the continued warfare in Gaza, as Figure 5 shows, exports in Palestine did not significantly decrease. On the contrary, exports in Palestine increased from 148.3 USD Million in August 2023 to 164.20 USD Million in December of 2024. Exports in Palestine averaged 68.15 USD Million from 2001 until 2025, reaching an all-time high of 164.20 USD Million in December of 2024 and a record low of 15.92 USD Million in April of 2002. Exports in Palestine maintained pre-war level in 2025, recording 140.70 USD Million in January of 2025. Top exports of Palestine in 2023 were scrap iron ($68.6M), tropical fruits ($53.8M), pure olive oil ($10.9M), and building stone ($7.56M).  Figure 5: Exports in Palestine Figure 6 shows, imports in Palestine significantly dropped in 2024 as warfare continued in Gaza. Imports in Palestine decreased to 420.30 USD Million in April 2024 from 747.20 USD Million in August 2023. Imports in Palestine averaged 370.00 USD Million from 2001 until 2025, reaching an all-time high of 750.60 USD Million in November of 2022 and a record low of 82.71 USD Million in April of 2002. According to media reports, there are severe food shortages in Gaza, but there is no information about the imports of food after 2023.   Figure 6: Imports in Palestine As Figure 7 shows, since October 7, 2023, government spending in Palestine has significantly declined in 2023 and early 2024, hitting a record low of 461.20 USD million in the first quarter of 2024. And then government spending in Palestine increased to 666.70 USD million in the fourth quarter of 2024 from 616.50 USD million in the third quarter of 2024. Government spending in Palestine averaged 797.95 USD million from 2011 until 2024, reaching an all-time high of 974.90 USD million in the fourth quarter of 2016 and a record low of 461.20 USD million in the first quarter of 2024.   Figure 7: Government spending in Palestine 3. Economic Effects of the Gaza War on Israel  As Figure 8 shows, since October 7, 2023, when the Hamas attacked Israel, government spending in Israel significantly increased as Israel government conducted massive military operations against the Hamas. Government spending in Israel increased from 84100 ILS (Israel new shekel) Million in the third quarter of 2023 to 97973 ILS Million in the fourth quarter of 2023 and 97018 ILS Million in the fourth quarter of 2024. Government Spending in Israel averaged 58676 ILS Million from 1995 until 2024, reaching an all-time high of 97973 ILS Million in the fourth quarter of 2023 and a record low of 39524 ILS Million in the third quarter of 1995.   Figure 8: Government spending in Israel As Figure 9 shows, as Israel government conducted massive military operations against the Hamas, military expenditure in Israel increased to 46505.30 USD Million in 2024 from 27498.50 USD Million in 2023. Military expenditure in Israel averaged 7742.87 USD Million from 1951 until 2024, reaching an all-time high of 46505.30 USD Million in 2024 and a record low of 57.60 USD Million in 1954.   Figure 9: Military expenditure in Israel As Figure 10 shows, Israel recorded a government budget deficit of -33793.00 ILS Million in December of 2023 from 14100 ILS Million in January 2023 because government spending, in particular military expenditure significantly increased. Government budget value in Israel averaged -3405.71 ILS Million from 2005 until 2025, reaching an all-time high of 22839.00 ILS Million in January of 2025 and a record low of -33793.00 ILS Million in December of 2023.   Figure 10: Budget Balance in Israel As Figure 11-1 & 11-2 show, Israel's economic growth plunged to -4.32 percent in the fourth quarter of 2023 from 3.44% in the third quarter of 2023. Israel experienced consecutive negative growth until the third quarter of 2024 as the ongoing conflict with the Hamas had taken a significant toll on economic activity. This marked the weakest growth since 2020, when the covid-19 pandemic severely impacted the economy. However, the Gross Domestic Product (GDP) in Israel expanded 5.46 percent in the fourth quarter of 2024 over the same quarter of the previous year. GDP annual growth rate in Israel averaged 3.73 percent from 1996 until 2024, reaching an all-time high of 16.27 percent in the second quarter of 2021 and a record low of -8.37 percent in the second quarter of 2020.  Figure 11-1: Israel's economic growth rate  Figure 11-2: Israel's GDP growth (quarterly) As Figure 12 shows, industrial production in Israel decreased 7.4 percent in December of 2023 and 9.8 percent in March 2024 and then increased 15.9 percent in December 2024. Industrial production in Israel averaged 5.66 percent from 1960 until 2025, reaching an all-time high of 62.70 percent in June of 1968 and a record low of -29.20 percent in June of 1967.   Figure 12: Industrial production in Israel As Figure 13 shows, unemployment rate in Israel decreased from 4.30 percent in January 2023 to 2.80 percent in November 2023 and 2.60 percent in December 2024. This decline seems to result from the fact that Israeli government called up tens of thousands of reservists to replace conscripts and active-duty soldiers. And then unemployment rate in Israel slightly increased to 2.9% in March 2025. Unemployment rate in Israel averaged 5.89 percent from 1992 until 2025, reaching an all-time high of 11.40 percent in March of 1992 and a record low of 2.60 percent in August & December of 2024.  Figure 13: Unemployment Rate in Israel As Figure 14 shows, the number of unemployed persons in Israel decreased to 119200 in December of 2024 from 184000 in January 2023. Unemployed persons in Israel averaged 192800 from 1991 until 2025, reaching an all-time high of 305400 in September of 2003 and a record low of 119200 in December of 2024.  Figure 14: The number of unemployed persons in Israel As Figure 15 shows, after October 2023, exports in Israel fluctuated between 4470 USD Million in October 2023, 5330 USD Million in March 2024, 4320 USD Million June 2024 and 5250 USD million in December 2024. Exports in Israel averaged 1836.30 USD Million from 1959 until 2025, reaching an all-time high of 6276.70 USD Million in March of 2022 and a record low of 10.80 USD Million in July of 1959.   Figure 15: Exports in Israel As Figure 16 shows, imports in Israel fluctuated between 8090 USD Million in August 2023, 7590 USD Million in December 2023, 7010 USD Million in August 2024, and 8318.70 USD Million in March 2025. Imports in Israel averaged 2500.72 USD Million from 1959 until 2025, reaching an all-time high of 10372.30 USD Million in May of 2022 and a record low of 33.10 USD Million in November of 1959.   Figure 16: Imports in Israel As Figure 17 shows, inflation rate in Israel decreased from 5.40 percent in January 2023 to 3.70 percent in October 2023 and 2.50 percent in February 2024. It then increased to 3.60 percent in August 2024 and 3.80 percent in January 2025. Inflation rate in Israel averaged 26.75 percent from 1952 until 2025, reaching an all-time high of 486.20 percent in November of 1984 and a record low of -2.70 percent in March of 2004.   Figure 17: Inflation rate in Israel As Figure 18 shows, despite on-going warfare in Gaza, gasoline price in Israel did not rise significantly. It increased from 1.82 USD/Liter in September 2023 to 1.98 and 2.14 USD/Liter in January and May 2024, respectively and then dropped to 2.06 and 2.04 USD/Liter in August 2024 and February 2025, respectively. Gasoline prices in Israel averaged 1.78 USD/Liter from 1995 until 2025, reaching an all-time high of 2.30 USD/Liter in June of 2022 and a record low of 0.73 USD/Liter in December of 1995.   Figure 18: Gasoline price in Israel IV. Conclusion The Gaza war has had negative impacts on both Palestine and Israel, but the negative effects were much bigger in Palestine than in Israel. The number of casualties was much higher in Palestine. Especially the war brought down Palestine economy, lowering economic growth, reducing industrial productions, and increasing inflation & unemployment in Palestine. The Israeli economy has also slowed down, and budget deficit increased. However, unemployment went down, and inflation has been stable between 2 and 5 percent. Trade has maintained a pre-war level, although there have been some difficulties. References Bilmes, Linda, and Joseph E. Stiglitz. 2006. The Economic Costs of the Iraq War: An Appraisal Three Years After the Beginning of the Conflict. Cambridge, MA: National Bureau of Economic Research. Chan, Steve. 1985. “The Impact of Defense Spending on Economic Performance: A Survey of Evidence and Problems.” Orbis 29 (2): 403–434.CIA Factbook. 2024. “Ukraine.”Gilpin, Robert. 1981. War and Change in World Politics. New York: Cambridge University Press.  Glick, Rouven and Alan Taylor. 2010. “Collateral Damage: Trade Disruption and the Economic Impact of War.” The Review of Economics and Statistics 92(1): 102-127.Iklé, Fred C. 1991. Every War Must End. New York: Columbia University Press.Kešeljević, Aleksandar, and Rok Spruk. 2023. Estimating the Effects of Syrian Civil War. Empirical Economics.  Koumi, Valley. 2005. “War and Economic Performance.” Journal of Peace Research 42 (1): 67-82. Liadze, Iana, Corrado Macchiarelli, Paul Mortimer-Lee, and Patricia Sanchez Juanino. 2023. “Economic Costs of the Russia-Ukraine War.” The World Economy 46: 874–886.Organski, A. F. K., and Jacek Kugler. 1980. The War Ledger. Chicago: University of Chicago Press. Russett, Bruce. 1970. What Price Vigilance? The Burdens of National Defense. New Haven: Yale University Press.

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском Last week, the Trump administration signed a deal with Ukraine that gives it privileged access to Ukraine’s natural resources. Some news outlets described the deal as Ukrainian President Volodymyr Zelensky “caving” to US President Donald Trump’s demands. But we see the agreement as the result of clever bargaining on the part of Ukraine’s war-time president. So, what does the deal mean for Ukraine? And will this help strengthen America’s mineral supply chains? Ukraine’s natural resource wealth Ukraine is home to 5% of the world’s critical mineral wealth, including 22 of the 34 minerals identified by the European Union as vital for defence, construction and high-tech manufacturing. However, there’s a big difference between resources (what’s in the ground) and reserves (what can be commercially exploited). Ukraine’s proven mineral reserves are limited. Further, Ukraine has an estimated mineral wealth of around US$14.8 trillion (A$23 trillion), but more than half of this is in territories currently occupied by Russia. What does the new deal mean for Ukraine? American support for overseas conflict is usually about securing US economic interests — often in the form of resource exploitation. From the Middle East to Asia, US interventions abroad have enabled access for American firms to other countries’ oil, gas and minerals. But the first iteration of the Ukraine mineral deal, which Zelensky rejected in February, had been an especially brazen resource grab by Trump’s government. It required Ukraine to cede sovereignty over its land and resources to one country (the US), in order to defend itself from attacks by another (Russia). These terms were highly exploitative of a country fighting against a years-long military occupation. In addition, they violated Ukraine’s constitution, which puts the ownership of Ukraine’s natural resources in the hands of the Ukrainian people. Were Zelensky to accept this, he would have faced a tremendous backlash from the public. In comparison, the new deal sounds like a strategic and (potentially) commercial win for Ukraine. First, this agreement is more just, and it’s aligned with Ukraine’s short- and medium-term interests. Zelenksy describes it as an “equal partnership” that will modernise Ukraine. Under the terms, Ukraine will set up a United States–Ukraine Reconstruction Investment Fund for foreign investments into the country’s economy, which will be jointly governed by both countries. Ukraine will contribute 50% of the income from royalties and licenses to develop critical minerals, oil and gas reserves, while the US can make its contributions in-kind, such as through military assistance or technology transfers. Ukraine maintains ownership over its natural resources and state enterprises. And the licensing agreements will not require substantial changes to the country’s laws, or disrupt its future integration with Europe. Importantly, there is no mention of retroactive debts for the US military assistance already received by Ukraine. This would have created a dangerous precedent, allowing other nations to seek to claim similar debts from Ukraine. Finally, the deal also signals the Trump administration’s commitment to “a free, sovereign and prosperous Ukraine” – albeit, still without any security guarantees. Profits may be a long time coming Unsurprisingly, the Trump administration and conservative media in the US are framing the deal as a win. For too long, Trump argues, Ukraine has enjoyed US taxpayer-funded military assistance, and such assistance now has a price tag. The administration has described the deal to Americans as a profit-making endeavour that can recoup monies spent defending Ukrainian interests. But in reality, profits are a long way off. The terms of the agreement clearly state the fund’s investment will be directed at new resource projects. Existing operations and state-owned projects will fall outside the terms of the agreement. Mining projects typically work within long time frames. The move from exploration to production is a slow, high-risk and enormously expensive process. It can often take over a decade. Add to this complexity the fact that some experts are sceptical Ukraine even has enormously valuable reserves. And to bring any promising deposits to market will require major investments. What’s perhaps more important It’s possible, however, that profits are a secondary calculation for the US. Boxing out China is likely to be as – if not more – important. Like other Western nations, the US is desperate to diversify its critical mineral supply chains. China controls not just a large proportion of the world’s known rare earths deposits, it also has a monopoly on the processing of most critical minerals used in green energy and defence technologies. The US fears China will weaponise its market dominance against strategic rivals. This is why Western governments increasingly make mineral supply chain resilience central to their foreign policy and defence strategies. Given Beijing’s closeness to Moscow and their deepening cooperation on natural resources, the US-Ukraine deal may prevent Russia — and, by extension, China — from accessing Ukrainian minerals. The terms of the agreement are explicit: “states and persons who have acted adversely towards Ukraine must not benefit from its reconstruction”. Finally, the performance of “the deal” matters just as much to Trump. Getting Zelensky to sign on the dotted line is progress in itself, plays well to Trump’s base at home, and puts pressure on Russian President Vladimir Putin to come to the table. So, the deal is a win for Zelensky because it gives the US a stake in an independent Ukraine. But even if Ukraine’s critical mineral reserves turn out to be less valuable than expected, it may not matter to Trump.

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском The agreement was an acknowledgment of the significance of their trade for mutual economic development and the health of the global economy, the joint statement says. China and the US agreed to roll back high tariffs imposed on one another last month for a period of 90 days. The agreement was announced in a joint statement issued on Monday, May 12. The agreement was a result of a high-level meeting on trade and economic affairs held between Chinese and US delegations in Geneva, Switzerland over the weekend. As described in a press conference on Monday by the US Treasury Secretary Scott Bessent who was part of the US delegation, both sides have agreed to reduce the tariffs by 115%. That would mean that the US will reduce its tariffs on China to 30% from its present 145% while the Chinese will lower their tariffs to 10% from its present 125%. These new tariff rates would be effective from Wednesday for the next 90 days. Both the countries also agreed to explore a more stable arrangement in the interim period. China also agreed to reverse additional measures imposed in response to US President Donald Trump’s tariff war, such as putting various US companies on the sanctions list and placing export controls on rare earth minerals. The parties committed to taking these measures as an acknowledgment of the mutual significance of their bilateral trade and its importance for the global economy and for “moving forward in the spirit of mutual opening, continued communication, cooperation and mutual respect,” a joint statement says. The 30% US tariff includes a 10% baseline tariff imposed on all imports by Trump in April after suspending his reciprocal tariff regime for 90 days, and a 20% tariff imposed by the Trump administration before April in the name of stopping the illegal flow of the drug fentanyl. Answering a question on the cooperation between both the countries over fentanyl, the spokesperson of the Chinese Foreign Ministry Lin Jian criticized “the wrongly slapped tariffs on Chinese imports” by citing the issue and claiming that “if the US truly wants to cooperate with China, it should stop vilifying and shifting the blame.” Jian also advised the US “to seek dialogue with China based on equality, respect and mutual benefit.” Relief for the global economy  Trump announced a reciprocal tariff regime on April 2 against all those countries which had a trade surplus with the US, including China. After global backlash, Trump later postponed the implementation of the regime for 90 days, inviting countries to seek bilateral agreements to avoid high tariffs while imposing a 10% common tariff. The Trump administration had claimed that reciprocal tariffs were required in order to lower the US trade deficit, which is over a trillion dollars. China, the third largest trade partner of the US, faced the highest tariff rates under Trump’s tariff war and chose to retaliate. It also called the policy a violation of international law and an attempt by the US to weaponize trade. On Tuesday, Chinese President Xi Jinping reiterated his country’s position that there are no winners in trade and tariff wars, claiming bullying and hegemony will only result in self-isolation. He was addressing the fourth ministerial meeting of the China-CELAC (Community of Latin American and Caribbean States) forum in Beijing. The tariff war between the world’s leading economies was seen as a disaster for the global economy and trade. A large number of US businesses had also opposed Trump’s tariff war. They had claimed high tariffs may lead to a rise in prices which harm both the consumer and domestic production. Several businesses filed lawsuits in the US claiming Trump’s reciprocal tariff regime was illegal and harmful for their ability to do business. US trade representative Jamieson Greer, who was part of the negotiating team in Geneva, claimed that the talks with various countries, including China, is the first step to reducing the US trade deficit and ending the national emergency declared by Trump to authorize the reciprocal tariff decrees, South China Morning Post reported. The Chinese Ministry of Commerce also hailed the agreement as “substantive progress” for mutual economic development. It expressed hope that “the US side will build on the meeting, continue to work with China in the same direction, completely rectify its wrong practices of unilateral tariff hikes, and keep strengthening mutually beneficial cooperation.” Acknowledging that “high levels of tariffs were equivalent to an embargo and neither side wanted that,” Bessent declared on Monday that the US wants a trade relationship with China, though a balanced one. The Chinese Ministry of Commerce also hoped that the US would pursue the matter much more seriously and “inject more certainty and stability into the world economy.” Both the countries have agreed to establish “a joint mechanism” to continue their trade and economic negotiations in future. Text under Creative Commons Attribution-ShareAlike 4.0 (CC BY-SA) license

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском By assuming that trade relations are a zero-sum game in which one party must lose for the other to win, and that a trade deficit represents a loss while a surplus represents a win, President Trump reveals a simplistic view far removed from the dynamics of international trade. Let’s imagine that the global economy is Central America, that Costa Rica imports more goods than it exports, and that other countries accept paper printed by its Central Bank — bills in colones — as payment for their exports. Furthermore, let’s assume that a good portion of their trade surpluses are used to buy Costa Rican government bonds and make deposits in its banks, accepting — due to confidence in the strength of its economy — lower interest rates than they might obtain in other markets, and that those debts can be paid with the same printed paper. Trade deficits arise because a significant share of Costa Rican consumers and investors prefer to source final, intermediate, and capital goods from other Central American countries where prices are lower than at home. In other words, those deficits are the result of a national choice to enjoy a higher quality of life and greater productivity than what its economy would otherwise allow. Under these circumstances, Costa Rica, far from being a victim of other countries’ policies, would actually be enjoying levels of consumption above its means and economic growth beyond what its productivity would justify. The willingness of those countries to hold the colones derived from their trade surpluses in Costa Rican government bonds and bank deposits results in lower interest rates in Costa Rica. This enables a higher sustainable level of public debt, greater investment at low cost to improve infrastructure and service quality, and lower interest rates for private investment — all of which contribute to a higher rate of economic growth without endangering macroeconomic stability. In such a scenario, making imports more expensive through tariffs to boost local production competitiveness and eliminate trade deficits would, one by one, remove these advantages — amounting to nothing more than an own goal. This remains true even if Central American countries did not retaliate by restoring relative competitiveness to its starting point, and even if Costa Rican investors were not left uncertain about whether a future government might remove the tariffs. The U.S. economy faces the world in a situation identical to that hypothetical scenario of Costa Rica. It takes advantage of the fact that with paper printed by its central bank — the dollar — can pay for the real production of other countries, allowing it to live far beyond its means. Far from being “cheated” by other nations, as Trump claims, the United States enjoys a standard of living well above its capacity precisely because of this. That does not mean the U.S. is cheating anyone, since it is thanks to its economic strength that the rest of the world accepts that paper as a means of payment and trusts in its government bonds and banking system. Thus, by assuming that trade relations are a “zero-sum game” — where one must lose for the other to win — and that a trade deficit signals losing while a surplus signals winning, President Trump ignores these realities. He reveals a board-game level of simplification, detached from the complex chessboard that defines international trade dynamics. It is nothing less than a massive own goal. Trade deficits are an economic problem for countries like Costa Rica, which must pay for their imports using foreign currency, often requiring them to take on debt and/or attract foreign investment through subsidies and tax exemptions. This combination of factors permanently threatens macroeconomic stability and forces governments to limit spending on infrastructure and social services to free up resources to cover interest payments and the growing fiscal costs of structuring an economy based on incentives to foreign companies. Adding to the absurdity of Trump’s proposals, his goal is to achieve trade surpluses with every country in the world. However, the United States does not produce coffee or cocoa; thus, with some of the countries that export these products, running trade deficits is not only inevitable but also beneficial for the U.S. Many countries in the region, even without the advantages the United States enjoys, are unlikely to avoid trade deficits — for example, with oil-producing countries or those manufacturing goods that incorporate cutting-edge technologies. In such cases, raising tariffs could severely damage their economies. Trump boasts that the countries affected by the tariffs are lining up to renegotiate, claiming that this was his goal. If so, it marks the beginning of an uncertain period, contaminated by threats and blackmail, with China standing by to benefit from the resentment against the United States. This scenario will severely affect private sector investment plans, employment, and economic growth — not only in the United States but around the world. Far from "Making America Great Again" (MAGA), Trump is diminishing both his country and the world while violating every rule of international trade, both global ones under the WTO framework and those contained in free trade agreements like CAFTA-DR. This, of course, validates the concerns of those of us who argued that such treaties did not guarantee protected access to the U.S. market against political or geopolitical shifts. In international relations, the historical rule has been that decisions are not based on any moral or legal absolutes but rather on the exercise of power from unequal positions ("might is right"). This is why we always doubted that a free trade agreement with weaker countries would truly guide the behavior of the United States. But Trump's overwhelming violations of international law (surprisingly and disappointingly supported by more than half of his country’s political establishment) strip the United States of any moral authority to criticize countries that do not act according to the rules. This imposing attitude, reaffirmed by Trump when he paraphrases emperors and tyrants — enemies of any democratic principle — who claimed that "those who save their country violate no law," leads us to a world where anything is permitted for those who hold power. From the perspective of the definition of civilization, a world where anything goes loses its value. It takes us back to the law of the jungle — the rule of the strongest, of violence and war, or of peace imposed by one over others, not through harmony and goodwill. This is not a new “Washington Consensus”, now guided by the mercantilism typical of the 18th and 19th centuries, because in this case neither multilateral organizations like the World Bank or the International Monetary Fund nor other Western powers share Trump’s decisions. Far from consensus, today the most frequently heard word in those circles is “retaliation”. Latin America will be affected by the potential decline in global GDP growth, the tariffs imposed on our exports, and the rise in interest rates resulting from inflation that could be triggered by higher import taxes in the United States. However, the region could benefit from the U.S. confrontation with its developed-world allies by strengthening economic ties with Europe, China, Japan, India, and other powers of the Global South — without, of course, abandoning the U.S. market. To achieve this, our governments must stop meekly following Trump’s directives, such as preventing Huawei from competing to sell us 5G technology, participating in a shameful deportation policy that violates fundamental human rights, or undermining Panama’s absolute sovereignty over the Canal. What is needed is to build and implement a foreign policy with dignity, one that best serves the interests of each of our countries — not the whims of a single power.

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском I. Introduction U.S. trade with China has significantly grown in recent decades and is crucial for both countries. Today, China is one of the largest export markets for U.S. goods and services (second to Mexico), and the United States is the top export market for China. As Figure 1 shows, this trade—much of which increased after China joined the World Trade Organization (WTO) in 2001—has brought lower prices to U.S. consumers and higher profits for American companies. But it also comes with costs, notably the loss of American jobs because of import competition, automation, and multinational companies moving manufacturing overseas.   Figure 1: US-China Trade over the 20 years Source: U.S. Bureau of Economic Analysis. After President Donald Trump began a so-called trade war with China in 2018, economic tensions between China and the U.S. have been on the rise. Chinese officials have warned that there are “no winners” in a trade war, but the second Trump administration embarked on a new and more aggressive tariff policy. In the first months of his second administration, Trump has threatened tariffs as high as 145 percent on all Chinese goods, while China’s latest retaliatory tariffs on U.S. imports are as high as 125 percent. The Trump administration claims the levies attempt to punish China for unfair trade practices, including Chinese subsidies that hurt U.S. workers and the long-standing accusation that China pressures American companies to hand over their technology and intellectual property, as well as China’s role in illicit fentanyl trafficking. Some economists doubt, however, that Trump’s aggressive approach will achieve its desired goals and raise concerns that tariffs will drive up inflation and the costs of goods, hurting American consumers and exports. This paper attempts to examine the economic effects of the U.S.-China trade war. It first shows the economic effects of the U.S.-China trade war under the first Trump administration and then forecasts for the second Trump administration. II. Trade War between the U.S. and China As Figure 2 shows, the US trade deficit with China has increased as trade between both countries expanded. Therefore, the first Trump administration started the trade war by imposing higher tariffs on Chinese goods. Figure 2: US-China Goods Trade (2001-2024) Figures 3-1, 3-2, and 4 show U.S. and Chinese tariff rates for each other’s goods. As Figure 3-1 shows, the US tariffs on Chinese goods were less than 5 per cent when the first Trump administration began on January 20, 2018. Then the tariff continued to rise. As Figure 3-2 shows, the average US tariffs on China goods were 20.8 percent when the second Trump administration began on January 20, 2025. As Figure 4 shows, after the second Trump administration took office, US tariffs of 10 percent were imposed on all imports from China under the International Emergency Economic Powers Act (IEEPA) on February 1, 2025. Then the Trump administration increased tariffs on Chinese goods to 20 percent on March 3 and to 34 percent on April 2. US tariffs of 10 percent were imposed on nearly all countries under IEEPA, but with some sector carve-outs on April 5. China retaliated against US tariffs by increasing tariffs on U.S. products to 34 percent on April 4 and to 84 percent on April 10. US tariffs ranging from 1 percent to 74 percent were imposed on nearly all countries with a trade surplus with the US, including China (74 percent). US tariff on Chinese goods included an additional 50 percent tariff as counter-retaliation for China’s retaliation announcement on April 10. Then again China faced an additional 41 percent tariff increase under IEEPA (to 125 percent total). However, Trump instituted a broad 90-day pause on steep Liberation Day tariffs, aiming to give time for negotiators to work out new deals. But Trump has not provided a pause for China. In response, China has raised its duties on imports of US goods to 125 percent from 84 percent on April 12, while US tariffs on Chinese imports have increased to 145 percent by adding a 20 percent tariff in relation to the fentanyl. Figure 3-1: US–China tariff rates toward each other and the rest of the world (ROW) before 2025 Source: MacroMicro. https://en.macromicro.me/charts/130548/china-us-tariff-rates  Figure 3-2: US–China tariff rates toward each other and rest of world, 2018-2025  Figure 4: US–China tariff rates toward each other in 2025 Source: Reuters, April 11, 2025. III. Economic Effects of the Trade War between the U.S. and China A.  The first Trump administration Chad Bowen (2023) at the Peterson Institute for International Economics raised a question “was the trade war between U.S. and China worth it for US exporters”? And his answer so far is no. In the middle of the trade war, the United States and China signed a historic trade agreement on a ‘Phase One trade deal’ on January 15, 2020. Bowen supposes that in 2018–21, US goods exports to China of phase one products had grown at the same pace as China’s imports of those products from the world and that US services exports to China had grown at the rate of US services exports to the world. Cumulative US goods and services exports to China in 2018–21 were about 19 percent lower with the trade war and phase one agreement between the two countries (see Figure 5). His estimates suggest that the United States would have avoided export losses of $24 billion (16 percent) in 2018 and $30 billion (20 percent) in 2019 resulting from the trade war. Exports would also have been $27 billion (18 percent) higher in 2020 and $40 billion (23 percent) higher in 2021 than under phase one agreement.   Figure 5: US exports to China would be higher with no trade war. i. US manufacturing exports suffered in the trade war and did not recover. As Figure 6 shows, China purchased only 59 percent of the full commitment of US manufactured products in 2020–21 under Phase One trade deal. Manufacturing was the most economically significant part of the trade deal, making up 44 percent of covered US exports in 2017. Autos and aircraft dominated US exports before the trade war. Both did poorly during the period of 2020–2021. US auto exports reached only 39 percent of the target over 2020–21. The sector’s suffering is a trade war warning. In July 2018, Trump’s tariffs on Chinese imports included auto parts; China’s tariff retaliation hit US car exports. US car exports decreased sharply in 2018, as car makers like Tesla and BMW reacted to the higher costs by moving production destined for the Chinese market out of the United States. (Ford, another major car exporter, including through its Lincoln brand, complained in 2018 that Trump’s separate steel and aluminum tariffs raised the cost of its US-based manufacturing by $1 billion.) Even when China lifted the retaliatory tariffs in early 2019, US exports did not recover. Sales of US aircraft, engines, and parts to China did even worse, reaching just 18 percent of the 2020–21 target. Though the industry was less directly impacted by trade war tariffs, US sales to China plummeted in 2019 after the two crashes of the Boeing 737 MAX. Between March 2019 and late 2020, the airplane model was grounded, with Boeing shutting down production in early 2020. China cancelled orders in April 2020, and though the legal text allows credit for aircraft “orders and deliveries”, additional orders had not been publicly announced by the end of 2021, despite complaints by the Biden administration that China's trade policy was holding back sales. (Exports of the 737 MAX might eventually resume, as Chinese regulators instructed airlines in December 2021 to implement the changes needed to allow the model to fly again in China.) Not all manufactured exports performed poorly during the period of 2020–21. Medical supplies needed to treat Covid-19 significantly increased. US exports of semiconductors and manufacturing equipment also boomed – thanks to a combination of stockpiling by Chinese companies as US export controls in 2019-20 threatened to cut off Chinese firms like SMIC and Huawei as well as increased demand for chips needed for consumer electronics and data servers brought on by the Covid-19 pandemic shift to remote work, schooling, and leisure.  Figure 6: US-China war battered hard US manufacturing exports to China ii.  US agricultural exports suffered in the trade war, received subsidies, and then recovered. To the Trump administration, agriculture was a very politically important part of the trade deal in 2020, despite accounting for only 14 percent of covered exports. As Figure 7-1 shows, when China's retaliatory tariffs hurt US farm exports during the period of 2018–19, the Trump administration awarded the sector tens of billions of dollars in federal subsidies. In the days leading up to the 2020 presidential election, the Trump administration released a report that touted resuming farm sales to China—ignoring the continued troubles facing US manufacturing, energy, and service exports. US farm exports did get back to 2017 pre-trade war levels and ultimately reached 83 percent of the 2020–21 commitment under Phase One deal (see Figure 7-1 & 7-2).  Figure 7-1: US agricultural exports to China Soybeans made up approximately 60 percent of US agricultural exports to China in 2017. As Figure 7-2 shows, exports of US soybeans to China were devastated by the trade war, falling from $12 billion to $3 billion in 2018, because China imposed retaliatory tariffs. Though soybean exports managed to reach their pre-trade war levels during the period of 2020–21, they still fell over 30 percent short of their target under Phase One deal. Products like pork, corn, wheat, and sorghum exceeded expectations, though not necessarily because of the trade deal in January 2020. The outbreak of African swine fever led China to increase pork imports from the U.S. in 2019 before the deal was agreed. (In 2020–21, China's pigmeat imports from the rest of the world also averaged five times 2017 levels.) Wheat and corn imports increased after China began to comply with a 2019 WTO dispute settlement ruling against its unfilled tariff rate quotas. (Compared with 2017, China's imports from the rest of the world in 2020–21 were about 200 percent higher for wheat and 350 percent higher for corn.) Some farm exports also benefitted less from the Chinese purchase commitments under the trade deal in January 2020. Seafood and farm products did not rebound from the effects of the trade war. After being hit with Chinese tariffs, US lobster exports re-achieved about half of their target in 2020–21. US exports of raw hides and skins ended up at less than one-third (see Figure 7-2).  Figure 7-2: US agricultural exports to China (sub-category) iii. U.S. Imports from China: Total US imports from China were down with the beginning of the trade war. For 15 months beginning in July 2018, the Trump administration imposed higher tariffs on Chinese products. The Trump administration began the trade war by imposing tariffs of 25 percent on products covering roughly $34 billion of US imports from China in July 2018 (List 1) and on $16 billion of imports in August (List 2). When China retaliated against the U.S., the trade war continued with Trump imposing 10 percent tariffs on an additional $200 billion of imports in September 2018 (List 3), increasing the tariff rate of those duties to 25 percent in June 2019. In September 2019, Trump hit another $102 billion of imports (List 4A) with 15 percent tariffs, later reducing them to 7.5 percent upon implementation of the US-China Phase One trade agreement in February 2020. (The administration identified another set of products covering most of the rest of US imports from China of more than $160 billion—List 4B—for which it scheduled tariffs to take effect on December 15, 2019 but was cancelled on December 13, 2019.) As a result, as Figure 8-1 & 8-2 show, overall, the trade war reduced US imports from China. Then US imports recovered only slowly, starting in mid-2020. In January 2022, when the term of the first Trump administration ended, US imports from China (red line) remained well below the pre-trade war trend (dashed line), while US imports from the rest of the world (blue line) returned to pre-trade war levels of June 2018. China was the source of only 18 percent of total US goods imports in 2022, down from 22 percent at the beginning of the trade war.  Figure 8-1: Value of US goods imports from China and the rest of the world, 2016–2022 (June 2018 = 100)  Figure 8-2: Value of US imports from China and the rest of the world by trade war tariff list, 2018–2022 (June 2018 = 100) B.  The second Trump administration As of April 12, 2025, U.S. tariffs on Chinese goods are 145 percent, but this tariff rate is not sustainable over a long period of time because it is way too high and because U.S. President Donald Trump and Chinese leader Xi Jinping want to negotiate. In fact, Trump signalled on April 23 that he would cut his 145 percent tariff on Chinese goods substantially. Therefore, it is not reasonable to explore the effects of Trump’s tariffs of 145 percent. Last year, McKibbin, Hogan, and Noland at the Peterson Institute for International Economics (PIIE) examined the impact of now-President Trump’s proposed tariffs based on Trump’s campaign promises that would impose 60 percent additional tariffs on imports from China. They explored the impacts of a 60 percent additional tariff on China with and without other countries’ retaliating in kind by imposing steeper tariffs on imports from the United States. Figures 9 through 14 show the results from their analyses. Figure 9 shows that China experiences the most significant GDP losses (0.9% below baseline by 2026), while the U.S. also experiences a negative GDP growth rate (0.2% below baseline by 2027).  Figure 9: Projected change in real GDP of selected economies from an additional 60 percent increase in US tariffs on imports of goods from China, 2025-40 Figure 10 shows that the direct impact of the U.S. tariff of 60 percent on Chinese employment is initially negative (-2.25% in 2025), but a gradual decline in Chinese real wages eventually restores employment to the baseline after a decade. US employment will fall 0.23% below baseline by 2027.  Figure 10: Projected change in employment (hours worked) in selected economies from an additional 60 percent increase in US tariffs on imports of goods from China, 2025-40 Figure 11 shows that US inflation rises by 0.4% in 2025, with the higher cost of imports due to tariffs not offset by the stronger US dollar lowering prices of imports from other countries. The tariffs on US imports from China are mildly deflationary in other countries (see Figure 11).  Figure 11: Projected change in inflation in selected economies from an additional 60 percent increase in US tariffs on imports of goods from China, 2025-40 The slowdown in the Chinese economy causes capital to flow out of China and into other economies. This is initially a financial capital flow responding to a fall in financial rates of return in China and a rise in expected profits in countries like Canada and Mexico. That financial inflow becomes physical investment over time, which increases production capacity in these economies. Countries that receive the capital experience a trade deficit (see figure 12). This additional production enables the rise in exports to the US economy. While the US trade deficit with China shrinks, the overall US trade deficit increases (figure 12) as the partial relocation of production back into the US economy causes the dollar to appreciate.  Figure 12: Projected change in the trade balance of selected economies from an additional 60 percent increase in US tariffs on imports of goods from China, 2025-40 So far, figures have focused on the unilateral imposition of US tariffs on Chinese products. In figure 13, McKibbin, Hogan, and Noland compare projected changes in US GDP from the unilateral imposition of tariffs with a scenario where China retaliates by imposing a 60% tariff on US goods and services. By 2026, US GDP losses from Trump’s tariff policy more than double if China retaliates against the US (see Figure 13). The impact on US inflation in 2025 yields a similar result (see Figure 14). With Chinese retaliation, US inflation rises 0.7% above baseline compared with 0.4% without retaliation.  Figure 13: Projected change in US GDP from an additional 60 percent increase in US tariffs on imports of goods from China, with and without retaliation by China, 2025-40  Figure 14: Projected change in US inflation from an additional 60 percent increase in US tariffs on imports of goods from China, with and without retaliation by China, 2025-40 IV. Conclusion This paper showed that U.S. tariffs on Chinese goods imposed by the first Trump administration mainly had negative impacts on U.S. exports, although they reduced U.S. imports from China over a short period of time. The analysis by McKibbin, Hogan, Noland (2024) for the second Trump administration also shows that U.S. tariffs on Chinese goods will have negative impacts on US GDP, inflation, employment, and trade balance. This paper also showed that U.S. tariffs on Chinese goods will have larger negative impacts on U.S. GDP and inflation if China retaliates. Then a question arises: “Why does Trump attempt to impose extremely high tariffs on products from China?” Larisa Kapustina,  Ľudmila Lipková, Yakov Silin and Andrei Drevalev (2020) identify four main reasons that led the U.S. to the greatest trade war between the U.S. and China: a) to reduce the U.S. deficit of bilateral trade and increase the number of U.S. jobs; b) to limit access of Chinese companies to American technologies and prevent digital modernisation of the industry in China; c) to prevent the growth of China’s military strength; and d) to reduce the U.S. federal budget deficit. References Bown, Chad, “China bought none of the extra $200 billion of US exports in Trump's trade deal.” Peterson Institute for International Economics, Working Paper. July 19, 2022.Bown, Chad, “Four years into the trade war, are the US and China decoupling?” Peterson Institute for International Economics, Working Paper. October 20, 2022.Bown, Chad, “US imports from China are both decoupling and reaching new highs. Here's how.” Peterson Institute for International Economics, Working Paper. March 31, 2023. Kapustina, Larisa, Ľudmila Lipková, Yakov Silin and Andrei Drevalev, “US-China Trade War: Causes and Consequences.” SHS Web Conference. Volume 73, 2020: 1-13.McKibbin, W., M. Hogan and M. Noland (2024), “The International Economic Implications of a Second Trump Presidency.” Peterson Institute for International Economics, Working Paper 24-20.