The IMF is under pressure but on a mission

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Hello from Trade Secrets. It’s the annual meetings of the IMF and World Bank this week in Marrakech. It’s unlikely to produce an array of instant solutions to the myriad problems facing the world, but as today’s main piece points out, at least the fund is showing its worth. I also look at the controversy stirred up by the EU’s attempts to green the world with its trade policy, while Charted Waters is on slowing global economic growth. Last week a possible next stage emerged in the EU’s campaign to level the playing field for state-subsidised imports from China, or at least give the impression of doing so. Following its investigation into Chinese handouts to electric vehicles, Brussels is considering doing the same on wind turbines.

The rising cost of rescues from debt

Marrakech is a nice place to hold the IMF/World Bank meetings, for sure. Global governance hipsters will know it’s a location with one big success already on the board: the creation of the WTO was agreed there in 1994. (I’m assuming that still counts as a success, given the institution’s limited achievements since.)

But as well as the weekend’s events in Israel, which will no doubt overshadow the meeting even if it can’t do anything about them, there’s a lot of gloom to go round on a bunch of subjects — high inflation, slowing growth, climate change, the Ukraine war and the recent earthquake in Morocco. Mark Sobel, former US Treasury official with a long career including representing his country at the fund, has a suitably sombre assessment here.

Still, lots of trouble around and particularly debt distress from high global interest rates means at least the crisis management role of the IMF (unique unless you count China’s selective programme of bailing out its own bad BRI loans) comes into its own. There’s plenty of criticism of the fund, including its approach to organising debt restructurings. But IMF shareholders are moving towards agreeing to boost its firepower without a prolonged row about changing voting shares to benefit the likes of China, something I wrote about last week.

There’s a big and troubling issue here though, as well described in this recent Centre for European Reform paper on IMF lending by Sander Tordoir and Tobias Krahnke. Normally, high demand for IMF resources comes at a time of low or at least falling official interest rates, such as the 2008 global financial crisis. (Makes sense: low growth leads to both debt problems and central banks loosening.)

IMF rescue loans (for middle-income countries that is — low-income nations borrow at zero per cent) are priced off a weighted average of short-term rates for the dollar, the euro, the yen, sterling and the renminbi — the currencies in the basket of Special Drawing Rights, the IMF’s unit of account. This time round, the crisis is well in train and IMF crisis lending at market rates (in the so-called “General Resources Account”, or GRA) at market exchange rates has rocketed. But the collective rate cycle has yet definitively to peak in the SDR currencies. IMF crisis lending is still way cheaper than the borrower countries could get on the private capital markets, obviously, but the higher cost of an IMF rescue does narrow their margin of growth and fiscal error if they’re to get out of debt crisis.

The CER authors suggest putting a cap on IMF lending rates. Interesting thought, but might be a tricky sell to the IMF creditor shareholders, especially the US. It’s not the way anyone would wish it, but there’s a solid reason for preserving heavy American influence over the IMF and the World Bank — it makes it that much easier to get funding for them voted through the US Congress.

The EU’s thicket of forest-saving bureaucracy

Last week’s meeting of the EU and Mercosur negotiators to try to get their draft bilateral trade deal over the ratification line went, it seems, probably as well as it might have done. The talks didn’t actually break down, the atmosphere seemed reasonably constructive and the conversation has now moved to a technical level.

It still probably has a less than evens chance of making it into law, though. The EU’s demands for binding environmental rules in the deal (and its separate new regulation banning crops raised on recently deforested land) plus Brazilian president Luiz Inácio Lula da Silva’s desire to retain more powers over public procurement are going to be tricky to incorporate. (If you want to hear me and three better-informed people than me discussing LatAm trade in general and Mercosur in particular on the Bruegel think-tank’s regular podcast, by the way, you can do so here.)

There’s more at stake here than just this bilateral. It’s about whether the EU’s new range of instruments to green its trade — in this case the deforestation regulation — are so complex they’re impossible to comply with. Indignant resentment at the regulation from middle-income agricultural exporters, 17 of which last month complained to the EU about being micromanaged from Brussels, isn’t being faked. The tracing and geolocation requirements, including keeping supply chains of certified bulk commodities separate, are hefty bureaucratic challenges. (See this excerpt from the regulation.)

And of course this is just a warm-up for the blockbuster of EU green unilateralism, the carbon border adjustment mechanism (CBAM). I’ve argued before that protracted WTO disputes over the CBAM are, oddly and depressingly enough, one of the world’s best chances of actually moving towards a global carbon price. (The UK, for example, is pondering whether it can afford to diverge from EU carbon pricing, and in fact from the deforestation rules as well.) But the perception of caprice and coercion in CBAM has similarly irritated the emerging markets.

These EU regulations bear the mark of having been substantially drafted by environmental and tax types in Brussels who don’t necessarily get the risk to trade relations from difficulties in compliance and a perception of coercion. There’s a lot of technical consultation and diplomatic mollification with trading partners for the EU to do. Still, it’s only the future of the planet at stake, no biggie.

Charted waters

As noted above, there’s gloomy growth news out of the world economy, which is clearly now at its weakest since the crunch caused by the pandemic.

The weakening in China’s economy since the spring has added to a general slowdown because of energy price shocks and tighter monetary policy.

Trade links

Some evidence that deglobalisation is adapting rather than going into reverse: the Bank for International Settlements says that value chains are lengthening, with Asian countries in particular interposing themselves between the US and China.

The WTO has cut its forecast rate for trade growth this year in half from an already low projection, but continues to think it will recover next year. (I wrote last week about why we shouldn’t panic about this quite yet.)

An interesting paper for the ECIPE think-tank seeks to do for the EU what this work did for the US — show that mini-deals over various unglamorous aspects of trade have influence even in the absence of high-profile preferential trade agreements.

The EU is planning to help out the UK with a partial extension of helpful rules of origin which might stop — or at least delay — post-Brexit trade barriers destroying Britain’s car industry.

The FT reports that the Belgian security services think China might be using Alibaba’s vast distribution centre in Liege for collecting sensitive information.

Trade Secrets is edited by Jonathan Moules