U.S.-China Trade Deal: Looking Beyond the Truce


trade war supply chain impact


For the past 18 months, the U.S. and China have been embroiled in a tariff war. The two countries on January 15 signed an agreement that commits to addressing the problem. This Phase I agreement is widely viewed as a step forward.

According to Mauro Guillen, Wharton professor of management, while many challenges remain to be ironed out, the most important aspect of the agreement is that the two countries are finally talking. With the U.S. and Chinese economies being so tightly integrated, any outright confrontation, he believes, “would be a disaster for both countries and for the global economy.”

In a conversation with Knowledge@Wharton, Guillen shares his views on the implications of the deal for the U.S. and China.



Knowledge@Wharton: The U.S. has described the recent U.S. – China trade deal as a significant agreement and China also has spoken positively about it. What will the deal really mean for both countries?

Mauro Guillén: It is clearly a first step; that’s exactly the way in which both governments are describing it; it’s a Phase 1 agreement. The agreement essentially is about not doing anything that would derail the relationship [between the two countries].

It contains some concessions by China in terms of imports from the U.S. of manufactured goods, farm products, and services, and some kind of a vague commitment to enforce intellectual property laws more strongly. This seems to be a truce rather than a comprehensive trade deal which is something that takes much longer to conclude.

Knowledge@Wharton: What do you consider the agreement’s positive achievements to be? More importantly, what does it fail to accomplish?

Guillén: The most important aspect of this Phase 1 agreement is that the two countries are finally talking and negotiating, and that the escalation of tariffs on both sides has come to an end. The United States, as part of the deal, is not implementing the last round of tariff increases that was supposed to come into effect on December 15, 2019.

What’s missing here is a general framework about the relationship between China and the United States — a high-level framework as to what this relationship is going to look like. It is also important to note that none of the tariff increases has been rescinded.

These are the two biggest economies in the world, the two largest trading nations in the world.

They are tightly integrated in terms of trade, many [American] companies do business in China, and [Chinese companies] do business in the United States. For many American firms, having an operational base in China is essential even if they’re not selling in China because they are making goods that then they sell somewhere else.

What’s also missing is a lot of the details as to how we’re going to de-escalate. They have agreed not to continue escalating, but there’s no agreement so far as to how we could go back to where the tariffs were before the trade war was initiated.

Knowledge@Wharton: What are some of the most contentious issues that still separate the U.S. and China?

Guillén: The agreement does include a commitment on the part of China to not manipulate its currency in order to regain competitiveness. And in exchange, the United States has taken China off the list of currency manipulators. That’s a step in the right direction because of all the protectionist measures that countries may adopt, the most dangerous is currency manipulation. It is indiscriminate. It affects every kind of goods and services and it triggers a chain of reactions around the world.

The biggest issue that remains unresolved is the one that lies at the core of the dispute, which is intellectual property. It’s one thing that as part of the Phase 1 agreement China has committed to enforcing intellectual property laws, and quite another that they will do so. And more importantly, that they will be able to enforce the regulations.

Over the last two or three decades, Chinese companies have learned how to get around regulations, how to obtain technology without being detected. It’s going to be difficult for the Chinese, especially initially, to figure out all the ways in which Chinese companies are getting U.S. technology without paying for it.

It is a legitimate request on the part of the United States to have China enforce these laws because obviously intellectual property is valuable. But I think it’s going to take a while. Nonetheless, it is a step in the right direction. There is recognition on the Chinese side that something needs to be done.
Knowledge@Wharton: How has China been dealing with intellectual property issues and enforcement in recent years? Has it affected China’s ability to attract foreign direct investment?

Guillén: Unlike 20 or 30 years ago, the Chinese economy is no longer in a situation in which it either attracts foreign direct investment or it doesn’t grow. China has moved beyond that phase in terms of its economic development. In fact, the biggest development in China over the last 10 years has been the investment by Chinese companies outside China, as opposed to foreign companies in China. Having said that, in certain sectors China continues to welcome foreign direct investment and this is helping them further develop their economy.

The issue with technology was that initially it was a requirement that every foreign company in China had to be a joint venture in which the Chinese party would have a majority. That was an arrangement that lent itself to technology transfer, either officially or unofficially. After 1989, after Tiananmen, China relaxed the rules for joint ownership of foreign ventures. Since then, it has been more difficult for Chinese companies to obtain technology without paying.

But, as I was mentioning earlier, they have found different ways around that as well. So, this agreement, as difficult as it is going to be for the Chinese to implement or to enforce these regulations, at least signifies that China understands that the most important grievance for the U.S. involves intellectual property. As part of this deal, they have committed to enforcing, specifically in pharmaceuticals, intellectual property protections more strongly.

Knowledge@Wharton: One of America’s objectives for the trade war has been to bring back manufacturing jobs to the U.S. To what extent has that goal been met?

Guillén: That is going to be very difficult.

Knowledge@Wharton: Why?

Guillén: There is a study by the United Nations that was published in November 2019 that I think is the best analysis of the consequences of the tariff war between China and the United States. This study found two things.

One was that consumers have been hurt, especially poorer consumers or lower middle-class consumers. Since a greater percentage of their income is [spent on] consumption, whenever there is an increase in tariffs they get hurt more.

The other big finding was that the tariffs have not brought manufacturing back to the United States.

Instead companies, in response to the tariffs, have moved their operations or have sourced whatever it was that they were making, in other countries. So other countries have benefited indirectly from these tariffs. The biggest beneficiaries — and this is a very interesting list — are Taiwan, Vietnam, South Korea, Japan, and the European Union.

It’s worth mentioning that Taiwan has been the biggest beneficiary precisely at a time when there are growing tensions between China and Taiwan. In other words, companies that were making something in China or sourcing something from China destined towards the U.S. market, have essentially said, “Okay, we can find a supplier…or we can quickly switch production to Taiwan.” And they have done so.

Knowledge@Wharton: Have there been any winners in the U.S.-China trade war? If not, which country has lost more?

Guillén: Everybody loses from these protectionist episodes. While we all agree that the goal of the protectionist policies — to compel China to play by the rules — is a legitimate one, the method or the means used to accomplish that goal have not been so. Introducing protectionist measures is always dangerous because while it’s relatively easy to implement them, it’s difficult to take them away. Companies that are now enjoying the protection may become lazy and not work as hard. And they’re going to lobby for those protections to remain in place.

The other problem in this bilateral relationship is that China is not a small, powerless country.

This is the second biggest economy in the world. It’s the biggest trading nation, bigger than the United States. So, China has retaliated — and it has retaliated where it hurts most. Iowa farmers, farmers in the Great Plains, have suffered immensely. The Trump administration has subsidized those farmers to the tune of nearly $20 million over the last 18 months since the trade war began.

Several industries in the United States have suffered. Consumers have suffered. And China’s entire economy has suffered. Given that it’s so much driven by exports, the fact that their biggest market — the U.S. — has become protectionist has had a large, aggregate effect in terms of reducing the growth potential of the Chinese economy. It’s safe to say that in addition to those industries that have been targeted, the entire Chinese economy has suffered because of this trade war.

Knowledge@Wharton: How do you see the long-term effect of the trade war on American companies? For example, how will U.S. tech companies such as semiconductor firms be affected? On the flip side, how will Chinese firms be affected?

Guillén: In general, companies have options at their disposal. They can in principle decide where to produce, where to sell. They can decide how much to invest in different parts of the world. Most of the time, they can switch those investments and move those operations relatively quickly. Companies have sensed — American companies in particular — that protectionism is here to stay in one way or another. But there is a strong public sentiment against free trade these days, and so they’ve been making decisions.

As I mentioned earlier, many of them have switched their sources of production or supplies from China towards Taiwan, Vietnam, South Korea, even the European Union, depending on the product. This will continue.

That’s also the case in semiconductors. The three industries where we’ve seen the biggest shifts of production locations as a result of this protectionism or this trade war have been chemicals, electric machinery, and electronics — that would include semiconductors. And then there are mechanical devices. Those are important sectors in the economy.

As part of the Phase 1 agreement, a lot of emphasis has been placed on automobiles and auto parts. China has promised to increase their imports from the U.S. Ironically, those imports are not going to come from Detroit. They’re going to come mostly from the BMW and Mercedes factories in Alabama and South Carolina where they make BMW and Mercedes SUVs because those are in high demand in China.

The Chinese are not going to buy American cars. They’re going to buy SUVs and they prefer the European ones. The expectation is that BMW and Mercedes are going to benefit from this, but not necessarily GM, Ford, or Chrysler. By the way, this comes in the wake of very bad news from Ford in terms of its Chinese operations. Ford has been reporting over the last few weeks that their sales in China are falling behind.

Knowledge@Wharton: What would be the best way forward for Phase 2 of the US-China negotiations?

Guillén: What’s important is to keep talking. It is also important to recognize that comprehensive trade talks take a long time. It’s not something that you can hope to conclude, let’s say, between now and the U.S. presidential election, for instance. The presidential election is only nine months away. That’s very little time. It would be a mistake to rush this conversation. You need to first establish a good framework that would inform the relationship over the long run, and then you can take care of all the details.

More importantly, during this process they should continue talking, they should continue negotiating. They should also continue to make acts of good faith. Both sides should continue to lower the tariffs that they have increased over the last 18 months. I think that’s very important. So good gestures, a lot of talking, and a lot of patience.

I strongly believe that the deal will not be concluded until after the next presidential election, in which case it could be a different president who is in office in the United States. If the deal is concluded before the presidential election, then it will be another patch. It won’t be a comprehensive deal because there’s literally not enough time to do that. Trade negotiations are very time consuming.

Knowledge@Wharton: What might be the political implications of the trade war, especially the impact on the presidential election?

Guillén: An agreement already existed before Trump was elected, between people from or candidates from both parties, in that China’s behavior is not acceptable over the long run, that China needs to change — especially over intellectual property. There’s more of a disagreement in terms of how important it is to reduce the bilateral trade deficit between the U.S. and China.

Relatively few people would say that is a priority because what really matters is the overall deficit. By increasing tariffs with China, all that we accomplish is that we reduce the trade deficit with China, but then it increases with Taiwan or with Vietnam or with somebody else.

Very few of those manufacturing operations, let alone the jobs, are coming back to the United States.

The other issue is, it all hinges on who is the Democratic president. Some of them are far more radical in terms of trade. At one extreme you have somebody like Bernie Sanders who insists that every trade deal should also be a deal about the environment and about global warming.

That introduces yet another degree of complexity into the negotiations. If Sanders were president and if that’s the way in which trade deals are going to be made after he becomes president, then it’s going to take even longer to do any one deal.

If it’s somebody else like Biden, let’s say — and I’m just picking random names — but Biden I think would probably represent more of a continuation of the style of looking at trade and at potential agreements with other countries that has been the norm in the United States over the last 20 years or so.

Knowledge@Wharton: What is your long-term view of US-China economic and trade relations?

Guillén: Some people are saying that this is the new Cold War. I couldn’t disagree more. When we had the competition geopolitically between the U.S. and the Soviet Union, the two economies were separate; they were not interconnected. But in the case of the confrontation that potentially could be geopolitical between China and United States, it’s very different. The two economies are completely integrated, especially in the manufacturing area.

What is important here is to acknowledge that China and the U.S. are the biggest economies; they need to agree on fundamentals because otherwise the global economy wouldn’t be able to work. That means updating certain institutions including the World Trade Organization, the IMF, and the World Bank, so that we can have a set of tools and arrangements that help us with the situation today, not the situation that was created after World War II.

We’re still using institutions that were put in place long ago.

The important thing is that the U.S. and China need to talk to one another.

They need to agree about basic issues. They can compete, but they also must cooperate. The level of integration is so high that flat-out confrontation would be a disaster for both countries and for the global economy.


The Fed is not doing QE. Here’s why that matters

Attributing rally to the US central bank could wrongfoot investors later this year

Dominic White



Risk assets started this year on a tear. Before the coronavirus outbreak unsettled investors, global equity prices had risen by more than 10 per cent in three months while credit spreads were near record lows.

This left institutional investors wrongfooted, as many were positioned conservatively back in the autumn. To some, the explanation is obvious: no one expected the US Federal Reserve to restart “quantitative easing” a few months ago.

The problem with this explanation is that it is wrong. The Fed is not doing QE. To see why, it is worth revisiting how this policy is supposed to work.

In simple terms, QE can operate through three different channels. The first works by increasing the volume of reserves in the banking system. These are the balances that commercial banks hold at the central bank to settle transactions between themselves. Raising the amount of reserves in the system could encourage banks to increase their exposures to the rest of the economy, boosting the broader money supply.

The second channel works by altering the mix of assets held by investors. For example, if the Fed buys long-term Treasury bonds, it reduces the private sector’s exposure to interest rate risk. If some investors are required to hold these assets for regulatory purposes, a reduced supply should raise their price and lower yields. This in turn could support other asset prices, as a lower discount rate makes future streams of income more valuable today.

Finally, QE might influence investors’ expectations about monetary policy. Buying bonds could make the Fed’s commitment to keeping rates low that much more credible. This forward guidance should suppress interest rate expectations along the yield curve, elevating asset prices further.

The Fed’s attempt to quell problems in the repo market — where investors borrow cash in exchange for collateral such as US government debt — works only through the first of these channels, and even then, only partially. Since the middle of September, the Fed has lent up to $240bn to banks through repo operations and bought roughly $230bn of Treasury bills.

Ordinarily, this would raise the value of reserves in the system by an equivalent amount, $470bn. Yet reserves have increased by just $220bn. The difference is mostly due to the Treasury overfunding the federal deficit, rebuilding the balance on its account at the Fed and withdrawing cash from the commercial banking system. In effect, this has offset 50 per cent of the increase in the Fed’s balance sheet.

More importantly, this is probably the weakest of the three channels outlined above. Reserves rarely constrain banks’ ability to lend. So it should be no surprise that the US banking system has not multiplied up the Fed’s injection of reserves. Instead, banks have increased their assets at a slower pace. Nor are there signs that other investors have exploited the Fed’s calming influence on the repo market to leverage up their positions. Aggregate repo volumes look to have declined since September.

The second channel outlined above does not apply in this case because reserves at the Fed are functionally equivalent to T-bills. Both are risk-free liquid assets, providing a similar rate of return, so the mix of risk in investors’ portfolios is unchanged. The only important difference is that T-bills settle a day later than reserves, meaning banks need to tap the repo market if they need to access intraday liquidity.

The third channel is also moot — the Fed is not using its balance sheet to guide expectations for interest rates. More important were comments from Jay Powell, the Fed chair, in October, when he said it would take a “really significant move up” in inflation for the Fed to raise rates.

The best that can be said about the Fed’s actions is that they have headed off a tightening of monetary conditions.

Perhaps we are getting too hung up on the details. A lot of clients have put it to us that if enough investors believe that what the Fed is doing is stimulus, then it is. Maybe so. The trouble with this logic is that it has been crafted after the event. As markets have rallied, investors have searched for a reason why. We struggle to remember anyone arguing that the Fed’s actions would boost risk assets back in September or October. It seems more like a classic case of rationalisation after the fact.

Rather than obsessing about fluctuations in the size of the Fed’s balance sheet, then, investors might be better off focusing on those things that have changed more fundamentally in recent months, and ask themselves the following questions. Will the stabilisation in global economic data result in a more pronounced upturn? Can corporate earnings recover? Have trade tensions been permanently put to bed? What impact will the coronavirus outbreak have?

Attributing recent market moves to the Fed’s actions is alluring. But it could leave investors wrongfooted again when the central bank pares back its interventions later in the year.


The writer is chief economist at Absolute Strategy Research in London

How I became a China sceptic

At home and abroad, Xi’s hardline approach is having negative effects

Gideon Rachman

Wi Wall of China
© James Ferguson


I first visited China in the early 1990s and its transformation since then is still a source of astonishment. The country’s wealth, power and prestige have risen as fast as the new skyscrapers on the Shanghai skyline.

Throughout this period there have always been sceptics, who predicted that the country’s miracle was about to end. Books with titles such as The Coming Collapse of China (published in 2001) appeared at regular intervals and were just as regularly proved wrong. My own take has always been that China’s rise is for real, that it will continue and that it will transform the world. I even wrote a book about it, called Easternisation.

But I’m beginning to have doubts. This is not because the Chinese economy is now growing at its slowest pace for almost 30 years — although it is. Nor is it because of the rebellion in Hong Kong — although that, too, is part of it. The fundamental reason for my growing scepticism is the establishment of a personality cult around President Xi Jinping.

After the disaster of Maoism, China’s leaders made determined efforts to move away from personality cults and towards a more collective style of leadership. Term limits were established for the country’s president. Deng Xiaoping, who set China on the road to its economic miracle, abandoned the idea that all wisdom was to be found in Mao’s “little red book” and pledged to “seek truth from facts”. His pragmatism allowed the Chinese Communist party to embrace capitalism and open its economy to foreign investment and domestic entrepreneurship.

But under Mr Xi, term limits for the presidency have been abolished and “Xi Jinping thought” has been written into the Chinese constitution. Party members, students and state employees are forced to study the leader’s thought on a regular basis. Billboards quoting Mr Xi’s wisdom overlook city streets. In Shanghai, there are even posters of Mr Xi with rays of light emerging from his head.

Mr Xi’s supporters say that his “strong leadership” has allowed him to crack down on corruption, clean up the environment and lead the country through a trade war initiated by the US. They point out that over the past 40 years China has consistently demonstrated that one-party rule is compatible with rapid economic growth.

But the Xi era is looking increasingly like one-man rule, rather than one-party rule. And it is hard to think of many places — from Ceausescu’s Romania to Stalin’s Russia — where that has worked out well. (Mr Xi, incidentally, would not resent comparisons to Stalin — on the contrary, he has urged his followers to continue to learn from the teachings of Stalin and Lenin, as well as Mao.)

A personality cult makes the adoption of bad policies more likely, as frightened and sycophantic advisers tell the great leader what he wants to hear, rather than what is actually happening. There is evidence that this is already occurring.

The outrageous decision to intern over 1m Uighur Muslims in Xinjiang, so as to “re-educate” them, has been an international public relations disaster. It is also the kind of policy that is likely to alienate a generation and so intensify the problems of separatism and terrorism that it is meant to solve.

Mr Xi also now faces a Hong Kong in open revolt. Even pro-Beijing figures in the territory are frustrated by their inability to persuade him to take a more flexible approach, and wonder if their advice ever makes it to his desk. Some fear that Beijing believes its own propaganda: that the problems in Hong Kong are the product of agitation by hostile foreign forces.

It is a similar story with Taiwan, where Mr Xi’s heavy-handed demands for “reunification” with the mainland have backfired, helping President Tsai Ing-wen, who is detested in Beijing, to her recent crushing re-election victory.

The international and economic situations also show signs of a negative Xi effect. To be fair to the Chinese president, it is likely that US president Donald Trump would have launched a trade war, come what may. But the Xi government’s heavy-handed policies, at home and abroad, have alienated potential allies. Partly as a result, Mr Xi’s China has found itself labelled a “systemic rival” by the EU.

At home, economic reformers are worried about the increasing emphasis on the role of the state in the economy, fearing that it could kill entrepreneurship. One leading Beijing academic says: “We are increasingly living in a totalitarian state.”

Yet any fair account has to accept that Mr Xi can also claim some successes. China’s continued military build-up and diplomatic outreach has altered the balance of power in Asia. Chinese companies lead the world in ecommerce and 5G communications. Britain looks as if it will break ranks with the US and adopt 5G technology from China’s Huawei.

At home, there is no real sign of domestic political revolt. On the contrary, increased state surveillance — combining artificial intelligence, smartphones and facial recognition technology — is strengthening the party’s grip on society.

So it is possible I will be just the latest in a long line of western sceptics who get China wrong.

But it is hard to look at the Xi cult and not feel a sense of foreboding.

Russia’s Black Sea Fleet Ventures Into the Mediterranean

By: Jacek Bartosiak


In 2008, Russia invaded Georgia, which compelled the U.S. Navy and other NATO countries to demonstrate their overwhelming land-attack capabilities in the Black Sea.

Their combined resources and capabilities frightened Russian decision-makers to the point that military officials informed President Vladimir Putin that the Black Sea Fleet would not be able to stop Western forces from destroying Sochi – southern Russia’s unofficial capital, where Putin (like Stalin before him) stays for up to six months each year – and striking any Russian targets throughout the Black Sea Basin.

The Russian leadership then set out to strengthen the Black Sea Fleet, including by restoring submarine-deployed cruise missiles and introducing a Bastion coastal defense missile system.

But the modernization efforts failed to alter the overall balance of power in the Black Sea that had been in place since the collapse of the Soviet empire, in part because Russia did not yet have full control of Crimea and in part because the Black Sea Fleet’s operations have expanded widely over the past several years.

The Soviets’ Foray Into the Mediterranean

To change the balance of power in the Black Sea region, the Russians would need to be able to block the passage of NATO ships through the Bosporus.

To achieve this goal, they need a forward sea presence at the southern European perimeter beyond the Bosporus in the Mediterranean. If this could be achieved, the Turkish Straits could be defended from Western navies, which could then be blocked from entering the Black Sea.

The Bosporus would then become the first bolted position on the outskirts of the Mediterranean, turning the Black Sea Basin essentially into an additional buffer against the West and shielding Crimea, the Don and Volga areas – the soft underbelly of Russia – and of course the southern capital, Sochi.




The Soviet Union tried to create such a buffer by establishing a Mediterranean squadron that would operate separately from the Black Sea Fleet. At its peak, the squadron numbered 30-50 ships.

Its primary task was to block the freedom of action of the U.S. Sixth Fleet in the Mediterranean Sea as well as to support Arab client countries. Essentially, its goal was to keep the Turks below the 43rd parallel (in the southern Black Sea) and the Americans behind the 23rd meridian (west of the British Isles).

When the Soviet Union, which was never a real naval power, collapsed, the Black Sea squadron’s escapades into the Mediterranean also ended. The Black Sea, like the Baltic, was no longer dominated by the continental empire. That opened these waters to U.S. influence and began the process of Western expansion into Eastern Europe that brought with it the establishment of democratic systems.

A Grand Return

The Russians used the civil war in Syria as a convenient excuse to make a grand return to the Levant and the Eastern Mediterranean. The focus was on securing the port of Tartus and providing air cover for land operations and sea communication to the air base in Hmeimim, Syria. Generally speaking, the Russian fleet coped poorly with the task set for it in Moscow.

This is evidenced by the fact that within the Russian armed forces, which are undergoing major organizational shifts, the navy does not wield sufficient influence among the top brass.

In Syria, the Russian navy has produced mixed results. Frigates, corvettes and submarines have been deployed and have launched Kalibr missiles at a number of enemy targets. Perhaps the navy’s most impressive strike early in the campaign came on Oct. 7, 2015, Putin’s birthday, when four flotilla corvettes in the Caspian fired 26 Kalibr NK 3M14 missiles with a range of 1,500 kilometers (930 miles) over Iranian and Iraqi airspace at targets in Syria.

A total of about 25 volleys and 140 missiles were fired, some by Black Sea Fleet frigates located in the Mediterranean approximately 160 kilometers from the Syrian coast. On average, one salvo consisted of 4-8 missiles.

Kilo-class submarines also fired cruise missiles – a total of about 40 pieces at an average distance of 400-900 kilometers deep into Syria. Though Kalibr missiles have proved to be a good weapon system, the Russians do not have enough of them in stock, a problem the French have also had to deal with in their operations in Libya and Syria.

It’s noteworthy, however, that the Syrian factions on which the Kalibr missiles were tested do not have anti-aircraft defense or modern radars, so the weapon has not been properly tested against a professional, sophisticated opponent.

They are also rather expensive, costing up to $6.5 million per piece. And although they are theoretically difficult to detect, their overall effectiveness, beyond demonstrating to the U.S. and other Western countries Russia’s capability to strike from a distance, is difficult to gauge.

The Fleet’s Shortcomings

The other traditional capabilities of the Russian fleet fared much worse. In 2016, the Kuznetsov aircraft carrier, accompanied by the Pyotr Velikiy nuclear cruiser, two rocket frigates and logistics ships, was sent to the Mediterranean Sea.

The squadron left from Severomorsk and while sailing along Europe’s northern rim, the Kuznetsov cruised at less than 10 nautical miles per hour and released plumes of smoke that indicated serious engine failure and poor propulsion. The ship has been waiting for repairs since returning to its home port in February 2017.

The Kuznetsov is able to carry up to 50 planes and helicopters, but when it passed Gibraltar, it had only 10 Su-33, four new MiG-29K and a few helicopters. The reason was the lack of pilots trained to fly aircraft stationed on a carrier and the lack of operational equipment.

Since the Kuznetsov has no catapult, the planes take off from the ramp with the help of afterburners, but in this case the low speed of the ship (it needs to sail at a minimum of 20 nautical miles per hour) prevented combat launch.

In total, on-board aircraft made only 420 combat flights over Syria, of which as many as two-thirds were from land bases in Syria. In addition, two planes crashed from the sea due to a chassis failure and poor pilot training.

Meanwhile, the Pyotr Velikiy battlecruiser participated in very few operations because it did not have the capacity to strike at land from the sea; with ongoing renovations, this is expected to change.

Russian maritime logistics performed better than the fighting fleet. Russian vessels sailed constantly from Russian ports across the Bosporus to Syria, mainly along the Novorossiysk-Bosporus-Tartus route, transporting up to 100,000 metric tons of cargo per month. This was done thanks to the mobilization of a landing fleet that included ships made in the PRL – the Toad 775 project, which can carry a Russian marine battalion and 12 tanks with supplies.

In addition, civilian ships carrying civilian crews were purchased in Turkey, Greece and even Ukraine and painted in the Black Sea Fleet colors so that they would not be stopped by the Turks on the Bosporus.

Russia’s presence in the Eastern Mediterranean, Syria and Libya could be a step toward achieving Moscow’s goal of shielding the Black Sea from Western influence.

But a number of other pivotal changes would need to be made before it can really alter the balance of power in its favor, especially as other powers grow increasingly interested in establishing a foothold in the region.

Who Pays for the Green Deal?

As laudable as they are, the European Commission's proposals for addressing climate change rely overwhelmingly on forms of financing that violate EU rules. Because the Commission is barred from assuming debt, the European Investment Bank will do so on its behalf, and the European Central Bank will ultimately be left holding the bag.

Hans-Werner Sinn

sinn90_DUELGetty Images_euroshadow


MUNICH – Under President Ursula von der Leyen, the new European Commission has big plans to address climate change. With a €1 trillion ($1.1 trillion) investment package, it hopes to transform Europe into a carbon-neutral economy by 2050.

But much of that €1 trillion for the Commission’s proposed Green Deal would be generated through financial-leverage effects. In 2020, the European Union will formally allocate for such purposes only around €40 billion, most of which is already included in the budget from previous years; arguably, only €7.5 billion of additional funding under the plan would actually be new.

As with the previous Commission’s 2015 Juncker Plan, the trick, once again, will be to muster the lion’s share of the quoted sum through a shadow budget administered by the European Investment Bank (EIB). The Commission, after all, isn’t allowed to incur debt; but the EU’s intergovernmental rescue and investment funds are.

In essence, the EU is doing what the major banks did before the 2008 financial crisis, when they circumvented regulation by shifting part of their business to off-balance-sheet conduits and special-purpose vehicles. In the case of the EU, the guarantees offered by the Commission and individual EU member states are sufficient for a high credit rating, and thus for the issuance of European debenture bonds. The funds generated will be used for public and private purposes, and sometimes even for public-private partnerships. But should the guarantees be called in one day, eurozone taxpayers will be the ones to foot the bill.

These planned shadow budgets are problematic, not just because they would allow the Commission to circumvent a prohibition against borrowing, but also because they implicate the European Central Bank. To be sure, ECB President Christine Lagarde has already announced that she wants the bank to play a more active role in climate-friendly activities within the eurozone. And the ECB is now considering whether to pursue targeted purchases of bonds issued by institutions that have received the Commission’s climate seal of approval.

In practice, of course, this most likely means that the ECB would buy up the “green” bonds now being devised by the EIB. Those purchases will then reduce the interest rates at which the EIB can take on debt, ultimately leading to activation of the printing press to provide the money for spending on climate policy.

It is laudable to want to do something about climate change. But under the current plan, the ECB would be pushed into a legal grey area. The institution is not democratically controlled, but rather managed by technocrats on the Executive Board. Every member state, big or small, appoints its own representative, who then has equal voting rights, personal immunity, and the autonomy to operate free from any parliamentary accountability.

Moreover, under the Maastricht Treaty, the ECB Board is primarily obligated to maintain price stability, and may support separate economic-policy measures only if doing so does not endanger its ability to fulfill this mandate. In the case of the Green Deal, the dangers are obvious.

If the additional demand created by an expansion of green projects is funded by printing money instead of collecting taxes, it will not withdraw demand from other sectors of the European economy and would therefore be potentially inflationary.

Situations like this serve as a reminder of why Article 123 of the Treaty on the Functioning of the European Union strictly prohibits the ECB from taking part in the financing “of Union institutions, bodies, offices or agencies, central governments, regional, local, or other public authorities, other bodies governed by public law, or public undertakings of Member States.”

But, of course, the ECB has already circumvented this rule by purchasing around €2 trillion in public debt from the market, thereby stretching the limits of its mandate to a legally dubious degree.

The latest plans to circumvent the Maastricht Treaty will not improve matters. Before the financial crisis, the ECB was concerned only with monetary policy. During the crisis, it turned into a public bailout authority rescuing near-bankrupt banks and governments. Now, it is becoming an economic government that can print its budget as it sees fit.

The impending violation of the spirit of the Maastricht Treaty will be twofold: the EU will be assuming debt covertly, and it will be doing so through the printing press. As such, the Commission’s plans will further undermine the credibility of the very institution on which Europe relies for its financial and macroeconomic stability and its long-term growth prospects – and this at a time when the world is becoming even more uncertain, competitive, and aggressive.


Hans-Werner Sinn, Professor of Economics at the University of Munich, was President of the Ifo Institute for Economic Research and serves on the German economy ministry’s Advisory Council. He is the author, most recently, of The Euro Trap: On Bursting Bubbles, Budgets, and Beliefs.