- The FT has news that London’s position as the dominant global financial hub is slipping, with the UK capital now tied with New York for top spot in the latest rankings. Elsewhere Barry Eichengreen and Kevin H. O’Rourke examine the latest economic data comparing the present crisis with the Great Depression across a range of indicators (including global output, world trade, and equity markets). Robert Shiller, meanwhile, explains the difficulties of using past experience to predict the course of the current crisis.

- European Geostrategy suggests that EU security and defence policy is like a jazz band and explains why a White Paper providing a “grand strategy” is needed. EUobserver, meanwhile, has news on the emerging shape of the European diplomatic service – its structure and staffing – as member states gear up to secure the important EEAS secretary general post.

- Elsewhere, Constanze Stelzenmüller takes an in-depth look at the travails of German security policy, offering insights into how it might evolve. Highlighting the lack of strategy, she argues that “fundamental decisions regarding German security policy have been repeatedly forced into the Procrustean bed of moral necessity, domestic imperatives, or the demands of external alliances.”

- Finally, over at openDemocracy, Andy Yee explores the “hedgehog’s dilemma” between China and the West, highlighting a gradual acceptance of different core values. TIME magazine, meanwhile, assesses the slow progress toward democracy in Hong Kong and the possible wider implications from Beijing’s perspective.

Yale’s Jeffrey Garten thinks America needs to face up to a key fact: it doesn’t have the leverage to deal with China on its own. So, he says, it needs to partner up with others:

It doesn’t take a genius to see that America needs more help in dealing with China. That’s why we must shift from what is primarily a bilateral and at times unilateral, pound-the-chest approach to one involving more support from other key countries, many of whom are also having big problems with China, including the European Union and India.

This enhanced multilateralism must be based on at least two premises that are hard to discern in U.S. policy today. The first is that China is not just bursting on the global stage, but rather is changing the world as it does so. Put another way, we can forget about trying to force China into conforming to Western rules and institutions without allowing the country a big voice in reshaping those arrangements to serve its own needs. Secondly, the U.S. and its partners are better off compromising with China on these arrangements so long as they have rules and enforcement mechanisms. The key goal must be to encourage China to obey laws and regulations that are agreed upon.

Not sure I’m wholly convinced that Van Rompuy and his travelling circus are the missing link in getting China to be a constructive world citizen – but hey, we can dream.

There are disturbing reports floating around today that the Chinese government has “ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee.”

The FT, and the city analysts it has spoken to, are speculating that the move may be in retaliation for US arms sales to Taiwan and Obama’s decision to meet the Dalai Lama.

In other cheery news, Iran is promising the ‘demise’ of the liberal capitalist system. But that’s supposed to be tomorrow.

One of the most significant developments at Copenhagen was the emergence of the BASIC coalition – Brazil, South Africa, India and China – which negotiated the final details of the Copenhagen Accord with the United States.

My understanding is that BASIC was formed at China’s instigation. China agreed a Memorandum of Understanding with India in October 2009, committing the two countries to working closely together at Copenhagen. It then invited Brazil and South Africa to join the party, at a meeting in Beijing a week before Copenhagen started. Sudan was also invited to represent the G77.

According to Jairam Ramesh, India’s environment minister, the four countries decided that they’d walk out of Copenhagen together if necessary:

We will not exit in isolation. We will co-ordinate our exit if any of our non-negotiable terms is violated. Our entry and exit will be collective.

During Copenhagen, China worked extremely closely with India, with the two delegations meeting up to six times a day. It also engaged intensively with the other members of BASIC. In the final meeting with the Americans, China agreed to accept a limited international monitoring of its targets (India claims to have pushed China on this point).

The decision was also taken to drop language, setting a deadline for turning the Copenhagen Accord into a legally binding agreement. South Africa and Brazil both appear to have been unhappy with this decision.

Since Copenhagen, the BASIC countries have met once and have agreed to continue to get together on a regular basis. They want the Copenhagen Accord to set the stage for a ‘twin track’ agreement – with tough and binding targets for developed countries through Kyoto #2 and voluntary commitments for themselves under a new agreement.

No-one really knows how the US would fit into this picture. It is also increasingly clear that they and the US left Copenhagen with quite different impressions of what will happen next. The US believes that large emerging economies now have “very explicit activities and obligations”. I don’t think they believe they are committed to anything significant, beyond what they agreed at Bali or put on the table on a voluntary basis before Copenhagen started. (more…)

- With President Obama embarking on his visit to Asia, John Plender examines the nature of China’s challenge to US dominance. Cheng Li and Jordan Lee suggest what the President has to do in striking the right tone for US-China relations going forward. Kishore Mahubani, meanwhile, views Asia’s rise through the prism of Francis Fukuyama’s End of History twenty years on.

- In a wide-ranging interview with Der Spiegel, Russian President, Dmitry Medvedev talks about Stalin, democracy and the rule of law, his relationship with Vladimir Putin, and ongoing Western entanglement in Afghanistan.

- Elsewhere, Stefan Theil argues that, aided by the financial crisis, the EU’s global standing is on the rise:

“The EU’s modus operandi — sharing power, hammering out agreements, resolving conflict by endless committee — can be boring and even frustrating to watch”, he argues, “[b]ut in an increasingly networked and interdependent world, it has become the global standard.”

Julian Priestley, meanwhile, suggests four conditions if the EU is to get the most from its “institutional architecture”.

- Finally, writing in the New Yorker, Seymour Hersh explores US concerns about the safety of Pakistan’s nuclear arsenal amid growing instability.

On climate, campaigners are unbelievably craven when it comes to the big emerging economies. China, in particular, gets treated with kid gloves. Within NGO circles, it is now more or less obligatory to kowtow to Beijing’s domestic track record on clean energy. Which is all very well – but I see absolutely no signs of Chinese leadership internationally (although its track record in the G20 shows how quickly it can pull out its finger when hard economic issues are at stake).

Weakness on China is especially egregious now that the country is above average global per capita emissions. Campaigners should be demanding that China ties itself to a date when its emissions will peak and then to commits to deep cuts by mid-century. (Armed with such a commitment, of course, China itself could then begin to turn the heat up on America – rather than allowing the US congress to bleat about US competitiveness.)

A failure to ask hard questions of China is bad for lower income countries. Not only will they suffer worst as the climate changes, they are going to wake up in ten years’ time to find that most of the global carbon budget for 2 degrees has been spent. Their interests are being sacrificed on the altar of G77 solidarity, with the global NGO community helping sharpen the knife.

The problem is similar, if less extreme, for the world’s other rising powers. Their per capita emissions may be lower than China’s and NGOs less terrified of offending them. But still, a country like India has 17% of the world’s population – which gives it quite a stake in our collective future. It is also massively vulnerable to a changing climate (especially as a lack of water disrupts food production).

But yet India is notoriously rubbish at international climate talks. So all the more credit to Malini Mehra, from the Center for Social Markets, for her persistent (and unusual) attempts to shine a light on India’s failings.

“In recent months, India has sought to challenge its image overseas, and in growing quarters at home, as recalcitrant and obstructionist on climate change,” she writes in her latest critique.

“[But] in a showdown this week with the old guard, the reformist environment minister, Jairam Ramesh, had to tone down his climate advice to India’s Prime Minister, Dr. Manmohan Singh. Political correctness won, but the loser was India’s climate security.”

Here’s the rest of her analysis: (more…)

As the spotlight shifts from the UN General Assembly and world leaders converge on Pittsburgh for the G20, there’s been much debate about the prospects for success and the competing agendas of member countries.

- The core negotiations seem set to finalise agreement over a “framework for balanced and sustainable growth” – particularly critical from US and Chinese perspectives – that seeks to give the IMF a greater reporting role in policing global imbalances. The FT’s Money Supply blog offers a sceptical comparison of the leaked draft agreement with the IMF’s current role.

- As to the Europeans: Gordon Brown seems to be adopting a broader focus, calling in an NYT op-ed for “a new system of governance” to form the “next common economic goal”. (He also announced that UK Business Minister Shriti Vadera would be going on secondment to the South Korean government to help develop proposals on global financial architecture ahead of their G20 presidency next year.) For Angela Merkel, the “most important subject” is financial regulation; she argues that “we must not search for substitute issues”; and for Sarkozy too, the top priorities look to be bankers’ bonuses and agreement over capital requirements for banks.

- Trade and protectionism are sure to form another important aspect of negotiations, particularly for China and India. VoxEU takes an interesting look at trends in world trade since the November 2008 Washington Summit,  highlighting how G20 states’ oft-proclaimed commitment against protectionism has been broken by member governments approximately once every three days since last year’s commitments. “No other statistic”, Simon Evenett argues, “better demonstrates the paucity of global leadership on contemporary protectionism”.

- Robert Zoellick, President of the World Bank, calls for the summit to focus on the world’s developing economies, highlighting the positive contribution they can make to the health of the global economy. Pittsburgh, he argues, can mark the advent of a more “responsible globalisation” founded on “multiple poles of growth”. Brazilian President, Luiz Inácio Lula da Silva, meanwhile, presents his take on the G20 grouping in the LA Times.

- Around the think tanks, finally: Brookings has an in-depth report focusing on some of the broader implications of the G20 agenda, from the protectionism issue to African and Latin American perspectives, as well as assessing the G20’s approach to climate change. The Carnegie Endowment, meanwhile, has an interesting take on Saudi Arabia’s approach to the summit, given its increasing exposure to instability in the financial markets and vulnerability to shifts in oil and food prices.

Elsewhere, Chatham House has analysis of some of the key short-term economic indicators, as well as long-term GDP forecasts – arguing that it is still to early too be coordinating exit strategies. The Canadian-based Centre for International Governance Innovation, meanwhile, takes a comprehensive look at some of the challenges facing the G20 as a forum for global economic governance, with contributions from policymakers and academics alike.

- Writing in the New Yorker, Malcolm Gladwell explains how “the roots of Wall Street’s crisis were not structural or cognitive so much as they were psychological”. Overconfidence among bankers, he suggests, in addition to the more familiar arguments about poor regulation and simple incompetence, played a significant role in the financial crisis.

- The Prospect blog, meanwhile, discusses how “the Indian Ocean is emerging as a focus for Chinese logistical and naval expansion” – something being felt acutely in Washington and New Delhi. Staying with the US and India, WPR takes an interesting look at Hillary Clinton’s recent trip to South Asia.

- Elsewhere, the Channel 4 News blog has more details about the UK’s upcoming Iraq War Inquiry – suggesting that it is due to hear “mountains of evidence” and, given the expansive nature of its remit, is unlikely to have lawyers present.

- Finally, Adam Roberts has an interesting piece in The World Today assessing the current state of the Geneva Conventions. Sixty years later, he ponders, are the laws of war still relevant to the changing nature of conflict?

US climate envoy, Todd Stern has tried to clarify exactly what the Obama administration wants from China on climate at Copenhagen (see post from Leo and me on the confusing signals the US has been sending out).

So here it is:

• “Very considerable” reductions on China’s business as usual emissions.
• These reductions to be binding, transparently measured and verifiable.
• No absolute emissions reductions but (preferably at least) a designated year when China’s emissions should peak.
• China’s commitment to be consistent with the world stabilising its emissions at around 450 ppm (“we don’t know whether it’s 445 or 460 or… but in that general range”).
• The package to be backed up by carbon offsets from the US to China – but these offsets should have “real environmental integrity” – and technology cooperation.

Obvious questions to ask Stern -

1. Do you believe that President Obama’s domestic commitments on climate are consistent with a 450ppm stabilization target?
2. Will the United States be pushing for a 450ppm target to be enshrined in the Copenhagen agreement?
3. When does the United States think Chinese emissions should peak to meet 450ppm?
4. When does the United States expect global emissions to peak?

Today’s Guardian has a big splash announcing that “China and US held secret climate talks“.  According to Suzanne Goldberg,

A high-powered group of senior Republicans and Democrats led two missions to China in the final months of the Bush administration for secret backchannel negotiations aimed at securing a deal on joint US-Chinese action on climate change, the Guardian has learned.

The report continues that the track 2 talks were orchestrated by the Carnegie Endowment’s Bill Chandler, who says that “My sense is that we are now working towards something in the fall… It will be serious. It will be substantive, and it will happen.”

Hmm. For all the breathless talk of “secret” dealings and ”backchannel” negotiations about which “the Guardian has learned”, you have to figure that the talks probably weren’t that secret if Radio Free Asia was able to report fully two months ago that,

China has raised hopes for environmental cooperation with the United States despite differences that emerged during a Washington visit by leading officials this month. 

On March 18, Xie Zhenhua, vice chairman of the National Development Reform Commission (NDRC), stressed a positive outlook for cooperation on climate change at a Washington meeting co-hosted by the Carnegie Endowment for International Peace and the Global Environmental Institute of Beijing. After years of disagreement over which country bears greater responsibility for global warming, Xie, China’s top climate negotiator, voiced readiness to discuss joint action.

If you’re wondering where Bill Chandler is coming from on climate change, then this 2007 interview with CFR  is worth a look (n.b. his heavily sceptical view of Kyoto’s crappy Clean Development Mechanism); more up-to-date and in depth is this 2008 article entitled “Breaking the Suicide Pact: US-China Cooperation on Climate Change” (see also this summary on China Stocks Blog).

There’s a lot of good stuff in the article, with a particular focus on cooperation on best practice technologies and innovation in new ones.  But here’s what gives me pause: “Both countries could reach a deal – without a treaty – that could unlock the global stalemate”.

Without a treaty? Hmm. Chandler’s article is full of sensible proposals for confidence building measures between the US and China.  But none of these can substitute for a global system of binding, quantified targets, if the world wants to be sure of stabilising greenhouse gas concentrations at any given level.  Initiatives like this are useful – but if we learned anything from the Bush Administration, it’s that there’s always the risk of them becoming figleaves.

As Sri Lanka’s assault on the Tamil Tigers continues, Kotare has an interesting observation on an angle of the conflict that I’d missed:

While the US is entangled in an escalating war in Afghanistan, China is quietly strengthening its strategic position in the Indian Ocean. One sign of this is the way Beijing is helping the Sri Lankan government crush the Tamil Tigers while building a port at Hambantota, on Sri Lanka’s south coast.

China’s Achilles heel is its reliance on imported oil and minerals from the Middle East and Africa, and the need to ship those resources across the Indian Ocean and through the Straits of Melaka and the South China Sea. This poses a security problem for Beijing. If China and the US went to war, say over Taiwan, the US Navy could stop the flow of oil and minerals and do real damage to the Chinese economy and war machine. Similarly, India, which has a large navy, could interdict China’s ships in the Indian Ocean.

 To safeguard its shipping, China needs to be capable of projecting power into the Indian Ocean, the Middle East and Africa. From ports and airfields like Hambantota, sited along the Eurasian seaways like a ’string of pearls’, Chinese forces could gather intelligence, protect its shipping and attack hostile navies.

What next for ‘Chimerica’, as Niall Ferguson calls the unholy alliance of Chinese capital and US debt that has grown up over the last decade.

China is concerned about the erosion of value in US Treasuries and the dollar:

China should seek guarantees that its $682 billion holdings of U.S. government debt won’t be eroded by “reckless policies,” said Yu Yongding, a former adviser to the central bank.

The U.S. “should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way,” Yu, who now heads the World Economics and Politics Institute at the Chinese Academy of Social Sciences, said in response to e-mailed questions yesterday from Beijing. He declined to elaborate on the assurances needed by China, the biggest foreign holder of U.S. government debt.

But what can China do? John Higgins, senior economist at Capital Economics: ‘It’s self-defeating for China or others to offload Treasuries. if China dumped US Treasuries, it would push up yields, slow economic activity in the US, and slow demand for imports. Is that in China’s interests? No.’

On the other hand, this from Steve Barrow, currency strategist at Standard Bank:

‘The issue of declining appetite among foreign central banks for US Treasuries is not just about supply. It’s also a protectionist issue. For us to envisage a significant rise in the yield of US Treasuries and a fall in the dollar, it would have to be because of a rise in protectionist and isolationist tit-for-tat policies. But that’s the way the world is heading. You can see creeping protectionism all the time. And that could lead to emerging market central banks keeping more of their reserves locally, to defend their currency and support their economy.’

In an interview with the FT yesterday, Wen Jiabao sets out China’s negotiating position in the run up to the Copenhagen climate negotiation. Three main points:

• Green stimulus as part of the response to the financial meltdown.
• Domestic action to increase energy intensity by 4% a year (“We failed to meet the targets in the first two years of the five year period, and we succeeded in meeting the target in 2008.”)
• No quantified emissions targets for China – the country is still at an early stage of development and “in terms of per capita greenhouse gas emissions, we are certainly not the biggest one.”

How strong is China’s position? Not very, I think. China is obviously right to expect the rich world to do more, but if they accept tough targets and China refuses to, then there are two consequences. 450ppm stabilization becomes impossible – and it’s the rest of the G77 that will end up with a highly inequitable deal.

(more…)