From the campaign trail to the White House, US President Donald Trump has made it clear that he considers China to be the United States’ greatest geostrategic threat. But when it comes to America’s European allies, he sees them as lagging not too far behind the Chinese. But while a fledgling global trade war and a collapse of transatlantic relations are dominating headlines, what’s not making page one is the expansion of a China-led bank, and how its formation highlighted the first signs of the current breakdown in EU-US relations.

The Asia Infrastructure and Investment Bank (AIIB) opened on January 2016 with a near $100 billion capital base and European powerhouses Germany, France, Italy, and the United Kingdom among its founding members. The creation of the multilateral bank was fueled by China’s desire to lead a rival to the US-led World Bank and the Japan-led Asia Development Bank (ADB). All three seek to answer the nearly $8.3 trillion infrastructure demand in greater Asia.

From the outset, the US and Japan spurned China’s invitation to join the AIIB. But they were the only G7 nations to decline. Washington, under the leadership of Barack Obama, assumed its European allies, the UK in particular, would immediately follow suit. But the British government completely ignored the White House’s warning not to join, giving the US less than 24 hours’ notice before it became a member. Germany’s government, including then-Finance Minister Wolfgang Schäuble, met with France and Italy, and the three nations together decided to follow the UK’s lead and become founding members as well.

For the Trump administration, America’s $375 billion trade deficit with China is the biggest challenge to his country’s global standing. In reality, the US is hurt much more by its refusal to support the multilateral bodies it helped create in the post-war era, and new institutions like the AIIB.

The AIIB provides opportunities to nations that argue that current World Bank and IMF quotas do not accurately reflect the size and influence of their economies. Two years after its formation, the AIIB has expanded from 57 to 84 members, moving beyond Asia and Europe to include Latin American and African nations. This expansion is taking place at the same time that China is pushing its Belt and Road Initiative, a multi-trillion dollar trade and infrastructure project spanning seaports, waterways, roads, bridges, railways, and other brick and mortar projects in more than 80 countries.

Europe’s Stake

Although the bulk of AIIB’s infrastructure financing has been in Asia—there are already five projects in India, approximately $285 million in loans to the energy and power sector in Bangladesh, and a $100 million loan to a state-owned infrastructure firm in Indonesia—the bank has just announced it is including Kenya, and it has recently financed a project in Egypt. Ecuador, Peru, and Chile are among the Latin American nations looking to join. Many of the AIIB’s existing projects were implemented in collaboration with other multilateral banks, including the World Bank, ADB, the Inter-American Development Bank (IADB), and the European Bank for Reconstruction and Development (EBRD).

With the US absent, the AIIB’s largest non-regional shareholders are Germany (4.3 percent), France (3.2 percent), the UK (3 percent), and Italy (2.5 percent). Germany and the UK hold vice presidency seats, and from these positions, they can weigh in on human rights practices, an area of concern for the previous White House administration.

But not anymore—and with a US president taking the wrecking ball to the American-built world order, there has been a drastic shift for Europe in terms of priorities and alliances. With US sanctions looming over Europe’s existing business ties to Iran and over the Nord Stream 2 gas pipeline with Russia, not to mention tariffs and counter tariffs hitting industries from agriculture to automobiles, Europe’s recovering yet fragile economy will be ripe for Chinese money.

Although the AIIB’s mandate is currently focused on Asia, the Belt & Road Initiative snakes through Central and Eastern Europe as well, and Hungary, Poland, and Greece have already signed up to BRI projects. Although the AIIB’s capital base is only 30 percent of the European Investment Bank’s (EIB) capacity, it’s more than twice the size of the European Bank for Reconstruction and Development and could be used to supplement future projects.

A New Geostrategic Avenue

China’s large trade imbalance with Central and Eastern European countries has raised their demands for greater infrastructure financing. Greece, for example, is still reeling from the eurozone debt crisis and in need of both foreign and domestic investment. Meanwhile, major Chinese firms are already acquiring large stakes in Greek ports and industries as the EBRD is gearing up to finance the Trans Adriatic Pipeline project, which will run from Greece to Italy through Albania and the Adriatic Sea. As Athens pushes further for the privatization of critical assets, the AIIB could be in a prime position to provide additional capital after Chinese firms acquire these assets.

This is significant because it would crystalize a new geostrategic avenue between China and Europe through multilateral development financing, from an institution that is China-led and European-supported. Plus, with major EU countries very much involved in AIIB’s governance structure, the bank has more credibility in the global market place than its emerging market counterpart, the BRICS’ New Development Bank, created in 2014 by Brazil, Russia, India, China, and South Africa—at a time when the World Bank and IMF are more restrictive in their lending and more selective in the countries they choose as partners.

Joining the AIIB was one of the first signs that Europe was willing to break away from the US as a new global landscape is taking shape. The decision by key European states to align themselves with the AIIB will have an impact on the economic face of the world for decades to come.

The post Red Herring & Black Swan: The Other Pivot to Asia appeared first on Berlin Policy Journal - Blog.

Paris, Frankurt, Dublin, Luxembourg, Amsterdam: When the results of the British Brexit referendum came in the early hours of June 24, 2016, these cities found themselves suddenly on the map as new EU headquarters for several UK businesses. Banks in particular worried about losing their “passporting” rights—the right to do business across the EU.

While the public focus has been primarily on the plight of these British businesses, what’s not being discussed is the effect Brexit will have on their EU counterparts. Non-UK and foreign companies have been using London as their gateway into Europe, through passporting. But while this method is now in jeopardy after Brexit, EU businesses stand to lose a lot more.

Passporting allows companies with offices in one EU country to automatically have access to customers and clients in the other 27 member states. With contentious Brexit negotiations between London and Brussels ongoing, British Prime Minister Theresa May has found herself at odds with a wary business community afraid that a two-year post- Brexit transition period (currently on the table) after leaving the EU on March 31, 2019, will not give them nearly enough time to adjust the necessary operations and personnel needed once a hard border between the UK and the EU is in place.

For Europe’s financial sector in particular, London has been the continent’s banking center since the EU was formed via the Maastricht Treaty in 1993. After the euro was introduced, the UK had the best of both worlds: It was allowed to keep its own currency (the British Pound) as well as the ability to clear euro-denominated bonds. But with the fear of a hard Brexit, this arrangement is destined to change, and with it the global financial landscape. Instead of retaining their UK presence, some EU financial firms are packing up.

EU-based banks that service UK businesses through their London branches have already begun unloading their UK assets faster than a yard sale. In November 2017, the European Banking Authority (itself moving from London to Paris due to Brexit) issued a report showing EU banks have divested more than €300 billion in their UK assets since the June 2016 referendum vote. This happened despite assurances from the Bank of England that the EU’s financial services sector will be able to sell their services within the UK after Brexit is finalized.

Continental European companies, however, have not been as fortunate. The impact on them will rely more so on what kind of Brexit will result from years of negotiation. A “hard Brexit,” or clean break cutting the UK off from the EU single market and customs union, will have more drastic effects on European businesses than a “soft Brexit,” in which Britain secures some form of single market membership or customs union in exchange for budgetary contributions and a degree of free movement of people. No deal at all would be massively disruptive, damaging both sides.

Cutting Off Supply Chains

A hard Brexit would amount to cutting off EU-UK supply chains as well as trade and customer relationships in critical sectors that date back decades. According to a June 2017 Deloitte study, auto sales within the remaining EU-27 would drop 20 percent in the event of a hard Brexit. For Germany, that would affect 1 in 5 cars exported and nearly 18,000 jobs. For European companies in general, the same study finds that a hard Brexit also would have a similar impact on the bloc’s economy as the 2008 global financial crisis.

Companies in Germany, Belgium, Ireland, and the Netherlands would be hit the hardest under a hard Brexit due to their large export volume (Germany), UK import volume (Belgium and the Netherlands), or geographical closeness (Ireland). To make matters worse, under a soft or hard Brexit, these companies could face a significant increase in corporate taxes as Brussels needs to plug a potential €15 billion budget gap left behind by a departing UK.

Simultaneously, their counterparts across the pond are enjoying the benefits of a tax holiday under a new US reform plan that slashed corporate taxes from one of the highest in the developed world (39 percent) to below the global average of 22 percent. These diverging tax regimes could affect the global competitiveness of EU businesses as well as new hiring. Although the tax hike is just in proposal form, it’s being championed by European Commission President Jean-Claude Juncker backed by a white paper claiming it would bring in as much as €140 billion in government revenue over seven years if adopted.

The damage is not just isolated to large markets either. The Flanders region in north Belgium for example would face a loss of roughly 42,000 jobs in the event of a hard Brexit (as opposed to approximately 10,000 under a soft Brexit scenario), according to local officials, as the UK is a top-five export market for its transportation sector. In all, the hardest hit industries will be automakers, electronics, and agriculture.

Thus far, EU companies have stayed optimistic. A survey titled “Brexit in the Boardroom: The View from Business,” published in March 2017, polled 2,500 European business leaders from the UK, Germany, France, and Spain, and found a majority banking on a soft Brexit. 65 percent thought the outcome would result in a tariff-free EU/UK border.

They should hope their optimism comes to fruition. If a soft Brexit is negotiated—as matters stand, the government in London still insists on leaving the single market and rules out any form of customs union with the EU—it means a new, far-reaching trade agreement between the UK and EU has been achieved. A UK-EU trade agreement would provide close to or similar access to the UK market that these businesses currently enjoy. Still, these EU companies should brace for impact. After Brexit is finalized, they may come to the same harsh realization EU citizens arriving at the UK border will have—that their passports don’t carry the weight they once had.

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© REUTERS/Marcos Brindicci

Since being elected last November, Argentina’s new right-of-center president Mauricio Macri cannot complain about a lack of international attention – most of it welcome, some of it unwelcome, as his outing last week in the “Panama Papers” as a former owner of an offshore company. The United States and the International Monetary Fund have already made overtures to the business-friendly former mayor of Buenos Aires who ended twelve years of the leftist governments of Néstor and Cristina Kirchner; US President Barack Obama, on a state visit recently, even demonstrated that he knows how to tango.

Does the EU, too? Given sanctions and counter-sanctions with Russia and stalled TTIP negotiations with the US, intensifying relations with Latin America’s third-largest economy would make a lot of sense. A large EU footprint would also contribute to Western efforts to compete with China’s growing influence and investment in Latin America. Argentina, a major soy exporter, is mainly exporting to China, while Beijing, for its part, has made the most of the West’s absence through sizeable agriculture-based land grabs and multi-billion dollar investments in sectors like nuclear power. Now is the time for the EU to seize this opportunity if it hopes to remain globally competitive amidst the uncertainty within the region.

In Macri, Europe should find an eager partner. He has wasted no time implementing campaign pledges, such as allowing the Argentine peso to float after years under government control, making significant budget cuts, and removing long-standing subsidies. But these immediate reforms are small compared with ending a 14-year-long debt battle with creditors, following Argentina’s $100 billion default of 2002, that has made the country persona non grata in the international credit community.

Since Macri’s election the Argentine government has reached an agreement with creditors, and US District Court Judge Thomas Griesa conditionally lifted a 2012 injunction which had declared Argentina to be in default: The country would be able to return to the credit markets if its parliament repealed the Padlock Law (ley cerrojo), which caps, or “padlocks”, the amount that can be paid to creditors, and the Sovereign Payment Law, a 2014 Kirchner-led attempt to skirt injunctions through backdoor payments to creditors via France.

Remarkably, the congress accomplished this task in March, well before the court-approved payment deadline of April 14, with consensus between Macri’s Cambiemos coalition and the majority Peronists, in both the Senate and Lower House. As a result, Argentina is paying the last holdouts with a settlement of $4.65 billion, roughly 25 percent less than initially desired by the bondholders. To raise funds to make the payment, the legislative deal included an issuance of new bonds worth $12.5 billion. Finally, Argentina can move on from this controversial chapter of its recent history.

Leading up to and after the deal, Argentina has received positive signals on the global engagement front. In addition to the US president Macri has welcomed French President François Hollande, Italian Prime Minister Matteo Renzi, and the European Parliament’s Committee on Foreign Affairs. Its Chair, Elmar Brok (from Germany), heaped praise on Macri’s economic agenda and expressed optimism regarding the prospects of finally concluding the EU-Mercosur trade agreement (negotiations started back to 1999).

However, Macri’s economic task at home is daunting. His government must lower inflation rates, which now hover around 30 percent – a major concern, given that the country’s governors are battling with cash shortages and need funding for infrastructure improvements in their provinces. Also, he must sell his pro-growth agenda as one that can benefit everyone – not just the Argentine elite, as in pre-Kirchner days.

Internationally speaking, Macri’s administration should take the lead on the fledgling EU-Mercosur trade agreement. During the last formal round of talks in 2012, the agreement was stymied by France and Ireland over fears of what agriculture competition posed by the Mercosur bloc (Argentina, Brazil, Paraguay, Uruguay, and Venezuela) could mean for their farmers. An agreement would have major implications, as the EU is Mercosur’s largest trading partner, and Mercosur is the EU’s sixth. Brazilian President Dilma Rousseff is currently beleaguered by scandals and calls for impeachment, and Macri could use this as an opportunity to reinsert Argentina, a major food exporter, as a lead negotiator. As Brock observed during his visit, “For the first time, Argentina is becoming a stronger protagonist than Brazil in these negotiations.”

The agreement is a high priority for both sides. It was a major topic discussed during the Macri administration’s meetings with EU Foreign Affairs and Security High Representative Federica Mogherini in March. The results of an exchange of proposals between the two trade blocs, scheduled for early April in Brussels, could set the tone for the implementation of Argentina’s bilateral trade agreement with the United States, the framework of which had been agreed upon during Obama’s visit. Both agreements will improve Macri’s ability to foster firmer ties with the West, incentivizing all sides to stay engaged.

A new outlook in Argentina would also benefit a few European powers in particular, as it would offer an opportunity to export more than trade-related goods. In meetings with Argentina Foreign Minister Susana Malcorra during her visit in March, German Deputy Foreign Minister Maria Böhmer highlighted vocational educational training, scientific research, and culture as areas of great interest. Argentina is one of few places outside of Europe with schools compatible with Germany’s dual system, running parallel tracks of vocational education and apprenticeship training. With a large workforce skills gap prevalent on both sides of the Atlantic, this could be Germany’s most significant imprint on Argentina’s economy.

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