December 9, 2022: Global News Roundup
International trade shakeup—Mercosur infighting, Pacific Alliance expansion, US-Mexico nearshoring, oil price cap
This post was originally published at IPEwithSBB.org.
The Global News Roundup collects news stories from entirely international (non-US) media sources on variety of pressing global issues and events.
This week, it felt like one could actually see the global economic architecture shifting in real time, especially with international trade. Starting in Latin America, infighting and disagreement marked the 61st Mercosur summit, held this week in Montevideo, Uruguay: “This edition of the summit was marked by trade differences among bloc members, especially after the Uruguayan government expressed its desire to sign free-trade agreements outside of Mercosur.” Mercosur, a Spanish language-based abbreviation for the Southern Common Market, is a regional economic group formed in 1991 by Brazil, Argentina, Paraguay, and Uruguay that, among other functions, coordinates and negotiates external trade policy among member states (i.e., all member states are supposed to negotiate agreements with non-Mercosur trade partners collectively as a bloc). This was the first-ever Mercosur summit that did not result in a joint declaration, not unlike what transpired at the G20 summit last month in another unusual instance of a disputed joint declaration.
Uruguay issued its own closing statement on Wednesday “ratifying President Luis Lacalle Pou's intentions to keep seeking trade opportunities outside Mercosur”. Lacalle argues that Mercosur has not been effective in negotiating trade agreements and that Uruguay therefore must seek out new opportunities alone: “We cannot wait 25 years to sign an agreement, it is not serious,” explained Lacalle, referring to the 25 years it took to finally sign a deal with the EU in 2019, the first deal ever struck by Mercosur with a major trade partner. Further, “There was tension among Mercosur Presidents in Montevideo, particularly Lacalle [Uruguay’s President] and Argentina's Alberto Fernández who received from his host the scepter as pro-tempore head of the alliance for the next semester, a period expected to be shaky with Uruguay insisting on brokering its accession to the Trans-Pacific Partnership (TPP) in addition to a Free Trade Agreement (FTA) with China”, reported MercoPress.
Similar trade policy shifts were also visible elsewhere in the region. With Uruguay, new Colombian President Gustavo Petro has also indicated a greater desire to trade with China and reduce dependence on the US, causing “concern” among US officials. Mexican President Lopez Obrador announced that Ecuador will be joining the Pacific Alliance this month, a regional trade group formed in 2011 by Mexico, Colombia, Peru, and Chile, so named because its member states border the Pacific Ocean. (Mexico also cancelled the Pacific Alliance summit scheduled for next week in Lima, Peru, owing to unrest and political instability related to the ouster of Peru’s President Castillo this week.) Costa Rica is also slated to join the Pacific Alliance this month. Chinese state media celebrated the expansion, quoting Colombian Minister of Trade, Industry and Tourism German Umana: “At the Pacific Alliance, we will be able to have a more organized position in regard to China.”
Even as countries across Latin America were working to further open trade relations with China, the US—which is grappling with falling exports and a mushrooming trade deficit—was working on plans with Mexico to do the opposite. Noting that more than 400 companies already have plans to relocate from Asia to Mexico (called “nearshoring”), the Mexican Economy Ministry stated that an agreement had been reached to “put together a ‘joint presentation’ to the private sector ‘to disseminate the opportunities and economic and fiscal benefits that both countries offer for the relocation of companies’.” Mexico News Daily reported that “[t]he ongoing United States-China trade war, proximity to the U.S., USMCA free trade pact-associated benefits and affordable labor costs are among the reasons why many companies are looking to shift operations to Mexico.”
The US and Europe were also busy this week closing off trade with Russia via the oil bans and price cap I discussed last week. Late last Friday, the EU agreed on a price cap of $60/barrel or less, to be enforced via bans on maritime insurance provision to parties that transport Russian oil to third-party buyers over the cap. It went into effect on December 5. As we’ve seen generally since February, these prohibitions on trade with a major global producer are working to rapidly restructure global oil markets. In anticipation of the new sanctions, Russia has been amassing a “shadow” fleet of oil tankers to take the place of the US and European commercial fleets that currently dominate global oil shipping (the US and Europe also dominate global provision of maritime insurance). Russia stated that it will not abide by the cap, even if that means a reduction in oil production. China and India have also stated that they will not abide by the cap. Right now, oil tankers are piling up outside the Turkish Straits, unable to adequately prove to the Turkish government that they have proper insurance coverage. The Financial Times explained: “The jam has been caused by new Turkish requirements that all crude vessels travelling through the Bosporus, the Sea of Marmara and the Dardanelles — collectively known as the Turkish Straits — prove they have valid insurance to cover incidents such as oil spills and collisions. The requirement, which came into force on December 2, is a response to new EU sanctions that bar vessels transporting Russian crude from accessing European maritime insurance unless the oil is sold for $60 a barrel or less”.
(Image: The crude oil tanker RN Polaris and a bulk carrier sail in Nakhodka Bay near the port city of Nakhodka, Russia, December 4, 2022. REUTERS/Tatiana Meel/File Photo, in the original here).
It thus seems that a parallel oil market, complete with supporting financial markets and institutions, is forming before our very eyes, filling the void created by Western sanctions against Russia. When the US and EU cut Russia off from the SWIFT system (used to settle international trades in dollars, including oil and gas trade), China, Russia, and India rushed to fill the gap. Now, Russia is amassing a parallel tanker fleet, with a leg-up from Turkey (tankers carrying Russian oil are apparently passing through the Bosporus with no problem), and China is working with Russia on developing alternatives for maritime insurance. China has been building parallel institutions for some time, for example, the Asian Infrastructure Investment Bank, designed to compete with the US-led World Bank. But a parallel oil market is a horse of an entirely different color, with much larger and deeper implications for the global economy and the US’s position in it.
In other news, Chinese President Xi arrived in Saudi Arabia on Wednesday for a 3-day visit, his first trip to the kingdom in 6 years. North Korean leader Kim Jong Un selected his “most beloved” child, 9 year old Ju Ae, to be his successor. And, Oxford Dictionaries selected “goblin mode” as the word of the year, “a slang term to describe “unapologetically self-indulgent, lazy, slovenly, or greedy” behavior”.
Things I’m keeping an eye on:
1. US arms deals with Taiwan: “The US has proposed selling Taiwan as many as 100 of its most advanced Patriot air-defense missiles along with radar and support equipment in a deal valued at US$882 million,” reported the Taipei Times. China is angry.
2. Ukraine war: Drones coming from the Ukrainian side struck targets inside Russia’s borders this week, and Russia retaliated with missile strikes on critical infrastructure.
3. Mining companies, corruption, and bribery: The Anglo-Swiss mining company Glencore agreed to pay $180 million to the Democratic Republic of Congo this week to settle legal claims arising from the company’s long record of bribery and corruption. In Mongolia, protestors tried to storm the state palace in Ulaanbaatar, calling attention to miserable economic conditions as well as a corruption scandal involving top executives of state-owned coal mining company Erdenes Tavan Tolgoi.
4. Food crisis: With cereal prices rising again the last couple of months, it was good to see news about Ukraine grain shipments to Ethiopia this week.
5. Oil politics: OPEC+ kept oil production levels constant at the meeting this past Sunday. The Keystone Pipeline sprung a leak in Kansas on Thursday and is currently shut down.