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The world economic order is fast changing, with industrial policymaking a rapid comeback in the United States and Europe at the cost of multilateralism and the Global South facing serious headwinds due to the dominance of the US dollar in the international financial system that gives Washington and other western capitals enormous leverage to impose economic blockade on any country.
Against this backdrop, the 23rd Council of Heads of Government of the Shanghai Cooperation Organisation (SCO) met in Islamabad last week. The joint communiqué released by the SCO member states at the end of the moot echoes their concerns — rather frustration — about these developments as the group is worried over protectionist trade practices being adopted by the West and the use of economic sanctions by Washington and other developed European nations as a weapon to subdue other nations for their own benefits.
At the same time, it underlines the need to protect and promote the World Trade Organisation’s multilateral trade system for inclusive global growth, particularly in developing and underdeveloped economies, reduce reliance on the American currency for international trade transactions, and improve digital and physical connectivity among the SCO countries.
Two members of the SCO, Russia and Iran, are facing Western sanctions restricting their access to international markets and stifling their economic growth. Others like China are confronting massive tariff barriers imposed by the US and the European Union on its goods — especially electric vehicles, solar panels and other green products — and actions against its technology companies (Huawei and TikTok being two major examples) for the last decade.
Despite accounting for one-third of global GDP, the bloc’s economic might will only come into play if bilateral disputes within it are resolved
Still, others like Pakistan have suffered significantly due to the higher-for-longer US Federal Reserve interest rates, driving up the costs of their foreign debt payments and retail domestic energy prices. Many developing nations have also seen investors taking money out of their economies for better returns in the US securities, shaking down their currency values and international reserves.
On top of that, the revival of the industrial policy in the US, which has led Washington to announce large subsidies for its automakers and other industries, is also being seen with suspicion in the rest of the world.
These factors have led the group founded in 2001 to foster security, economic and political cooperation among its member states to take a unified stance against unilateral sanctions and protectionist trade practices of the US, which are “seen as barriers to open trade and economic collaboration”, in the joint communiqué released at the end of the SCO meeting.
The communiqué argues that “sanctions not only undermine the sovereignty of countries but also disrupt global economic relations”. It advocates for multilateral cooperation under which countries can openly trade, and respect for international law takes precedence over unilateral actions.
“The heads of delegations emphasised that the unilateral application of sanctions is incompatible with the principles of international law and has a negative impact on third countries and international economic relations,” says the communiqué. It also opposes protectionist actions and trade restrictions that undermine the multilateral trading system and impede global sustainable development.
The Islamabad moot was also important because of its push for developing and adopting a local currency payment mechanism to allow the SCO member countries to settle mutual trade transactions in their respective local currencies rather than relying on international currencies like the dollar or the Euro. This would reduce the cost of trade by eliminating currency exchange and transaction fees, minimising exposure to fluctuations in the exchange rate of and cost of borrowing in major global currencies.
Some SCO members, including Pakistan, have already entered into bilateral currency swap agreements, which allow them to trade goods and services directly in their local currencies. This is expected to enhance economic cooperation and increase financial stability in the region.
In order to encourage the use of local currencies and boost economic cooperation among member states, the SCO leaders have further decided to expedite consultations on the establishment of financial institutions: SCO Interbank Union, SCO Development Bank, SCO Development Fund and SCO Investment Fund. These institutions are expected to contribute to economic integration, trade facilitation, and regional connectivity by providing financing for infrastructure projects, supporting economic development initiatives and focusing on investments in key sectors, such as energy, transportation and telecommunications.
By providing alternative financing options, the SCO aims to reduce dependence on external financial institutions and promote economic growth among its member states. “Transitioning to settlements in mutual currencies will shield us from global financial disruption,” Pakistan’s Prime Minister Shehbaz Sharif told the meeting as he appealed for harmony, urging nations to “prioritise collaboration over political differences.”
Apart from supporting multilateral trade regime over unilateral Western actions undermining global competition and adoption of local currencies for mutual trade settlement among member countries, the SCO moot has sought to increase connectivity and cooperation in joint energy infrastructure, information technology, security and counterterrorism, logistics, transportation, environment and climate change, public health, industrialisation, green technologies, science and so on.
Another major outcome of the Islamabad meeting is the group’s support for the Belt and Road Initiative (BRI) despite India blocking a consensus on the infrastructure project. The SCO leaders strongly emphasised enhancing connectivity and improving transport links as crucial drivers of regional cooperation and economic growth.
Development of railway systems, multimodal transportation, port and logistics infrastructure, and the digital transformation of the transport sector were highlighted as key priorities. “Flagship projects like the Belt and Road Initiative of President Xi Jinping… should be expanded focusing on developing road, rail and digital infrastructure that enhances integration and cooperation across our region,” Shehbaz Sharif said in his speech as the chair of the meeting.
That said, progress on the common goals of the 10-state SCO — now one of the world’s largest regional organisations, with members accounting for roughly one-third of global GDP, around 40pc of the global population, a significant share of oil and gas reserves, and nearly two-thirds of the Eurasian landmass — has been slow, despite the initial euphoria surrounding it.
Some member countries have yet to resolve their bilateral disputes, while others have yet to ease visa restrictions for other group members to increase greater people-to-people interaction due to security concerns.
The development of the SCO as a vibrant economic bloc offers tremendous potential to bolster regional trade and investment, enhance security cooperation and facilitate access to energy and infrastructure projects for its members. But these countries will have to tackle their bilateral tensions to make meaningful strides as a bloc to counter western hegemony on global trade.
Published in Dawn, The Business and Finance Weekly, October 21st, 2024
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