Trade deal with Ukraine delayed until 2015.

The European Union, Russia and Ukraine agreed on Friday to delay the implementation of an EU-Ukraine free trade pact until the end of next year, EU Trade Commissioner Karel De Gucht said.  Ukraine will continue to enjoy privileged access to the EU market until that date, he said, but it will not have to cut duties on imports from the EU in return.  The move appears to be at least partly a concession to Russia, which fears the EU-Ukraine agreement will harm its industry.

Russia has been urging the EU to refrain from implementing the free-trade pact with Ukraine until its concerns over the agreement are addressed.

The EU-Ukraine free trade pact is the centrepiece of a wide-ranging political and trade agreement which has been at the heart of Ukraine’s political crisis over the last year.  Moscow had threatened to introduce import tariffs on Ukrainian goods if Kiev went ahead with the planned trade agreement from Nov. 1.

Ukrainian President Petro Poroshenko had also asked the EU to consider allowing Kiev to delay reducing customs duty on EU exports coming into the Ukraine under the new pact, Interfax Ukraine news agency reported.  Allowing EU products more cheaply into the Ukraine market could initially create problems for the weak economy there.

“We will delay the provisional application of the (free trade agreement) until Dec. 31 of next year,” De Gucht told a news conference after talks with Russian Economy Minister Alexei Ulyukayev and Ukrainian Foreign Minister Pavlo Klimkin.

The EU will extend temporary tariff cuts it granted to Ukrainian products earlier this year until the end of next year, De Gucht said.  “The reason we are doing this .. is the very difficult economic situation in Ukraine.  This is part and parcel of a comprehensive peace process in Ukraine.”

The move also created a breathing space of 15 months in which Russia, Ukraine and the EU would continue talks to try to meet Russian concerns over the EU-Ukraine trade pact, he said.

Under the agreement, Russia and Ukraine will continue to apply preferential trade treatment to each other’s products under a free trade agreement among countries of the Moscow-dominated Commonwealth of Independent States.

Russian news agencies quoted Ulyukayev as saying earlier on Friday that Russia would introduce import tariffs on Ukrainian goods from Nov. 1 if Kiev went ahead with the trade pact with the EU.

Barry Eichengreen writes:

European and Chinese officials have made two notable announcements in recent weeks. On June 18, China’s second largest financial institution, China Construction Bank, was designated as the official renminbi clearing bank for London. The next day, the Frankfurt branch of the Bank of China, the country’s largest commercial bank, received the same designation for the eurozone.
Both announcements were greeted with great acclaim. British Chancellor George Osborne hailed the creation of a London clearing bank as “hugely important” for the financial future of the City. Joachim Nagel of the German Bundesbank lauded the Bank of China announcement as a “milestone on the road toward creating a renminbi trading center in Frankfurt.”
We should expect these kinds of enthusiastic pronouncements from European officials, who are desperate for good news, whatever its source. But should the rest of us care? After all, banks, firms, and even individuals already can buy renminbi for their pounds and euros. A range of financial institutions, both locally and in Hong Kong, have long stood ready to provide this service.
The only difference is that the two big Chinese banks, when doing business in London and Frankfurt, will be permitted to purchase renminbi in China itself when their foreign customers demand it. The People’s Bank of China (PBOC) will give them a quota for this purpose. Other banks, when seeking to provide renminbi to their clients, are limited to bidding for the fixed supplies that circulate offshore. This raises their costs and limits demand for their services.
Thus, by permitting two clearing banks to access renminbi onshore, Chinese officials are effectively subsidizing their London and Frankfurt operations and encouraging direct sterling and euro trades.
But London and Frankfurt would be reckless to bank on rapid growth in their renminbi transactions. In its most recent survey of foreign-exchange markets, in April 2013, the Bank for International Settlements found that renminbi-dollar trades averaged $113 billion a day, whereas direct renminbi-euro trades totaled a mere $1 billion, while direct renminbi-sterling trades amounted to even less.
In practice, when Europeans want China’s currency, they use their euros and pounds to buy dollars, and then use those dollars to buy renminbi. This reflects the fact that the market in dollar-denominated assets is exceptionally deep and liquid, which limits transaction costs. In other words, European practice reflects the dollar’s “exorbitant privilege” as the only true global currency, freely accepted by currency traders and investors in China and around the world.
Chinese officials presumably believe that this situation will change over time. Once banks offer new assets denominated in renminbi, more customers will be drawn into the market, thereby adding liquidity and reducing transaction costs for purchases of renminbi in European currencies. The dollar’s asymmetric role will be superseded. At that point, the renminbi, the euro, and sterling will all play consequential international roles.
Thus, the decision to designate renminbi clearing banks in London and Frankfurt is, in effect, one more step by China to foster the emergence of an international monetary system with several global currencies, not just one. It is a step toward creating a better match between our multipolar global economy and its monetary and financial system – and thus a step toward ending the world economy’s dependence on the dollar, which European and Chinese policymakers have complained about since the global financial crisis erupted in 2008.
But it is only a step. Deep and liquid markets are not built in a day. In June 2013, when the PBOC unexpectedly tightened monetary policy, domestic interbank interest rates shot up to 25%. Thus, even a quota that permits an offshore clearing bank to tap funding in China does not guarantee that it can obtain that funding at a reasonable price.
Moreover, if China develops financial problems, capital outflows may accelerate. The Chinese authorities may then be forced to tighten the quotas made available to the clearing banks. Market liquidity would be a casualty.
One can also question how much appetite European investors will display for renminbi-denominated financial assets. In the past, demand for such assets has been fed by the expectation that the renminbi will continue to appreciate. If Chinese growth slows, such expectations might well dissolve.
There is no doubt that, with time, the renminbi will acquire a more consequential international role. Twenty-first-century financial technology will facilitate direct trading in a variety of different currencies, eliminating the need and custom of routing virtually all international transactions through the dollar. Ultimately this will spell the end of America’s “exorbitant privilege.” Just not yet. And not anytime soon.

Joseph Stiglitz writes:  

For better or worse, economic-policy debates in the United States are often echoed elsewhere, regardless of whether they are relevant. Australian Prime Minister Tony Abbott’s recently elected government provides a case in point.

As in many other countries, conservative governments are arguing for cutbacks in government spending, on the grounds that fiscal deficits imperil their future. In the case of Australia, however, such assertions ring particularly hollow – though that has not stopped Abbott’s government from trafficking in them.   Should Australia Copy the US

The new United States ambassador to China, Max Baucus, said advancing a bilateral investment treaty between the world’s two largest economies will be his top priority.  “While we still have a lot of work to do for concluding the treaty, helping move it forward would be a top priority of mine. I am going to work very hard to make this bilateral investment treaty successful,”Baucus said while addressing members of the American Chamber of Commerce in China.
A member of the Democratic Party, Baucus was appointed to the post by US President Barack Obama in February, succeeding Gary Locke.  When he was in the US Senate, Baucus strongly supported permanent normal trade relations with China and China’s subsequent entry into the World Trade Organization.
China and the US started discussing the treaty in 2008, but talks stalled with China’s insistence on a long list of protection for some sectors.

The US is the world’s top recipient of foreign direct investment, followed by China. Analysts believe a bilateral investment pact will help reshape global investment rules.  “The Sino-US treaty talks and the introduction of the ‘negative list’ approach in the China (Shanghai) Pilot Free Trade Zone show the Chinese government’s determination to reform the regulations for foreign investment,”Zhan Xiaoning, director of the investment and enterprise division at the United Nations Conference on Trade and Development, said.

“China needs to engage in the building of higher global investment rules through participating in high-standard bilateral, regional and multilateral investment pact talks,”Zhan said.  Baucus noted that China is “again at a critical junction”in its development and new challenges have emerged.

“We will use the dialogue to advocate aggressively the things that matter most to the business community, that is, removing investment restrictions, improving (intellectual property rights) protection, increasing transparency, especially in regulatory proceedings, and creating a level playing field for all companies in China,”the ambassador said.