Friday, February 09, 2018

Between Currency Internationalization, Production, and Trade--Considering Yuan Oil Futures in a Production and Trade Context

(Pix © Larry Catá Backer 2018)

In Strategic Disclosure in an Age of Transparency: Cuba as Model for Emerging State-Based Trade and Production Orders I suggested that it is possible to discern an emerging consensus trend in global trade and production.  With OBOR and America First,  two of the largest participants in unified global have begun steps toward its fracture.  Were once the assumption was for the construction of a unified trading and production space among all states, increasingly it appears that the trend, at least among some key stakeholders--is to develop  self contained production spheres and interconnected trade spheres.   
In place of a global market built on the foundations of the structures created after 1945 and refined only recently, there will emerge (again) regional trading blocks around the most powerful states, within which information and the power of markets will be protected, and beyond which information, and the barriers of equal treatment in market activity, will be fostered. This possibility, already well evident by 2006, has now become a possible successor ruling ideology around which global economic activity (and the politics that follow) will be structured (Economic Globalization Ascendant and the Crisis of the State: Four Perspective on the Emerging Ideology of the State in the New Global Order, pp. 154-158).

These trends suggest a restructuring of markets through hierarchically arranged state based trade relations and their conflation with state to state routed production chains. Where once there might have been a global approach to production with markets increasingly indifferent to states, the new trade relations that might well emerge--OBOR and America First--offer a distinctive view where production chains and power chains among states begin to conflate.  In that environment information becomes important,
But the move toward global production fracture enhanced through control of information (strategic transparency initiatives) is not the only element that suggests fracture and restructuring along the new silk roads that will shift global production into distinct channels even as global trade continues to build a global market space. 

This post considers how China's recent announcement of trading in Yuan Oil Futures (China Ends 25-Year Wait as Yuan Oil Futures to Start Trading) ought to be read in a different context, one in which the object is not merely internationalization and efforts to supplant the Dollar as a global trading currency but also as another step to insulate increasingly fractured production blocks among apex states and will in this sense contribute to this divergence between production and trade. 

In  China Ends 25-Year Wait as Yuan Oil Futures to Start Trading (Bloomberg 9 Feb. 2018), it was reported that "China will list local-currency crude futures in Shanghai on March 26, according to the nation’s securities regulator. The start of trading, open to foreigners, will mark the end of years of delays and setbacks since China’s first attempt at a domestic contract in 1993." The object is to add an additional layer to China's years long quest to emerge in the forefront of managing global economic activity and either displace or challenge the dominance of the United States and its post 1945 World Order arrangements (see, e.g., here, here, here, and here). 

The efforts have been viewed with a little fear but are at best ultimately dismissed as an effort that will take years to realize.
 If the futures are embraced by overseas investors and become a benchmark for global oil transactions, China’s hoping the yuan could challenge the dominance of the greenback in international trade. Still, skeptics say that won’t happen as long as the currency is controlled by the central government, and while international traders may agree to settle contracts converted into yuan, they’ll continue to price the oil in dollars. (China Ends 25-Year Wait as Yuan Oil Futures to Start Trading (Bloomberg 9 Feb. 2018)
But this analysis misses an essential point of the effort. It is true enough that Chinese ambitions for the Yuan are pointed in the direction of substituting the Yuan for the Dollar as the benchmark global currency for trade.  But is is also clear that Yuan internationalization along the lines pursued are also intended to detach and protect a state based global production chain around the OBOR pathways. That is, Yuan oil futures are meant to enhance the autonomy of global production around an apex state as the center of a set of production chains. These efforts toward Yuan internationalization, then, are bound up in a host of efforts that produce an "all-around" (comprehensive) approach to the restructuring of global production around an apex state (in the way that contemporary production chains are meant to be centered on an apex multinational corporation) (e.g., Reflections on Shen Wei: "One Belt One Road Initiative and Beyond in the Context of (Anti-) Globalization"). The efforts at Yuan internationalization
RMB internationalization is one small part of a larger more ambitious project: (1) External: An integral part of Chinese trade and development policies; an interlocking set of objectives to solidify the all around central position of China. (2) Internal: Core of socialist modernization and development of productive forces within China; situating China at center of global commerce essential for next stage of economic and political development. ("One Belt One Road and RMB Internationalization—A Strategic Alliance"--PowerPoints of My Presentation at the "Symposium On the Internationalization of the RMB: Risks and Challenges Ahead").
Thus, Yuan based oil futures trading is not merely another effort at Chinese global grandstanding--a spectacular gesture. While everyone is looking at the obvious--the efforts (unlikely to be immediately successful and thus contained on that basis)--the establishment of Yuan Oil Futures adds an important dimension to the autonomy of the Silk Road concept at the heart of OBOR. It will tend to insulate, and sever,  OBOR internal transactions from those outside the OBOR.  Consider Yuan Oil futures the way one can see the establishment of intra-enterprise markets within complex multinational enterprises.  OBOR establishes a production block that will be insulated from interference or management from competitors.  It will be able to project power outward while at the same time erecting the new forms of borders that define an autonomous collective. 

Indeed, to understand Yuan Oil Futures (and the internationalization project) in context one must understand how they might fit into the construction of a production universe geared toward the strategic needs of the apex state (not enterprise) within a production chain whose value is enhanced by its coordination with the fundamental objective of socialist modernization and the development of productive forces to achieve national aims (with collateral benefits to partners united in the effort). To that end, consider the recent announcement of efforts (with a long term implementation horizon) to establish "a brand new dispute settlement mechanism, so as to provide legal protections including litigation, mediation and arbitration solutions for business along the Belt and Road Initiative." (China to establish court for OBOR disputes).  One perspective suggests the utility of this coordinated approach for the centralization of dispute resolution around the apex state.
Chinese enterprises are facing rising contractual disputes as they are increasing investments in the countries along the route of the “One Belt, One Road” Initiative (OBOR Countries). If they failed to provide dispute resolution terms in the contracts, such disputes would be submitted to the jurisdiction where the disputes arise, and this may incur bigger expenses and cause uncertainties to Chinese investors as they are unfamiliar with the languages and legal systems in such jurisdictions. One way to avoid such trouble is to provide in the contract that all disputes shall be submitted to the Chinese jurisdiction. (China establishes “One Belt, One Road” Arbitration Court)
None of this is to suggest judgement or criticism--but it does suggest the way that orthodox perspectives in the West may well be missing the larger picture as they continue to insist of seeing the world through the perspective of a world view that may not be shared by others.  And in that context, as well, one can make substantially more sense of the U.S. America First position as both trade and national policy (e.g., here).  It is a plausible counter strategy to that of the OBOR initiative and its internationalization efforts.  It does accelerate the undoing of the post 1945 consensus.  And for those committed still to the ancient powerful vision and objectives of fostering global trade and production on the basis of the ideal of equality among states and enhanced private sector operation of multilaterally maintained markets, the moves by the United States and China to detach trade from production ought to be deplored.  But deploring them will not make these trends disappear.,  We are now entering an age in which multinational enterprises have been governmentalized, but also one in which states have begun to take on the characteristics of apex multinational enterprises within markets. This potentially emerging new world orlder will change the landscape of relations among governmentalized public and private actors in ways we cannot even begin to grasp (e.g., here).  enterprises to control specific sectors of production and their global chains.

No comments: