Virtual Media Briefing: Previewing the World Bank/IMF Spring Meetings

Tuesday, April 16, 2024
Denis Balibouse/Reuters

Adjunct Senior Fellow, Council on Foreign Relations

Paul A. Volcker Senior Fellow for International Economics, Council on Foreign Relations

Whitney Shepardson Senior Fellow, Council on Foreign Relations


President, Council on Foreign Relations

CFR experts preview the upcoming World Bank and International Monetary Fund (IMF) Spring Meetings taking place in Washington, DC, from April 17 through 19. 

FROMAN: Good morning, everybody. And welcome to today’s CFR media briefing. I’m Mike Froman. I’m president of the Council on Foreign Relations. 

This media briefing is on the eve of the spring meetings of the World Bank and the IMF. I’m joined today by CFR senior fellows Heidi Crebo-Rediker, Sebastian Mallaby, and Brad Setser. We’re going to have a conversation for the first twenty minutes or so, and then open it up to questions from the press and our other participants here. 

Let me also say in addition to this press briefing we’re having one later today on the situation in the Middle East. If you’re interested in that, please let us know as of 4:00 today. We’ll include, I think, six of our fellows, talking about Iran’s recent attack on Israel and Israel’s potential—Israel’s potential response. And, finally, let me say that in addition to this press briefing there is a lot of material available on these issues at,, our various other digital platforms, podcasts, et cetera. So please view us as a resource more broadly.  

Let me start, if I can. I’m going to ask each of you to talk about a couple of issues. But then what I’d like you to do is at the end tell me what headline you’d like to see come out of this week’s set of meetings. What do you think the most important outcome will be out of this? Let me start with Heidi, if I can. The meetings are taking place against perhaps one of the most difficult geopolitical environments we’ve had in some time. How are those geopolitics, including the most recent outbreak of violence in the Middle East, affecting the way the IMF and World Bank are thinking about these issues? And what’s on the mind of the delegates there? 

CREBO-REDIKER: So, thank you. Yeah, I think geopolitics might not be an actual topic on the agenda, but the fragmentation and the spillovers are. And you really—you can’t actually avoid the geopolitical backdrop this week. You have, you know, the recent Iranian attack and threat of escalation. You have the G-7 working on the sidelines of these meetings on a package of measures against Iran. You had the last—during the annual meetings in Morocco, that was actually during the October 7 terrorist attack on Israel. And so that was a—there was a very muted, you know, conversation there, because I think everyone was in shock. And it was—it was not as prevalent a discussion on geopolitics.  

But you also have Russia-Ukraine. You have this whole side drama going on in Congress on the House splitting four different bills and having Ukraine separate, and also with for a lower amount. And then, U.S. and China. The tensions are brewing in the background, even though the mood music is a little bit better. And there are consequences for all of these geopolitical issues to spillover it into energy, and commodities, and food security, and trade and supply chains. And, you know, with all of that, an impact on inflation.  

And then something I think we might get into a little bit later, which is industrial policy. And that was one of the chapters that was referenced in the Fiscal Monitor for these spring meetings. So those—I think you can’t avoid the geopolitical backdrop. And it will—it will play out both in topics that are touched on around the spring meetings, but also a lot of the side meetings that will be discussing how to deal with some of the economic fallout from these geopolitical issues. 

FROMAN: As you mentioned, there’s going to be a G-7 meeting on the margins. I think the Chinese are meeting with the U.S. delegation of the Treasury Department today. What do you expect to come out of those meetings? You know, on the G-7 of the issue of Ukraine and Russia, and central bank assets, do you expect there to be a consensus coming out of that at this point about what to do about those assets? Particularly in light of what looks like a congressional effort to pass a law allowing or requiring us to seize those assets?  

CREBO-REDIKER: Right. The REPO Act. So yeah, I think there was a meeting last week in Kyiv where there was a discussion. It was G-7 plus a group of donor countries that are looking to utilize those frozen—the frozen Russian central bank assets, and coming up with some innovative ideas to do that. And it’s a matter whether we can actually pull all of the G-7 members together to come up with a consolidated view on legal issues around this. But, yes, I think there’ll be a follow-up meeting of the G-7 on the sidelines this week to continue those discussions. And, as I mentioned, also to talk about additional sanctions on Iran. And certainly the issue of China will be front and center in the bilateral conversations, but also in multilateral conversations this week. 

FROMAN: So, Heidi, if you were writing the headline for Friday’s New York Times—I don’t know if we have anybody from the New York Times on the call—what would be your—what would your headline be? 

CREBO-REDIKER: Managing fragmentation in a divided—an increasingly divided world? I’m not good at writing headlines. 

FROMAN: (Laughter.) All right. Here we are.  

Brad, let’s shift, if we can, to the state of the global economy, and the issues of debt in particular. Debt markets have largely reopened to emerging markets. There’s a lot of debt to be refinanced. How concerned or complacent are you about the state of the global debt markets? Larry Summers and N.K. Singh yesterday put out a piece talking about how actually if we look over the last year it’s been a disastrous year for emerging markets and developing countries, with more assets flowing out than flowing in, in part due to this debt repayment. Any progress on the common framework, the G-20 common framework, on debt sustainability, the sovereign debt roundtable? You expect anything to come out this week that would fundamentally change the debt profile of developing countries in emerging markets? 

SETSER: I don’t expect any major developments this week, but I do think there have been some important developments over the past three months as the frontier markets regained market access, as some of the risk around Egypt dissipated. The backdrop here, though, is—as was described accurately by Larry Summers—in both 2022 and in 2023 money flowed out of the low-income countries as they repaid bonds issued prior to COVID, prior to the shocks associated with COVID, and they weren’t able to re-access markets. And also, because a lot of Chinese loans are relatively short term. They had a five-year grace period. A lot of the Chinese loans are LIBOR linked, so they ratcheted up with U.S. interest rates. So it is undeniably the case that over a two-year period, global finance moved out of the low-income countries.  

And I do think that there were missed opportunities to provide more help, to allow a broader set of countries to reprofile their debts rather than draw down their reserves, squeeze social spending, and try to pay. But we are where we are. And where we are is a world where there is renewed optimism amongst investors for the dollar bonds of frontier markets. Some countries have issued—Kenya issued a bond at 10 ½ percent. And that’s a kind of interesting bond, because most bonds issued with double digits over the preceding ten years were not paid. A double-digit yield typically indicates very high risk. It’s a very big burden on the issuing country. And in many states of the world, it’s a bond that has a very high probability of future default.  

However, the market loved it. And it helped trigger a rally across the frontier land of emerging markets, those who had not had access. African countries have been issuing left and right. And so I think the issue going forward will be, are countries making the wrong decision to issue at this high levels of yields rather than approach their creditors for a coordinated extension of maturities? And that’s to be determined. But right now, we are in a wave of optimism where if you issue and show you can issue, the market will tend to rally. And that optimism is extending to the hard debt restructuring cases. The common framework cases of Zambia and Ghana, the just-outside the common framework case of Sri Lanka. 

Zambia looks like it will soon close a rather comprehensive restructuring of its debt that covers the Chinese official claims—China EXIM—the Chinese commercial claims—China Construction, Bank of China, China Development Bank. Sort of strange, but China’s development bank is considered a commercial lender. And then the three billion (dollars) in Zambian bonds who have a $4 billion claim because of all the missed interest over the past three and a half years. That restructuring is basically done.  

I think the only real question is in a couple of years will we look back and say, ah, that was the basis for a long-term recovery in Zambia, or will some of the features of this restructuring, particularly that contingent bond or the ghost bond which kind of hides in the background but if the IMF upgrades Zambia it suddenly becomes a real bond that has to be paid pretty fast, at the same time a lot of the Chinese payments are pulled forward, will be setting up Zambia for a new crisis after 2027? The IMF own analysis would put Zambia back at high risk of debt distress if all these contingent features kick in. So it’s a—it is a deal. I think after three and a half years, you needed a deal. But it is not a deal that, in my mind, allows a clear path to sustainability.  

Ghana looks like it is close to an agreement. The IMF says the proposed bond terms, which are a face value reduction of about a third, a 6 percent coupon, are a little bit too rich. And then they exceed the IMF thresholds by a little bit. But it seems like a deal is close. And then I’ve been very public in saying that in Sri Lanka, a case just outside the common framework, the IMF has set insufficiently constraining criteria for the debt restructuring that will leave Sri Lanka with a debt to GDP level of over 100 percent, when Sri Lanka has less revenue—tax revenue—and less export proceeds than either Ghana or Zambia, which are going to have lower levels of debt. I think that’s setting Sri Lanka up for future trouble. But I think the bondholders realize that there’s scope for a deal. I think Sri Lanka sees there’s scope for a deal. And I expect that restructuring to conclude.  

So I think there’s a lot of progress on individual cases. I think a lot of the architectural issues have not been addressed. And I think some of the biggest architectural issues aren’t really about the common framework, which is just a how do you organize creditors for a discussion when that set of creditors includes the Chinese Development Bank, and EXIM? I think some of the real issues are what criteria are the IMF setting for restructuring, and are those criteria the right ones? And are some of the contingent instruments that are coming out of these restructurings setting up key countries for failure? 

FROMAN: Would you expect more countries to line up and follow Zambia’s example? You’ve mentioned Ghana, but is there a long list of countries that have been waiting in the wings to see how it worked out ready to jump into the common framework?  

SETSER: No country voluntarily will choose to go through the common framework. And every country right now thinks that they are on the verge of regaining market access, and they want to make payments. There is no pipeline. So that’s kind of good news. I think the bad news is, you know, Egypt, Pakistan, Kenya, their debts haven’t gone away. They’ve gotten IMF funding. Egypt’s gotten a big slug of funding from the UAE. So short-term pressures have been reduced. But the underlying question of whether they can sustain in a higher rate world their existing stock of debt remains. 

FROMAN: And the headline, your headline for Friday—for Friday’s paper? 

SETSER: My feel is that there’s going to—this is going to be a headline-less meeting. The headline that I would like to see which won’t happen, because it’s not on the agenda is that the shareholders of the World Bank agreed to provide the World Bank with a lot more capital and then help it lever up. But, you know, hopefully behind the scenes people are starting to build the case for what, to me, is an obvious decision. We’ve only put $20 billion over time in paid-in capital to the World Bank. They have 50 billion (dollars) of capital because of retained earnings. They lend out 250 billion (dollars), which is about half the size of the—either of the two Chinese development banks. The World Bank itself, setting IDA aside, is not scaled correctly for today’s world. 

FROMAN: That’s a great segue to Sebastian. Those issues around scale, speed, impact—those are all very much at the top of Ajay Banga’s agenda at the World Bank. Sebastian, he’s been there now almost a year. Want to give a report card on how he’s doing, and how these reforms are coming, and what do you expect and hope to see out of the World Bank and IMF meetings this week? 

MALLABY: Sure. Well, listening to Ajay Banga’s press remarks last week, I was reminded a bit of kind of back to Jim Wolfensohn, who ran the bank from 1995 to 2005, because that was a time when the idea of speeding up the efficiency of disbursements was very much in vogue. It was associated with a decentralization of power in the bank to country directors in the field, with the idea that rather than experts in Washington on power, or water, or whatever have you, sort of dreaming up the ideal development policy from afar, it’s better if you have a loan officer who is locally based speaking to the government about what the government’s priorities are, and then bringing in experts from the bank’s networks as and when they are called for.  

So it’s sort of a—you know, there’s a matrix in the World Bank. On one side of the matrix, you’ve got regional specialists who talk to country leaders. On the other side of the matrix, you’ve got sectoral specialists who know about particular kinds of technical intervention. And I think where we’re seeing a tilt back towards the country offices, which means that countries get to—governments get to kind of set priorities more and to receive funds faster. One particular example of this shift in priority is that there is a target which Ajay Banga has set to reduce the average time for the approval of a World Bank project loan from nineteen months by about a third. So knock off six months of that. And he said last week that he’d already knocked off half of that target, so three months of speeded-up delivery. 

He also talked about putting one World Bank official in charge of talking to governments sort of as the conduit for all four bits of the World Bank. There’s IDA, there’s the hard loan window, the IBRD, there’s the loan guarantee window, and there’s the IFC, the private sector window. And so rather than having all country leadership go through the bureaucracy of sort of figuring out which channel of the World Bank they should speak to on which project, the idea is to give them one contact point and make it all easier. These seem, to me, to be excellent priorities. I very much endorse the focus.  

The problem is, you know, he is coming in—and this gets back to what Larry Summers wrote, what Brad was saying—it is a particularly difficult time. You know, we’ve talked already here about the debt squeeze and the—and the problems there. But we have to add in the fact that it’s not just about flows. You can see the toughness in just the development performance. So there are seventy-five countries which are eligible to borrow from the World Bank’s soft loan and grant window, which is IDA. And of those seventy-five countries, fully half have seen per capita incomes grow more slowly than per capita incomes in the rich world during the last five years, and one-third of those seventy-five IDA countries have actually seen an outright decline in per capita incomes in the last five years.  

So, you know, it’s one thing to sort of do the right thing in terms of trying to streamline operations, get some savings out of the overhead costs of World Bank operations. This is all good. But I kind of agree with Brad that the fundamental issue is, you know, we have too small of an institution to deal with too big of a problem, at a time when there’s an enormous need for transformative climate finance in addition to this sort of problematic private flows, as evidenced by the interest rate that Kenya is paying on its new Euro bond. You just do need more official assistance. And the problem is that although the headline numbers of official development assistance look as if they’re going up, they’re not really. Because they appear to go up when a lot of money is sent to Ukraine, for very good reasons, but that’s not going to feed IDA. And, likewise, they appear to go up when spending on sort of dealing with immigration pressures within rich countries go up.  

And so just to give you one example of that, in the U.K. fully 28 percent of the official development budget last year was spent not on development in poor countries, but on dealing with migration inside U.K. borders, which gets counted as official development assistance. So, you know, in a climate where rich countries are on a path to have pretty difficult budget constraints, debt to GDP heading up towards 100—public debt to GDP heading up to 120 percent by 2028 in on one projection I looked at, there just isn’t much fiscal space to enlarge the sort of generosity that I think the World Bank needs in its current replenishment for the IDA soft loan and grant window. 

FROMAN: Can they be doing more with their existing balance sheet to boost their lending? Or do you feel they’ve exhausted the mechanisms to do so? That without a capital increase they’re really sort of capped out at where they are? 

MALLABY: Well, there is some space, but IDA issued its first bond in 2018. You know, hitherto it hadn’t issued bonds. And in six years, since 2018, it’s leveraged itself up quite a lot. The estimates used to be that it could carry on like this for another ten years, till 2034, until it reached the point where it risks its AAA credit rating. But that 2034 date has been pulled forward to 2030 because of the rate of leveraging that’s been going on so far. So, in other words, you could probably get away with it for another three years. And I suspect that that may indeed be what happens, because if you can kick the can down the road for three years governments are often inclined to do that. But it’s not an endless option.  

And equally, you know, I am not against what Ajay Banga wants to do on the loan guarantee front, which is to triple the amount of loan guarantees by 2030. In order to leverage more private capital flows into developing countries. That sounds like a good idea to me. But it’s not—you know, it’s not addressing the bigger picture. I mean, just to give you a feel for how important is leveraging can be, the last IDA replenishment, the donor countries kicked in 23 ½ billion (dollars) if I remember right. And then that was leveraged up to 93 billion (dollars) or so. So the leverage was a very big part of the overall sort of budget window that IDA got out of that replenishment round. But, as I say, you can do that for a bit longer, but not for too much longer.  

SETSER: Mike, if I could jump in on this topic?  

FROMAN: Please. 

SETSER: You know, I think IDA is actually in a slightly more difficult position than Sebastian stated. The current funding plan requires IDA to issue about 30 billion (dollars) in net new bonds. So it has to refinance some of the bonds it’s already issued. It’s issued about 30 billion (dollars). And it needs to place another 30 billion (dollars) of new bonds to hit its lending goals. When that financing plan was developed, global interest rates were much lower than they are now. And so that intrinsically makes it harder for IDA, which lends on concessional terms, to finance itself in the market.  

And as a practical matter, Ida now needs to finance very long-term loans off its own balance sheet. And it is having difficulty finding private buyers in scale for twenty-year bonds. It’s only placed one. It was a small issue. And it came in with a premium of over seventy-five basis points above the risk-free rate. If IDA pushes out more long-term bonds, they’ll likely widen that spread. So I honestly think the G-7 needs to start thinking creatively about other ways to lever IDA up which don’t require IDA to pay this ever-increasing premium above higher interest rates, which just fundamentally makes it much harder to keep lending on concessional terms. 

CREBO-REDIKER: So can I add one more—one more sort of sort of comma, and? 

FROMAN: Sure, absolutely. 

CREBO-REDIKER: I mean, this is—this is one of the big topics that also Jay Shambaugh, undersecretary at U.S. Treasury, raised in a big speech last week, on where is—where is this financing for poor country is going to come from? And it’s—we’ve mentioned IMF, World Bank, I’d put IFIs, other regional MDBs, in that, and private. But also, there are large official bilateral lenders. And we saw the UAE stepped up, in the case of Egypt. You obviously have China as a large official bilateral creditor, but also there are a lot of other—a lot of other countries. India, new rising emerging market powers that are bilateral creditors. And the question is, how can you—how can you incorporate them into multilateral structures and have them all work cooperatively?  

But also, you know, how do you keep them from—you know, as Brad mentioned, you have—you have the—you know, a lot of Chinese flows going out of emerging markets, and particularly poor countries. And you have net—I think at this point—net debt flows from Chinese creditors since 2019. They’re all—they’re negative. And for those countries, almost all of them have IMF programs in place. So you have this conundrum of you have official funds going in, but you have Chinese funds going out at the same time. So it’s a big issue. Private sector—figuring out how to—how to encourage the private sector to more actively engage through whatever catalytic government, or quasi-government, or multilateral structure you can, is definitely the way that we want to move forward. But it’s been a tough nut to crack in the past. And I have a feeling it’s going to continue to be a tough nut to crack for all of these institutions and bilaterals moving forward. 

FROMAN: Sebastian, just on that—on the question of China, they are the proverbial elephant in the room here in so many ways. As a major creditor for these countries, as Heidi just laid out, sometimes as a helpful credit restructurer, as Brad, you know, mentioned, there are a few cases now where they’ve been at the table and been willing to restructure their debt. They used to account for about a third of global growth. They’re a bit flat on their back, or at least in a slow growth mode. It’s in the interest of the world, I imagine, that they not collapse economically, that they be a major power going forward.  

And yet, the way they’re choosing to grow their economy at this stage is not by doing what everyone advises them to do, moving towards more consumption-led demand growth and services growth—but to go back to the old playbook of exporting their way out of it, at a time when the U.S., Europe, many other markets, are very sensitive to Chinese exports, may well close their markets to Chinese exports. Particularly in critical sectors like EVs. How do you think about the multiple roles that China plays in this equation, and what role they’re likely to play this week in terms of being on everyone’s mind either as a major creditor, as a major exporter, as a major economy that’s working its way through challenging economic circumstances? 

MALLABY: Well, I think, as you say, Mike, the spillovers from this decision in China to go back to the pre-2008, export-led growth model are going to be enormous. I mean, it was clear that—when we looked at the data retrospectively—that the Chinese surge of exports after they joined the WTO, in 2001 was, you know, enough to turn sort of the disruption to U.S. labor markets from something that you couldn’t really see in the data, in the sense that, you know, workers managed to find new jobs fast enough, such that—you know, trade displacement is normally absorbed by flexible U.S. markets, but—labor markets. But it was not the case during the so-called China shock of the early 2000s, just because of the speed of that surge.  

And what we’re seeing now is the threat, or even the promise, from China of another such surge. Except that this time the Chinese economy is fully ten times larger than it was twenty years ago. And China’s share of global goods exports, which was around 2 percent, in the early 2000s, now accounts for 15 percent. So if you try to grow from that base—and, by the way, you’re not just growing in terms of, like, exports in furniture, which disrupts what everyone would have recognized was sort of a sunset industry anyway, but you’re talking about going after the market for EVs and other higher tech goods. As you say, it’s just not going to be accepted by the rest of the world.  

Even if one thinks, as I do, that there is an upside a Chinese export boom—and, you know, cheap cellphones are good for African development, cheap solar panels are good for the climate transition in the U.S. and Europe. There are upsides. It doesn’t matter if it’s politically unacceptable, which I think—which I think this is. So for reasons that have, I think, more to do with kind of a sense of national security on the part of Xi Jinping, that he fundamentally thinks that demand stimulus is, quote/unquote, “welfarism,” and it’s sort of soft, and therefore he prefers to try to revive growth through a supply stimulus, which means you’ve got to export that excess supply by pouring investment into next generation technologies on a scale that makes the U.S. industrial policy look paltry. That just sets up China and its trading partners for a nasty clash, at a time when the global trading system is already pretty weak and fragmented. 

SETSER: Maybe I’ll pile on, if you don’t mind, since I think you’re absolutely right. There’s going to be a lot of discussions about China, including a lot of discussions about China when China’s not in the room. So I suspect that the G-7 will be thinking about how it responds to this new export pressure. And I think there’s actually—if you ignore a few off-kilter headlines, there’s growing convergence between the U.S. and the EU about the nature of the challenge that China is posing. Some of the rhetoric coming out of Europe sounds not that dissimilar for things that Bob Lighthizer, Trump’s USTR, would have said. And that wasn’t the case four years ago.  

So why? First of all, I would amend Sebastian’s argument ever so slightly to say that China is not just going back to its pre-global financial crisis model. It is trying to build on its strategy for getting out of the pandemic, which basically was to export its way out. China’s exports are about a trillion dollars higher now than they were four years ago. We’re already seeing a surge in Chinese exports, it’s just not coming to the U.S.—at least not directly. It’s coming through Southeast Asia. But Europe experienced a pretty big increase in imports already. And when Xi—after having already relied on exports to get China out of the COVID shock—indicated he is just ideologically opposed, as Sebastian noted, to providing help to households, and his vision for how China overcomes the property market downturn was more manufacturing, more exports, I think it did trigger a much broader consensus that China’s growth model, as it is now constructed, poses challenges for the rest of the global economy.  

That said, China is a very important source of demand for commodities. And what all the economic research around spillovers, including some recent research from the IMF, shows, is that Chinese growth does matter much more for other emerging economies than it matters for the advanced economies. Largely because of this commodity export channel. And I think there’s a growing body of research that says the nature of China’s growth actually matters much more than the pace of China’s growth, that if China experiences a surge in productivity induced by throwing capital and capital deepening in sectors where the U.S., Europe, the manufacturing parts of Southeast Asia already have established industries, the short-term effect of that is a drop in output, or slower growth, in those countries that have industrial overlap with these new Chinese sectors.  

So I think there’s an empirical case, as well as a political case, for concern, frankly, because it’s not just that China is becoming a global export success in new sectors because of the fruits of China’s labor. There’s a clear government—set of government policy supports. But even more so, China’s government is not doing the things that it needs to do to make China’s economy less dependent on the world for demand. To me, it is shocking—shocking—that China now relies more on global demand, runs a bigger manufacturing surplus, than it has done at any point after the global financial crisis. It’s already big. And the vision for Xi’s recovery is getting that even higher.  

So I think—I think we—fully agree with Sebastian. We’re headed for tension and conflict over trade. But I think I would say that this is almost necessary, because China has not shown a willingness to make the domestic policy adjustments that would make its own vision for its growth more compatible with that of the rest of the world. 

CREBO-REDIKER: OK. I’m going to pile on to the piling on.  

FROMAN: Briefly, and then let’s open it up to questions. 

CREBO-REDIKER: OK. It’s not just Europe. It’s Japan and emerging markets, and other—and other large industrial countries that are complaining. And they’re complaining to the IMF about it. So it will be on the agenda this week. But also the response. The Chinese response to Secretary Yellen and to Chancellor Olaf Scholz’s complaints about overcapacity have been that it is fake news. And it’s either fake news, or that Europe and the U.S. are far too uncompetitive and they’re behind, and it’s their own fault. So that is not a constructive approach to dealing with an overcapacity issue. And this is a fool me once, fool me twice overcapacity issue, where we’ve seen, you know, massive subsidies over the decades in aluminum and steel, solar panels.  

And it’s not just EVs. It’s combustion engine cars as well. They’re piling up in ports in Europe. They have nowhere to go. Domestic demand can’t be met in China for combustion or EVs, and so they’re just shipping them overseas. And the response will be, you know, as we’re hearing from the Biden administration, contemplation of tariffs from a national security perspective, that they end up coming in through Mexico. There are—you have a 25 percent tariff on Chinese cars coming in right now, plus a basic 2 ½ percent tariff. You have Trump talking about 60 percent tariffs. You have Europe doing, you know, subsidy reviews. So there will be a backlash. It will be significant. 

FROMAN: All right. Let’s open it up to questions from our friends in the media first, and then others. 

OPERATOR: (Gives queuing instructions.) 

At this time, we have no raised hands. 

FROMAN: You’ve answered all their—you preemptively answered all their—all their questions. We’ll give it another minute. 

Let me ask one. While we’re waiting, let me ask one. I think, Brad, you may have referred to this. In one of the IMF reports coming out, maybe the Fiscal Monitor, it talked a little bit about industrial policy. Yet, there’s no—they condemned it. Talked about what bad fiscal policy it is. And yet, every country seems to be doing it, or even more countries than usual, including the United States, seem to be doing it with great enthusiasm these days. Where should the rules of industrial policy be? Should there be rules—internationally agreed upon rules about the scope, nature, or appropriateness of industrial policy? And if so, where should they be set? Should the IMF have taken this up as an issue? Is it something for the WTO to do? How do you think about international coordination on those issues?  

Any of you can jump in. Brad. 

SETSER: Well, I’ll start. I’m sure others have views. And I suspect there will be less consensus than there was on our condemnation of China’s lack of demand support. So, first point I would make is that the U.S. has long had a de-industrial policy. It’s called our international tax code, which has favored offshore manufacturing of high-value-added components as the basis for shifting profits abroad. So the U.S. pharmaceutical industry is now the U.S. and Irish pharmaceutical industry. The U.S. semiconductor equipment manufacturing industry is the U.S., Singapore and Malaysian chip manufacturing industry. Very high tech, sophisticated products selling at very, very high margins, where the U.S. tax code encourages the offshoring. So the first component of any sensible industrial policy is to stop our de-industrial policy. And that involves reform of the tax code.  

Second observation is that it will be almost impossible to get rules around industrial policy when industrial policy is the only alternative other than tariffs to respond to China’s own industrial policies and the broader basis for the second China shock. So I don’t see any country being willing to unilaterally disarm and step away from industrial policy options, no matter how strongly the IMF criticizes them, when they are the tool that is available to respond to China. And when, frankly, China’s industrial policies in some sectors have been unambiguous successes. I don’t think even the IMF can say that China would be worse off today if it had not run an industrial policy that promoted the manufacturing of electric vehicles in China. It’s changed the Chinese economy. It has increased Chinese productivity. It has created a new export industry. It’s just challenging the rest of the world, which now wants to catch up with the China’s EV industry. And I don’t think anyone’s going to say, we’re not going to use the tools China used to create our own EV industry.  

Third observation is I don’t think either the WTO or the IMF is the right place to figure out the initial set of rules or limits on industrial policy. The problem with both of them is that that includes China. And I don’t think there’s any way you can credibly constrain China under Xi, when he’s made his commitment to throwing money at manufacturing super clear. Where I think you could get some forms of agreement, let’s say, are between the countries in the G-7, who themselves are at times engaged in a bit of a subsidies race, where they might agree to set limits, say a share—we will not subsidize capital investment in key sectors beyond covering 1/3rd of the cost of the factory or the new aircraft. And I can imagine getting agreement amongst countries of the G-7 around those kinds of limits. And then I have a modest hope that as other countries adopt buy Europe or buy Japan, like we’ve adopted buy America—and I think Europe needs to get there—that if they do so, the countries of the G-7 could agree to share subsidies amongst themselves and be open to trade amongst each other, even as those subsidies are not going to the Chinese EV sector. So I think there are things you can do that are creative, but they’re not global. 

MALLABY: I would frame it slightly differently, as Brad predicted. I think, you know, the reasons why industrial policy have come back into vogue, in the U.S. at least, are mostly a perceived need to use industrial policy for climate purposes. Climate being an obvious externality which markets don’t generate the right outputs alone. And then, secondly, security concerns around depending on China for key inputs, depending on Taiwan for advanced semiconductors, given Taiwan’s position and its—you know, position in the crosshairs of China. And I think it would be healthy if we made a brighter distinction between the climate imperative and the national security imperative.  

When it’s a question of climate, climate as a global public good. And we can try to get towards that by some sort of, you know, globally shared effort. And so if China wants to produce extremely cheap solar panels, it’s not crazy for the rest of the world to buy them. And that will get us to our climate objectives faster than if we say, you know, no, no industrial policy. We want to shut up all of the stuff that China might produce. That’s not actually productive for the stated goal of dealing with a climate transition.  

The reason why security and resilience are so different is, obviously, there the worry is that in a geopolitical confrontation and, God forbid, a war, you don’t want to depend on your enemy for crucial inputs. And so, there you need onshore or to friendshore. And so it’s fundamentally different to the climate argument. And I think, you know, there is room for reasonable disagreement where you have some sort of crossover technology which is both, you know, important and useful for combating climate but also might be viewed as high enough tech to be of a security concern. Maybe some applications of AI would fall into that. One could argue about very high-end batteries, perhaps. But I think it would be good to disentangle this climate imperative and the sort of security resilience one. 

FROMAN: A quick question before we go to somebody in the audience. Does your analysis of solar panels apply to electric vehicles, advanced batteries, as well as a climate reason? Or do you feel that that’s in a different category? 

MALLABY: Look, I do think—so I think that cars a such a central part of a manufacturing economy that when a vast economy like China throws as much subsidy as it has at its car sector, and then, you know, threatens to flood everybody else’s market, that is something, based on the experience of the last China shock, that one should not tolerate. And so I would favor measures to contain China’s industrial policy on EVs. Not actually because of the security point I made earlier, but that is more of a trade and industrial policy point because cars are so important. 

FROMAN: OK. Let’s go to the questions we have online. Will. 

OPERATOR: We will take our first question from Michelle Caruso-Cabrera. 

Q: Hey. Good morning. Thanks so much for doing this.  

In the face of this increased capacity coming from China, I’ve heard some critics say that instead of focusing so much on tariffs we should instead focus on quotas. Any thoughts on whether or not one is a better policy than the other when it comes to dealing with this? 

MALLABY: Sounds like a question for you, Mike. 

FROMAN: I was thinking the same. (Laughter.) I’m feeling PTSD here. 

CREBO-REDIKER: That’s what I was thinking.  

FROMAN: Yeah. Yeah. Look, it’s an interesting question. The tariffs, of course, raise the cost to the consumers. And the quotas don’t necessarily do that. And so as a general matter the trading system has moved from quotas to tariffs, because then tariffs could be reduced over time. If you’re heading in the other direction and the goal is to identify some limited number of sectors that you want protection of—whether it’s EVs, or steel, or something else—a quota may be a better way of doing so without then having the inflationary costs of additional tariffs. 

SETSER: So I’ll take the other side of that. I think tariffs are almost always the better choice because the government gets the revenue. In a lot of cases, quotas work as a cartel where you still get the price increase but the price increase goes to the private producers. And then it’s actually a more level—quotas tend to be very negotiated, whereas a tariff is just there. And so it doesn’t have as big of an anticompetitive impact, in my view. 

CREBO-REDIKER: I would add, one thing is it’s—if you are going to target Chinese EVs, and they are moving their production to substantially transform the manufacturing in, for example, Mexico or another connector third country, and then export to the U.S. through an FTA, you have—the quota issue is then it becomes a Mexican manufacturer rather than a Chinese vehicle. 

FROMAN: Well, you may well move to a situation where you’re imposing it on companies rather than countries, as we’ve seen in some other instances. Thank you, Michelle.  

Next question. 

OPERATOR: We’ll take our next question from Reshma Kapadia. 

Q: Hi. Thank you so much.  

So, you know, speaking about tariffs and the trade restrictions that everyone seems to see coming, what does China do in response to, you know, tariffs and the restrictions that we may see come out of the subsidy investigations in the EU? Especially since this is so central to the recovery playbook this time around? 

MALLABY: Well, China has filed an antidumping case against the U.S., I believe, on EVs.  

FROMAN: Antidumping? 

MALLABY: Is that—did I get that wrong?  

FROMAN: I don’t know.  

SETSER: It’s a WTO challenge. 

MALLABY: I think there was some countermeasure with the— 


SETSER: So, look, the other thing China can do is that China right now has reduced its tariff on imported autos from 25 to 15 percent. But within its WTO binds, it can change that back to 25 (percent) at any point in time, which is what some of the German manufacturers, in particular, fear, because Mercedes, Porsche, BMW—for the very top of their luxury lines, they’re selling German-made cars in China, and they’d be hit by those tariffs. The other threat China has is that it can squeeze—using all the tools that are kind of uniquely Chinese—the Chinese operations of the major foreign auto companies operating in China. Some have already been squeezed out of the Chinese market, as Chinese marques, Chinese firms are leading in the EV side and the old industrial combustion engine joint ventures are not doing as well. They’re operating at very low levels of capacity.  

And I think Nissan has just said as it’s not worth it. We’re going to leave. We’re going to pack up. Chrysler, Stellantis, has made the same decision. And China could make, in its own way, it very hard for VW to compete effectively with it’s in-China production with some of the Chinese marques. So that is what people are afraid of. The impact on the German economy of squeezing VW’s China operations is not quite the impact on the German economy of not importing Mercedes that are made in Germany. But if you’re an auto company and worried about your global profits, you’re going to be concerned about these possible countermeasures, even as you are also worried that you may be losing a lot of market share in, say, Europe, from China’s imports. 

The interesting thing about the U.S. is there’s really nothing in the auto sector that China can hit us back with, because they’ve already done it. And Tesla already produces in China. 

MALLABY: I think the other thing to watch here is that when told that European and American governments won’t tolerate another surge of Chinese exports, the Chinese, I’m told, are wont to argue, yeah, don’t worry, we’re going to export it to developing countries, emerging markets, middle-income countries, which are delighted to import our goods. Now, they’re not actually delighted. Brazil, India, Indonesia, and Mexico have all alleged Chinese dumping of steel, ceramics, and other products. So I think one thing to watch is the trade war that transpires between these other middle-income countries which China will try to, presumably, pressurize, and whether—and how that turns out. It could be that this is one of those things where China overplays its hand so badly that it actually costs itself quite a lot in terms of diplomatic capital. 

FROMAN: Another thing I would add to this is I think we should look more broadly. You know, as Brad said, they’ve already put retaliatory tariffs on much of what the U.S. exports to China. And because there’s such an asymmetry in the manufacturing/trading relationship, there’s only so much more they can do directly in that sort of tit for tat. But they can restrict the export of critical minerals that they process. And they can use economic coercion in various ways. And so I wouldn’t necessarily limit their actions to what they could do in the auto sector to a bilateral partner who’s imposing tariffs on them, but other forms of leverage that they have that they’ve shown a willingness to use at times to get the attention of other countries and other governments to their priority economic interests as well.  

I think we’ve—I think we’re sort of coming to the end. Let me thank Heidi, Sebastian, and Brad for taking time and joining us. Let me thank all of you for joining us today. A video and transcript of this discussion will be posted on CFR’s website very soon. And, as I mentioned earlier, additional resources can be found on and And with that, we hope you all have a good IMF, World Bank week.  

SETSER: Thank you. 


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