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Economics Assessment Task

QUESTION ONE

Read the following extract and answer the questions that follow:

Brexit: How can Africa benefit?
Africa may benefit from Brexit, but it must be through technological advancement and not through its commodities. Finance ministers of the G20 grouping have just concluded a meeting in Chengdu, China. Discussions between Britain and China can be used as a roadmap for Africa as we look to benefit from the UK’s recent vote to leave the European Union (EU). Oil from Nigeria, Zambia’s copper, Kenya’s flower growers or South African wineries will all suffer if a recession follows the UK’s exit from the EU. That is the common wisdom. However, African economies have been dealing with a slowdown in the Chinese economy and depressed prices for commodities. At the G20 meeting, the English Chancellor of the Exchequer, Philip Hammond, began discussions with China on a free trade deal agreement, the first by a European nation with China. While there is no guarantee that the new government in London will trigger an exit, the turmoil in international markets is a sign of concern.
Hammond believes that beginning talks now with possible trading partners will stabilise the global economy. As he told the BBC, “What we now need to do is get on with it in a way that minimises the economic impact on the UK economy in the short term and maximises the benefit in the long term.
“The mood music that I have heard here is very much that this will mean more opportunity for countries like China that are outside the European Union to do business with Britain,” Hammond said.

Repercussions of Brexit
The global economy contracted by $2-trillion (R28.7-trillion) on the morning of 24 June 2016, after British voters chose to leave by a slim margin. The dollar strengthened, and gold mining stock increased in value as investors looked for a safe haven for their money. South African miners AngloGold Ashanti and Gold Fields saw double digit gains as the price of gold increased to $1,358 per ounce, its biggest increase since 2008.

The Brexit vote marked a historic shift in the United Kingdom’s trade relationship with the world. For countries who trade with the EU or the United Kingdom, these are uncharted waters. Douglas Rowling, a vice president at ratings agency Moody’s, wrote: “The next few months will likely be bumpy for the gold and currency markets as Brexit effects materialise. AngloGold Ashanti and Gold Fields’ credit profiles remain well positioned to accommodate any volatility over this period given their deep liquidity sources and strong credit metrics.” Most economists predict a recession if the UK triggers Article 50 of the Lisbon Treaty, which allows a country to exit the EU. As European borders are closed to UK goods, and new tariffs are negotiated, Britain’s trade with Europe will decrease and, if it can’t find new markets, its economy will shrink. During the Brexit referendum the Vote Leave campaign emphasised that trade with the rest of Europe had grown by 3,6% a year since 1999, but trade with other partners (especially China) grows by 6% every year. “One thing that will change if we vote leave is that we will be able to forge trade deals with the economic powerhouses of the future – the emerging markets – which we are currently forbidden from doing by the EU.” said

Matthew Elliott, chief executive of the Vote Leave campaign. “That’s why we will not only be stronger and more secure if we vote to leave the EU, we will also be more prosperous.”

Africa can Benefit from Brexit
In June, Pravin Gordhan, South Africa’s finance minister, said, “the volatility and uncertainty (of Brexit) could have a serious impact on us as a country.” Britain’s exit from the EU would mean that all trade deals and aid agreements would have to be renegotiated. It is too early to predict how Africa would benefit, but African governments have a strong hand to play when negotiations begin.
It will take at least two years for the UK to exit the common European market and longer for the full economic impact to ripple through the market. What matters now is that Africa makes a place for itself at the table as deals are negotiated. When Britain joined the European Economic Union in the 1973, African countries in the Commonwealth were given preferential trading agreements with the EU because of their relationship to Britain.
For the UK and its African Commonwealth partners stronger trade relationships are mutually beneficial. British officials have suggested that African farmers could benefit in any new trade deal with the UK because they could sell their produce at rates that would be attractive to the UK market.
For Kenya and South Africa, whose roses and wine are popular in the UK, Brexit could mean an end to the Common Agricultural Policy (CAP). The policy allows subsidised European farmers to dump goods in Africa while imposing tariffs to prevent equitable trade in the other direction. With more than 60% of Africa’s economically active population working in agriculture, the subsidies take an important toll on the livelihoods of a majority of Africans.

Re-negotiating trade deals would have another important benefit. The CAP and the Cotonou Agreement (which binds the EU with 48 sub-Saharan countries on shared rules in development cooperation, politics, and trade) has, according to Calestous Juma, Professor of the Practice of
International Development at Harvard, suppressed “technological innovation and industrial development among African countries”. Juma has argued that the belief Africa will suffer from the fallout from a Brexit is based on the outdated view of Africa as a source of commodities. Africa, he contends is building a future tied less to commodity exports and more on technological advancement. “When Africa’s potential for innovation and entrepreneurship is taken into account, a long-term perspective indicates a much brighter future.”

When the African Union (AU) adopted Agenda 2063, one of its aims was to build learning economies across the continent. Agenda 2063 and the Science, Technology, and Innovation Strategy for Africa, adopted by the AU in 2014, is a roadmap for building a diverse education and innovation driven continental economy.

In June this year the EU signed an Economic Partnership Agreement with South Africa, Botswana, Lesotho, Mozambique, Namibia and Swaziland. These SADC partners have increased trade with the EU from R151-billion in 2011 to R216-billion in 2015. While this agreement still needs to be ratified by the EU and the SADC countries, the African trading bloc would gain preferred access for sugar, ethanol and wines.

African leaders understand that working as an AU trading bloc, the continent could negotiate better deals. Strategically, it would be in Africa’s interest to seek access to the larger and more diverse European market.

Working together as a bloc will become easier once the AU concludes its Continental Free Trade Area (CFTA) negotiations in 2017. The CFTA agreements, when signed, will remove trade barriers between African nations and increase intra-African trade, allow for free movement of people and boost investment in infrastructure. It will create a $3-trillion-dollar market with a population of 1 billion people that should reshape Africa’s trade relationship with the world. Negotiating as a bloc would strengthen Africa’s position. Or as Michael Froman, a US trade representative, pointed out when talking about Britain. “We have no FTA (Free Trade Agreement) with the UK so they would be subject to the same tariffs – and other trade-related measures – as China, or Brazil or India. We’re not particularly in the market for FTAs with individual countries. We’re building platforms…that other countries can join over time.” Before Britain voted to leave, the UK Minister for Africa, James Duddridge, told a French reporter that a Brexit would allow the UK to focus, “more on our bilateral relationships with Africa”. In a globalised economy, Britain needs to act quickly to duplicate the trade agreements they will lose should they actually leave the EU. Africa’s Commonwealth partners could benefit but this is also a “blood in the streets opportunity”. Africa wields the power of being in the right place at the right time. The continent has a unique opportunity to demand an equitable share of global trade. Or as Warren Buffet once put it, this is the time to be, “greedy when others are fearful”. (Source: https://www.brandsouthafrica.com/investments-immigration/brexit-how-can- africa-benefit)

1.1 Taking into consideration the benefits associated with regional integration, critically evaluate the effects of UK’s decision to exit the Eurozone. 
1.2 Critically discuss the importance of Britain investing in Africa for the UK and for African countries.
1.3 Explain, in context of the article, how Africa can benefit from the UK leaving the EU. 
1.4 Differentiate between the motivating factors for regional integration for developed nations such as UK and developing nations such as African countries. (20)

QUESTION TWO

Read the extract below and answer the questions that follow: China, Brics push to shift world order amid trade threats The Brics nations said they want a fairer, more
representative global order in diplomacy and trade. Brazil, Russia, India, China and South Africa, representing about 40% of the world’s population and almost a quarter of its output, think it’s time for a change in how things are done. After a three-day summit in Johannesburg, the Brics nations said they want a fairer, more representative global order in diplomacy and trade just as China, the biggest member, faces billions of dollars of extra US tariffs. They also seek reforms at the United
Nations, the UN Security Council and the International Monetary Fund to better represent developing nations, and have asked that members of the World Trade Organisation — including the US — abide by WTO rules as the multilateral trading system faces “unprecedented challenges.”
“They’re not only re-balancing the current global order, but contesting that order,” Lyal White, senior director of the Johannesburg Business School at the University of Johannesburg, said by phone Friday. “Each of these countries can’t do that on their own, but together they’re a force to be reckoned with. This is a decisive but progressive shift.” Driving the call for multilateralism in trade at the summit was Chinese President Xi Jinping, whose US counterpart Donald Trump escalated trade tensions by threatening to impose tariffs on every one of the Asian economy’s exports. That could derail a global upswing that’s already losing momentum amid weaker-than-expected economic growth in Europe and Japan as financial markets seem complacent to the mounting risks, theInternational Monetary Fund warned July 16. ‘Under attack’ Brics “took a firm stance against protectionism,” South African President Cyril Ramaphosa told reporters at the end of the summit on Friday. “We felt we need to do everything we can to strengthen the multilateral trade system which is now under attack. There are many attempts to weaken it.” The members are sovereign nations and would never be pressured into taking sides, he said. “None of us, as part of Brics, will ever accept the fact that we should be told who our friends should be and who our enemies should be.”
The annual gathering of the coterie of emerging economic powers, first identified by former Goldman Sachs Asset Management chairman Jim O’Neill, is the 10th since its leaders started meeting and the first since the prospect of a full-blown global trade war became a real threat.

EM coalition “The Brics summit has been extremely successful for China in terms of building a coalition of emerging markets that seek to defend the current multilateral trade regime,” Martyn Davies, managing director for emerging markets and Africa at Deloitte, said by phone. “What we have seen is the development of an agenda for these countries, because there’s never been an agenda before. We’ve never seen Brics talking about liberalised trade as a grouping or as a coalition, but now trade is front and foremost.” Russia is pushing for better business ties between counterparts in the club, President Vladimir Putin said. All countries committed to strengthen their cooperation in energy and developing new technologies. China pledged $14.7 billion in investment in South Africa, including loans to its state power utility and Logistics Company. The commitments are the biggest yet from the Asian nation to South Africa, whose electricity producer is cash- strapped as it cleans up governance issues. Global rules “Are you going to say no to investment and loans that are sorely needed?” said White. “China is going to become the most dominant economy
in the world. These are the rules of the game globally – South Africa has to learn how to play.” China benefited significantly from joining a multilateral, regulated liberalized regime when it became part of the WTO in 2001, Davies said. “The major component of China’s growth has been dependent on exports — of course it’s going to defend that and to bring other countries along,” he said. “It’s making the point by creating these coalitions in the Brics directed against the belligerence and
erratic nature of US trade policy.” 

2.1 “Driving the call for multilateralism in trade at the summit was Chinese President Xi Jinping, whose US counterpart Donald Trump escalated trade tensions by threatening to impose tariffs on every one of the Asian economy’s exports”. Discuss possible reasons for intervention in international trade by Donald Trump. (16)
2.2 “Brics “took a firm stance against protectionism,” South African President Cyril Ramaphosa told reporters at the end of the summit on Friday”.

QUESTION THREE

 Read the extract below and answer the questions that follow: Is a new global payment system possible? The US is using the economic order and financial architecture it established after World War II to economically dominate the world and, since the election of Donald Trump as president, it continues to use its economic and political power to threaten countries through the dollar and the international monetary system. In other words, it built an unjust order and it is using this order to punish in its own way. As a matter of fact, it is doing this in spite of the Western countries with which it established this system, threatening them as well. Frankly, predicting that this order will not last much longer, the US is trying to continue this by using all the opportunities it has. Well, is this global order sustainable? Many Western countries, primarily those that fall in the category of developing countries, openly express that they are not happy with the current course of events. The US's trade wars and its threat on countries and economies through the dollar have triggered the developing countries among the G20, namely China, Russia and Turkey - which are the new actors of the global economy - to speed up efforts to stop using the dollar in trade and to develop an alternative payment system. Meanwhile, the trade wars, as well as the threat to impose sanctions on countries that are not willing to withdraw from the nuclear deal with Iran have caused a commotion in Europe. EU countries are now calling for a global payment system independent from the US. Because, despite EU countries unwillingness to fulfil the US every wish, major EU companies have no choice but to abide by these sanctions and, as a result, are left to deal with great costs economically. As the US is imposing trade sanctions, it is also disciplining countries with the dollar, thus, having the ability to exclude these countries through its financial system. Most recently, it was the German foreign minister who stated that this situation is highly disturbing and expressed the necessity of establishing a "European Monetary Fund's and an independent SWIFT system (an electronic fund transfer standard in foreign exchange) that leaves the US out. This outburst is nothing other than an open expression of the significance of Europe strengthening its independence, both economically and politically. As a matter of fact, this outburst should be identified as a step to trigger an alternative system, as well as the redesign of the economic system that was established just after World War II. Why is a new payment system necessary? The US-led global finance system does not consist of trade using the dollar alone - so it does not consist of reserve currency. When money transfers between all banks worldwide are made using the SWIFT system and in dollars, all the transfers automatically need to pass through the US. Taking advantage of this, the US monitors all the money transferals made between countries and in its own way, thinks it has a right to intervene in the transfers. We saw in the past how, during its sanctions on Iran, the US had Iranian banks removed from the international banking system, while the money of individuals and companies was seized. Thus, even though the fundamental reason underlying trade with local currencies in the recent period is to reduce dollar-dependency, the other reason is to prevent the
US's unjust interventions on any likely money transferals and sanctions on countries. Therefore, trade using local currencies, a new money transfer system and new institutions will cause the economic system established under US leadership to crack and accelerate the formation of a new financial architecture.

3.1 In context of the article, explain how the “US continues to use its economic and political power to threaten countries through the dollar and the international monetary system”.

3.2 “As the US is imposing trade sanctions, it is also disciplining countries with the dollar, thus, having the ability to exclude these countries through its financial system”. Highlight the possible trade sanctions that could be imposed by the US.

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