Global Trade Initiatives Shift East as World Economy Slows

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Global economy - Sputnik International
The past year saw some defining events in global trade, with an apparent failure of US-led free trade area deals in the Atlantic and the Pacific, the rise of Chinese initiatives in Asia and a looming fracture of the European bloc leaving the world's economy in the clutches of uncertainty amid near-recession growth rates.

World Economy

The past year has been a mixed one for the world economy, bringing about a contradictory pattern of trends in growth and trade. While nowhere near a recession comparable to that of 2008-2009, the world's GDP growth has been increasingly sluggish as the year went on, losing momentum amid flagging advanced economies and turbulence in some of the leading developing countries.

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The World Bank has already revised its year-end growth expectations down from 2.9 percent to 2.4 percent, citing weaker trade, less capital flows and the slump in commodity prices as the chief reasons hampering growth. The figure is in line with growth over the past several years since 2012 after a post-recession spike. Meanwhile, the US economy, considered by many economists as the main driving force behind global consumption, picked up pace in the latter half of the year and is on track to reach some of the highest indicators in years.

Commodity prices have been declining since mid-2014, falling some 30 percent throughout 2015, according to International Monetary Fund (IMF) figures. Most non-energy commodity prices have somewhat recovered from record lows seen in late 2015, but have not gone on to a full-scale rebound, instead hovering at relatively low levels. The IMF commodity index stayed below 140 compared to the pre-slump average of around 170. Energy commodities performed likewise, with oil prices showing some recovery as producers struggled to curb output and stem the market glut.

As a result, commodity exporters, especially among the Latin American countries, including Brazil, Venezuela and Argentina, saw growth dip below zero. Outside of Latin America, Russia went through its second year of recession amid continued Western sanctions and low oil prices but is on track to recovery in 2017, according to official expectations.

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China's performance, despite being buoyed by lower prices for its enormous commodity imports, went through a second year of turbulence after hitting the lowest growth rate of 6.9 percent in 25 years in 2015. Figures for this year are expected to reach 6.7 percent, with the growth rate consistent across the first three quarters. Chinese stock markets went through a meltdown in January, falling almost 18 percent and sending shockwaves throughout the world. The authorities responded with trading curbs and devaluing the yuan to the lowest value in years.

The United States now appears to be an isle of calm with strong upwardly revised growth and economic confidence at the highest level in years after an upswing in the wake of Donald Trump's presidential election victory. Europe, however, went through a year of stagnation, with just 0.3 percent year-on-year growth reported in the Eurozone in the third quarter. The continent has also been shaken by the United Kingdom's decision to leave the European Union, leading most agencies and analysts to assign a negative outlook and rising downward risks to the EU economy. The rise of right-wing movements and a swing toward isolationism across the continent will further test the bloc in 2017.

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What has become a crisis year for many also became the year of hampered trade and rising protectionism. In a mid-year report, the World Trade Organization (WTO) said protectionist measures were being rolled out by countries at the fastest rate since the 2008 recession. In November, the WTO said protectionism remained on the rise in the G20 economies throughout the year despite somewhat declining in intensity from the early year peak. The growth rate of global trade is forecast to come to just 1.7 percent this year by the WTO, down from almost 3 percent forecast earlier and thus showing a decline relative to GDP growth. This is the slowest growth rate since the crisis year of 2009. The WTO, the IMF and other global economic bodies have called on countries to stem the tide of protectionism and boost trade in an effort to rejuvenate stagnating global GDP growth.

Brexit Shakes Europe

It is against this backdrop of Eurozone crisis and increasingly protectionist attitudes, coupled with the global refugee crisis, an unprecedented influx of migrants into the European Union and the specter of terrorism carried along with geopolitical instability, that the United Kingdom shocked the world with its decision to pull out of the European bloc. The unexpected result of June's Brexit referendum is now a looming threat to one the world's largest free trade areas.

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The UK government has already announced its intention to follow up on the referendum result and begin the withdrawal process by the end of March next year. The process is set to be dominated by negotiations on a future trade deal between the United Kingdom and the European Union. The talks are widely expected to be grueling and pose a major challenge to UK institutions.

A number of EU leaders have stated that the United Kingdom would lose its access to the EU single market unless it keeps freedom of movement rules and allows EU nationals to enter into the country just as prior to Brexit. UK Prime Minister Theresa May, meanwhile, suggested that the country’s exit would be "hard" rather than "soft," meaning that control over immigration would be prioritized over access to the single market. UK officials have since stated that the country will turn to the rest of the world in what appears to be a move away from collective agreements and toward bilateral trade deals with various overseas partners.

Transatlantic Trade Deals in Limbo

While Brexit has so far had a limited impact on the UK and EU economies, various grim predictions of a post-Brexit recession have yet to fully unravel in case UK threats of a hard exit prove to be real. The impact of the EU fracture is, however, likely to impact global trade in a much broader way. The United Kingdom has traditionally championed free trade and its voice in Brussels has served as a staunch pillar in support of Europe opening up its markets to the world. The proposed Transatlantic Trade and Investment Partnership (TTIP) free trade agreement, a highly secretive and controversial EU-US deal still in the making, was no exception, and the United Kingdom has shown consistent support for its implementation.

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The controversial TTIP free trade agreement has been under negotiation since 2013 between the United States and the 28-member bloc. It has been repeatedly criticized by its opponents for the lack of transparency in the negotiations as well as for the tremendous power it would potentially give to international corporations.

The European Union's continental bloc, including France, Italy and Germany has been far more skeptical of the TTIP. The latest round of TTIP negotiations wrapped up in New York in early October. The sides have again failed to find common ground, with French President Francois Hollande reiterating that there can be no agreement given existing imbalances in US-EU trade and slamming the United States for imposing fines on European companies, such as Deutsche Bank's punishment for handing out risky loans in the country. After the talks, German Economy Minister Sigmar Gabriel ruled out reaching common ground before the end of the year.

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German Chancellor Angela Merkel has shown much more enthusiasm for the deal, but her popularity has dipped to the lowest levels since 2011 and her cabinet has been rocked with discord over the past year. Public support for TTIP has also been abysmal, with opposition to the deal reaching 70 percent in Germany this year. In a survey conducted in May, almost 80 percent of respondents said they believed the agreement would harm consumer protection and over 80 percent were dissatisfied with the secretive manner of the talks. Italy's former Prime Minister Matteo Renzi has also backed the deal but was routed in a constitutional referendum in early December. The country is now likely to see a snap election in early 2017 in what could lead to a surge for regionalist and eurosceptic parties.

Once the United Kingdom leaves, the TTIP could therefore be left hung out to dry amid growing opposition from both sides of the Atlantic.

Another north Atlantic trade initiative, the EU-Canadian Comprehensive Economic and Trade Agreement (CETA), has also gone through a rocky ride this year with the European Union eyeing the free trade deal with ever more suspicion.

The deal was signed in October and the EU parliament is set to vote on the deal in December. Opponents, however, fear it would undermine standards and regulations on environmental protection, health, safety and workers' rights.

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The European Commission, pressured by France and Germany, stated that the agreement must be ratified by all 28 EU member states. The second obstacle emerged in October, when the French-speaking Belgian region of Wallonia voted against CETA's ratification. The deal also met opposition in the European Parliament, where lawmakers filed a motion questioning CETA's compatibility with governments' right to regulate national economies, as well as its environmental credentials, in November. The motion, referring the deal to the European Court of Justice (ECJ) was rejected in parliament later that month. CETA has also been legally challenged in Canada, with opponents arguing that the government has no right to sign or ratify major treaties without parliamentary approval.

The rising anti-trade sentiments on both sides of the Atlantic are now certain to bury any regional free trade area initiative from being negotiated or implemented for decades, experts told Sputnik.

"Brexit, the Trump victory, the tortured passage of the Canada-EU trade agreement, and growing anti-trade sentiment generally has heaped additional layers of complication… And certainly, a sprawling regional deal on trade, investment and regulations will lack political support on both sides. In fact, I think we will probably not see any large mega-regional deal between two dynamic trading areas take shape anytime in the next decade or two — perhaps even in a generation," Sourabh Gupta, a senior fellow at the Institute for China-America Studies (ICAS), said.

The fact that Trump has not flat out rejected the deal means that a smaller US-EU deal of limited scope is still possible under the TTIP umbrella, he added, stressing that Brexit will also not spell an end of the EU single market.

"Finally, on EU market disintegration, I do not believe it will be the case – even after Brexit. The single market and the ‘four freedoms’ on which it is premised will hold in the continental EU area. And within the core Eurozone area (particularly among the northern tier countries) there will also be a deepening of financial integration. The latter of course could be hostage to significant events, such as a potential Italian banking and sovereign debt implosion. But the single market has a storied history and it will certainly endure through these harsher times," Gupta said.

Jagdish Sheth, the founder of India, China & America Institute (ICA Institute), and the Charles H. Kellstadt Professor of Marketing at the Goizueta Business School of US-based Emory University, agreed that Brexit is now a key factor thwarting the TTIP.

"Brexit is a key catalyst against TTIP. In addition, there are fundamental competitive issues with continental industries especially from Germany, France and Italy. All five major German automakers are massively investing in America rather than export from Europe. Unfortunately, the current political uncertainty in Europe is not helping much. European governments are too preoccupied to manage their own survival and, therefore, TTIP will be in the back burner," he said.

The expert added that the United Kingdom is set to get the most benefit out of the entire situation with rupturing trade areas across the north Atlantic as it drifts toward the Commonwealth of Nations, encompassing the former British Empire, as well as the United States.

Trump Tramples Trans-Pacific Trade Deal

In the United States, the rise of Donald Trump hailed the start of an era of rising isolationism and protectionism, both recurring themes throughout US history. Trump won a Brexit-style shock victory against his rival Hillary Clinton in November after running an aggressive campaign in which he repeatedly lashed out against existing and proposed free trade deals.

Trump, who is set to take office on January 20, has shown significant disdain for free trade areas in favor of bilateral agreements in a spirit somewhat similar to pro-Brexit rhetoric. While Trump has not often explicitly referred to the TTIP in his speeches, the deal is not considered to be a priority for the future US administration and the next round of talks is unlikely to take place anytime soon.

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The upcoming change of power in Washington is set to shake up the world of global trade in more ways than one. The prospects of the United States finalizing the Trans-Pacific Partnership (TPP) deal also suffered a blow after Trump’s election. During his election campaign, Trump labeled the deal "a disaster," as well as proposing to pull out of the North American Free Trade Agreement (NAFTA) in a bid to safeguard US jobs.

During his campaign, Trump has criticized NAFTA, which comprises the United States, Canada and Mexico, over lack of benefits for the United States and said he would consider withdrawing from it. The unraveling of some 20 years of free trade, which was previously seen as a threat to Mexico's economy and even caused the 1994 Zapatista uprising, is thus now coming from the United States itself and will apparently manifest itself within the first 100 days of Trump's presidency.

November's leak of plans drawn up by the Trump team indicate that the US Commerce Department and International Trade Commission will be tasked with studying the consequences of the United States withdrawing from NAFTA, while Mexico and Canada will be notified of US plans to propose changes to the agreement, on the first day of the new administration. The plan also stipulates a 100-day mark for continuing NAFTA negotiations. Once 200 days into Trump's presidency, the United States would edge closer to formally withdrawing from NAFTA in favor of bilateral agreements with both Canada and Mexico.

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The TPP's death knell seems to be even closer. The TPP seeks to remove barriers to trade among its 12 signatories, which together account for 40 percent of the world's economy: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. The agreement was signed in New Zealand's Auckland on February 4 but has yet to be ratified by the United States. It now appears unlikely that the deal will be ratified at all during the "lame duck" US Congress session between now and Trump's arrival in January. The deal is then looking to be scrapped, with Trump vowing to make the move during his first day in office.

The United States currently has a large trade deficit which has fueled protectionist attitudes that Trump played on during his campaign. A lot of the deficit comes from trade with Asia, which has become the world's industrial powerhouse over recent decades amid declining manufacturing in the West.

"Importantly, too, Trump has personally held a motivating belief for a long time that the trade and economic practices of East Asian governments are instinctively mercantilist and deceitful. Asia, in one form or the other has its stability underwritten by the U.S., yet Asian countries do not reciprocate by providing fair and equal economic access to their markets to U.S. goods and services. TPP, in his view, is exactly the sort of agreement that will entrench this business-as-usual pattern of short-changing America and further hollow out the U.S. manufacturing base," ICAS fellow and a member of the United States Council for Security Cooperation in the Asia-Pacific (USCSCAP) Sourabh Gupta said, stressing that opposition to the deal was a centerpiece of the president-elect's campaign.

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The fate of the TPP appears to be a major factor in determining the way the global economy and the geopolitical balance in the Asia-Pacific region move next year and thereafter. Japan's Prime Minister Shinzo Abe had previously urged the United States to show its commitment to the region and take on economic leadership, while Singapore's Prime Minister Lee Hsien Loong said the deal would rebalance US military presence in the region with real economic weight.

The TPP's "success or failure will sway the direction of the global free-trade system, and the strategic environment in the Asia-Pacific," Abe told Trump's former rival and TPP proponent Hillary Clinton about a month before she lost the presidential election. A major tectonic shift is therefore in the making in Asia, which China set to reap the benefits of.

China and the Pacific Vacuum

It is in the Asia-Pacific region where the top two global economies, the United States and China, have been facing off in both influence and trade. China, which was conspicuously excluded from US-led TPP talks, has pushed for its own vision of regional integration. The Free Trade Area of the Asia-Pacific (FTAAP) concept emerged in 2006 as one of the competing visions for the region and gained Chinese support alongside the China-led Regional Comprehensive Economic Partnership (RCEP), which is focused on Southeast Asia. The latter is a trade framework between Association of Southeast Asian Nations (ASEAN) members and Australia, China, India, Japan, South Korea and New Zealand.

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With TPP prospects increasingly bleak, Chinese initiatives appear to have gained the upper hand this year. During the Asia-Pacific Economic Cooperation (APEC) meeting in November, 21 Pacific Rim members of the forum, including Russia, China and Japan, vowed to counter the rising tide of protectionism and formalized plans to roll back protectionist measures until the end of 2020.

While the United States is also an APEC member, the regional center of gravity appeared to shift east. APEC endorsed a collective study on the possibilities of creating the FTAAP zone and reaffirmed their commitment to its creation in the Lima Declaration. The study also integrates the RCEP and TPP deals. The endorsement means that negotiations on creating the China-backed free trade area can start.

Chinese Premier Xi Jinping delivered a keynote speech at the APEC event, endorsing the FTAAP and stating that it is "a strategic initiative critical for the long-term prosperity of Asia-Pacific," vowing that China will open its door to economic integration as well as helping its developing neighbors with sustaining economic growth.

Countries such as US ally Japan have so far pursued pro-TPP rhetoric, while Philippine President Rodrigo Duterte said a China-led trade agreement would be suitable for the country in what appears to be a continued drift away from US orbit and into China's.

"I think the TPP is dead, as far as the US is concerned.  Other countries [may] try to do their own deals, but they are not that important to global trade… China is already the "trade leader" in Asia, and will remain so with or without the TPP," Robert Scott, Senior Economist and Director of Trade and Manufacturing Policy Research at the US-based Economic Policy Institute told Sputnik.

Trends in Asia therefore appear to run counter to Western protectionist tendencies and the global rebalancing of trade and geopolitical arrangements is likely to continue taking shape in 2017.

Gupta of ICAS was more skeptical of China's ability to independently lead trade liberalization efforts but stressed that the country will regardless be the top champion for free trade as it has been in RCEP talks.

"China could become the Asia-Pacific’s new trade "champion" or "cheerleader"- although not its "leader", if TPP is scrapped. China is already very heavily invested in regional and global trade integration, and increasingly – albeit gradually, in global financial and investment integration too… That having been said, China is still a low-to-middle income country (as per market prices) and its capacity to make deep liberalization offers in many services sectors as well as within beyond-the-border domestic regulations is questionable," he said, adding that China will have to become much richer and more developed before being able to bear liberalization commitments as a leading force.

Despite this year's slowdown, the Chinese economy continue to grow at rates far above the global average and as the US-led TPP is abandoned, the country is likely to continue consolidating its economic clout in the region.

ICA Institute founder Jagdish Sheth described various "soft power" ways in which China will continue to permeate throughout Asia.

"China will definitely exert its market power as well as its soft power to dominate Asia especially through the Asian Infrastructure Investment Bank. Countries such as the Philippines, Indonesia, Thailand and Malaysia will be more influenced by China. Finally, Chinese state enterprises such as China Mobil and Huawei Technologies will invest significantly in these countries. I also expect e-commerce companies such as Alibaba and Ten Cents and their subsidiaries to expand in the Asia region. So will Chinese car makers, steel makers, agriculture equipment, chemicals and pharmaceuticals," Sheth said.

China is also the most important partner of Japan and South Korea, both of which are also the most affected by the anything related to the TPP, he added, noting that these are likely to move toward bilateral agreements with the United States in line with what was on the table before.

"Finally, both Japan and South Korea will invest heavily in the US instead of exporting from their products made in China or in their own countries. These include companies such as Samsung, Huyandi and other Chaebols form Korea and several Zaibatsu such as the Mitsubishi Group," the expert concluded.

Latin America Fractured

Somewhat less grand, but possibly far-reaching, developments took place in Latin America's Mercosur regional bloc amid the economic and political crisis in Venezuela and the change of power in Brazil.

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Founded in 1991, Mercosur is a sub-regional economic bloc that includes Argentina, Brazil, Paraguay, Uruguay and Venezuela. Venezuela assumed presidency in the bloc on July 1 amid concerns over growing discord in the country and a political standoff between the country's President Nicolas Maduro and the opposition-dominated parliament. Brazil, Paraguay and Argentina then refused to recognize the chairmanship and raised the possibility of blocking Venezuela's chairmanship due to what was claimed to be a breakdown of democratic order in the country.

The move occurred after former Brazilian President Dilma Rousseff's opposition-led suspension over allegations of her manipulating government books. Argentina had also undergone a shift to right-wing politics under new President Mauricio Macri.

Venezuela was officially notified of having its Mercosur membership suspended in early December. The split in Mercosur is unlikely to leave the bloc unscathed. Its members have previously shown interest in further integration as part of the Pacific region and talks on a free trade area with the European Union have also been held. Unless the spat with Venezuela is resolved, the bloc may therefore fall prey to more cohesive trade structures amid the right-wing backlash on the continent.

Russia Pushes For Integration

Russia, much of which lies on northern Asia, has spent the year seeking new trade and integration partners in what appears to be an eastward move amid anti-Russian Western sanctions. The country's trade with Europe and the United States fell dramatically as the West imposed economic and individual restrictions on Russia in response to its alleged meddling in the Ukrainian debacle. Russia did lapse into recession through 2015 and 2016 but is on track to recovery as early as the last quarter of 2016.

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The concluding year saw Russia regain its bearings and look eastward, with Russian-Chinese trade reviving after a decline in 2015. The two countries have been working on improving transport and postal service links as well as looking into ways of integrating various regional economic initiatives. In June, the sides agreed to start formal talks on coupling the Russia-led Eurasian Economic Union (EAEU) and China's pan-Eurasian One Belt, One Road initiative.

The EAEU replaced the looser integrated Eurasian Economic Community in January 2015. The union comprises Kyrgyzstan, Armenia, Belarus, Kazakhstan, and Russia. The EU-style bloc aims at greater economic integration between its member states, including a streamlined flow of goods, services, capital and labor. The One Belt, One Road initiative, also known as the new Silk Road, was proposed by Xi Jinping in 2013 to facilitate the direct flow of goods from the Pacific Ocean to the Baltic Sea. The project is intended to connect China with Europe and strengthen economic ties between Asia, Europe and the Gulf states.

In October, Russian President Vladimir Putin said the coupling of the new integration initiatives could become a basis for the creation of a large Eurasian partnership between EAEU states, the Shanghai Cooperation Organization (SCO) and ASEAN, with the BRICS group being used to implement the plan.

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The EAEU has also made strides southward and conducted negotiations with India, another BRICS member. In 2015, the EAEU and India established a joint group that has been examining the feasibility of a potential free trade agreement. In October this year, Putin met with Indian Prime Minister Narendra Modi and expressed hope that EAEU leaders will make a decision on starting the talks in December. Indian Ambassador to Russia Pankaj Saran later told Sputnik that New Delhi is ready to start the negotiation process and is waiting for a go-ahead from the organization.

The EAEU has also decided to start looking into the prospects of a free trade area with Singapore, while Indonesia, Cambodia, and Thailand all expressed interest in creating such a zone with the Russian-led bloc.

Africa's Bid for Unity

On the African continent, countries took another major step toward integration by vowing to speed up the creation of a pan-African free trade area which is likely to become the largest economic bloc in the world in terms of population once complete. Africa's planned trade bloc aims to create a single market for goods and services, as well as allowing for the free movement of people and capital, on an area inhabited by over one billion people with a combined GDP of over $3 trillion.

The decision to fast-track the Continental Free Trade Area (CFTA) was taken by dozens of African heads of state at the 27th Ordinary Session of the Assembly of the African Union (AU) in Rwanda's capital Kigali in July.

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The AU, established in 2001 to replace the post-colonial Organization of African Unity, comprises 54 countries and includes every country on the continent except Morocco. Plans for the CFTA were approved at the 2012 AU summit and aim to address the issue of low intra-African trade in what is effectively an attempt to overcome dependency on raw material exports to developed countries. Experts' estimates have projected that the CFTA could boost trade by over 50 percent within five years.

At this year's AU summit, African leaders agreed to establish a high level panel to oversee the fast-tracking of the planned CFTA establishment slated for October 2017. The establishment of the panel ensures that the tight deadline would be met.

Experts from the African Union Commission (AUC), the chief executive body of the bloc, later started regular meetings with the United Nations Conference on Trade and Development (UNCTAD) Economic Commission for Africa to work on a draft agreement based on templates designed to ensure maximum consultations with all stakeholders.

The launch of the CFTA will unite a number of regional free trade agreements, namely the Common Market for Eastern and Southern Africa (COMESA), the East African Community (EAC), and the Southern African Development Community (SADC).

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The only setback so far appears to be the lagging behind of the Economic Community of West African States (ECOWAS), thus limiting the CFTA to 26 mostly eastern and southern African nations. Nigerian-led ECOWAS remained beset by tariff disputes early in the year.

Nigeria, Africa's largest economic powerhouse by far, has proven to be highly sensitive to reducing trade barriers and caused some delays to implementing a common ECOWAS external tariff. Negotiations were finally complete in August and tariffs were implemented by 10 ECOWAS members in September. The remaining five members are expected to join within five years.

Since making progress with ECOWAS, Nigeria stepped up its participation in CFTA negotiations. In early December, Nigeria's trade minister arrived to Ethiopian capital Addis Ababa to take part in the four-week Africa Trade Week event at the AU headquarters. The Nigerian negotiation team has been pushing for the CFTA and accompanying structural reforms, but has maintained that stakeholders must still be able to safeguard national economies from a flood of imports.

Overall, Africa is on track to overcoming its lack of home markets and economic dependency, as well as surging ahead in growth and development. With many African countries growing at rates above 5 percent per year, the continent is hope to some of the world's fastest growing economies which have defied global stagnation and are on track to defying resurgent protectionism as well.

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