Brown and Sarkozy on Darfur

I've got to run, but I just saw a mention about this op-ed in the Times of London by Gordon Brown and Nicholas Saroky on Darfur:

There has been important progress on Darfur in the past two months. In July we agreed on the deployment of a robust UN/African Union (AU) force and the start of peace talks. But the situation remains completely unacceptable. In the coming weeks and months, we commit as leaders to redouble our efforts to make further progress.

At the end of July the UN agreed to our plan. UN Resolution 1769, passed –– for the first time –– unanimously, was the culmination of intense diplomatic activity over the crisis in Darfur. In the next few weeks, one of the largest UN troop deployments –– this time in partnership with the African Union –– will begin arriving in Darfur. Twenty thousand peacekeepers and nearly 4,000 police will contribute to ensuring the security of Darfur’s people –– as well enabling safe delivery of essential supplies of food.

Moreover, on the political front, most of the Darfuri rebel groups met in Tanzania early this month under UN and AU auspices to prepare for political negotiations. They reached agreement on their common demands and said that they would commit to a ceasefire if the Sudanese Government also made the same commitment.

But there is still a gap between the efforts pursued by the international community and the dramatic situation that remains on the ground.

More than two million people have already been displaced, and their numbers continue to grow. Four million people now rely on food aid and other humanitarian assistance. And the fighting continues with aerial bombardment, banditry and skirmishes between groups flourishing in a lawless and insecure environment. The pain of the people of Darfur demands quick and decisive action from the international community.

The important UN Resolution 1769 is not the end but just the starting point of the international efforts that we must mount to stop the killing and to bring peace to this troubled region. The troop deployment is only one stage in the process of bringing peace, and we cannot wait a moment longer for intense international action to secure a ceasefire. That is the reason why we are determined and fully committed to step up our actions over the crisis in Darfur and the region. We intend to mobilise all energies along five directions.

In the coming days, both Rama Yade, the French Secretary of State for Foreign Affairs and Human Rights, and Lord Malloch-Brown, the British Foreign Office Minister, will visit Sudan, including Darfur. We call on all sides to lay down their arms, to respect a ceasefire without delay and to bring the aerial bombings of civilians to an immediate end.

We will support all efforts to expedite preparations of the deployment of the AU-UN force (UNAMID), authorised by Resolution 1769, so that it will be operational by the end of this year.

But our plans go beyond the ceasefire, which cannot on its own resolve such a complex conflict. We need a political settlement that addresses the root causes of the violence and allows Darfur to participate in national elections in Sudan in 2009. The UN and AU will issue invitations for political talks to start in October. We urge the Government of Sudan and rebel leaders to engage fully and sincerely in this process. And we welcome the role of Sudan’s neighbours in support of UN/AU efforts.

If progress is not made on security, the ceasefire, political process and humanitarian access, we will work together for further sanctions against those who fail to fulfil their commitments, obstruct the political process or continue to violate the ceasefire.

We also believe there is a need to help with economic reconstruction –– to help people to return to their villages and rebuild their livelihoods. As soon as security allows, we will commit resources to grassroots development. When there is political progress, we will work with all parties to meet Sudan’s longer-term development needs.

And we must look beyond Darfur, to the issues affecting Sudan and the region. We want to see faster progress on the comprehensive peace agreement that brought peace between north and south Sudan.

In Chad, hundreds of thousands of people fleeing the conflict in Darfur are living in camps alongside people displaced by internal unrest. We are working intensively with the UN and the EU to ensure better security and greater humanitarian assistance. It is clear that the deployments of two missions to ensure security on both sides of the Chad-Sudan border are the two sides of the same coin.

The causes of conflict in Sudan are deep-rooted: economic, environmental and political. Neither Britain nor France, nor the people of Sudan, can achieve a successful outcome alone. We need cooperation from all parties and engagement from the international community. We welcome the visit to Sudan in the coming days by Ban Ki Moon, Secretary-General of the UN. There will be a AU/UN meeting in New York on September 21 to sustain international initiatives to address the crisis. And France will chair a Security Council meeting four days later at the level of heads of states and governments to rally world leaders to deliver on commitments to peace in Darfur and beyond.

It is the combination of a ceasefire, a peacekeeping force, economic reconstruction and the threat of sanctions that can bring a political solution to the region –– and we will spare no efforts in making this happen.

Sarkozy: Free Market an "Illusion"

Dontcha just love Sarkonomics? (Or is that Sarkonomiques, mon ami?) While ol' Sarkozy is not one to shy away from talk about globalization, he says France will do it in its unique way, replete with dirigisme, national champions, and other manifestations that the French government still occupies the commanding heights. In other words, while France cannot isolate itself from the winds of globalization, it will not be cowed into allowing markets free rein over the power of government. How typically...Gallic. Meet the new boss, same as the old boss, etc. From the International Herald Tribune:

In a country that has long resisted globalization, President Nicolas Sarkozy bluntly told France on Thursday to stop kidding itself and face up to it - but in a French way.

Calling the free market an illusion, Sarkozy said France should not be shy about having the government defend French companies and interests from foreign marauders. But he also signaled that he was not the French "dirigiste" of the past.

Outlining his own brand of Gaullism, the president vowed to make conditions more business-friendly at home to allow French companies to compete better in the world. In return, he asked them to have French interests at heart when they set prices, negotiated wages and made investment decisions.

"We will not obtain growth if we don't play the game of globalization collectively," Sarkozy told about 4,000 business executives at the annual conference of the country's biggest employers' federation, Medef.

"But let's not be naïve," Sarkozy went on to say. "Let's look at the world and ask ourselves the question: Should we be naïve to the point of being the only ones not to defend our interests when all the others are defending theirs?"

Sarkozy's comments came as the debate about the winners and losers of globalization was gathering pace in several countries, where governments face rising demands for protection from voters. The recent turmoil in credit markets has only intensified those calls.

Sarkozy promised to equip French business to compete better in world markets and vowed to go further in cutting payroll taxes and relaxing the 35-hour workweek - a piece of legislation he called "an immense economic mistake."

He also vowed to press ahead with changes to the labor code, easing onerous hiring and firing rules, and paving the way to an American-style "Small Business Act" that would earmark a share of public tenders for small and medium-sized companies.

In a speech that was as much aimed at voters and labor unions as the business community before him, the president said that globalization had changed the goal posts of economic policy - stripping the state of power in some areas, like raising taxes on jobs that could end up being moved abroad, while obliging it to act more forcefully in others.

One such area is industrial policy.

"I'm not afraid of industrial policy," Sarkozy said. "I will not leave our industry at the mercy of all sorts of dumping and all the speculators."

As if to illustrate his determination to create "national champions" in strategic sectors, he used his speech to press Suez, a private utility, to sell its water and waste business and merge its energy division with the state-owned natural gas company Gaz de France to create "a large European electricity and gas group in which the state would be the main shareholder."

Under Sarkozy's predecessor, the government announced a merger of the two companies to thwart a takeover bid from the Italian electricity company, Enel. But after 18 months, the deal has so far failed to materialize.

Vowing to take his battle for economic realpolitik to Brussels, Sarkozy said that Europe would not preserve its place in the global economy if it went the idealistic way of an ever freer market with strict competition rules and a ban on state aid for industry. In comments that are certain to irk the European Central Bank again, he repeated his call for a lower euro to bolster European exports.

"We are condemned if competition rules are tougher here than elsewhere, if it's the only region in the world where it's impossible to conduct industrial policy, trade policy or exchange rate policy," he said.

Sarkozy broke with tradition when he chose the campus of a business school and the audience of the country's top business executives to outline his economic program. France's political class has traditionally preferred to be seen with philosophers and intellectuals. But under Sarkozy, money and big business are no longer taboo.

The son of a Hungarian immigrant and, unlike most of his predecessors, not a graduate of France's elite Ecole Nationale d'Administration, Sarkozy counts numerous big bosses among his closest friends and unapologetically spends his holidays in their luxury villas or on their yachts. "There is no shame in success or money," he said during his election campaign.

On Thursday, Sarkozy moved with visible ease among executives, as if, one chief executive of a large French company remarked, "he was one of us."

Labor unions and leftist politicians, who have criticized Sarkozy's decision to give a high-profile speech on economic policy before a business federation, appeared to concur. "He is the president of the CAC 40," grumbled Jean-Luc Melanchon, a Socialist senator.

Thursday's announcements follow a first round of economic measures, passed in an extraordinary parliamentary session in the summer. Legislators voted last month to cut the maximum tax burden to 50 percent of personal income and scrapped taxes on overtime pay.

Mekong River's Ch-ch-ch-changes

The Mekong River is an important waterway for China, Laos, Burma, Thailand, Cambodia, and Vietnam. Now, there are risks of water wars emerging over the Mekong as the growing economies that rely on it--especially China--begin to more aggressively claiming a stake through damming and other activities. The problem is that those other countries are downstream of the part which runs through China. In other words, Chinese activities with the river will affect the quantity and quality of water available in those Southeast Asian countries. Here is a snippet of a TIME article covering the consequences of China's activities in the region:

For millenniums, China hardly touched the mighty Mekong, content to let its raging headwaters flow unimpeded from the Tibetan plateau down through Laos, Burma, Thailand, Cambodia and Vietnam. But over the past few years, the emergent superpower has begun turning the world's 12th-longest river into a highway for regional commerce and a source of hydroelectric power. For many Indochinese entrepreneurs, increased China trade and investment has allowed a backward region to participate in their upstream neighbor's remarkable economic expansion. Southeast Asian governments hope China will share the electricity it will harness after a series of massive dams on the upper Mekong are completed in the nation's western Yunnan province. Two have already been built. At least six more are planned.

But for tens of millions of residents downstream, China's efforts to manage the Mekong also threaten their way of life. An astounding 17% of all fish caught in inland waters worldwide come from this generous river, while 90% of the basin's residents are subsistence farmers who largely depend on the Mekong's nutrient-rich waters to feed their fields. Yet Chinese dams, along with engineering projects to make the river navigable by larger vessels, have begun to ravage the river's ecology by blocking sediment and producing unnatural water flows that dissuade fish migration and spawning. The nonprofit Southeast Asian Rivers Network estimates that fish stocks on the Thai-Laos border have already declined by half because of Chinese activity. Farmers, too, complain that the once-predictable floods needed to nourish their paddies have been disrupted by the two existing Chinese dams — and the cavalcade of future hydropower projects will only make things worse. "You can't talk about the Mekong today without talking about China," says Carl Middleton, a Bangkok-based consultant for environmental watchdog International Rivers Network. "So much that's happening on the river, whether it's economic, social or environmental, can be linked to China's rise."

Snaking its way from the icy reaches of Tibet to tropical rice paddies near the South China Sea, the Mekong serves as the lifeblood for 70 million people in six different countries. The river's wetlands alone cover an area the size of Ireland, while its fish diversity is rivaled only by the Amazon. But even as many of the world's other majestic rivers — the Nile, the Yangtze, the Mississippi — were efficiently exploited for trade or hydropower, the 3,000-mile (4,800-km) Mekong has until recently largely escaped the imprint of the modern world. During the colonial era, treacherous rapids stymied expeditions hoping to uncover its upstream secrets, leaving the waterway for local fishermen and farmers. By the mid-1900s, when the West was forced to withdraw from Indochina, the Mekong had become a byword for the failure of modern military might against dogged resistance forces nourished by the river's gifts.

The Mekong is not so unyielding these days. In 2001, Chinese crews, brought in by Southeast Asian governments eager to increase traffic and trade, began blasting and dredging a stretch of the river running from Burma and Laos to Thailand, clearing away islands, reefs and rapids that once blocked the passage of ships. Since then, sleepy Southeast Asian river ports have morphed into boomtowns, with boats from China disgorging cheap electronics, fruits, vegetables and every kind of plastic gadget imaginable. River traffic runs both ways: in December 2006, the first shipment of refined oil chugged up the Mekong bound for energy-hungry China, opening up a potential alternative shipping route to avoid the pirate-infested Straits of Malacca through which roughly half of its imported oil now passes. And with China needing somewhere to park its ballooning foreign-exchange reserves, the riverfront capitals of Phnom Penh and Vientiane now gleam with Chinese-built roads, buildings and other infrastructure. The torrent of investment will likely grow even greater next year when Chinese construction workers finish building a 1,100-mile (1,800-km) Yunnan-Bangkok highway that parallels a section of the Mekong. "Chinese are natural businessmen," says Liu Jingchun, a Chinese boat captain who transports goods between Yunnan and northern Thailand. "For so many years, we shut ourselves off from doing business. Now that we're allowed to trade again, it's like a giant floodgate has opened."

China: Those Wormy US Products

Here's the latest volley from China in the never-ending US-China product safety tit-for-tat: US wooden packaging contains "microscopic worms" while US vitamins are "substandard." Somehow, I am less inclined to believe that American products are as crummy as the Chinese say; unlike many countries complaining about substandard Chinese products, there is no international outcry against American ones. It seems one country is doing all of the complaining about US products. As I've suggested, it's mostly a face-saving exercise for the Chinese to single out American ones as defective. Citing nematodes in containers is rather picayune--these worms are exceedingly common, and we're not talking about products but product containers, fer crying out loud. From Reuters:

China has found microscopic worms in wooden packaging from the United States and uncovered substandard U.S. vitamin pills and fish oil for children, Chinese media said on Friday in the latest volley of cross-border accusations.

China has highlighted several quality concerns with U.S. products in apparent response to recent complaints in Washington about the safety of Chinese exports ranging from toys to toothpaste.

The pine wood worms, or nematodes, were found in 13 sets of packaging in the manufacturing hub of Shenzhen, the China Daily said.

Harmful organisms were found in another 10 of 70 batches of wooden packaging sampled between mid-July and mid-August.

This meant the rate of sub-standard packaging from the United States was higher than that for the European Union, Japan, Korea or Canada, the newspaper said.

The labels on some of the wooden packaging were unclear, the report said, adding that that this suggested some exporters might have used fake documents.

Officials have destroyed the goods and urged tighter supervision of wooden U.S. packaging, the paper said.

The vitamin and mineral pills and children's fish oil were discovered in the eastern coastal province of Zhejiang, the China News Service said.

"The two failed to reach the nutritious levels promised on their labels," it said, citing the Zhejiang industrial and commercial department.

China recently destroyed a cargo of sub-standard frozen potato slices also shipped from the United States, and the quarantine bureau earlier this month highlighted a cargo of contaminated soybeans that arrived in February.

China has sent a notice to the World Health Organization defending its own food safety standards and said it was willing to cooperate globally to tackle the problem.

China's quality watchdog on Friday introduced what Xinhua news agency called a landmark recall system for unsafe food products and toys to improve product safety.

The regulations, following the introduction of recall system for defective cars in 2005, went into effect on Friday, the General Administration of Quality Supervision, Inspection, and Quarantine announced.

Xinhua did not give details.

Britain Deals with Subprime Fallout

What we have here are two stories dealing with the ongoing global fallout from the US subprime disaster-slash-contagion. Both of them focus on the UK. The first from Bloomberg deals with tightened credit standards for prospective homeowners in the UK in response to America's misadventures. It's not a welcome development for the British are already rather fond of debt like their American counterparts:

U.K. lenders responsible for 12 percent of the nation's mortgages are tightening standards for loans on house purchases, withdrawing offers and raising the cost for borrowers with less than perfect credit.

Merrill Lynch & Co.'s Mortgages Plc unit said yesterday that it raised its interest rates. Northern Rock Plc, the Newcastle upon Tyne building society that had 8.4 percent of the market last year, and Residential Capital Corp.'s GMAC-RFC unit, with a 3.5 percent share, said they stopped some offers and lifted costs for others. Deutsche Bank AG did the same, while two lenders backed by Investec Plc have stopped all subprime loans.

``There are some lenders who have pulled their current product range and not announced any new ones,'' said Ray Boulger, senior technical manager at Charcol Ltd., Britain's biggest online mortgage broker. ``Others have put up rates until they get little or no business.''

The changes add to evidence that homeowners are finding it more costly and difficult to borrow in Britain after a collapse in the U.S. mortgage market dried up credit around the world. That may hurt house prices, which tripled in the last decade to an average 198,915 pounds ($404,000) because banks were allowing homebuyers to take on loans of up to five times their income.

``The same person trying to get a mortgage will find the situation more difficult now than three months ago,'' said Fionnuala Earley, chief economist at Nationwide Building Society, the U.K.'s fifth-biggest home lender. ``Some lenders will reassess how much they want to lend. You're not going to stretch yourself for volume in a market you think is a little risky.''

U.K. consumers shoulder a record 1.35 trillion pounds in debt, the highest per capita among the Group of Seven nations. Mortgage lending hit a record in July, rising 13 percent over the year even as the Bank of England raised its benchmark interest rate to the highest in six years.

Nationwide Building Society said today that house price inflation eased to 9.6 percent from a year ago in August from 9.9 percent in July. Lenders approved 115,000 loans for house purchase last month, the same as in June, the central bank said in London today.

In the U.K., so-called subprime lending to homebuyers with a shaky credit history accounts for about 6 percent of the market, half the level of the U.S., according to the London-based Council of Mortgage Lenders.

``Subprime lending has been of a higher quality in the U.K.,'' said Kelvin Davidson, a property economist at Capital Economics Ltd., a London-based consultant. ``But the problems don't really emerge until the market starts to turn down.''

The Financial Services Authority, Britain's securities regulator, last month said it had studied 485 subprime loans and found that more than half were awarded to customers who were not required to provide evidence of their income. And with almost half the loans, the brokers involved failed to adequately assess the ability of borrowers to pay.

John McFall, a member of Parliament for the ruling Labour Party, said he has been pressing Bank of England Governor Mervyn King to study the risk subprime borrowing has on the economy. On Aug. 8, King said ``I don't think there's much evidence of major damage to loan performance in other markets'' outside the U.S.

``We're walking blind,'' McFall said in an interview. ``I don't think there's any systemic risk, but there will be pain.''

DB Mortgages, a unit of Frankfurt-based Deutsche Bank, said on Aug. 22 that had it raised interest rates by around 1 percentage point. The firm also said it wouldn't be offering loans to first-time buyers.

``We're reacting to market conditions,'' Peter Beaumont, deputy chief executive of Mortgages Plc, said in an interview on Aug. 29. The company demanded bigger deposits from borrowers and raised its interest rates.

Infinity Mortgages, funded by Investec Plc, and Unity Homeloans, which Investec set up in 2006, said they would not take on new business. Unity blamed ``adverse movements in the capital markets'' in an Aug. 10 statement. Infinity cited the cost of borrowing and the difficulty of selling on debt securities.

``We're the victims of the global situation,'' said Simon Biddle, head of marketing for Infinity. ``The spreads that are emerging in securities are absolutely huge.''

Northern Rock said on Aug. 23 that it raised some rates and withdrew some of its subprime offers. Ron Stout, a spokesman for the company, said the changes weren't unusual.

Edinburgh-based HBOS Plc, the nation's biggest mortgage lender, hasn't changed its offers lately, said spokesman Mark Hemingway.

The lenders are concerned about increasing default rates in the U.K. A record 30,075 people in England and Wales declared themselves bankrupt in the first quarter, up 24 percent from a year ago, according to government figures.

So far, the lending squeeze hasn't slowed the broader market. In June, 102,000 loans were made for home purchase, the most since November, according to the CML. The lobby group doesn't identify how many were subprime loans.

Even so, higher costs to some borrowers will further inch up the cost of servicing a mortgage, which already is at its highest since 1992, according to Citigroup Inc.

``The longer the situation persists, the more likely it is that we do see the credit crunch feeding through to new borrowers,'' said George Buckley, chief U.K. economist at Deutsche Bank in London.

Next, the Financial Times noted in an earlier article how London property prices--which have been extraordinarily robust--may finally be felled by subprime. As the City of London-based financial services industry encounters tighter credit conditions, fat salaries, fees, and commissions emanating from elevated levels of financial activity may be endangered. In this manner, high-end demand for very pricey London prime addresses may fall:

Fears are growing that the fallout from the US subprime mortgage meltdown will hit house prices in central London, one of the world's hottest high-end property markets.

Prices for "prime" homes in the most expensive streets of the capital have risen about 50 per cent in the past two years as a financial services boom has enriched bankers and other professionals in the City of London.

But the global market turmoil unleashed by the US subprime collapse is threatening activity levels at banks in the City, and London property agents are warning that high-end residential prices could suffer as result.

"If there is a downturn in City profits and employment levels, you couldn't be surprised if central London prices fall," said Liam Bailey, head of research at Knight Frank, the property consultancy.

The importance of the City to the economy was underlined as official figures showed business services contributed over half the economic growth in the second quarter of the year.

Mr Bailey said there had long been a correlation between the health of the City and London residential prices. The prime London market suffered badly in 2002 and 2003 after prices of technology and telecommunications shares crashed.

John Young of Humberts, a London estate agent, said the recent "uneasiness" in the City had prompted several deals to fall through. Tracy Kellett, founder of BDI Home Finders in London, a buying agent, said some sellers were dropping prices.

David Forbes, a director of agents Savills in its posh Knightsbridge office, said it was too early to call the market.

Charles Ellingworth of Property Vision, an adviser to home buyers, said City "tremors" had a "huge impact" on buyers' confidence. "We are not seeing panic yet but the closest comparison we have is that this feels remarkably like August 1998."

But in a word of well-deserved caution, given the strength of the rebound after the 1998 financial crisis, he added: "For three months, we didn't do a deal then suddenly in November it all came back to life and we had the two busiest months ever."

US Plays Financial Globocop

Yesterday, I featured an article concerning how the rest of the world is keen on making sure that it isn't the unwitting buyer of US subprime and assorted junk. Today, we have a brace of articles from the Financial Times on how the US is seeking to fine various European financial institutions millions of dollars for doing business with the likes of Iran, Libya, Cuba, and Sudan. Unlike what I viewed as a rather dubious case for the rest of the world meddling in US financial regulation, there may be a more legitimate basis in ensuring compliance from FIs not to engage in business with these regimes as some are subject to UN sanctions as well. Below is the lead-off article:

The US justice department and other authorities have stepped up investigations into several large European banks for violating US sanctions against Iran, Libya, Cuba and Sudan.

One person familiar with the probes said some banks had started to discuss settlements with the authorities and could agree to financial penalties by the end of the year.

A number of the banks, whose names have not been disclosed, came under investigation by authorities, including the Treasury, when they alerted the government to potential violations after a landmark money laundering settlement by ABN Amro in 2005, according to people familiar with the matter.

The Dutch bank was fined $80m by the Treasury’s Office of Foreign Assets Control, state regulators and the Federal Reserve after it emerged that its US offices had processed wire transfers that originated from Bank Melli Iran and engaged in transfers involving Libya.

The payments breached anti-money laundering compliance rules and requirements that banks report suspicious activity.

Some payments were transferred through the US after ABN obscured identifying references. After its $80m civil fine, ABN Amro said in April it was putting aside €365m to resolve a separate criminal investigation by the justice department into its dollar-clearing activities.

The Clearing House and the Wolfsberg Group, two international banking associations whose members include HSBC, UBS and Credit Suisse, have endorsed changes that would provide banks and their counterparts with more information about those conducting wire transfers.

US officials, including under-secretary Stuart Levey at the Treasury, applauded the banks’ initiative but it is thought unlikely to deter authorities from addressing previous violations.

And here is more of a backgrounder to the story. A issue being raised here is why the US is acting now when it was common knowledge that such activities were commonplace before:

When regulators in 2005 slapped ABN Amro with an $80m (€59m, £40m) penalty for violations of US sanctions against Libya and Iran, it sent seismic waves through the international banking system.

The reverberations are still being felt today.

People close to several European banks say that US regulators and criminal investigators have broadened the scope of a probe that began with the Dutch bank.

They are now examining whether a handful of banks similarly violated laws by processing US dollar payments through US counterparts for clients in Iran, Cuba, Libya and Sudan, countries that – with the exception of Libya after 2004 – are still subject to US sanctions programmes.

Some legal experts say the case against ABN Amro, which promised in April to set aside hundreds of millions of euros to resolve a criminal investigation by the US justice department into its US dollar clearing practices, clarified for the first time the Bush administration’s position and interpretation of sanctions rules and their application to the financial services industry.

Namely, that US banks and individuals are not allowed to facilitate banking activity abroad in which they could not engage directly.

“The ABN Amro case is a very high-profile indication of the intention of the Office of Foreign Assets Control [at the US Treasury] and other agencies to enforce that position.

“As a result, it is a wake-up call for the financial community with respect to the handling of wire transfers by foreign banks that ultimately touch on US-embargoed states,” says Wynn Segall, a partner at law firm Akin Gump in Washington.

Another Washington attorney said it remained to be seen whether the investigations that were under way would result in penalties as large as the one facing ABN Amro, or whether they were part of a broader strategy by regulators to put pressure on European banks to cut ties with Iran.

The US Treasury has warned more than 40 banks across the world that it would follow a strict interpretation of US and United Nations restrictions on doing business with Tehran as part of its campaign to persuade financial institutions to break ties with Iran.

Some people familiar with the investigations, who asked not to be named, say that the looming possibility of financial penalties raises questions about the authority of US regulators to penalise banks for conduct that went unchecked for years.

“This is an issue where the legal lines are not clear. It is the kind of thing that banks around the world engaged in.

“The bottom line is, name a major bank in Europe that didn’t do dollar payments for Iran or Sudan. A large number of them did it for Cuba – and right there is the issue,” said one person familiar with the matter.

But if the ABN Amro case represents a model for the kinds of cases that US authorities may be bringing against other banks in the future, as some legal experts believe, then the US government would have a strong case to argue that the violations under scrutiny were not just routine technical blunders.

In the case of the Dutch bank, regulators found that one of ABN Amro’s foreign branches was able to develop and implement “special procedures” for certain fund transfers and other operations “designed and used” to circumvent compliance systems established to comply with US laws.

James Freis, director of the Financial Crimes Enforcement Network (FinCen), a division of the Treasury that investigates money laundering, said last month that “myths” about big penalties for minor lapses in banking requirements should be dispelled and that federal financial regulators were making “great efforts” to eliminate uncertainty about what they expect in a “solid, risk-based”, anti-money laundering programme.

Banks seeking to come to grips with the potential regulatory issues they face for previous activity are, in the meantime, moving ahead with voluntary changes to international wire transfer practices.

Two international banking associations in April said they anticipated that an “enhanced system” of message formats would be developed that would “protect the integrity” and “enhance the transparency” of international wire transfers.

Will We See Singaporean Seawalls?

The International Herald Tribune has a set of articles out today [1, 2, 3] dealing with Singapore. The first deals with how Singapore's founder, Lee Kuan Yew, is changing along with the times together with Singapore, while the second is an interview with him. I do suggest reading these if you're interested, though the third one about Singapore envisioning the construction of a seawall interests me most. Like many other countries in Asia and elsewhere, low-lying Singapore is vulnerable to rises in the sea level. They've already "gone to the well" by asking the Dutch masters for advice on combating encroachment by the sea to build up their defenses.

While I'm glad to know that Singapore is getting ready for the nearly inevitable rise in sea levels, I'm also saddened that there are so many other countries that do not have the foresight of a Lee Kuan Yew, the educational research facilities of Singapore, or its deep pockets in dealing with the matter. Make no mistake: there are a lot of vulnerable countries that have not given this matter much thought and are even less prepared to meet its challenges [sigh]. Let's go about things in order. We begin with this snippet which shows the absolutely astounding amount of knowledge Lee has about global warming and other, ah, burning issues. Petro BushTM he ain't:

Lee Kuan Yew: ...You in America could ignore large parts of the world. Why do you worry about what's happening to the Aborigines of Australia, or natives in the Congo or the Amerindians in South America. They do not concern you.

But this interconnected world is not going to become disconnected. Technology has brought this about. I do not see that technology disappearing. I think the problems will become more acute the other way, overpopulation, earth warming and displacement of millions, maybe billions of people, that is the greater danger.

IHT: What about the risks to Singapore, what are the risks to Singapore in those scenarios?

Lee Kuan Yew: Oh! We are already in consultations with Delft in Holland to learn how we can build dikes!

IHT: Is that right?

Lee Kuan Yew: Oh, yes! Let's start thinking about it now.

IHT: Are you serious?

Lee Kuan Yew: We are. We are in consultations with them.

It scares me because many world leaders have not woken up to the peril that their populations are in. This melting ice cap. I expected great consternation! What would happen to this earth? But, no. Has it triggered off emergency meetings to do something about this?

Earth warming, the glaciers melting away? Never mind the Swiss Alps and skiing resorts having to manufacture snow. When the glaciers in the Himalayas and Tibet melt away, the Ganges, the Yangtze, the Irrawaddy, the Mekong, may dry up, except for rainy seasons. What will happen to the hundreds of millions? Where do they go? Where can they go? This will be a very serious problem.

And without further ado, the article on how Singapore is planning for sea level rises:

Surrounded by sea and almost pancake flat, Singapore is without doubt vulnerable to the rising sea levels many scientists predict global warming will cause.

While topographical maps are considered a military secret here, anyone flying into Singapore can easily see that the island is elevation-challenged. Its highest point is a jungle-clad hill rising 165 meters, or 540 feet, above sea level. Most of the business-end of Singapore - its airport, its business district and, of course, its busy container ports, lie less than two meters above sea level.

Faced with the prospect of a long, slow submersion into the very waters that serve as the lifeblood of this maritime trading hub, Singapore has reached out to the world's greatest experts on the subject of battling back the sea - the Dutch.

"We are already in consultations with Delft in Holland to learn how we can build dikes," said Lee Kuan Yew, the former prime minister, in an interview last Friday.

Delft Hydraulics, a research institute and consulting firm specializing in water management issues in the canalled Dutch city of Delft, is already helping Singapore convert its biggest river and marina into a huge downtown reservoir. Now it is also helping the city-state look into just what it can do to defend its roughly 200-kilometer, or 125-mile, coastline.

"We feel we have strong reasons to be concerned, but no reasons for panic," said Vladan Babovic, director of the Singapore Delft Water Alliance, a $43 million research center opened in February between Delft, the National University of Singapore and the country's water management agency, PUB Singapore. "We will be able to resolve these challenges," he said.

Singapore got a preview of just what havoc rising sea levels could cause back in 1974 when a rare astronomical event caused the tides to rise 3.9 meters, more than double the usual level.

"It eroded the coast very badly," said Wong Poh Poh, an associate professor specializing in beach geography at the National University of Singapore, who studied the event. Areas along the Singapore River were inundated, as were parts of the airport and a coastal public park built on reclaimed land.

Wong later discovered that during such periods of elevated sea levels, the variations between high and low tide are accentuated, putting the country's reservoirs, many of which lie adjacent to the coast, at risk. Singapore officials later used one of Wong's reports to draw the attention of the United Nations to the problems associated with global warming.

Still, no one is certain just how much of Singapore is vulnerable to the problem. The Singapore Delft Water Alliance and researchers at the national university's Tropical Marine Science Institute began a study into the potential effects of climate change on Singapore in March. But the leader of that study, Liong Shie-Yui, said that the group had yet to produce any noteworthy findings.

Assessing the risk is complicated by the fact that no one knows for sure just how much the sea may rise or how fast. Estimates vary from as little as 60 centimeters, or about 24 inches, to as much as 6 meters. And sea levels are not consistent from place to place: atmospheric pressure, wind and currents can cause variations.

Ultimately, Singapore is unlikely to build dikes per se, but rather concrete seawalls, Babovic said. Dikes are technically made of earth. After digging up and quarrying much of its own interior to reclaim new land that has increased Singapore's area by between 15 percent and 20 percent, Singapore now relies on imported landfill and sand for its reclamation efforts and to produce cement for new buildings.

Many scientists believe that dikes are no longer the most environmentally sensitive solution. Wong recommended docks and seawalls back in the early 1990s but now said that more natural structures might work better.

Babovic said that scientists were studying ways to incorporate mangroves and sea grasses into the design of dikes and seawalls to improve their environmental impact and make them look better, too.

"You need more imaginative solutions," said Wong. "What we don't want is to put something there that will constrain future use."

Three Gorges Dam, Enviro-Disaster

If I were a conspiracy theorist, I'd be citing the recent boom in Chinese product safety and pollution stories in the American media as a coordinated effort to defame the Middle Kingdom. China has already suggested that the product safety issue serves this purpose. However, as I am not a conspiracy theorist, I'll pluck the more interesting stories about those two issues here. You may recall the furor over the construction of the Three Gorges Dam from not so long ago. The mother of all megadams was supposed to alleviate water scarcity, control flooding, and provide hydroelectric power.

According to today's Wall Street Journal, however, the dam is falling short of these goals. On top of that, it is adding all sorts of additional problems that are mostly of the environmental variety. I always was critical of the cultural and social damage that the dam would cause, but it turns out there are environmental issues which may render those concerns as secondary, hard as it is to believe. Siltation, landslides, water pollution...you name a damming (pun intended) issue, and the Three Gorges has it:

China's vaunted engineering marvel, the Three Gorges Dam, drew fierce criticism during its construction for uprooting more than a million people and manhandling the Yangtze River basin. Now, a year after completion, the project has new problems -- including landslides, water pollution and suggestions that the dam could contribute to the very flooding it was built to prevent.

Geologists say the massive weight of water behind the Three Gorges Dam has begun to erode the Yangtze's steep shores at several spots. That, along with frequent fluctuations in water levels, has triggered a series of landslides and weakened the ground under places like Miaohe, a village about 10 miles up the reservoir from the dam. Local officials worry that a whole mountainside here could collapse into the water, killing residents and threatening a vital shipping lane.

There are additional dangers. Chinese scientists say that as the dam blocks silt heading downstream, the Yangtze River estuary region, which includes Shanghai, is shrinking and sea water is coming further inland. A report this spring by the World Wildlife Federation [sic] said water flowing through the dam is now moving faster, damaging downriver dikes. The urbanization that accompanied the dam's construction led to more raw sewage and fertilizer runoff, which collects in the reservoir rather than flushing downstream.

The emerging issues at Three Gorges illustrate this rapidly industrializing country's efforts to control its environment, and how the attempts to overcome them can worsen the problem. In other areas of the world, dam building has resulted in landslides or earthquakes set off by the weight of water in reservoirs. Here at the world's largest hydroelectric project, a center of China's population and economy, the consequences could be magnified...

China's media is starting to cover problems at Three Gorges Dam and its 400-miles-long reservoir. The government hasn't spoken publicly about issues here, but it has quietly rolled out a warning system for landslides and is supporting research to map out at-risk regions. Officials are pouring money into water-treatment plants and reinforcing about 1,400 miles of riverbanks.

"We thought of all the possible issues," says environmental scientist Weng Lida, the former head of the Yangtze River Water Resources Protection Commission, a government agency tasked with protecting the river basin's water and environment. He is now secretary general of the Yangtze River Forum, a coalition of the Chinese government and nongovernmental organizations that share research on the region's environment. "But the problems are all more serious than we expected..."

The changes can be seen here in Miaohe, where villagers have grown oranges from gnarled trees and farmed the area's steeply terraced rice paddies for generations. Miaohe's 100 or so residents narrowly avoided the mass relocations that accompanied the dam's construction, when some 1.3 million people moved from their homes to make way for the reservoir.

This spring, villagers noticed a crack some 600 feet long and barely a half-inch thick zigzagging across their paddies. Not long afterward, dam officials lowered reservoir levels to prepare for the summer flooding season.

After early May rains raised reservoir levels again, there were four landslides in five days not far from Miaohe village. Villagers say they heard timbers in their houses begin to split. The government told them to evacuate.

Officials in Zigui City, the county seat, are facing a new wave of relocations. Some 100,000 people in the county moved to make way for the reservoir. Now officials are concerned they'll have to relocate more. "The changes have come faster than our plans," said Cui Shaofeng, an official from the Zigui County resettlement office.

The 4,000-mile long Yangtze is the world's third-longest river, racing down from Tibetan glaciers, slicing massive valleys through the middle of China and passing fertile plains before its brown waters meet the sea. On the way, the river passes the Three Gorges, a series of canyons that for centuries plagued sailors with swift currents and hidden rocks. Floods were a constant threat, claiming 300,000 victims, by some estimates, in the last century alone.

China's leaders long dreamed of damming the Yangtze in part to harness its power, but primarily to prevent catastrophic flooding. Modern China's founding father, Sun Yat-sen, proposed a dam in 1919. Mao Zedong, who believed nature could be shaped to man's purpose, wrote a poem about turning the treacherous Three Gorges into a navigable lake...

Construction officially began in 1994. Controversy continued. Responding to pressure from human-rights groups, the U.S. government and the World Bank pulled support from the project. In an open letter in 2000, leading engineers in China, including some who had worked on the feasibility study, protested a decision to fill the reservoir faster than originally planned.

The first trouble came in June 2003, two weeks after the Yangtze River was impounded and the reservoir began to fill. While water levels rose, passing 300 feet and approaching 450 feet, the valley's slopes started eroding under the pressure of the water.

On July 14, a mountain on a tributary of the Three Gorges gave way, shearing a tongue of land about two-thirds of a mile wide and long and more than 60 feet thick. Thirteen farmers were swept to their deaths in the mud and debris. The wedge hit the water, sending a two-story-tall wave crashing over 20 boats, drowning 11 fishermen. Officials blamed the landslide on heavy rainfall. Geologists say a sudden change in water levels loosened rocks along the riverbanks.

With a final cost of at least $22 billion, the 600-foot-tall dam was finished in May 2006. Once it is fully operational later this year, it will contain five trillion gallons of water, equivalent to one-fifth of the fresh water consumed each year in the U.S. It will produce more than 18,000 megawatts of electricity, nearly 10 times the capacity of Hoover Dam.

Mr. Weng, the environmental scientist, believes the dam was necessary to stop floods. His biggest concern now is the worsening quality of the reservoir's water. Phosphorus and nitrogen levels from industrial and fertilizer runoff have risen 10 times above levels a decade ago, according to the WWF report, which he co-edited.

The reservoir is filling with sewage as well. Waste-water discharge has soared in the Yangtze basin, more than doubling from 2000 to 2005, the WWF report says. The basin is home to some 160 million people, including 30 million in the municipality of Chongqing, 400 miles upstream from the dam. In the 10 years ending in 2005, the Yangtze basin economy grew 12.6% a year on average -- a percentage point faster than the rest of the nation -- as it has switched from agriculture to industry.

Scientists and government officials say many sewage plants were built to process waste before it hits the reservoir, but that some aren't connected to city drains. Zhou Wei, vice director of the department of reservoir management at the government's Three Gorges Project Construction Committee, acknowledges that sewage levels in the reservoir appear to be increasing. He says the government has given additional funds to make sure plants are running full-time.

From the beginning, engineers were also concerned about sedimentation. The Yangtze carries some 500 million metric tons of silt into the gorges each year. Without a way to release most of this mud, the reservoir would silt up and the dam could breach or collapse. Government engineers created 23 sluice gates at the bottom of the dam to release turbid water during flood season, and they estimate the system will keep the reservoir at roughly 90% or more of its capacity for nearly a century. Some critics believe sedimentation is growing at a faster rate, which could eventually make the dam unable to contain a flood crest...

There are also concerns about whether the dam will control floods. Weeks of downpours in July created the biggest surges on the upper Yangtze since 1998, when flooding on the undammed river killed thousands downstream. Officials announced on Aug. 1 that the July crest passed through the dam without incident.

Critics say that while the dam can handle surges, it may contribute to downstream flooding for an unforeseen reason. Past the narrow gorges where it enters central China's broad plains, the river traditionally slowed, and in some places centuries of sedimentation raised the riverbed above the surrounding countryside and is held back by dikes, as in New Orleans. Water released by Three Gorges runs faster, the WWF says, because the dam traps most of the silt. Lightened of its muddy load, the water courses out with more force and threatens to gouge out these dikes.

Geologists, meanwhile, are focusing on landslides. The Three Gorges have a base of limestone but are layered in places with sandstone, shale and mudstone -- softer materials that are more likely to collapse. Some areas were reinforced before the reservoir was filled. But as dam officials raise and lower water levels in anticipation of floods, the soaking and huge pressure changes leave banks weakened.

A team of scientists at the Imperial College London said earlier this year that slope instability is the gorges' "most widespread natural hazard." Writing in the Quarterly Journal of Engineering Geology and Hydrogeology, published by the Geological Society of London, they warned the problem is likely to get worse.

One of the authors looked at satellite readings of Zigui, Wushan and Badong counties, with a combined population of more than a million people. Geologist Ioannis Fourniadis of Imperial College London estimated that 3% of the counties' slopes are actively falling and 7% are unstable for activities such as road building. Another 15% were mostly stable. The rest were solid limestone, which he says pose extremely low risk.

A spokesman for China's Ministry of Land Resources blames this year's high incidence of landslides on heavy rainfalls since spring. He says the early-warning system has detected some major slides and that the government is training local people to recognize landslide warning signs.

Less than a mile from Miaohe, where a gravel road that provides sole access to the village passes through a muddy tunnel, the villagers have set up temporary housing. Inside the tunnel, they camp in plastic lean-tos. Nearby, the local government is clearing an area for the refugees to build new homes.

The government is providing money for homes, but the villagers say it isn't enough. The farmers will be able to grow rice, oranges and tea here, but they complain that the land isn't good. The local government is providing families a dowry for their daughters, to encourage them to marry out.

"This all started happening right after they began damming the river," says Han Qingxi, 52 years old, pausing from rebuilding his simple stone home. Nearby, backhoes level the mountainside. "They say it's safer here," he says.

World Wants to Regulate US Finance

This, my friends, is the dumbest idea I've come across in 2007--and I've come up with plenty myself [bada-bing! Thank you, thank you, please take my wife, etc.] The gist of it is the rest of the world wants to participate in the oversight and governance of the US financial industry so that they don't suffer from "collateral damage" when things like the subprime mess blow over. Now, there is a fashion to blame all the wrongs of the world on America--even I engage in such talk on occasion, I confess--but this is going too far. My gripes are too many:

• If even the Americans themselves can't figure out how widespread and extensive the fallout will be in the States, what more the rest of the world?
• Who believes rating agencies anymore, anyway? Aren't these the same folks who give debtlodocus americanus a triple-A rating for its sovereign debt?
• Don't we already have a Bank of International Settlements (BIS) doing some oversight?
• Haven't the Americans already signed up to Basel II regulations on banking supervision? Why weren't provisions concerning all these newfangled financial instruments given more consideration? We can't go back to the drawing board again...
  

I can go on all day, but I won't. As always it's caveat emptor--buyer beware. Who is wiser, the free-spending fool (US) or those fooled by the free-spending fool (like China, famously)? The rest of the world knows perfectly well that the US doesn't particularly mind hoodwinking others into buying CDO, CLO, and CMO riffraff at this point in time when it's desperate to fund its free-spending ways. [Uncle Sam: "Psst! Wanna buy some AAA T-Bills?"] How the mighty have fallen. You can be sure though that it will be a cold day in hell before America budges on this matter. No dice. From the International Herald Tribune:

Politicians, regulators and financial specialists outside the United States are seeking a role in oversight of American markets, banks and rating agencies in the wake of recent problems related to subprime mortgages.

Their argument is simple: The United States is exporting financial products, but losses to investors in other countries suggest that American regulators are not properly monitoring the products or alerting investors to the risks.

"We need an international approach, and the United States needs to be part of it," said Peter Bofinger, a member of the German government's economics advisory board and a professor at the University of Würzburg.

While regulators in the United States have not been receptive to the idea in the past, analysts said that Europe and Asia have more leverage this time around. Washington might have to yield if it wants to succeed in imposing bilateral regulations on state-owned investment funds from emerging economies.

"America depends on the rest of the world to finance its debt," Bofinger said. "If our institutions stopped buying their financial products, it would hurt."

Banks and investment funds from China to France were recently hit with heavy losses after buying mortgage-related securities and complex financial products originating from the United States. In many cases, investors were caught by surprise because American rating agencies gave the products top ratings, leading buyers to believe there was little risk. International investors are also asking why American banks were allowed to give mortgages to home buyers who could not repay them.

"In a globalized economy with hedge funds, leveraged buyouts and all these investment funds, we have to ask the question about more transparency," said Claude Bébéar, the chairman of the supervisory board of AXA, one of the world's largest insurers.

Half a dozen U.S. banking and financial regulators - including the Securities and Exchange Commission and the Federal Reserve Board - would not comment. Several mentioned, however, that they were not the sole regulators of the subprime market.

In Europe, the credit crisis appears to have emboldened those who have pushed for stricter international rules for some time.

The German government was rebuffed by Washington and London earlier when it pushed for an international code of conduct for hedge funds. Now some economic advisers to the German government are going further, suggesting that rating agencies should be nationalized, that large-scale loans be registered publicly and that minimum standards be developed for complex debt securities.

The head of the French Council of Economic Analysis, which advises the prime minister, said hedge funds should be subject to stricter disclosure rules about their risk exposure.

Christian de Boissieu, president of the group and a member of the Committee for Credit and Investment Institutions, which helps regulate the French banking sector, is also calling for a global register of all hedge funds. In addition, he said, complex securities should be scrutinized before being authorized for banking portfolios.

President Nicolas Sarkozy of France, who has vowed to "moralize financial capitalism" has asked his finance minister, Christine Lagarde, to prepare a proposal for stricter disclosure rules on market participants before a meeting of the Group of 7 countries' finance ministers in October.

On Monday, in a foreign policy speech, Sarkozy called again for an enhanced global rule book to avoid financial crises.

Such crises could recur, "if the leaders of major countries fail to take resolute concerted action to foster transparency and regulation of international markets," Sarkozy said.

The Chinese central bank said Tuesday that it was moving to standardize information disclosure of all asset-backed securities as it expands its own market for these financial instruments. Information about loans, terms and borrowers will need to be included in any new securities that are introduced in China, it said.

The United States and Britain are the genesis of the bulk of the world's sophisticated financial products, like the ones that broke down recently, in part because Wall Street banks have a big presence in both countries.

"At the heart of the issue is that the largest financial institutions continue to innovate and create ever more sophisticated products," said Chris Rexworthy, director of enhanced regulatory services at IMS Consulting, a London compliance consulting firm, and a former regulator with the British Financial Services Authority.

Regulators around the world talk about the importance of stress-testing, Rexworthy said, but the recent developments create concerns that "institutions are either not investing enough effort in this, getting it wrong, or just producing things too complex for their risk-assessment models to cope with," he said. "Greater cooperation on the international stage between regulators is undoubtedly one of the things we need to see more of."

U.S. regulators are aware of the problem. American banking and financial services regulators conducted a series of surveys and reviews dating back to 2005 that found that credit standards had loosened for home loans, and that borrowers in some cases did not understand or qualify for the loans they were given.

Some financial institutions are managing the risk from nontraditional mortgage loans by following more prudent underwriting, the U.S. Federal Deposit Insurance Corporation said in September 2006, while some are "spreading the risk of these products to investors."

Some American regulators have been pushing for more international cooperation in general. The Securities and Exchange Commission has been discussing greater hedge fund oversight in recent months, and it signed several cooperation agreements with regulators from China to Germany in the past 18 months.

The commission is a "very active member" of the International Organization of Securities Commissions, the global body that brings together all securities regulators, said Andrew Larcos, the international group's public affairs officer. "They do understand the need for closer international cooperation." Still, he added, because the subprime mortgage loans that kicked off this current crisis were primarily from the United States, the situation "obviously raises questions about how that market is regulated."

In the United States, much of the blame is being focused on rating agencies, which are paid by banks for rating products, and who sometimes attached investment-grade ratings to securities that turned out to be less so.

Joseph Mason, a finance professor at Drexel University in Philadelphia, and Josh Rosner, the managing director of the research firm Graham Fisher, have pushed for more oversight of rating agencies.

"It's not just the U.S. regulators that failed, though they did fail," Rosner said. International banking regulators have "thrown the keys to the rating agencies," which have been left in charge of the safety and soundness of bank capital, insurance and pension money.

In Australia, where investors have embraced financial products like derivatives and swaps, several hedge funds were hard hit by exposure to subprime loans, and analysts said they expected it would be months before the extent of the problem is seen.

As geographical boundaries are broken down, "a problem in one location is a problem everywhere," said Dick Bryan, a professor of economics at the University of Sydney. In the aftermath of a credit crunch, "there is the need to challenge the sovereignty of national regulators - why should the rules of lending in the U.S. be left to U.S. regulators when the consequences go everywhere?"

Asian nations were pushing for some regional cooperation even before the credit crisis, as cross-border investing and their equity markets have boomed. The South Korean market regulator, the Financial Supervisory Committee, has been particularly vocal on the issue.

"Regulators and policy makers in the region are quietly looking at the unfolding developments and asking many questions to themselves about what's happening and what should be done," said Douglas Kim, a spokesman for the South Korea regulator. "Few would doubt that more policy cooperation and coordination are in the region's interest even in times of market calm," he said.

In general, Washington's reaction has been that it wants "no form of oversight," said Kenneth Rogoff, an economics professor at Harvard and a former chief economist of the International Monetary Fund. "We're talking about America's most dynamic export industry."

In China, the Internet Ain't for Porn

There's a song number in the Tony Award-winning musical Avenue Q entitled "The Internet is for Porn." However, some folks who disagree are China's platoon of 30,000 censors working day and night to keep lascivious, heretical, and subversive thoughts from the minds of comrades and comradettes everywhere. In fact, they've even upped the game as now they've recruited cybercops to tell the citizenry to stay away from assorted filth. These mind police are rather cute and cuddly (see picture)--until real cops prevail to take you away, perhaps. I'm sorry; I can't comment anymore for this is beyond belief. From the Associated Press:

Police in China's capital said Tuesday they will start patrolling the Web using animated beat officers that pop up on a user's browser and walk, bike or drive across the screen warning them to stay away from illegal Internet content.

Starting Sept. 1, the cartoon alerts will appear every half hour on 13 of China's top portals, including Sohu and Sina, and by the end of the year will appear on all Web sites registered with Beijing servers, the Beijing Public Security Ministry said in a statement.

China stringently polices the Internet for material and content that the ruling Communist Party finds politically or morally threatening. Despite the controls, nudity, profanity, illegal gambling and pirated music, books and film have proliferated on Chinese Internet servers.

The animated police appeared designed to startle Web surfers and remind them that authorities closely monitor Web activity. However, the statement did not say whether there were plans to boost monitoring further.

The male and female cartoon officers, designed for the ministry by Sohu, will offer a text warning to surfers to abide by the law and tips on Internet security as they move across the screen in a virtual car, motorcycle or on foot, it said.

If Internet users need police help they can click on the cartoon images and will be redirected to the authority's Web site, it said.

"We will continue to promote new images of the virtual police and update our Internet security tips in an effort to make the image of the virtual police more user friendly and more in tune with how web surfers use the Internet," it said.

China has the world's second-largest population of Internet users, with 137 million people online, and is on track to surpass the United States as the largest online population in two years.

The government routinely blocks surfers from accessing overseas sites and closes down domestic Web sites deemed obscene or subversive.

China's Copycat Cars Cornered

They say imitation is the sincerest form of flattery, but it appears BMW and DaimlerChrysler aren't too happy with Shuanghuan's knockoffs of their wares as both these German firms are considering mounting legal challenges against the Chinese concern. BMW says that the Shuanghuan CEO (great product name, BTW) resembles the X5 too closely, while the Benz boys say that the Shaunghuan Noble (lame name---there already is a British sports car called the Noble) resembles the Smart ForTwo too closely. What can I say? Guilty as charged. I myself have been up close and personal with a Honda CR-V clone and, from the outside at least, there was very little to differentiate the knockoff from the real thing.

In time, though, I definitely see Chinese automakers coming out with more, er, distinctive models to appeal to the home market. As China already is the third largest maker of automobiles in the world, the twin pressures of legal challenges and the marketplace will probably ensure that these sorts of automotive fakeries become less common (or one would hope). From the FT:

DaimlerChrysler and BMW are threatening legal action over Chinese-made vehicles that they claim are copies of their own models.

German chancellor Angela Merkel weighed in on the issue on Tuesday, describing plagiarism and copyright infringement in China as “a big problem” in a speech in Beijing.

DaimlerChrysler said it would consider unspecified legal action if Chinese carmaker Shuanghuan Automobile showed the Noble, which it says closely resembles its Smart Fortwo minicar, at next month’s Frankfurt motor show.

“We take intellectual property protection very seriously,” a DaimlerChrysler spokesman said. “We decided to reserve the right to pursue legal action.”

BMW said it was considering legal action against the importer of another Shuanghuan vehicle – the CEO – which it claims closely resembles a previous version of its X5 sports utility vehicle which was discontinued in 2006.

Shuanghuan and China Automobile Deutschland, the importer, could not be reached for comment on Tuesday.

“If suddenly a car turns up that looks like a Smart but isn’t one, but rather a copy produced by not entirely legal means, then that’s not good,” Ms Merkel said.

DaimlerChrysler, which following its sale of Chrysler is due to change its name to Daimler in October, has not elaborated on its legal plans, but the company is understood to have contacted Shuanghuan about the issue.

The German company last year succeeded in stopping another Chinese producer, CMEC from bringing to market another vehicle that closely resembled the Smart.

Global carmakers, including Germany’s, are seeking to entrench their positions in China – now the world’s second-largest vehicle market after the US – while seeking to protect and enforce their property rights.

Foreign Insurers' China Gripes

If you will recall, one of the provisions of Dodd-Shelby, otherwise known as "The Currency Reform and Financial Markets Access Act of 2007," would require the Treasury to report to the Senate Banking or House Financial Services Committee on market access barriers for US financial services firms. Being a China-oriented bill, it is in no small way inspired by difficulties encountered by the US financial services industry to establish a foothold in China. In a previous post, I detailed the onerous requirements put up by the Chinese for foreign banks wishing to do business in China dealing in RMB.

Now, it turns out that the insurance industry is also not too happy about the obstacles being placed by China in the way of those who want to provide property and casualty insurance there. Despite the plethora of China trade cases already out there, I believe that financial services may yet become another area of contestation between the US and China. From the Financial Times:

When China was negotiating to join the World Trade Organisation in 2001, a crucial sticking point was whether it would open the country's insurance sector to foreign companies.

Beijing agreed to allow foreign property and casualty insurers to operate wholly owned domestic units. Foreign life insurers would be allowed to hold up to 49 per cent of Chinese joint ventures by the end of 2004.

Many predicted that the major international insurers, with decades of experience and myriad sophisticated products, would rapidlycapture market share from the lumbering state-owned underwriters.

But three years after the market's opening, the fearsome foreigners have gained little ground even though large international insurers have dedicated enormous energy and resources to this tantalising market.

In the first half of the year, foreign-owned P&C insurers' market share was just 1.15 per cent, down from1.24 per cent in the same period a year earlier and even from the 1.17 per cent share notched up in 2005.

Foreign life assurers fared slightly better. Their market share reached 5.79 per cent in the first half, up from4.82 per cent in the same period of 2006. "This could reflect the fact that life insurance is more attractive to insurance companies than property and casualty, so the foreigners are putting less resources into that sector," says Dorris Chen, BNP Paribas analyst.

Foreign life assurers, however, captured 12.77 per cent of the market in the first half of 2005. That was thanks to a single Rmb20bn ($2.6bn) policy sold by Generali China Life Insurance, a joint venture between Italy'sAssicurazioni Generali and the China National Petroleum Corp.

That policy - an annuity, retirement and pension that covered CNPC's 390,000 employees - made up the bulk of the Rmb32.4bn in total premium income earned by foreign insurers in China in 2005. No such mega-policies have been issued by foreign insurers since.

The only foreign insurer to make a consistent strong showing is American International Group. Its wholly owned American International Assurance unit got its business licence back in 1992 through practised lobbying and captured 1.6 per cent of the overall life assurance market on its own in the first half of this year.

Though foreign groups are not gaining ground, China's insurance market is growing at an annual rate of about20 per cent and will probably continue its rapid expansion thanks to the dismantling of the country's social infrastructure and the lack of a replacement safety net.

Foreign insurers put their slow progress down in part to continuing regulatorybarriers. Although the national market was formally opened, insurers have found that they must apply separately in every local market in which they want to operate. This process is time-consuming, opaque and fraught with red tape.

No international insurer wants to be the one to accuse the government of not meeting its WTO commitments although many complain in private that Beijing has not acted in the spirit of the WTO's mantra of equal treatment for all market participants.

In the country's biggest cities, where international players have had more success at getting approval for branches, analysts say the they have carved out a relatively significant market share, though figures arenot available.

Still the foreigners have been constrained by a limited supply of agents and other industry professionals. Many prefer to work for domestic companies because of perceived better career opportunities. Consumers have also shown limited enthusiasm for foreign groups' policies, which, though aggressively priced, are often more expensive than those issued by local companies.

Global insurers, such as HSBC and Axa Winterthur, that have chosen to invest directly in existing Chinese insurers have been more successful than those striking out on their own or through newly formed joint ventures. Like their counterparts in the banking sector, they have found it more profitable to tie their fortunes to state-owned partners than to fight them.

Draft industry regulations released last week restated the limit on foreign ownership in local insurers as20 per cent for each individual investor and 25 per cent for all foreign shareholders combined, the same limits that apply in the banking sector.

Investors can still exceed those limits, but in practice are likely to continue to find expansion difficult because they will not be considered local.

The regulations, most of which are aimed at excluding short-term foreign investors, will also introduce a $2bn minimum asset requirement and make offshore investors hold their stakes for at least three years. Investors will also have to have top ratings from an international credit rating agency, a barrier that may screen out some institutional investors.

On the other hand, the draft regulations would allow banks to invest in domestic insurance companies, a long-expected move that fits with Beijing'splan to foster home-grown full-service financial institutions.

But companies such as China Life, which took in Rmb121bn, or 47 per cent, of total life assurance premiums in the first half of this year, are not going to besatisfied with domination of the domestic market. They are already investing large sums in offshore securitiesmarkets.

With Beijing's wholehearted support, these behemoths may turn the tables on the foreign insurers through takeovers that will give them access to foreign markets as well as inter-national expertise. International groups may find that being acquired by a Chinese insurer is the best way to improve their chances in the murky Chinese market.

Making E-Mail Marketing Work

When you think of e-mail marketing, one thing immediately comes to mind: spam. However, the Danish firm Come & Stay has a successful model built not on spam but on "permission based e-mail advertising" wherein it only sends messages to those who have previously indicated a willingness to accept such advertising. Yes, it appears there are such folks for Come & Stay claims to have amassed a database of 270 million addresses. It then earns a commission when it is able to elicit a response from those it sends messages to. From CRM Daily:

The Danish city of Odense, on a waterlogged island about 80 miles west of Copenhagen, is not exactly a global media capital. Yet in a villa in a quiet residential neighborhood, a new breed of Internet-based marketer is challenging the traditional advertising business model.

Come&Stay, with sales last year of $30 million and a market cap of $78 million on NYSE Euronext, does so-called permission-based e-mail advertising for blue-chip customers including BMW, Ikea, GE Capital, and Apple.

In effect, it's the opposite of a spammer, since it sends pitches only to people who have actively indicated a willingness to receive advertising. The company boasts a list of some 270 million such e-mail recipients, as well as a database of demographic information about them.

The names have been collected over many years, mostly from Come&Stay's roster of corporate clients, who use the marketing firm to manage big campaigns aimed at customers who've signed up for e-promotions.

For advertisers, who also include Dell Computer, Hyundai, and Chrysler's Dodge unit, Come&Stay offers a cheap and low-risk way to reach a target group. Clients pay only for responses, which can be defined in different ways -- anything from a simple click to more concrete actions such as signing up for a test drive, completing a loan application, or making an actual purchase. "We can track everything," says Chief Executive Officer Torben F. Rasmussen, whose goal is to boost sales tenfold within five years. Given that sales have been doubling every year, that could happen.

The business model is simple -- and powerful. That's one reason Come&Stay, which is active in the U.S. and has a quarter of its 160 employees in Ft. Lauderdale, Fla., is a lurking threat to traditional broadcast and print media. By using e-mail to hit consumers directly, Come&Stay bypasses traditional outlets (although its clients include CNN).

Now, the company is moving into mobile advertising, with a list of 27 million cell-phone numbers from people who have indicated willingness to get pitches via text or multimedia messaging, sometimes in exchange for free or reduced-price mobile service. "Your mobile phone is closer to your heart than e-mail," Rasmussen says. That's a market set to take off.

The company is the product of the merger last year of Paris-based Come&Stay and rival Danish firm Retail Internet, based in an Odense building that once served as executive offices for a cigar box factory. The combined company kept the name of the French unit but moved its headquarters to Denmark and handed management to Rasmussen, who had been CEO of the Danish outfit.

While Come&Stay is a major player in northern Europe, globally it's still a dwarf compared with Mountain View (Calif.)-based DoubleClick, the digital advertising company acquired by Google in April for $3.1 billion. Unlike DoubleClick, Come&Stay, with operations already in 14 countries, is focused solely on e-mail advertising.

That focus may be the key to Come&Stay's growth. "There's a big market and a growing market and there's space for smaller players," says Rebecca Jennings, a senior analyst for Forrester Research, which estimates the e-mail marketing sector could be worth $2.8 billion in Europe alone by the end of the decade, up from $2.1 billion this year...

Come&Stay also incorporates some of the management ideas of Lars Kolind, whose "spaghetti organization" became famous in the 1990s. Kolind, a well-known figure in Denmark who teaches occasionally at the Wharton business school in Philadelphia, was one of the original financial backers of Retail Internet, and Rasmussen considers him a mentor.

Kolind introduced the spaghetti organization at Danish hearing aid manufacturer Oticon in the early 1990s, attracting worldwide media attention. Immortalized by management guru Tom Peters in his 1992 book Liberation Management, the spaghetti organization eliminated traditional management and let employees choose their projects and teams.

While Come&Stay doesn't go quite that far, employees are given broad freedom to launch small-scale projects or make changes in ad campaigns without management approval. One example: An employee rearranged the content of a daily e-mail containing a weather forecast and advertising.

By moving the forecast to the middle of the page and the ads to the top, the employee boosted revenue from the mailing by 30%, Rasmussen says. "If an employee has an idea, he'll just do it. We'll know tomorrow if it works." So far, it seems to work just fine.

China Does the Product Safety Dance

We can dance if we want to
We can leave your friends behind
'Cause your friends don't dance and if they don't dance
Well they're no friends of mine
I say, we can go where we want to
A place where they will never find
And we can act like we come from out of this world
Leave the real one far behind
And we can dance

Saving face is a very important concept in Asian cultures. It involves not embarrassing your counterparty too much even if he/she/it has let you down to some extent. In this context, the response of the Chinese to the current brou-ha-ha over the safety of products emanating from the Middle Kingdom is perfectly understandable. In part, it is a cultural misunderstanding. Western media has mercilessly pounced on Chinese products found to be defective as "Poison Me Elmo" or "SpongeBob PoisonPants." Western firms have also been quick to dump their Chinese partners when product safety questions arise.

The Chinese would undoubtedly prefer a less confrontational approach to handling the product safety issue than it being thrown into the court of public opinion, which is already quite resentful of China's rising dominance in manufacturing. (There are, of course, underlying trade tensions.) What we have here is another not-so-snappy retort from China aimed at face saving that's the equivalent of "Oh yeah? Well, your mother wears army boots." It goes, "Yes, we could improve our product safety standards, but your product designs were dangerous to begin with." It's all rather silly if you think about it, this product safety dance, so I've decided to include a clip above of the equally silly 80s video entitled "Safety Dance" by Men Without Hats. Unlike today's mostly tuneless, humorless, and crass mu-sick, 80s music is fun. Anyway, on to the Reuters story:

China on Monday hit back at Mattel, after a massive toy recall, saying designers and importers should also take responsibility for product safety, but promised to punish its own manufacturers who flout standards.

The world's largest toymaker, Mattel, recalled more than 18 million Chinese-made toys in mid-August because of hazards from small magnets that can cause injury if swallowed, just two weeks after it recalled 1.5 million toys due to fears over lead paint.

"I myself looked at some of the samples of these problematic toys, and I found that there is a serious problem with the design. The design is seriously defective," Li Changjiang, head of China's General Administration for Quality Supervision, Inspection and Quarantine, told a news conference.

"In my view, no matter where those toys were sold there would be a recall, because it is highly likely they are dangerous for children.

"While we recognize that Chinese producers should be blamed for those problematic toys, what kind of responsibility should the U.S. designers and the U.S. importers take in this respect?" Li asked.

China is facing growing global pressure to clean up its manufacturing sector and ensure the quality of its exports after a series of scandals involving products ranging from poisonous pet food ingredients to sub-standard toys and tainted toothpaste.

Li has described the storm surrounding Chinese-made goods as politically motivated and unfair, but he has also called for tougher regulation of manufacturers and warned that failure to improve quality was undermining China's trade strength.

On Monday, he blamed differing national standards, misleading statistics and lack of communication for some of the product safety scares that have alarmed foreign consumers.

"For some products, the two countries enforce different standards," Li said of China and the United States, also citing "inaccurate statistics".

But he said the latest Chinese campaign to improve product safety would focus on creating a chain of supervision across the entire production process for both industrial products and food.

Monitoring and inspection of drug manufacturers would also be strengthened, and celebrities banned from endorsing drugs in advertisements, Li said.

He also acknowledged the vast challenge China faces in overseeing its hundreds of thousands of tiny, often family-run producers, a task compounded by lack of communication between myriad government agencies overseeing production and safety standards, and between central and local authorities.

But Li defended the "made-in-China" label and said Chinese-made toys in particular were enjoyed the world over.

"In China, about 3 million workers are working in the toy industry, providing toys to children all across the world," he said.

"It is because of their hard work that children in other parts of the world are having fun in their daily life."

Indian Beats Chinese RM Demand?

When the world's largest mining company, Australia's BHP Billiton, says that growth in demand for its wares is coming more from India than from China, I pay attention. According to my copy of the Fortune Global 500, this firm is the largest in the land down under and the 205th largest in the world by revenues. India is requiring more shovelfuls' worth of coal to power its industries and nickel to build up its infrastructure. From Bloomberg:

BHP Billiton Ltd., the world's biggest mining company, said growth in sales to India is outpacing gains in China as the southern Asian nation requires more coal and nickel to meet rising demand.

BHP is raking in higher sales from India than it did six years ago from China, which now accounts for a fifth of revenue, incoming Chief Executive Officer Marius Kloppers said at a conference with reporters in Melbourne. BHP is still looking to invest in bauxite and iron ore projects in India, he said.

India's government plans to spend as much as $450 billion by 2012 to build new roads, ports and power stations and accelerate growth to 10 percent from an average 8.6 percent in the past four years. BHP said Aug. 22 it has as much as $50 billion of projects it could develop to feed rising demand.

``Everybody in the industry missed the Chinese growth story, and what BHP is doing now is to set themselves up for the next stage when India could go on the same growth path,'' said Mark Pervan, a commodity strategist at Australia & New Zealand Banking Group Ltd., in Melbourne. ``They've built the business for Chinese demand, and what they want to do with the $50 billion of projects is to prepare for the new emerging economies like India...''

[BHP] gained 6.5 percent yesterday after posting its eighth consecutive record half-yearly profit on Aug. 22.

BHP's sales to China jumped 47 percent in the six months ended June to $5.29 billion from a year ago, according to a slides presentation on Aug. 22. Its sales to India surged 56 percent in the same period from a year ago to $1.14 billion, according to calculations by Bloomberg from figures provided by BHP today.

China accounted for 20.4 percent of BHP's sales in the second half, whereas India only contributed to 4.4 percent of sales, BHP spokeswoman Samantha Evans said in an e-mail.

BHP's total sales have jumped to $47.5 billion this year, from $17.8 billion in 2002, and the $19.1 billion it had in 2001 when it was created from the merger of BHP Ltd. and Billiton Plc.

China, the world's largest consumer of metals and the fastest growing major economy, will continue to want more metals and iron ore, Kloppers said. India, the world's second-fastest growing major economy, will need energy commodities such as coal, as well as metals, he said.

``This is a larger portion of the globe industrializing than before,'' said Kloppers. ``It's not one economy, but two economies. We're pushing into India extremely aggressively in selling products there.''

The company pulled out of a partnership with South Korea's Posco, Asia's third-largest steelmaker, to invest in a $12 billion steel and iron ore venture in the Indian state of Orissa in 2005. BHP was to develop the iron ore mine for Posco's planned plant.

BHP is ``very glad'' it dropped out as the Indian government's refusal to allocate resources to the project has hampered development, said Chief Executive Officer Charles `Chip' Goodyear, at the same conference.

``The amount of resources they will allocate doesn't allow for the efficient operation of that mine,'' said Goodyear. ``We determined it won't be profitable for us to create a resource that's not competitive in a global market. Posco since has been trying very hard to get access to land and resources.''

BHP will announce details of its plan to increase iron ore production in Western Australia state to 300 million tons a year in the next two months, said Kloppers. The company is targeting production of 155 million tons from its mines from 2010.

``We've put in a date of 2015,'' for the new production, said Kloppers.

ASEAN's Bilateral Trade Deal Frenzy

In the absence of much progress at the Doha Round, free trade deals have moved from multilateral to bilateral fora. You can be sure that Jagdish Bhagwati would be mortified by what the Association of Southeast Asian Nations (ASEAN) is doing right now with regard to pursuing bilateral trade deals with virtually all of Asia's regional powerhouses. ASEAN has just concluded a summit of economic ministers in Manila which also featured counterparts from China (Bo Xilai) and Japan (Akira Amari). As you would expect, ASEAN is keen on consolidating its competitive footing among the biggies. For instance, it has moved up its plans for an ASEAN Economic Community from 2020 to 2015 to improve its competitiveness in regional stakes.

Who's ASEAN aiming to sign bilateral deals with? For starters, try China, Japan, South Korea, India, Australia, and New Zealand. Channel News Asia brings us news of this veritable noodle bowl of trade deals. WTO, we hardly knew ye, or so it seems:

The Association of Southeast Asian Nations (ASEAN) will complete its free trade agreements with China, Japan, South Korea, India, Australia and New Zealand by 2013, an official said Sunday.

The announcement came after ASEAN economic ministers met with their counterparts from the six "dialogue partners" in Manila at the last day of a three-day economic conference.

ASEAN Secretary-General Ong Keng Yong said a free trade agreement (FTA) with South Korea could be completed by 2008, China by 2010, India by 2011, Japan by 2012, and Australia and New Zealand "before 2012 ... although hopefully we can do it by 2009."

He put 2013 as the expected time for the completion of all the FTAs but acknowledged that "loose ends" involving issues such as trade in goods and services in South Korea remained.

"Essentially by 2013, all the free trade area agreements between ASEAN and the rest of our major trading partners should be completed and the FTAs should be in place," he said.

"This will tie in with our leaders' decision to have the ASEAN community established by 2015," he added.

ASEAN and Japan are expected to sign in November an agreement abolishing tariffs on 90 percent of ASEAN imports to Japan, but officials at the meeting said the gradual abolition of all tariffs with some ASEAN countries would take over a decade.

Ong said ASEAN is not closing the door to further FTAs with other countries or groupings but stressed such trade talks were a "heavy burden" on government negotiators who were already busy on pending FTAs.

He said that for the moment, ASEAN would instead focus on "finishing what we have on our table."

Ong said ASEAN had already "started exchanging views," with the European Union on an FTA accord but had not set any schedule. He also said a joint study was being made on a possible FTA with Pakistan.

Chinese minister of commerce Bo Xilai said that even though the FTA with China was not yet completed, China was already lowering tariffs on goods from ASEAN.

"Although the FTA agreement with China has not yet come to a full conclusion, both sides can already start to benefit from it," he said, adding that it was the services and investment issues that were still being discussed.

ASEAN, which groups Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam, is preparing to set up an integrated Southeast Asian Economic Community by 2015.

Private Equity Goes Rent-Seeking

Very few people are sympathetic to private equity firms. Not so long ago, they were famously fictionalized in the image of one Gordon Gekko, whose famous line is that "greed is good." In a time of unprecedented, nearly Latin American levels of inequality in the United States, they too have become shorthand for capitalism's worst excesses, especially for Democratic lawmakers adopting populist rhetoric. With the possible exceptions of Senators John Kerry (D-MA; see below) and Charles Schumer (D-NY)--whose state obviously benefits a lot from financial services industry revenues--Democratic lawmakers are generally keen on raising taxes on private equity. The showdown is set between them and President Bush, who has always been the quarry of Wall Street. Also, don't forget that many Bushites, like Treasury Secretary Paulson, are private equity-friendly former Goldman Sachs men.

If you will recall, private equity bigwigs have been trying to keep the tax rate on capital gains applied to them at 15% instead the more typical 35% by lobbying Congress. Let's just say that it's unlikely that Congress will do the politically unpopular thing of giving them a Bush-like free pass even if Bush will likely veto any move to raise the tax rate on private equity. Ultimately, things may hinge on Republican lawmakers wary of being seen as Wall Street-loving elitists as election season 2008 nears. (A two-thirds majority in Congress is required to make a 35% tax rate applied to private equity veto-proof.) A good ploy would be to set up Republican lawmakers who do not vote for a tax increase for a ballot box backlash come 2008. The Financial Times describes here the Blackstone Group's recent lobbying efforts:

Blackstone, the private equity group that went public in June, sent a senior Democratic lawmaker a confidential assessment of the potential effect a proposed tax increase would have on its books to lobby against the plan.

In a letter to Senator John Kerry obtained by the Financial Times, Blackstone warned that a proposal under consideration by the Senate finance committee would diminish its market capitalisation by $10.5bn.

Using its own results to quantify the effect of the controversial proposal, Blackstone said it anticipated that it would pay $525m a year more in taxes, while individual partners would pay $175m a year less in taxes.

Mr Kerry’s office on Friday declined to release the letter, citing a request by Blackstone that it be kept confidential.

The former presidential hopeful has emerged as a potentially powerful ally to the private equity industry, alongside New York senator Chuck Schumer, who has said the proposed legislation unfairly targets private equity firms. At a hearing on the issue before Congress adjourned, Mr Kerry compared private equity executives with other entrepreneurs who risk their own capital and therefore merit special tax treatment.

Mr Schumer is expected to introduce a separate proposal that would increase taxes on carried interest that would apply to all partnerships, including oil and gas, and real estate groups.

By broadening the scope of a potential tax hike, Mr Schumer’s expected proposal would be likely to elicit strong opposition by a broad range of corporate lobbyists.

Blackstone did not return a call seeking comment Friday. The firm’s shares were down 3.4 per cent to $24.42, well below the listing price of $31.

In its letter, Blackstone said the proposed legislation, put forward by senators Max Baucus and Chuck Grassley, the two most senior lawmakers on the finance committee, would eventually result in a “significant loss of tax revenues” for the federal government and would “inadvertently handicap one of the few industries left in America where our country is, and can continue to be, the leader on a global basis”.

Mr Grassley, the most vocal proponent of the bill, said Blackstone’s arguments did not support the idea that private equity firms were meant to get an exception to the general rule that publicly traded partnerships are taxed as corporations.

“I’ll be interested to see whether Democratic senators will pursue that policy,” he said.

“Since a Democratic senator sought this analysis from a private equity firm, maybe that shows a new interest from Democrats in making corporate America more competitive,” he added.

China's Worsening Gender Ratio

For a long time now, China has been trying to push two seemingly contradictory policies at the same time. The first is what is widely referred to as the "one-child policy" designed to restrain population growth. This policy has helped exacerbate demographic imbalances in China as traditional preferences for male children are reinforced. In simple terms, a male child is often preferred if only one is allowed. Moreover, technological advances such as ultrasound to detect the sex of the fetus before birth have resulted in more sex-selective abortions. There is no other possible way of explaining China's lopsided national sex ratio of 119 boys for every 100 girls. This ratio continues to deteriorate despite a second policy to discourage sex-selective abortions through banning ultrasound tests and other measures.

The UN recently warned China that this ratio was very much out of order, though the Chinese leadership is undoubtedly aware of the perils posed by such an imbalance. A dire prognostication that is often mentioned is that there will be too many angry young men unable to find mates, resulting in widespread anti-social behavior and even military adventurism. It may sound far-fetched, but the world has not yet seen imbalances of this magnitude; it's frightening to contemplate what may come. In response, the Chinese are drafting more punitive measures for doctors and parents who use ultrasound and the like. From my point of view, however, unless more gender equality prevails in Chinese society, there is only so much these punitive measures can do. From the BBC:

The Chinese government says it is drafting new laws to tackle the growing gender imbalance caused by the widespread abortion of female foetuses.

The practice is already banned, but new rules are expected to set out specific punishments for parents and doctors.

China's Family Planning Association (CFPC) has revealed the extent of the imbalance - in one city there are eight young boys for every five girls.

Experts fear the phenomenon could have unpredictable social consequences.

Some believe that with millions of men unable to find a wife, there could be risks of increasing anti-social and violent behaviour.

China's one-child policy, and a traditional preference for male heirs, has led many couples to try to ensure that their single offspring is a boy.

Some pay for illegal ultrasound tests to discover the sex of a foetus, and abort it if it is female.

"The root cause is traditional thinking that boys are better than girls, especially in poverty-stricken areas," Song Jiang, a population expert at Beijing's Renmin University, told the Xinhua news agency.

"Those people expect boys to support the family."

On Friday it was revealed that the eastern city of Lianyungang had the most skewed population. Among children under four years old, there are 163.5 boys for every 100 girls.

Ninety-nine cities had gender ratios higher than 125, state-run news agency Xinhua quoted the CFPA as saying in a report.

The UN recommends a gender ratio of no more than 107.

I have also featured a host of recent stories from the China Daily on the matter. You can be certain that this topic is high on the priorities of the Chinese leadership. Whether it can come up with effective policies to lessen this imbalance is another question, for an attitudinal shift of great magnitude is undoubtedly required.

Jaguar & Land Rover's Many Suitors

It all makes sense circa 2007 when you see the four high-profile parties lining up to buy the famous British auto brands of Jaguar and Land Rover from Ford. Although Ford has said that a decision on a sale is not immediately forthcoming, it is nonetheless entertaining serious bids. Despite recent liquidity concerns, it seems financial markets are calming down somewhat to enable private-equity players like TPG Capital, One Equity Partners, and Ripplewood Holdings to make serious runs at the English duo. What makes things interesting is that these private equity players have former Ford men in their teams. TPG has former Jaguar and Land Rover chief executive Bob Dover as an advisor; One Equity Partners has former Ford chief executive Jac Nasser--known to some as "Jac the Knife" for his cost-cutting ways; and Ripplewood has Sir Nick Scheele who was formerly COO and president of Ford. From the Daily Telegraph:

Another high-profile motor executive has joined the race to buy Jaguar and Land Rover, a move that will pit him against two ex-colleagues.

Industrialist Bob Dover, a veteran of the car manufacturing industry and former chief executive and chairman of Jaguar and Land Rover, has linked up with US buyout group TPG to bid for the luxury marques, thought to be worth £1bn to £1.5bn, say bankers close to the situation.

The move will put him in direct competition with Jac Nasser, Ford's chief executive from 1999 to 2001, who is working with the buyout group One Equity Partners on an offer, and Sir Nick Scheele, Ford's president and chief operating officer from 2001 to 2005, who has teamed up with Ripplewood Holdings to bid.

If TPG's bid for Jaguar and Land Rover is successful, Mr Dover is likely to have an operational role in the new company, although it is not clear whether TPG plans to install him as chief executive, banking sources said.

Investment bank UBS, which advised Ford on the disposal of Aston Martin, is advising TPG and Mr Dover.

Mr Dover's inside knowledge is likely to give TPG, one of the world's largest buyout groups, an edge.

During his career with Ford's premium brands group, Mr Dover was responsible for the introduction of Land Rover's Discovery, Jaguar's XK8 and XJ saloon, and Aston Martin's DB7 Vantage and Vanquish.

As well as One Equity Partners, TPG and Ripplewood, buyout group Cerberus, which earlier this year bought Chrysler for $7.4bn, and India's Tata Motors are also thought to be preparing second-round bids.

Meanwhile, Mahindra & Mahindra is rumoured to be in talks with Leon Black's buyout shop Apollo Management to submit a joint offer. When Mr Dover retired in 2003, Sir Nick Scheele was reported to have said: "Bob Dover has made an outstanding contribution to the three British-based brands. His extensive automotive experience, together with his knowledge of the premium vehicle business, made him a widely respected leader for Jaguar and Land Rover." This may come back to haunt him if his consortium is trumped by TPG and Mr Dover. TPG declined to comment.

And the fourth party? It's India's Tata Group. Call it a potentially welcome case of reverse colonization. From the Times of India:

Tata Sons Chairman Ratan Tata on Friday confirmed that his group was interested in acquiring European car brands Jaguar and Land Rover from Ford Motor.

"We are certainly having an interest in it (Jaguar and Land Rover)," Tata told a news channel in an interview.

Asked about the details, he, however, declined to comment. "I don't think it will be fair to comment on it," he added.

Tata said the bid for the two auto marquees were not merely meant to make the group's international presence felt, specially after the successful acquisition of Anglo-Dutch firm Corus by Tata Steel.

"It is to get ourselves the kind of scales and think big... to give ourselves the global reach and to take ourself from single economy," he said.

On the much talked about small car, he said the company was confident of rolling it out in the market by "the middle or the third quarter of 2008".

With doubts being raised over Tata Motors would be able to price the car at Rs 1 lakh due to increasing input costs, he said the company hoped to stick to the original price.

The Apollo Group and Mahindra & Mahindra are also in the chase, says the Financial Times. Again, they are both suitors of the private equity and Indian conglomerate variety. It should be an interesting contest for these famed marques.

NGO Addresses Remittance Costs

Just when I thought I'd seen every sort of NGO under the sun comes another whose time seems to have come. Although there already are NGOs dedicated to migrants' rights advocacy and enterprise development from remittances, there has not yet been, to the best of my knowledge, one addressing the cost of sending home remittances until now. TIGRA (Transnational Institute for Grassroots Research & Action) does just that. It claims that fees charged on remittances average in the low double figures as a percentage of amounts sent. With remittances totaling about a quarter of a trillion dollars yearly, this is not an insignificant bite out of the money sent home.

The business of handling remittances is not exceedingly complicated. Firms engaging in this business make money through four main ways: (1) fees as discussed; (2) exchange rate commissions; (3) interest rate float on funds prior to transmission; and (4) handling charges if door-to-door is the mode of delivery chosen. Here are some charts from a recent report TIGRA put out on what it views as the high and regressive cost of sending remittances through typical money transfer services:

Also, here is a selection of combined transfer fees and exchange rate commissions as a percentage of amounts transferred to some Latin American countries:

Clearly, remittance cost is an interesting and important topic that does not get much NGO attention. However, do note that there are many innovative ways of sending remittances being developed that use technological innovation to reduce costs, such as the case of GCash in the Philippines piggybacking on cell phone text-messaging services to reduce transfer fees to as little as 1%. Another example is of Skype teaming up with PayPal to enable sending money transfers between PayPal users--say, from the US to Mexico--without transfer fees. (You can then withdraw proceeds from a local bank account in Mexico.) Still, TIGRA has a point: competition among remittance providers is simply not there in many remote areas of developing countries, and this form of "monopoly power" allows some remittance services to charge more than they could if more competition was present.

Aussie Farmers Do the Rain Dance

It's rather strange that Australia, the world's second driest continent, exports water. Or, more specifically, water-intensive crops and livestock. The recent drought in the land down under is testing the mettle of this rather unnatural industry. Now, Bloomberg notes that if this lack of rain continues, then it will put at jeopardy the fate of wheat growing Australian states which account for two-thirds of the nation's projected harvest. If you will recall, the political fallout from the ongoing drought has been are large. Longtime Australian PM John Howard is set to be turfed out of office for his perceived neglect of environmental issues despite a long record of delivering economic growth. (Like the US, Australia was another developed country that didn't sign on to the Kyoto Protocol.) It looks like wheat may be in short supply as government forecasts are unlikely to be met:

Australia's biggest wheat-growing states, supplying two thirds of the country's projected harvest, need rain within weeks to avoid yield losses and potential crop failure, state government and industry officials said.

``Parts of the wheat belt are in dire straits'' in New South Wales, said Frank McRae at the state's Department of Primary Industries. Without rain in three weeks, 30 percent of the state's crops could fail, McRae said in an interview today.

A recovery in wheat output in Australia, the world's third- biggest exporter, is being hampered by dry weather. Any losses to the crop, which the government projects will more than double from last year's drought-ravaged 9.8 million metric tons, may extend a 96 percent rally in Chicago prices in the past year.

``We're still on a knife's edge,'' said Michael Musgrave, operations manager for CBH Group, the biggest grain handler and marketer in Western Australia, which usually provides one third of the nation's wheat exports. Western Australia, which had beneficial rain in recent weeks, needs more, he added.

Wheat futures for December delivery, which reached a record $7.19 a bushel on Aug. 15, rose as much as 4.5 cents, or 0.6 percent, to $7.085 a bushel on the Chicago Board of Trade in after-hours electronic trading. The contract traded at $7.0575 a bushel at 5:47 p.m. Sydney time.

Global wheat inventories are expected to fall to 114.8 million tons by May 31, the lowest in 26 years, the U.S. Department of Agriculture said on Aug. 10. Drought cut Australia's last harvest to a 12-year low, while dry weather damaged crops in the U.S. and Ukraine.

``This will deepen concerns over global supplies following a production decline in Europe,'' Naoyuki Omoto, director of Andre Far East Inc. in Tokyo, said today, referring to the risk to crops from dry weather in Australia.

New South Wales was tipped to replace Western Australia as the nation's largest wheat grower, with an estimate of 8.1 million tons made by the federal government commodity forecaster in June. Yield potential will drop by half in western growing areas of New South Wales in the next week to 10 days without rain, said McRae, a technical specialist in charge of cereals.

``If we went three weeks without rain, a lot of the western wheat crop would be in trouble,'' he said. ``It's pretty desperate at the moment, everyone is on tenterhooks waiting for rain and the 10-day forecast doesn't look good at the moment.''

Australia's wheat production may miss a government forecast as dry weather threatens to cut yields, a Bloomberg survey this week showed. Output may be 20.75 million tons this harvest, according to the median estimate of eight analysts and traders. That compares with a government forecast of 22.5 million tons.

Still, output in Western Australia may not be as low as previously expected after recent rain, said CBH Group's Musgrave.

``The situation can still change,'' Musgrave said. ``We need a significant rainfall event to cross the state.''

Western Australia may produce between 6 million tons and 9 million tons of all grain, he said. That compares with an earlier forecast of 5 million tons to 9 million tons.

``We're more confident about the bottom end that we will get 6 million tons,'' Musgrave said. ``We're pessimistic about the top end.'' Australia was the third-largest exporter of wheat two years ago, after the U.S. and Canada.

China's Product Safety "Special War"

The Chinese have called in their Ms. Fix-It, Vice-Premier Wu Yi, to address growing concern about the safety of Chinese products worldwide. Having accused the United States and its media of mounting "smear attacks" on Made in China, it seems that the Chinese now recognize that this matter will not go away in the near future without more attention paid to errant manufacturers. Although Chinese officials are probably right in asserting that most products originating from the Middle Kingdom are safe, there are good reasons for protecting the good name of Made in China as the country is far more reliant on product rather than service exports. From Xinhua:

The government Wednesday declared a four-month "special war" against poor product quality and supervision after a spate of safety concerns over Chinese products worldwide.

Eight categories of products are involved: Pork, drugs, agricultural products, processed food, food in the catering sector, import and export products, and other products related to public health such as toys and electric wires.

Twenty detailed targets to be met by the year-end have been set.

For example, it is mandatory that all food producers are licensed; all pigs be slaughtered at designated places; all agricultural product wholesale markets in cities be monitored; all raw material bases for export products be inspected; and all restaurants and dining halls check safety certification when they buy raw materials.

There are some forbidden zones as well. For instance, it is banned to use five types of strong pesticide in agricultural products, to sell poultry that die of disease, or to add harmful additives to food.

"This is a special war to protect the safety and interests of the general public, as well as a war to safeguard the made-in-China label and the country's image," Vice-Premier Wu Yi said during a national teleconference yesterday in Beijing.

It was the first meeting on quality control Wu chaired after being appointed head of a Cabinet-level panel on food safety and quality control last week.

She acknowledged that despite progress made in the past few years, the country did have some "deep-rooted" problems regarding food and product quality.

They include a large number of small food plants with poor equipment and management, excessive amount of drug residues, and the use of fake materials. Poor supervision and overlapping enforcement powers have to be addressed as well, according to Wu.

She said it was essential to establish and develop "two chains, one system and one network".

The chains refer to the supervision of the entire production process of industrial and food products; the system is a product recall and accountability system; the network refers to a comprehensive quality monitoring system in every corner of society.

"If successful, food safety and product quality in the country will be lifted to a new stage," Wu said.

She also stressed zero tolerance toward violators, including producers and vendors, and government officials who fail to perform their duty.

The campaign is the latest by the government to improve product quality.

In the past month, apart from setting up the Cabinet-level panel on food safety and product quality, it has drawn up a blacklist of illegal importers and exporters, issued a special regulation on better quality supervision, and released a White Paper on food safety.

Despite safety concerns, the country's fast-rising exports show that Chinese products are still popular, Assistant Minister of Commerce Wang Chao told a press conference yesterday.

In the first half of this year, China exported $546.7 billion worth of products, up 27.6 percent over the same period of last year.

"The growth shows that most importers, retailers and consumers have a fair and understanding attitude toward Chinese products," Wang said.

Bloomberg offers a similar summary of the story.

Varieties of Africa Celebrity Activism

The Christian Science Monitor has a recent feature on the many famous activists who've brought their names to the cause of alleviating hardships in Africa. You know them as their faces are endlessly paraded in the media: Mia Farrow, Don Cheadle, Material Girl, Tomb Raider Woman, and the rest. Yes, they do bring attention to Africa, but their focus of attention, particular causes, and depth of knowledge invariably differ. It is suggested here that maybe former US Presidents Carter and Clinton may be doing more with their less flashy form of advocacy, though even the Clinton Foundation has its share of critics:

Celebrity attention to Africa runs the gamut. Some stars show up for a single celebrity poker match in Las Vegas or a benefit cocktail party in New York to raise awareness for an issue. Others write large checks, lend their names, and even roll up their sleeves to help, but still court controversy along the way. And yet others get deeply involved, hiring advisers and studying to understand the challenges, before deciding on what role they can play most effectively.

The "best" sort of celebrity involvement comes from those who "know their limitations better and are usually more genuinely interested in discovering how best to use their status," says Myles Spar, an HIV/AIDS specialist in Los Angeles who advises Doctors Without Borders.

Actors George Clooney and Don Cheadle, for example, have taken on advocacy for Darfur, as has actress-activist Mia Farrow, who – working with the Sudan expert Eric Reeves – is spearheading the "Genocide Olympics" campaign aimed at shaming China into pressuring Sudan's government to prevent violence in the troubled western region of Darfur.

And, famously, "Tomb Raider"-action-heroine-turned-UN-High-Commission-for-Refugees- (UNHCR)-spokeswoman Angelina Jolie has taken dozens of trips to refugee camps around the world and donated more than $6 million to help them. Ms. Jolie has said that she gets paid a "ridiculous amount of money" for what she does, and donates one-third of it to charity.

"We cannot close ourselves off to information and ignore the fact that millions of people are out there suffering. I honestly want to help," Jolie explained at a press conference when joining UNHCR in 2001. "All of us would like to believe that if we were in a bad situation, someone would help us."

Not surprisingly, influential public figures who don't get much coverage in such magazines as People and Rolling Stone typically offer more consistent and serious involvement in Africa.

Former President Jimmy Carter, for example, has dedicated a good portion of his post-White House years to such activities as monitoring complicated elections (68 to date), building houses, and eradicating Guinea worm, hardly the most glamorous of projects.

Mr. Carter, who, like Clinton, left the White House while still in his mid-50s and set up a foundation, has set the bar high for post-presidential public service. But it's not a do-gooder contest, he notes.

"Every former president is just as different as two people that you might meet going down the street," he says in an interview in Johannesburg, South Africa. "It's very good to have some element of competition among former presidents, but I think it is also ... important for each former president not to try to duplicate what the others have done, but to carve out some new arena in which they can be most effective."

Clinton, during his presidency, was not particularly known for his attention to the continent. He made two long visits here, forgave the debts of several nations, and pushed for closer trade ties. But, by his own admission, he failed to do enough to fight the growing AIDS pandemic or to respond to the 1994 genocide of more than 800,000 Tutsis in Rwanda.

"If I had moved as soon as possible on Rwanda, we could have saved half or a third of those who were killed," he says. "We cared a lot about it, but we were obsessed with Bosnia and Haiti, and Congress was mad about what had happened in Somalia. It's something I will have to live with. It's hard to believe there would be that colossal a mess-up."

Clinton rubs his brow and continues. "But it's a sort of spur ... my relationship with the Rwandans is one of the most interesting and rewarding of my life." It seems, he concludes, "that they have forgiven me alongside forgiving one another."

Today, whether in order to make peace with this past or out of a sheer appreciation for the African people – Clinton is a man reinvented...

The Clinton Foundation, created in 2002, works with 69 developing countries on initiatives ranging from expanding access to HIV/AIDS and malaria drugs to reducing big cities' greenhouse-gas emissions. The foundation prides itself on its passion (many of the 600-odd staff are volunteers), tight budgets (many of the senior employees take enormous pay cuts when joining and normally fly coach class), a high level of coordination with the host governments, and "private sector-style" impatience with getting things done right, and quickly.

The former president's ability to reach out to virtually any world or business leader, and the respect they accord him, has proved invaluable.

He bullies drug companies, pushes bureaucratic African governments, lures in top professionals, gets wealthy donors to open their wallets – and then brings all sides together and insists on immediate action.

"The foundation has one rock star," says Deepak Verma, CEO of the foundation's HIV/AIDS initiative. But, he stresses, the foundation has developed a serious name for itself that goes beyond the Clinton celebrity factor. "Today, we are both a real organization with a real management and infrastructure and, more importantly, we are recognized as a very serious foundation," he says.

Mr. Verma says that one of the foundation's greatest triumphs to date was taking a leading role in negotiating lower prices for antiretroviral AIDS drugs from the generic pharmaceutical companies. When the foundation entered this arena, the average cost of treatment ranged between $500 and $1,600 annually. Today, it's down to about $140 a year (with pediatric doses down to $60 per patient), making it easier for poor governments to purchase the drugs and allowing more people to take them – 750,000 to date, according to the foundation's calculations. This, points out Verma, is clearly an achievement with long-term benefits.

But in the often competitive aid community, some critics grumble about the Clinton Foundation's mode of operation. They say Clinton and his team are superficially involved in too many arenas, often fail to cooperate with or take advice from longer-serving aid organizations in the region, and take credit for more work than they do.

Other critics argue that the foundation's focus is misguided. In the HIV/AIDS arena, for example, they say that more attention, money, and time should be put into finding a vaccine against the scourge or into education. "It's fine to bring in medications, but that has actually never been our biggest problem," says Massoud Nassor, a social scientist at University of Dar es Salaam in Tanzania. "The real problem is how to properly distribute the medicine and how to educate people about not getting HIV in the first place."

But by and large, the foundation's efforts are well received. Clinton, says Doctors Without Borders' adviser Mr. Spar, is one of the most helpful celebrities on the continent. He uses his clout to "bring together groups who might otherwise not meet, which can be enormously important in helping to develop efficiencies, reduce reinvention of similar solutions, and even to broker negotiations."

On the ground, the average African finds hope in the high-profile attention. Innocent Richard, who hawks a collection of three-inch women's heels outside the luxury hotel where Clinton stays in Arusha, Tanzania, boasts that he managed to catch a glimpse of the man as he was whisked through the back entrance. "This is the president's second visit to Arusha, and both times I have seen him. I love him. I feel he is going to change things ... kidogo," says Mr. Richard, using the Swahili word for "a little." "And that is so wonderful," he adds.

David v. Goliath, Antigua v. USA

I've featured commentary [1, 2] on this story of Antigua claiming compensation from the US at the WTO over lost online gaming revenues as it very much concerns the idea--and ideal--of free trade. If the WTO truly is a "rule-based" and not a "golden rule-based" (he who hath the gold maketh the rules) institution as those Bretton Woods bodies are accused of being, then Antigua should have had its day of celebration a long time ago. However, the US, with nearly limitless legal firepower at its disposal (if there's one thing the US has a lot of, it's lawyers!), has been stalling the definitive resolution of this matter. The International Herald Tribune lays out the importance of this case for the future of free trade, a rules-based WTO, and inequities in the global political economy. It's simple, really: How is the US supposed to sell its free trade agenda elsewhere when it flouts the idea when doing so is convenient?:

With long blond hair reaching his shoulders and dozens of cloth bracelets peeking out from under his sleeves, Mark Mendel hardly conjures up the image of a typical lawyer.

But then there is nothing run-of-the-mill about the case that Mendel, a Texan who was born and reared in Southern California, has been waging against his own government before the World Trade Organization.

It is a clash that at once challenges Washington's attempt to prohibit online gambling while simultaneously testing the ability of the WTO to enforce its own standards.

The dispute stretches back to 2003, when Mendel, 51, first persuaded officials in Antigua and Barbuda, a tiny nation in the Caribbean with a population of about 70,000, to make a trade complaint against the United States, claiming that its ban against Americans' gambling over the Internet violated Antigua's rights as a member of the WTO

Antigua is best known to Americans for its pristine beaches. But the dozens of online casinos based there are vital to the island's economy, serving as a major employer.

More than a few people in Washington initially dismissed as absurd the idea that the trade organization could claim jurisdiction over something as basic as a country's own policies toward gambling. Various states and the federal government, after all, have been deeply engaged for decades in where and when to allow casinos, Indian gambling halls, race tracks, lotteries and the like to operate.

But a WTO panel ruled against the United States in 2004, and an appellate body upheld that decision one year later. In March, the organization upheld that ruling for a second time and declared Washington out of compliance with its rules. That has placed the United States in a quandary, said John Jackson, a professor at Georgetown University Law Center who specializes in international trade law.

Complying with the WTO ruling, Jackson said, would require Congress and the Bush administration either to reverse course and permit Americans to legally place bets online from offshore casinos or, equally unlikely, impose an across-the-board ban on all forms of Internet gambling - including the online purchase of lottery tickets, participation in Web-based pro sports fantasy leagues and off-track wagering on horse racing.

But not complying with the decision presents big problems of its own for Washington. That is because Mendel, who is claiming $3.4 billion in damages on behalf of Antigua, has asked the trade organization to grant a rare form of compensation if the U.S. government refuses to accept the ruling: permission for Antiguans to legally violate intellectual property laws by allowing them to distribute copies of U.S. music, movie and software products, among others.

For the WTO itself, the decision is equally fraught with peril. It cannot back down because that would undermine its credibility with the rest of the world. But if it actually carries out the penalties, it risks a political backlash in the United States, the most powerful force for free-flowing global trade and the WTO's biggest backer.

"Think of this from the W.T.O's point of view," said Charles Nesson, a professor at Harvard Law School and a founder of Harvard's Berkman Center for Internet & Society. "They're this fledgling organization dominated by a huge monster in the United States. People there must be scared out of their wits at the prospects of enforcing a ruling that would instantly galvanize public opinion in the United States against the WTO"

In April 2005, the trade body gave the United States one year to comply with its ruling, but that deadline passed with little more than a statement from Washington that it had reviewed its laws and decided that it had been in compliance all along. The case is now before an arbitration body charged with assessing damages.

"The stakes here are enormous," Nesson added.

If anything, the Bush administration raised those stakes in May when it announced that it was removing gambling services from existing trade agreements. John Veroneau, a deputy trade representative, said that the federal government was only "clarifying our view" that it never meant to include online gambling in any free trade agreements.

"It is truly untenable to think that we would knowingly bargain away something that has been illegal for decade upon decade in this country," Veroneau said.

He added that Washington was not defying the WTO but simply pursuing its case through all legal channels.

The WTO allowed that Washington probably did not intend to include online gambling when it agreed to the inclusion of "recreational services" and other similar language in agreements reached during the early 1990s. But the organization says it has no choice but to enforce the plain language of the pacts.

One reason for all the interest is the David-and-Goliath aspect of the case. Another is that the dispute, as the WTO's first to deal with the Internet, is likely to serve as a major precedent in establishing rules of commerce in an online age and dealing with such prickly issues as China's attempts to block online content it finds offensive.

Yet another reason the fraternity of trade lawyers and experts is so closely watching the case, said Lode Van Den Hende, an international trade lawyer with the firm of Herbert Smith in Brussels, is "that the U.S. is not behaving as one would expect."

"One day they're out there saying how scandalous it is that China doesn't respect WTO decisions," Van Den Hende said. "But then the next day there's a dispute that doesn't go their way and their attitude is: The decision is completely wrong, these judges don't know what they're doing, why should we comply?"

It is not clear that Mendel knew just how much of a hornet's nest he would stir up with this case. But he certainly seems to be enjoying the attention.

In 2002, Mendel - who does not gamble and knew little about international trade - was little more than an ordinary corporate lawyer in El Paso specializing in securities law. His law partner, though, was friends with Jay Cohen, the operator of an offshore sports book in Antigua, who had been sentenced to 21 months in prison for taking bets over the Internet from Americans. Mr. Cohen asked his old friend to see if there was anything his firm could do.

"I had not done any trade law whatsoever but for whatever reason this issue really struck my curiosity," Mendel said. Beyond the intellectual challenge, the case also offered the prospect of a set of deep-pocketed clients in the online casinos doing business out of Antigua.

So Mendel, who recently moved his family and his practice to Ireland to be closer to Geneva, jumped in enthusiastically.

Washington responded to Antigua's complaint by claiming it was within its rights to seek to block online gambling on moral grounds, just as any Muslim country would be within its rights under international trade agreements to ban the import of alcoholic beverages. The WTO rejected this argument as inconsistent with U.S. policy.

The general rule in the world of international trade agreements is that a country must treat foreign goods and services in the same manner as it treats domestic ones [that's "national treatment"]. The United States, the trade body found, permits online wagering through sites like Youbet.com, a publicly-traded company that allows visitors to place bets at horse racing tracks around the globe.

And of course some form of casino gambling is legal in more than 30 states and even local governments advertise gambling services when states run ads encouraging people to buy a lottery ticket.

"This isn't a case of forcing gambling on a population that has decided they don't like it," Mendel said. "This is the world's biggest consumer and exporter of gambling services trying to prohibit a small country from developing its economy by offering these same services. And we find that deeply hypocritical."

Indeed, despite all the obstacles Washington has imposed, including making it a crime for banks and credit card companies to handle Internet gambling payments, millions of Americans still manage to play poker and place sports bets online. Many more would certainly do so if the obstacles were removed.

The United States has exhausted its appeals, so now Mendel and trade lawyers for the United States are arguing over the extent of damages that Antigua has suffered.

Antigua presents a particularly thorny challenge. To balance the scales, a country that wins a WTO case typically demands trade penalties equal to its losses as compensation. But Antigua is so small that any ordinary trade sanctions would barely register in the United States.

"Compensation is not a check in the mail," said Jackson, the Georgetown professor. "It's the right to raise trade barriers against the country in violation." Whatever trade barriers Antigua constructed, he said, "would feel like a pin prick."

Antigua is seeking the right under international law to violate American intellectual property laws.

Only once has the trade organization done so, with Ecuador, though it never actually took advantage of that power. It was used instead as a cudgel to force its opponent to back down.

"This is all new territory," said Simon Lester, who worked in the appeals division of the WTO before co-founding WorldTradeLaw.net, which provides legal analysis of trade law disputes [fantastic site, BTW, and an excellent resource on trade disputes].

Lester said he expected Hollywood, the music industry and software makers like Microsoft to press Washington to work things out with Antigua.

"But the question" he said, "is whether that would be enough to make Congress do something."

China: US Breaks WTO Rules

US-China trade disputes have almost become the IPE Zone's stock-in-trade. At times, though, I get bored with all the posturing these countries adopt as they vie for dominance in the global political economy. Case in point: We now have China making largely inactionable accusations that the US is violating WTO rules with regard to anti-dumping and anti-subsidy measures aimed at China. My point here is that China is unlikely to find a sympathetic international audience as other countries are also having difficulties dealing with a veritable tsunami of Chinese exports. Nor is the WTO going to wade into the matter unless China brings its own cases against the US in Geneva.

As you know, China has the all-important trump card to play if it chooses to that would be far more effective in getting its message across than bellyaching episodes like this one which fail to catch anyone's attention save for the IPE Zone's: sell some dollar-denominated reserves. Geopolitics aren't for the faint of heart, and the US hasn't exactly kept its place by playing Mr. Nice Guy. Just think what selling, say, $10 billion of China's $1.3 trillion stash (less than 1%) would do to panicky world financial markets at this point in time. Note to China: you--not the debt-addled United States--are the boss of the global political economy. It's time you acted like it if you're serious about not being pushed around. Anyway, from the China Daily:

A senior Chinese trade official said on Thursday that the recent anti-dumping and anti-subsidy investigations launched by the United States against Chinese goods violate rules of the World Trade Organization (WTO).

Addressing a press conference held by the State Council Information Office, Gao Hucheng, vice minister of commerce, said the US investigations and the measures that it might take against Chinese goods will lead to double taxation, which is banned by the WTO.

The US has launched five separate investigations into Chinese products, including art paper, steel pipe and tyres, since last November.

China has been the fastest growing export destination of the United States for five consecutive years, Chinese Vice Minister of Commerce Gao Hucheng said Thursday.

China is expected to overtake Japan as the third largest export market of the United States at the end of this year or early next year, he said.

China's foreign trade value reached US$1.17 trillion in the first seven months of 2007, a year-on-year increase of 24.4 percent, according to customs sources.

The European Union remained its largest partner with a trade value of US$190.1 billion, a growth of 28.5 percent over the same period of last year, followed by the United States with 167 billion dollars, up 17.5 percent, and Japan with US$130 billion, up 15.2 percent.

Agence France Presse also has a related story.

US Desperately Seeks Latin Students

It is no big secret that the United States lost a lot of foreign students in the aftermath of 9/11 as the Feds cracked down hard on these students. Many of the hijackers, after all, were in the United States under student visas. American schools have been complaining however that these stringent rules discouraged throngs of legitimate international students from coming to America. As they pay significantly higher fees than their American counterparts, tougher regulations on international students translated into a lot of lost revenue, both for these schools and the government as well.

The United States seems more aware of the financial losses arising from exceedingly stringent policies on granting student visas. Just recently, a Newsweek feature related how the US is advertising itself as a destination for Chinese students--a first. Now, the Associated Press reports that even Latin America is being targeted for a marketing campaign to bring back students from that region. From my point of view, the weak dollar is making the US a comparatively good deal compared to other English-speaking educational destinations like Australia, Canada, and Great Britain, whose currencies are very strong against the rather worthless US dollar. On the other hand, foreign students may be put off by heavy-handed American policies. Call it the fear of being Guantanamo Ghraibed if another terrorist attack happens on US soil:

U.S. Education Secretary Margaret Spellings looks more like a college recruiter this week, traveling through South America with American university leaders to woo international students spooked by lengthy visa delays linked to post-9/11 security.

"American higher education is open for business to students from our neighbors," Spellings said in Santiago, Chile, before meeting Tuesday with students and university rectors. Her next stop on Wednesday is Sao Paulo, the continent's largest city.

The number of foreign students enrolling in American universities is rebounding from a drop caused by extra visa security precautions following the September 11 attacks. But the number of visas granted to students seeking to study for a year or more is still down.

Only 5,881 F-1 student visas were handed out in Brazil in 2006, the latest year for which figures are available, down from 12,325 in 2001, according to the U.S. Embassy in Brasilia.

And competition for students is growing fast from nations such as Australia, Canada and the United Kingdom. Even South Africa is in the race to attract South America's best and brightest.

American universities depend on foreign students for teaching and research help, and policymakers want future foreign leaders to be familiar with the United States. Foreign students also provide billions of dollars annually to the U.S. economy.

"If they got rid of the visa difficulties, I think most Brazilian students would choose the United States," said Leticia Amorim, a 22-year-old business administration major who will travel soon to Texas or New York to study.

But she said many of her friends are still concerned about U.S. visa requirements, and some are worried that they might not be well-received. She said the U.S. visa process is viewed as cumbersome and is the main reason "why people are going to other countries."

Education experts said American officials have speeded up visa approval in recent years, and Spellings insisted that the trend of falling enrollment has been reversed.

"We have started to regain ground that had been lost after September 11," she said in Chile.

But Australia, Canada, France and the United Kingdom have launched intense marketing campaigns to attract students from Latin America, where improving economic conditions have swelled college enrollments and demand for study abroad.

Renee Zicman, who heads international cooperation efforts at Sao Paulo's Catholic University, said Australia doubled its share of Brazilian students in just two or three years. An annual event to attract students to South African universities now draws heavy interest.

"We've just had a boom in the market, and these countries have calendars of events seeking out students in Brazil," she said.

The U.S. Education Department said the number of student and exchange program visas hit an all-time high of 591,050 in 2006. But the number of F-1 student visas for study in the United States for a year or more was 273,870 in 2006, below the high of 293,357 in 2001.

Officials have made similar recent trips to Asia. Accompanying Spellings this week are university presidents and chancellors from California, Florida, Iowa, Louisiana, Maryland, Missouri and Oklahoma.

"It's true that the U.K., Canada and Australia are aggressively marketing and increasing their percentages of international students, but they don't have the capacity to take the millions the United States can take," said Peggy Blumenthal, executive vice president of the New York-based Institute of International Education.

She added: "The problem is getting the word out to the people that the situation has changed, and making them believe it."

China & Textiles: Race to the Bottom?

The race-to-the-bottom hypothesis is simple: multinational firms go where labor and environmental arbitrage opportunities are the greatest. China, which bans unions not approved by the Communist Party and has not exactly been vigilant about pollution control, has been a much-preferred destination for a lot of environmental arbitrageurs. In particular, the textile trade has boomed there--especially after China's WTO accession and the lapse of the multi-fibre agreement (MFA) in 2005 (see chart).

However, today's Wall Street Journal details the environmental costs to China of a lightly regulated textile industry. It seems that even the government is finally having enough of the country bearing the brunt of everyday low pricing's environmental burden. With Chinese product safety being at the forefront of the news, it may not be long before Western consumers have a backlash against the environmental costs of "Made in China" too:

Last summer, Chinese government investigators crawled through a hole in the concrete wall that surrounds the Fuan Textiles mill in southern China and launched a surprise inspection of the plant. What they found caused alarm at dozens of American retailers, including Wal-Mart Stores Inc., Lands' End Inc. and Nike Inc., that use the company's fabric in their clothes.

Villagers had complained that the factory, majority owned by Hong Kong-based Fountain Set Holdings Ltd., had turned their river water dark red. Authorities discovered a pipe buried underneath the factory floor that was dumping roughly 22,000 tons of water contaminated from its dyeing operations each day into a nearby river, according to local environmental-protection officials.

In the more than two decades since international companies began turning to Chinese factories to churn out the cheap T-shirts, jeans and sneakers that people around the world wear daily, China's air, land and water have paid a heavy price. China has faced harsh criticism in recent months over the safety of exports ranging from tainted toothpaste to toxic toys. But environmental activists and the Chinese government are increasingly pointing to the flip side: the role multinational companies play in China's growing pollution by demanding ever-lower prices for Chinese products.

Prices on fabric and clothing imported to the U.S. have fallen 25% since 1995, partly due to the downward pricing pressure brought by discount retail chains. One way China's factories have historically kept costs down is by dumping waste water directly into rivers. Treating contaminated water costs upwards of about 13 cents a metric ton, so large factories can save hundreds of thousands of dollars a year by sending waste water directly to rivers in violation of China's water-pollution laws.

"Prices in the U.S. are artificially low," says Andy Xie, former chief economist for Morgan Stanley Asia, who now works independently. "You're not paying the costs of pollution, and that is why China is an environmental catastrophe."

Toxic runoff from China's booming textile industry is one reason why many of the nation's largest rivers resemble open sewers and 300 million people lack access to clean drinking water. Now, U.S. retailers are scrambling to prevent environmental issues from creating the same kind of consumer backlash as the antisweatshop campaigns of the past decade. Fountain Set says it hasn't lost any major customers since the government crackdown, but some U.S. retailers temporarily canceled orders and say they have tightened oversight of the company.

"After labor issues, the environment is the new frontier," says Daryl Brown, vice president for ethics and compliance at Liz Claiborne Inc., which uses Fountain Set cotton in some of its products. "We certainly don't want to be associated with a company that's polluting the waters."

The textile industry is one of China's dirtiest. In addition to heavy metals and various carcinogens, fabric dyes may contain high levels of organic materials, and thread is often dipped in starch before it is woven into fabric. The breakdown of large amounts of organic compounds such as starch can suck all the oxygen out of a river, killing fish, and turning the water into a stagnant sludge.

Fountain Set's 230-acre Dongguan Fuan Textiles factory campus here sends a huge volume of cotton fabric to Americans' closets. The company is the largest knit cotton manufacturer in the world, and its factories are responsible for about 6% of the global supply of knit cotton, according to Eddie Lau, an analyst at Citigroup Inc. in Hong Kong.

The company's main product is the stretchy soft cotton found in T-shirts and sweat shirts sold by companies including Gap Inc., Target Corp. and Eddie Bauer Holdings Inc. Fountain Set also markets a range of eco-friendly fabrics, including organic cotton. The company, listed on the Hong Kong stock exchange, has 20,000 employees. Annual sales topped $900 million last year.

Since the inspection in June of last year, Fountain Set has paid roughly $1.5 million in penalties and spent $2.7 million to upgrade its water-treatment facilities...

Many apparel companies distance themselves from Fountain Set, saying they aren't direct customers, even though they use its fabric. Large retailers typically work directly with Fountain Set to set colors and fabric styles each season, but they may ultimately purchase Fountain Set's products through a third-party supplier that sews the finished goods.

Companies including Target and Liz Claiborne say they have "no contractual relationship" with Fountain Set, but acknowledge they use its products. As recently as June, Fountain Set named Kohl's Corp. of Menomonee Falls, Wis., as one of its customers. In an email statement, Kohl's said it is "not a Fountain Set Holdings client..."

Fountain Set was founded in Hong Kong in 1969, just as U.S. companies were beginning to seek cheaper production bases in Asia. The initial motive for outsourcing was cheaper labor. But in the early 1970s, stricter environmental laws, such as the 1972 Federal Water Pollution Control Act Amendments, began driving up costs for U.S. fabric mills -- accelerating the overseas shift...

Li Changlin, 51 years old, owns a small shipping company along the banks of the Mao Zhou river in Dongguan, downstream from the site where Fountain Sets is accused of dumping.

After two decades of absorbing runoff from hundreds of factories upstream, the river resembles a thick, oily sludge and emits a pungent stench. Its surface is littered with plastic bags, shoes and electrical wires. On a recent day, the carcass of a dog floated near the bank. "We used to eat fish and crayfish out of this river," says Mr. Li, who has lived by the river all his life. "We swam in it. There were green plants on the banks and the water was clear. After 1989, the factories came and the water turned black."

That was the year Fountain Set opened its factory in Dongguan, just as Hong Kong began cracking down on water pollution. Gap, one of the Fuan factory's first American clients, began placing large orders for cotton polo-shirt fabric. Throughout the 1990s, Fountain Set began working with dozens of major retailers and brands, including Wal-Mart, J.C. Penney Co. and Nike.

The rise of discount chain stores, such as Wal-Mart and Target in the mid-1990s, brought intense pressure on fabric mills to keep prices low, according to textile industry executives. "The first thing they say when they sit down in a meeting is, 'How much discount do I get from last year?'" says Bill Lam, former executive director of Fountain Set who is now executive director of a competitor, Pacific Textiles Holdings Ltd.

Nike is the only company contacted for this article to provide evidence it monitored the Fuan plant for environmental violations prior to the government crackdown. The plant passed Nike's water-quality inspections every year since 1999. But the testing was voluntary, requiring the factory to submit its own water samples to a lab hired by Nike. In an emailed statement, Nike said that the factory was supposed to be "collecting samples that are representative of the waste water that they typically discharge" but acknowledged "it would be possible to falsify the sample." Fountain Set says the samples it submitted weren't falsified.

Nike says it has stricter environmental-compliance requirements for factories it works with more closely. Since 2000, Nike has developed an advanced factory-monitoring program after the company admitted to unknowingly using child labor in Pakistan.

The crackdown on Fountain Set was part of an increasingly aggressive campaign by China's central government to curb the environmental damage wrought by three decades of industrial expansion. China's Guangdong province, where Fountain Set is located, is a smoggy landscape of smokestacks and eight-lane highways, where some 50,000 factories churn out toys, cellphones and electronics. Here in Dongguan, a major manufacturing center, the air smells of burning rubber. Under pressure from Beijing, provincial officials have been cracking down heavily on polluting industries to encourage greener growth. About 20% to 30% of China's water pollution comes from manufacturing goods that are exported, estimates Mr. Xie, the economist.

After environmental-protection officials launched their stealth inspection in June of last year, authorities accused the Guangdong factory of keeping fake books to hide its illegal discharge, and said the amount of dye in the factory's waste water was 19.5 times the legal limit.

When Chinese newspapers began reporting on the findings, Fountain Set told customers over email that "heavy rains" had led to a slight increase in water discharge, but the plant was operating normally. Several weeks later, the company informed customers that a fine had been issued by environmental-protection authorities. The company cooperated with the government, and dialed back production at the plant to reduce its waste-water output.

Mr. Yen was bombarded with calls. Wal-Mart, which had recently launched a slew of initiatives in the U.S. to show its commitment to the environment, sent a team of inspectors to the plant and canceled all direct orders with the factory until the issues were resolved, according to the company. Lands' End, one of Fountain Set's major customers, says it sent inspectors to the plant and reduced its orders with the company. J.C. Penney says it shifted its orders to other Fountain Set factories. Abercrombie & Fitch held a meeting with management. Target says it began exploring alternative cotton suppliers.

Mr. Yen calls it a "very stressful time," but says the vast majority of the company's customers ultimately stuck with the company. Fountain Set considered appealing the fine, and disputes some of what was reported in state-run media. But ultimately the company decided not to challenge the government. "At the end of the day, we made a decision not to dispute the claim, and worked with the provincial environmental bureau so that we could get back to business," says Mr. Yen.

The complexity of the textile-industry supply chain means fabric mills like Fountain Set often escape tight scrutiny from apparel companies, even though mills are the site of the industry's heaviest environmental damage. Gap, for example, employs a full-time social-responsibility staff of 93 people involved in monitoring 2,000 factories around the world for labor issues and environmental practices. But Fountain Set isn't on the list, because Gap's monitoring program focuses on companies that sew fabric into clothes, rather than mills. Gap says it is exploring the possibility of extending its monitoring programs further back in the supply chain, and has already begun examining the water-use practices at its denim laundries.

Apparel companies say they have the most influence over companies at the end of the supply which they work with directly. "We take the most aggressive action where we have the most leverage," says William Anderson, head of Social and Environmental Affairs Asia Pacific at Adidas Group.

Many clothing companies say they are pleased to see the Chinese government taking action. Industry executives say the lack of regulatory enforcement in China has forced the apparel industry to become a police force, a job it is ill-equipped to handle.

Some companies defend their decision to stick with Fountain Set, saying it's typically better to work with a factory on improving standards, rather than ditching them when a violation occurs. L.L. Bean Inc. says it considered cutting ties with Fountain Set but was reassured that the company appeared to be cleaning up its act. "If we felt like there was a better option, we would have left," says Jim Ditzel, vice president of inventory. "It's not a perfect world. Wherever you go, it's probably going on elsewhere."

A few miles west of the Fuan factory, a mill owned by Mr. Lam's Pacific Textiles was recently charged with releasing dye water that turned a local river red. Employees from the Panyu, China, factory tried to conceal the problem by taking boats into the river and dumping dye neutralizer into the water, instantly turning the water back to brown. Chemicals in the neutralizer are toxic, and dead fish floated to the surface of the water. The local television news interviewed villagers complaining that the water would poison their crops.

Mr. Lam admits his workers dumped the neutralizer but speculates that his company was set up by a competitor, who may have paid off temporary workers to cause the spill.

Chinese activists are trying to make the textile supply chain more transparent by connecting the dots between Chinese factories and the multinational companies that buy their products. "We want them to know we're watching from China," says Ma Jun, a prominent Chinese water-pollution activist who has launched a Web site that aggregates data about polluting factories.

Fountain Set's new waste-water treatment facility was certified by the provincial authorities in January. Wal-Mart recently resumed placing orders.

Poland's Gdansk Shipyard at Risk

The Gdansk shipyard in Poland (Polska) will forever be known as the birthplace of the Solidarity (Solidarnosc) trade union movement, whose actions against the then-Communist government helped lead to the government's eventual downfall and inspired other folks in Soviet bloc countries to free themselves from their Bolshevik shackles. A lot is owed to the Solidarity movement for inspiring others to put up a brave fight against these totalitarian regimes, though I'd bet Vladimir Putin would take umbrage with this version of history.

The Commanding Heights website which I feature on my links list features tons of excellent material on international political economic history. All the contents of the PBS documentary of the same name is available there. (As an aside, we use this material for some IPE courses here at the University of Birmingham--what higher recommendation can I make?) If you have a QuickTime viewer, you can relive the pivotal moment when the Iron Lady, Margaret Thatcher, met with the Solidarity movement's leader, the electrician Lech Walesa. It was an odd juxtaposition in many ways, yet the union-bashing Hayek follower Thatcher and the union man Walesa thought the same way: with Poland's economy in shambles, the Communists had to go.

Today, however, it seems that the free market is having its revenge on Gdansk shipyard as it has not fared very well in spite of receiving subsidies in recent years. Ironically, whereas the Soviet Union was a big customer back in the day, Gdansk now faces uncertain commercial demand. The EU is prodding the Polish leadership to reconsider the economic viability of keeping the shipyard open just because of its iconic status. From the BBC:

The future of Poland's iconic Gdansk shipyard remains in doubt as a key European Union (EU) deadline approaches for the site to reduce its capacity.

Brussels has given Poland until the end of Tuesday to either close two of Gdansk's three slipways or else repay 51m euros ($69m; £35m) of European aid.

EU Competition Commissioner Neelie Kroes is now studying Poland's calls to keep open two slipways at Gdansk.

The shipyard is the birth place of the celebrated Solidarity trade union.

Solidarity founder Lech Walesa said he would consider it a "personal failure" if the Gdansk shipyard was not saved.

Back in 1980, a strike by 17,000 ship builders at Gdansk saw Solidarity recognised as the first non-communist trade union in the then Soviet Eastern Bloc.

The move was one of the first successful steps that led to the eventual collapse of communism, not just in Poland but Eastern Europe as a whole.

Under communism Gdansk could count on regular work from the Soviet Union, but it has struggled to compete in the post-communist free market and now employs 3,000 people.

The historical importance of the Gdansk shipyard is a central reason why the Polish government is loath to see its capacity cut too deeply.

The government argues that leaving Gdansk with just one slipway would turn it into "a tiny company instead of a shipyard".

However, under EU rules, state aid for struggling shipyards can only be granted if it is accompanied by extensive cost-cutting aimed at restoring long-term viability.

Another condition is that private investors must be brought on board.

Without such moves, the EU insists that the aid paid to Gdansk is illegal and therefore needs to be repaid.

Reports suggest that Ukrainian company Donbas, Italian shipbuilder FVH, and Middle Eastern investors are interested in taking over the Gdansk site.

Boeing, Airbus...now Air Putin?

You've got to hand it to Vladimir Putin: he's not exactly slowing down as his term ends next year while he plots Russia's fate and his own. Whether it involves claiming a stake in the North Pole's soon to be available oil reserves, sending Russian bombers on regular flights again to protect I don't exactly know what, or contemplating a leadership role at a Russian energy company post presidency, the peripatetic Putin has a theatrical flair Bush could only dream of. Now, he has yet another plan to make Russia's aerospace industry a player in the airliner arena against the likes of Boeing and Airbus. This time around, however, the Russians won't have a "captive" market of Soviet-bloc countries to sell their wares to. As the country only built 26 (!) civilian planes last year, let's just say the likes of Ilyushin, Antonov, and Tupolev have a long, long way to go. It may be more Putin posturing, but damn, it's entertaining nonetheless. From Bloomberg:

President Vladimir Putin said Russia will challenge Europe and the U.S. in aerospace as the country rebuilds an industry that once rolled out a quarter of the world's commercial aircraft fleet.

Russia ``has new economic possibilities'' to gain a greater share of the global market for civilian passenger and transport planes and ``keep its leadership in producing combat aircraft,'' Putin said today at the opening of the Moscow Air Show.

More than 780 domestic and foreign producers from 110 countries are participating in the biennial event, Putin said at the once-secret Zhukovsky airfield near the Russian capital. OAO Unified Aircraft Corp. expects contracts of more than $1 billion at the show, Chief Executive Officer Alexey Fyodorov said.

Putin pushed Russia's aerospace manufacturers and designers to merge into state-controlled Unified Aircraft to create a business with the scale to compete abroad. Russian companies aim to build and sell 4,500 civilian and military planes valued at $250 billion over the next 18 years, Fyodorov said Aug. 15.

Indonesia signed a contract today for three Sukhoi Su-27SKM and three Su-30MK2 fighters valued at as much as $330 million, Sergei Chemezov, chief executive officer for Russian state arms exporter Rosoboronexport, told reporters at the show. Russia is the biggest arms supplier to developing countries.

``Unified Aircraft Corp. plans more active entry into the world market for competitive civilian and transport aircraft,'' Putin said.

Unified Aircraft is Putin's effort to restore Cold War production levels and compete with Toulouse, France-based Airbus SAS and Chicago-based Boeing Co. Russia has as much as $8 billion in orders for combat jets and expects to more than double the airliner backlog to $3.5 billion this year from $1.5 billion.

That effort received a boost today with Russian airlines including GTK Rossiya, whose customers include the Kremlin, ordering about $600 million of aircraft from domestic manufacturers.

Rossiya signed an accord with Ilyushin Finance Co. for one Il-96-300 long-range plane and 12 Antonov An-148 short-range aircraft, Ilyushin Finance Chief Executive Officer Alexander Rubtsov said in an interview at the show.

``The Il-96 is for the presidential administration'' and costs about $75 million, Ilyushin Finance spokesman Andrei Lipovetsky said. The An-148s sell for about $22 million each.

Billionaire Alexander Lebedev's new low-cast carrier Red Wings signed a $250 million contract with Ilyushin Finance for six Tupolev Tu-204 mid-range airliners.

Vnesheconombank, a state-owned lender, signed an agreement today with Unified Aircraft to help finance its development, including upgrading plants and consulting on an initial public offering. The bank may become a shareholder in the aerospace company, Vnesheconombank said in a statement.

The Moscow-based bank, the former Bank for Foreign Trade for the Soviet Union, also agreed to finance international sales of the SuperJet-100, a new mid-range passenger airliner produced by Sukhoi Civil Aircraft Co.

``It is a further boost of government support in the project,'' and the bank will provide export loans on some transactions, said Mikhail Pogosyan, chief executive officer of the planemaker's parent, OAO Sukhoi Aviation Holding Co.

Vnesheconombank separately said on its Web site that it signed an agreement with Almaz-Antei Air Defense Concern to help finance building of factories for advanced-technology air defense systems.

Russian aerospace companies built 26 civilian planes last year, the Industry and Energy Ministry said in a report on its Web site. Airbus, the world's biggest maker of commercial aircraft, has delivered 269 planes this year and second-ranked Boeing has shipped 253, according to figures from the companies as of Aug. 9. Russian carriers have imported and contracted for hundreds of jets from the West in the last decade.

Exports of Sukhoi and MiG fighter jets helped Russia's aviation industry survive after the Soviet Union collapsed. Commercial aviation is the top focus now, Unified Aircraft's Fyodorov told reporters in Moscow a week ago. By 2025, the industry's annual production is targeted to reach 300 airliners, 100 transport planes and more than 100 combat aircraft.

Plane Development

Unified Aircraft will start a ``profound'' modernization of the Il-96 and Tu-204 and develop the regional Superjet-100 and an airliner similar to Airbus's single-aisle A320 model series, Fyodorov said at the Aug. 15 briefing. Unified Aircraft is holding preliminary ``consultations'' with Airbus on joint development of the model, with production to begin in 2015.

The Russian company expects to identify ``concrete'' ways to cooperate with Airbus's parent, European Aeronautic, Defence & Space Co., by the end of this year, Fyodorov said.

Russia has committed 18 billion rubles ($702 million) in state support for the industry over the next three years, including assistance to overhaul manufacturing facilities.

State-run OAO Aeroflot, eastern Europe's biggest carrier, last month approved buying 22 Airbus A350 XWBs and 22 Boeing 787 Dreamliner jets to upgrade its fleet beginning in 2014. The airliners, which seat between 250 and 350 depending on the version, are valued at more than $7 billion at list prices, though Aeroflot said it will pay less than $5.8 billion.

Bond Insurers, Subprime's Victims

Bond insurers, the so-called "monolines," have fallen under hard times. Obviously, what they do is insure bonds. In so doing, they function like credit rating agencies who have skin in the game. If these insured bonds default, then they become liable for both principal and interest to bondholders. Credit agencies have been accused of being unreliable, first during the Asian financial crisis when they made nary a warning sign about the impending crisis while giving favorable ratings to Southeast Asian countries and now during the subprime crisis when they made nary a warning sign about the impending crisis while giving favorable ratings to securities containing subprime loans.

While rating agencies might be subject to more scrutiny and lose some rating business at the most, the subprime mess can cause bond insurers a lot more trouble if the more dire prognostications of mass defaults come true. Unlike the credit rating agencies, the bond insurers will literally have to pay. The July 26 Economist offers this backgrounder:

As America's subprime-mortgage tempest spreads, Wall Street's latest parlour game is to bet on who will be next to get caught in the storm. A fair few have placed their chips on the so-called monoline insurers, an obscure but important bunch who guarantee the timely repayment of bond principal and interest when the issuer defaults.

The two largest monolines, MBIA and Ambac, both started out in the 1970s as insurers of municipal bonds. In recent years, much of their growth has come in structured products, such as asset-backed bonds and the now infamous collateralised debt obligations (CDOs). The total outstanding amount of paper insured by monolines reached $3.3 trillion last year.

André Cappon of CBM Group, a financial consultancy, describes monolines as “rating agencies that put their money where their mouth is.” Arguably the keenest of credit-market observers, they extend their gold-plated credit ratings to paper they deem worthy of their protection, in return for a premium.

The monolines' share prices have tumbled this year as the depth of the subprime crisis has sunk in (see chart). The cost of insuring against their own default has shot up, prompting talk of a “monoline meltdown”. This week Ambac's second-quarter profit missed forecasts due to a $57m write-down on credit derivatives.

The industry's tormentor-in-chief is William Ackman, who runs Pershing Square, a hedge fund. Mr Ackman has spent the last five years, no less, telling anyone who will listen that the monolines are doomed, with MBIA particularly vulnerable. He points to their massive leverage: outstanding guarantees amount to 150 times capital. He also questions MBIA's “aggressive” accounting techniques. Earlier this year the company paid $75m to settle allegations that it used reinsurance contracts to conceal losses.

Amid the market's jitters, other hedge funds are readily buying into this message. That may be all Mr Ackman, who holds a short (bearish) position in MBIA shares, wants. But most analysts think his analysis is based on a misunderstanding.

Monolines may be highly geared compared with traditional insurers. But, as Rob Haines of CreditSights points out, they are highly conservative in other ways. They model each transaction under a variety of high-stress situations and only accept those that show no losses in all scenarios. This may explain why they had little exposure to New Century, the biggest mortgage lender to go bust so far. Subprime makes up only 1-3% of their direct exposure.

To wipe out the monolines' capital cushion, it would take a loss twenty times bigger than the hit they took last year. Even in today's febrile markets that is hard to imagine, especially since the insurers are at the back of the queue when it comes to taking losses on CDOs. So, though losses may run into the hundreds of millions, they are unlikely to be big enough to deprive the biggest monolines of their cherished triple-A rating.

The monolines may lose business as investors turn their back on CDOs and other structured products. But MBIA's finance chief, Chuck Chaplin, thinks the general confusion over credit risk may even help them, as more debt issuers seek comfort in guarantees. It remains to be seen if that optimism is, like Mr Ackman's pessimism, somewhat overdone.

Today's Financial Times also offers an update on these monolines. It seems that many are still above water, though times are indeed testing for many investors are running away scared. As mentioned earlier, one of the problems of these bond insurers is that their capital base is remarkable small in comparison to the total amount of bonds they insure. In other words, the insurers themselves have little insurance :

The crisis in US subprime mortgage-related bonds and its spillover into broader structured credit markets has had a huge impact on one important but little-known group of companies: the bond insurers.

Among the worst hit has been Radian Group, which specifically insures mortgage-backed debt. It has seen its shares tumble by more than 60 per cent this year while the cost of protecting its debt against default in derivatives markets has spiked nine times higher.

Other bond insurers have also suffered because they have tiny capital bases compared with the volume of assets they insure.

Yet the rating agencies remain confident that these firms are stable and are weathering the problems in subprime markets. Some analysts, too, remain confident in their prospects.

Bond insurers lend their high credit ratings to securities issued by others in return for a fee.

Although the largest of these so-called “monoline” insurers, MBIA and Ambac, began as insurers of municipal bonds, much of the industry’s growth in recent years has come from providing guarantees to structured securities such as asset-backed bonds and collateralised debt obligations.

Now that such complex securities have run into trouble, the monolines are facing serious questions over their risk-management practices. If they were to prove unsound, that could pose a threat to the ratings of more than $3,300bn of securities that they insure, which includes much of the municipal bond market.

There are some signs that Radian and rival MGIC could already be facing difficulties.

Both companies have drawn on liquidity facilities from banks and last month they announced that their dual investment in Credit-Based Asset Servicing and Securitisation, which buys and services subprime securities, could be worthless.

Radian said last week that it had exposure to $47bn of collateralised debt obligations. Meanwhile, MGIC, whose shares are down 42 per cent this year, is trying to extricate itself from a merger with Radian agreed in February.

However, Rob Haines, analyst at CreditSights, the independent research firm, said the monolines are less exposed to the crisis than market prices are currently suggesting.

Subprime mortgages, he said, make up only a small portion – between one per cent and 4 per cent – of their direct exposure. Meanwhile, the monolines insure almost exclusively senior bonds that are protected by losses in more junior securities and they are not exposed to changes in market value, only actual defaults.

“The markets are treating Radian like the walking dead,” says Mr Haines. “While Radian’s credit risk profile has certainly deteriorated far faster than we ever anticipated, we think it is premature to place a high probability of near-term bankruptcy.”

For its part, Standard & Poor’s, the rating agency, said in a recent report that the deterioration in the subprime mortgage market did not threaten the ratings of the monolines.

“We come to this view as a result of the insurers’ underwriting standards . . . their sound risk-management practices . . . and their conservative capital management strategies,” it said. The agency added that the monolines could see “adverse development without jeopardising their capital adequacy”.

However, inadequate capital reserves are regularly cited by those betting against the industry as the chink in the monolines’ armour.

Ambac, for example, has guaranteed $26bn of CDOs with subprime exposure and a further $9bn of subprime mortgage bonds against a capital base of just $1.15bn at the end of last year.

At MBIA, the company’s outstanding guarantees amount to 150 times capital.

Jim Chanos, hedge fund manager and noted short seller, said MBIA is one of his largest short positions because his firm always like to bet against “financial alchemy stories”.

Mr Chanos believes MBIA keeps insufficient reserves against future credit losses and that, in doing so, “MBIA turns a very risky insurance scheme into a gold-plated credit rating for questionable debt issuance”.

Another long-standing and vociferous critic of the industry is Bill Ackman, head of Pershing Square, the activist hedge fund.

“People think of the bond insurers as safe because they started out by guaranteeing general obligation municipal bonds [that] rarely default,” he said. “Over time, they have morphed into financial institutions that take structured and corporate credit risk as they have moved up the risk spectrum.”

China's Co-opetition With Africa

While reading the International Herald Tribune piece excerpted below, I was reminded of a business bestseller from a few years back called Co-Opetition. Its main premise is similar to the situation between China and Africa at the current time. Replace the term "businesses" with "countries" in this Library Journal writeup of the book and you more or less sum up the situation at the moment:

Losing and winning are two extremes by which businesses are often measured. Brandenburger (Harvard Business Sch.) and Nalebuff (Yale Sch. of Management) argue that most businesses and their transactions lie somewhere between the two poles. Their liberating message is that your competitor does not have to fail for you to win. Conversely, you don't have to fail either. Your failure, in fact, can hurt your competitor. It is better, the authors assert, to have both cooperation and competition. Game theory requires drawing a representation of one's customers, suppliers, competitors, and complementers. In this strategy of business as a game, the rules, players, tactics, and scope can be changed to the individual's advantage.

However, it seems that the winners and losers in the China-Africa case are concentrated, at least on the African side, in the expected direction. On the winning side, African consumers benefit from cheaper Chinese manufactured goods while African raw material providers have had great success selling their wares to resource-hungry China. On the losing side, African firms making products that compete in export makets with Chinese ones have fallen under hard times (like the Southeast Asians, like the Europeans, etc.) The main question here remains unresolved: are the Chinese merely the new colonial powers? Surely, their dependencia theory-style trade pattern with Africa involving the exploitation of natural resources in exchange for sophisticated manufactures doesn't exactly point to new developmental directions:

Chinese officials and their African allies like to call their growing relationship a win-win proposition, a rising tide that lifts all boats in China's ever-widening sea of influence. This year, China pledged $20 billion to finance trade and infrastructure across the continent over the next three years. In Zambia alone, China plans to invest $800 million in the next few years.

From South Africa's manganese mines to Niger's uranium pits, from Sudan's oil fields to Congo's cobalt mines, China's hunger for resources has been a shot in the arm, increasing revenue and helping push some of the poorest countries on earth further up the ladder of development.

But China is also exporting huge volumes of finished, manufactured goods to those same countries, from T-shirts to flashlights, radios to socks, hampering Africa's ability to make its own products and develop healthy, diverse economies.

"Most of our countries have been independent for 35 to 50 years," said Moeletsi Mbeki, a South African entrepreneur and a political analyst. "Yet they have failed to develop manufacturing for a variety of reasons, and for the Chinese that's a huge opportunity. We are a very important market for China."

On the one hand, Chinese imports give Africans access to goods and amenities that developed countries take for granted but most people here could not have dreamed of affording just a few years ago: cellular telephones, televisions, washing machines, refrigerators, computers. And cheaper prices on more basic items, like clothing, light bulbs and shoes, mean people have more money in their pockets.

"There is no doubt China has been good for Zambia," said Felix Mutati, Zambia's minister of finance. "Why should we have a bad attitude toward the Chinese when they are doing all the right things? They are bringing investment, world-class technology, jobs, value addition. What more can you ask for?"

But across Africa, and especially in the relatively robust economies of southern Africa, there are clear winners and losers. Textile mills and other factories here in Zambia have suffered and even closed as cheap Chinese goods flood the world market, eliminating jobs in a country where less than half the adult population has formal employment. And the Chinese investment in copper mining here has left a trail of heartbreak and recrimination after one of the worst industrial accidents in Zambian history: a blast at a Chinese-owned explosives factory in Chambishi in 2005 that killed 46 people, most of them in their 20s.

"Who is winning? The Chinese are, for sure," said Michael Sata, a Zambian opposition politician who campaigned in last year's presidential election on an anti-China platform. He lost, but with a surprisingly strong showing, and his party, the Patriotic Front, won many seats in local and parliamentary elections in the capital and the Zambian industrial heartland, where China has made its biggest investments.

"Their interest is exploiting us, just like everyone who came before," Sata said. "They have simply come to take the place of the West as the new colonizers of Africa."

Officials at the Chinese Embassy in Lusaka did not respond to repeated requests to discuss the country's role in Zambia. But Chinese diplomats across Africa and top officials in Beijing have emphasized the money and opportunity they bring. In Zambia, for example, government officials say that the Chinese are bringing dozens of workers to China for training and that their investments will create thousands of high-wage jobs.

Measured in some ways, Zambia's economy is booming. Copper prices have soared from 75 cents a pound in January 2003 to more than $3 a pound this year, driven in large part by Chinese demand. That demand has pushed Zambia's long-dormant copper mines into record production.

China's state-owned Nonferrous Metals Corp. purchased rights to develop a mine in Chambishi, in the heart of the copper belt, in 1998, and plans to build an export processing zone that will bring as many as 60,000 jobs, according to government officials.

But China's entry into the World Trade Organization in 2001 has given it access to markets across the globe, wiping out thousands of jobs in countries with fledgling manufacturing sectors like Zambia and South Africa.

Despite relatively low wages in many countries, African manufacturers find it very hard to compete, arguing that China's currency policies undervalue the yuan and give Chinese exporters a huge advantage. Many industries in China also benefited at times from subsidies and free or low-cost government financing, making their costs lower.

Beyond that, there are major infrastructure problems in Africa, where industry struggles with inadequate roads and railways, unreliable electricity and water supplies.

"So who do you blame?" said Martyn Davies, director of the Center for Chinese Studies at Stellenbosch University in South Africa. "You can't blame China for being too competitive. China is doing what every other emerging market is doing."

The textile and clothing industry, one of the engines China used to fuel its own economic expansion in the 1980s, has been particularly hard hit in Africa. For decades, African countries exported large quantities of clothes and textiles to developed countries under a trade agreement designed to protect European and U.S. markets from competition from China and others, while encouraging exports from the world's poorest nations. But the trade provision, the Multi-Fiber Agreement, expired in January 2005, putting these countries in direct export competition with China.

Africa found itself once again on the losing end of globalization. If copper is Zambia's bread and butter, manufacturing should have been its main meal just as many economies across the globe have progressed from producers of raw materials to low-tech manufacturing and beyond, a well-trodden path to development.

Zimba, a 40-year-old quality control worker at the plant here who asked to be identified only by her commonplace last name because she feared losing her termination benefits, first got a job at the factory in 1989, after moving to Kabwe from the depressed eastern region of the country with her brother.

She earned a small salary and had free health care and a pension, as well as a three-room house in the workers' compound. But since she lost her job, her family's standard of living has plummeted. The water was turned off, and Zimba does not know where she will get next semester's tuition for her 20-year-old daughter's trade school. "We will see what God brings me," Zimba said.

For Zimba, the transition from salaried work to selling goods for pocket change in the market is a devastating setback to a grim fate she thought she had escaped - her mother was widowed when Zimba was 15 and reduced to selling in the market as well. "I am right back where I started," Zimba said.

As for the Chinese, she bitterly refers to them as "briefcase investors."

"They just fill their briefcases with our wealth and leave," she said.

Such anti-Chinese sentiment has been brewing here for several years. When China's president, Hu Jintao, visited Zambia this year he got the usual red-carpet treatment from his host, President Levy Mwanawasa, but the reception from many ordinary Zambians was nasty. A trip to the site of China's big new investment, Chambishi, was scuttled because of fears of unrest.

The circumstances of the industrial disaster there are still not entirely understood. The mine had been run by the government for decades and had limped along while copper prices slumped in the 1980s. When Nonferrous Metals Corp. bought the rights to develop the mine in 1998, the locals cheered, hoping for new jobs.

In 2003, Keegan Chibuye got one as a mechanic at the mine, a job he was grateful to have in a country where even skilled men like himself struggled to find work. Chibuye's sister, 27-year-old Vennie, also found work under the Chinese, as a computer specialist at an explosives factory on the mine's grounds.

Vennie was the eldest of seven, and her parents had sent her to Britain at great expense, to a technical college in Darbyshire, where she got a diploma in information technology. Another brother, Mwape, got a job as a casual worker in the explosives factory, for a little more than $1 a day, to save money for college.

Keegan Chibuye said he had concerns about the way the Chinese managers were running the mine almost from the beginning. "They were careless," he said. "Safety was not their priority. Everything was about productivity, no matter what."

On April 20, 2005, Keegan Chibuye heard an ear-splitting boom that would shatter his world - a huge blast at the explosives factory.

There was almost nothing left of Vennie and Mwape left to bury. Virtually all the bodies had been incinerated. Only fragments were buried at the graveyard built by the Chinese owners - a finger, an ear, a bit of scalp. As the 46 headstones in the clearing just off the main road testify, most of the workers were young, born after 1980.

Officials of the company that runs the mine did not respond to repeated telephone requests for an interview to talk about working conditions and safety at the mine. But at the Chinese workers' compound in Chambishi, Han Yaping, who identified himself as the company's human resources manager, said the company hoped to help Zambia develop. "China works here in cooperation with Zambia," Han said. "It is friendship."

Asked why the wages at the mine were lower than those paid by other companies, Han said Zambian workers had limited skills and no experience with technology. By way of example, he said, a Chinese worker trying to remove a screw would use a screwdriver. "But a Zambian worker," he continued with a chuckle, "he use his finger."

Skilled Migrants Have Doors Open

Ace migration reporter Jason DeParle has yet another interesting article on the topic that ties with the recent series of articles in Newsweek I posted about earlier on how education can open doors for skilled migrants. Migration is a political hot potato the world over, but you definitely improve your chances of successfully emigrating to your destination of choice if you can bring valuable skills. It relates to a need for enhanced international "competitiveness" by cultivating "human capital." This article appears in both the International Herald Tribune and New York Times. (Hint to fellow bloggers: it is usually preferable to excerpt the IHT article instead of the NYT one if it appears in both publications for the former doesn't hide behind the "Times Select" subscription service after a period of time.) Here are some excerpts:

This is migrant work, Ph.D.-style — a lesson about labor, a comment on class, a window onto globalization and a phenomenon on the rise.

Legions of common workers across the globe face new barriers to migration, as destination countries tighten their borders and toughen their talk. But professionals like [migrant professor who works in the UAE] Mitias, 39, find ever more welcome mats. Even countries wary of migrant brawn are bullish on migrant brains, and many offer tax breaks and streamlined visas to compete in the global marketplace.

"Everybody wants smart people in their country," Mitias said.

While most migrants remain unskilled, and many are desperately poor, the global demographics are shifting.

The number of college-educated migrants in rich Western countries rose 69 percent from 1990 to 2000, according to a World Bank analysis prepared for The New York Times. By contrast, the number of less-educated migrants rose 31 percent.

The analysis, by Caglar Ozden, an economist at the bank, measured movement to 20 nations, including the United States, Canada, Australia and most of Western Europe, and included people who went to college after migrating as children. Of 52 million migrant workers in those countries, 36 percent had some college education, up from 31 percent a decade before.

Of those migrants leaving one rich country for jobs in another, the number with some college education rose 30 percent. The parallel movement of less-skilled workers fell 8 percent.

"My sense is these trends have gotten much stronger since 2000," Ozden said. "Educated people are becoming more mobile."

As a small country filled with hired hands, the United Arab Emirates offers students of migration a uniquely rich habitat. About 85 percent of the work force comes from abroad. There are crowds of Indian construction workers, hammering and hauling in the sun, and solitary maids from Southeast Asia scrubbing behind locked doors.

Most are forced to come alone and spend years without seeing their children. But there are also pockets of prospering professionals, families in tow: Indian doctors, British bankers and American lawyers. Ski Dubai, the famous indoor slope, has Russian ski instructors.

"We're stuck in the paradigm of thinking that migration is only about poor people moving to rich countries," said Dhananjayan Sriskandarajah of the Institute for Public Policy Research, a London research group. "But lots of people move among rich countries, and people from rich countries increasingly move all over the world..."

Some countries want migrants to stay. Canada long ago pioneered a point system that promises a work visa and a path to citizenship to any worker with the right qualifications. Now the list of places with similar programs includes Australia, New Zealand, Britain, Hong Kong and the Czech Republic. But much of the recent growth has been in temporary plans. The United States, Britain, Ireland, and France are among those with time-limited visas. Sweden and Denmark have courted foreigners with tax breaks. Several countries, most notably Australia, try to capture migrants early, by encouraging foreign students to remain.

For all the global stress on brains, many economies need low-skilled migrants, too. A legion of foreign-born nannies keeps educated Americans on the job. Still, poor foreigners often raise fears of crime and cultural conflict and are more likely to cross borders illegally. Many countries are narrowing — or threatening to narrow — their ability to get in...

"Governments give a green light to high-skilled migrants, but put speed bumps in front of others," said Jeanne Batalova, a demographer at the Migration Policy Institute, a Washington research group. "There's a stark contrast."

Though educated migrants are often called "elites," some analysts say the term disguises the problems they face. Some are reluctant travelers with displaced families, struggling to find housing, health care and schools amid the isolation of a foreign land. A nascent academic literature is exploring such problems as workplace discrimination and the frustration of spouses without jobs.

MNC Polluters "Blacklisted" in China

The Chinese leadership is fond of adopting a "pot calling the kettle black" political ploy for what ails China. Why is China's trade surplus with the rest of the world so large? Because foreign manufacturers choose to take advantage of labor and environmental arbitrage in China. Why does China export some hazardous products? Well, imported ones are pretty dangerous too. Now we have this related point of, why is pollution in China so bad? You guessed it--foreign firms keep flouting Chinese environmental regulations.

Actually, I am inclined to believe that more than a handful of these violations are real. However, while Chinese environmental regulations look quite strong on paper, enforcement has been lax against both local and foreign violators. Hence this opportunity to score easy political points on the environmental front by shaming various multinational corporations. Cited here are the findings of an NGO, though you can bet that these findings would not receive attention in a state publication if they weren't...useful. From the China Daily (our favorite official publication):

Chinese joint ventures with global corporations such as Pepsi-Cola, Samsung, 3M and GM are among 100 multinational companies on an updated blacklist of water polluters, according to a non-governmental organization.

The Institute of Public & Environmental Affairs has compiled a list of water polluters based on government data since 2004 and publishes it at www.ipe.org.cn. The 2006 report listed 33 offenders.

Appearing on the latest list are foreign brands well known to Chinese consumers, such as Kentucky Fried Chicken, Pizza Hut and Kao.

It also reveals pollution caused by some global chemical giants, such as DuPont, Degussa and Ciba.

Ma Jun, director of the institute, collated information released by environmental watchdogs during the past four years. The updated list showed that some multinational companies have not taken the lead in environmental protection, but instead became severe and chronic polluters.

For example, Tianshui Benma Brewery Co Ltd in Gansu Province, in which Denmark-based Carlsberg has an investment, discharged untreated wastewater into rivers for two years, defying repeated government orders asking it to stop.

Four branches of Pepsi-Cola were found to have violated environmental rules in the cities of Changchun, Nanjing, Guangzhou and Fuzhou.

Ma warned multinational companies not to lower their environmental standards after entering China.

"The parent companies in their home countries are models for environmental protection. But some of them seem to have slackened their efforts here."

He attributed the situation to the companies' pursuit of profits, but said weak law enforcement and supervision have left loopholes that invite violations.

He said the updated list revealed "only the tip of the iceberg" in the overall pollution situation.

Pollution by domestic companies is even more severe, according to Ma.

On the Shortage of US Engineers

Leave it to (rather useless) political science types like your truly to become interested in more usable vocations. It's a commonly heard refrain: China and India will soon leave the US in the dust in the innovation sweepstakes because they have millions of graduates in engineering each year whereas America graduates far fewer. A recent feature in Newsweek says that this scenario isn't a convincing one. For, the quality of education in these countries is not comparable to that in the US when it comes to gaining the capability to generate innovations:

But these stats only tell half the story. Many of the [engineering] graduates can't find work, and corporate recruiters in both countries lament a dearth of qualified applicants. "Out of the huge number of engineering and science graduates that India produces, only 25 to 30 percent can be regarded as suitable," says Kiran Karnik, head of the National Association of Software and Services Companies. The reason? Underfunding and a range of other factors have produced serious educational crises in India and China. These problems could soon wreak havoc on their economies. To sustain their breakneck growth, the countries will need lots of high-quality engineers and scientists. Yet neither have enough reliable universities to produce them. M.A. Pai, who taught at the prestigious Indian Institute of Technology in Kanpur, warns that the "lack of highly trained people at the Ph.D. level in both sciences and engineering will be a serious setback to India becoming a knowledge economy..."

Experts also complain that Chinese schools emphasize rote memorization, which often "detracts from the quality of education," says Mao, who believe China's system fails to teach practical applications or to instill creativity. "That's why students in the United States might not have good marks in class but can produce effective missile technology, while students in China enjoy good marks in class but might not be able to make sufficiently good missiles," he says.

Another commentary I saw in eWeek a few moons ago cited a Duke University study whose findings were that China and India are hardly leaving the US in the dust. It is cost savings--not a lack of engineers or a loss of capabilities--that is driving the outsourcing phenomenon. However, the US still needs to improve its educational system at the primary and tertiary levels:

Yet, it is cost savings, and not the education of Indian and Chinese workers, or a shortage of American engineers that has caused offshore outsourcing, the study asserts.

"Respondents said the advantages of hiring U.S. engineers were strong communication skills, an understanding of U.S. industry, superior business acumen, strong education or training, strong technical skills, proximity to work centers, lack of cultural issues, and a sense of creativity and desire to challenge the status quo," wrote [author Vivek] Wadhwa in the 2007 report.

"The key advantage of hiring Chinese entry-level engineers was cost savings, whereas a few respondents cited strong education or training and a willingness to work long hours. Similarly, cost savings were cited as a major advantage of hiring Indian entry-level engineers, whereas other advantages were technical knowledge, English language skills, strong education or training, ability to learn quickly, and a strong work ethic."

The report concludes by stating that outsourcing will continue to build enough momentum that the next big piece to be offshored is R&D, and that these jobs will require more Master's degrees and PhDs, something China graduates more of in engineering than the United States. The number of India's engineering PhD's has remained flat, while China's has surged, the report said.

The study ultimately found that the United States has a tremendous amount of work to do to keep up, above and beyond fixing K-12 education.

By all means, do read the entire Duke article on "Where the Engineers Are" in Issues in Science and Technology that presents the most comprehensive research to date on the matter of an engineer shortage. I am including its summary below together with a chart illustrating the number of engineering graduates at the undergraduate level for each country:

Although there is widespread concern in the United States about the growing technological capacity of India and China, the nation actually has little reliable information about the future engineering workforce in these countries. U.S. political leaders prescribe remedies such as increasing U.S. engineering graduation rates to match the self-proclaimed rates of emerging competitors. Many leaders attribute the increasing momentum in outsourcing by U.S. companies to shortages of skilled workers and to weaknesses in the nation’s education systems, without fully understanding why companies outsource. Many people within and beyond government also do not seem to look ahead and realize that what could be outsourced next is research and design, and that the United States stands to lose its ability to “invent” the next big technologies.

At the Pratt School of Engineering of Duke University, we have been studying the impact of globalization on the engineering profession. Among our efforts, we have sought to assess the comparative engineering education of the United States and its major new competitors, India and China; identify the sources of current U.S. global advantages; explore the factors driving the U.S. trend toward outsourcing; and learn what the United States can do to keep its economic edge. We believe that the data we have obtained, though not exhaustive, represent the best information available and can help U.S. policymakers, business leaders, and educators chart future actions.

Beijing: Revenge of the Bicycle

There's less than a year to go to the start of the 2008 Olympics in China yet the Communist leadership is still tinkering with ways to make Beijing's legendarily poor air tolerable. It seems to me that the Chinese leadership has got the environmental question exactly backwards. Just a few days ago, it experimented with banning 1.3 million cars from motoring around Beijing to see if doing so could ease air pollution woes. Fair enough; other countries hosting the Games have tried the same tactic. The authorities' latest trick may take the cake, however.

As you know, Beijing--like other Chinese cities--was filled with comrades riding bicycles in the not-so-distant past. (As an aside, I've even got music video "evidence" c/o Wham's 1984 Freedom video shot largely in Beijing. Dontcha miss that Andrew Ridgeley?) As privately-owned cars became more common in China, deteriorating air quality and kamikaze-style driving antics made bicycling a rather dangerous proposition. Now, however, they're trying to promote the use of bicycles again to lessen congestion and air pollution. I'm hardly a dyed-in-wool environmentalist, but perhaps China would've been better off over the years, at least in the congestion and air pollution departments, if it took a more proactive role in promoting cycling with some semblance of urban planning and not leaving cyclists to become roadkill fodder. What is progress, indeed? From our favorite official publication China Daily:

Wanna tour Beijing? Rent a bike.

The Olympic city plans to put 50,000 bicycles for rent across the city ahead of the Games to curb pollution and ease congestion.

Brand new bikes will be available at 230 outlets close to subway stations, commercial districts, Olympic venues, hotels and office buildings as well as in big communities, according to a "rent a bike" program carried out by Beijing Bicycle Rental Services, a Beijing-based company.

The company has so far put 5,000 bikes for rent at 30 franchise outlets close to the Beijing Workers Stadium, the Drum Tower, the Forbidden City and the Xidan commercial street, according to the company's website.

Before next August, the network will be expanded to cover major communities and all the Olympic venues, said Wang Yong, general manager of Beijing Bicycle Rental Sevices. "Organizations and individuals are welcome to join our service network for free, as long as they can provide an area about the size of one parking space."

Wang said his company would provide all the bikes for rent, and franchise outlets would get 1 yuan a day for each bike they operate as running costs.

"The outlets will also get profit sharing at the end of each month, based on their own business incomes," he said. "Not every outlet can make a profit, as people can rent a bike at one outlet and drop it somewhere else close to their destinations."

The bicycle rental program is also sponsored by the Beijing Environment Protection Bureau as well as the anti-theft arm of the municipal public security bureau, because bicycles are frequently stolen in the city.

"This is like a centralized management of bicycles so that citizens won't have to worry about thefts," said police officer Wang Xiaobing.

To embrace next year's Olympic Games, Beijing, a city with 3 million motor vehicles and more than 4 million drivers, is working all-out to ease congestion and curb pollution.

Monday is the last day of Beijing's four-day experiment to test whether pulling 1.3 million cars off its roads each day would prove effective in reducing air pollution during the Games.

Drivers with even-numbered license plates, excluding taxis, buses and emergency vehicles, were told to stay off the roads on Friday and Sunday or face fines. Odd-numbered cars were banned on Saturday and Monday.

Experts say pulling 1.3 million motor vehicles off the roads in Beijing each day can reduce exhaust emissions by 40 percent.

Though Beijing's sky remained mostly gray and misty as a result of stuffy, humid late summer weather, nearly everyone felt the roads were smoother. "Going to work by bus took me only 15 minutes," said Zhang Jianguo, a government employee. "Driving took almost the same time."

Private Equity Ain't Dead Yet?

You know the spiel: With the spigot of easy money drying up, private equity is falling under hard times as the cost of borrowing heads up, up, up. Well, guess again--it seems the LBO herd is still keen on looking for deals, this time in South Korea for electronics retailer Himart. Fortunately from them, a buyout of Himart shouldn't be exceedingly costly. However, there is entrenched suspicion in Korea about the activities of these firms (good for them!) that may flare up to make a deal unlikely. This story comes care of Bloomberg:

Buyout firms including Blackstone Group LP, Carlyle Group and CCMP Capital Asia may bid for South Korea electronics retailer Himart Co., said three people with direct knowledge of their plans.

Affinity Equity Partners Ltd., Temasek Holdings Pte., Government of Singapore Investment Corp. and Himart's management hired Goldman Sachs Group Inc. to sell the retailer for at least $2 billion, said the people, who declined to be identified because the information isn't public. The Affinity-led group bought Himart for 787.8 billion won ($833 million) in April 2005, according to Affinity's Web site.

The sale may test the willingness of banks to fund buyouts as the global rout in credit markets leads to a slowdown in private-equity acquisitions. Blackstone, Carlyle and CCMP are counting on Asian banks wanting to fund the bids in local currency when international banks are cutting back on high-yield lending because of fallout from the U.S. subprime market.

``Private equity firms shouldn't have a problem raising debt for their acquisitions in the region as long as it's under $2 billion, which is around the amount the Asian banking market can handle without a problem,'' said Paul Mackintosh, Hong Kong- based managing editor of Asian Venture Capital Journal, an industry researcher. ``Asian banks are still eager to lend.''

Blackstone, Carlyle and CCMP are attracted to South Korea's growing retail market. Retail sales are forecast to expand 7 percent to $170 billion this year, according to the Korea Retailers Association, which has 22,000 members. A pickup in household spending may extend the longest economic expansion in a decade for Asia's third-largest economy.

Himart was established in December 1999. It has about 250 outlets nationwide, selling air conditioners, refrigerators, computers and other electronics products. The Seoul-based company reported net income of 87 billion won on sales of 2.15 trillion won in 2006.

The bidders may seek to borrow at least $1 billion in won to fund the acquisition, the people said. The Affinity-led group plans to send out preliminary information to interested buyers before the end of August, the people said.

Tony James, president of Blackstone, told investors Aug. 13 that private-equity transactions are ``clearly harder'' because of tougher financing. Firms have announced a record $717 billion of private-equity transactions worldwide so far this year. The number of deals dropped by a third in July, falling to $87.4 billion from $131.1 billion in June, according to data compiled by Bloomberg.

Tang Kok Yew, chairman of Affinity, declined to comment. Goldman's Hong Kong-based spokesman Edward Naylor declined to comment. Officials at Blackstone, Carlyle and CCMP were either unavailable or declined to comment.

Mergers and acquisitions involving the retail industry in Asia doubled in the first half of this year to $2.2 billion, according to PricewaterhouseCoopers LLP.

Paris-based Carrefour SA and Bentonville, Arkansas-based Wal-Mart Stores Inc. sold their Korean operations last year, after failing to win over local consumers. That leaves Tesco Plc of the U.K. as the only overseas supermarket chain in the country.

Overseas buyout funds and companies have run into difficulties in the past few years expanding or buying assets in South Korea, whose economy has been expanding for 17 consecutive quarters. Private equity and venture capital funds made $139 million of investments in South Korea in the first half of this year, down 82 percent from a year earlier, according to the Asian Venture Capital Journal.

Lone Star Funds, the U.S. buyout firm founded by John Grayken, in June raised 1.19 trillion won ($1.3 billion) selling a minority stake in Korea Exchange Bank, seven months after scrapping the sale of its controlling interest. In November, Lone Star scrapped a planned $6.8 billion sale of a controlling stake of Korea Exchange to Seoul-based Kookmin Bank amid a series of stock manipulation investigations, which Grayken said were driven by an ``anti-foreigner'' political climate.

``Overseas buyout funds haven't been able to make much inroad in the South Korean market in the past couple of years because of rising nationalism,'' Mackintosh said. ``It's in most politicians' interest to keep this up until the next election and foreign buyout funds are an easy target.''

Japan Inc. Makes Its Case to India

Battered at home, Japan's PM Shinzo Abe could use a semi-vacation. Tomorrow, he is scheduled to lead a Japanese entourage on a tour of India to drum up business for Japan, Inc. Throw in the usual hyperbole here--India may eventually become a more important trade partner for Japan than the US or China, etc. Biggies like automaker Toyota and electronics maker Canon are tagging along. There are good reasons for being optimistic about Japanese firms establishing a larger market presence in India, but is seems they have to compete with Korean ones that may have already established an earlier beachhead in the country. Still, Japan has become increasingly wary of Chinese competition for regional influence in Asia and looks to consolidate its standing. From Bloomberg:

Japanese Prime Minister Shinzo Abe, who says relations with India may become more important than Japan's links with the U.S. or China, leads his biggest corporate mission to the South Asian country tomorrow.

Abe travels to New Delhi with 243 executives from companies including Toyota Motor Corp. and Canon Inc., more than the 175 he took with him to the Middle East earlier this year. Japan has 4,757 companies in China and only 216 in India, according to Nomura Securities Co. Ltd.

Japan has been investing in China and other parts of Asia since the late 19th century and now wants to tap growth in the world's second fastest-growing major economy. Abe says India, as an Asian democracy, is a natural ally. Strengthening links may help both nations counter China's growing global influence.

``Japan has a hot economic relationship and a cold political relationship with China,'' said John Swenson-Wright, a Japan analyst at Chatham House, a London-based international affairs institute. ``A closer partnership with India also maximizes Japan's leverage on the security front.''

Japanese companies until now have shied away from investing in India because of the country's poor road, port and other infrastructure, according to a 2006 survey by the Japan Bank for International Cooperation.

That's changing. India plans to invest $475 billion by 2012 to improve its infrastructure. Since 2003, the economy has expanded at an average 8.6 percent, a pace surpassed only by China among the world's biggest economies.

``India's rapid growth and improving infrastructure has caught the attention of the Japanese,'' said H. S. Prabhakar, a professor at the Jawaharlal Nehru University in New Delhi. ``But Japan's move is in response to a larger reality -- a change in the balance of power in Asia with the rise of China.''

Abe, who lost control of Japan's Upper House in last month's elections, says he'll still pursue his platform of creating a ``Beautiful Japan'' that is more assertive internationally.

India was included in Japan's security dialogue with Australia and the U.S. at Abe's initiative, and defense ties between the two countries have strengthened. Indian naval ships visited Japan's Yokosuka base four months ago to hold joint exercises with Japanese and U.S. forces.

Japan and India are also both seeking, along with Germany and Brazil, permanent seats on an expanded United Nations Security Council.

``I won't be surprised if in another decade, Japan-India relations will overtake Japan-U.S. and Japan-China ties,'' Abe wrote in his book ``Toward a Beautiful Country'' that was published before he became prime minister last September.

Abe will arrive in New Delhi tomorrow from Jakarta, where he will sign a free-trade agreement with Indonesian President Susilo Bambang Yudhoyono today. Abe will end his two-day visit to India on Thursday with a trip to the eastern city of Kolkata, from where he will leave for Malaysia.

Japan's trade with India was worth $6.5 billion in 2006, less than four percent of its trade with China. Between 1991 and 2006, Japanese companies invested $2.15 billion, or just 6 percent of the total foreign direct investments into India, according to the Confederation of Indian Industry.

Japan is now taking the lead to build a $90 billion, 1,500-kilometer (2,400-mile) infrastructure corridor between India's capital New Delhi and Mumbai, the financial center. The project includes freight lines, power stations and improved access to ports and airports. Abe, during his visit, may pledge 400 billion yen ($3.38 billion) of loans for the cargo railway, the Tokyo-based Sankei newspaper reported Aug. 14.

``India is one of the most exciting emerging markets in the world today,'' said Masahiro Takedagawa, president of the local car unit of Honda Motor Co., Japan's second-biggest automaker. ``This is the best time to be part of India's growth.''

Mitsui & Co. Chairman Nobuo Ohashi said last month he plans to agree on investments in the industrial corridor during his visit to India with Abe. Marubeni Corp., Japan's fifth- largest trading company, said it is exploring investment opportunities in India's power business.

Japan's main competitor as an investor is South Korea, whose Posco, Asia's third-biggest steelmaker, is poised to become India's single biggest foreign direct investor. The company plans to build a $12 billion steel factory in India's eastern state of Orissa.

Almost all Korean consumer product companies including LG Electronics Inc. and Samsung Electronics Co. have factories in India to cater to growing demand from a middle class that numbers about 300 million, equal to the population of the U.S.

Japan's investments in India have been led mainly by automakers such as Suzuki Motor Corp. which sells one in two cars in India. Sony Corp., which had a factory in India for about a decade, shut it down about two years ago because inadequate power and transportation led to increased costs.

``The joint economic development plan between India and Japan could drastically change the map,'' said Tetsuji Sano, a senior economist at Nomura Securities in Tokyo.

Battle of Heathrow Nears Climax

A few weeks ago, I mentioned the Camp for Climate Action's planned protests at Heathrow over plans to create a third runway at what is the world's busiest international airport. Perhaps wisely, the group has toned down their original plan of disrupting flights and performing other acts of civil disobedience. Their reasoning is that they do not want to create exceedingly negative attention to their cause. Indeed, they are now marketing today's demonstration which will feature a siege of the privately-owned BAA (British Airports Authority, which runs Heathrow) as "fun, family friendly and suitable for children"! I sure do hope that they're right and no one is up to gluing their hands to the entrance doors of the BAA offices like some third runway protesters have already done elsewhere (see picture). "Daddy, why is that man's skin still stuck to the door after the cops pulled him away?" BTW, here a copy of the injunction obtained by the BAA against the activists over this matter. In response, activists have even cited their protests at the Airbus A380 factory as a result of this injunction.

It's an interesting three-ringed battle. Of course, you have the commercial interests that are keen to emphasize that, with judicious planning, the expansion will have negligible detrimental impact. You then have activist groups like the Camp for Climate Change Action, No Third Runway Action Group, and AirportWatch that do not necessarily agree with one another. Also, you've got resident groups like the Hillingdon Council which do not want to be associated with this action despite being vehemently against the addition. The pro-third runway interests seem to have the upper hand against a largely disorganized opposition in the sense of "united we stand, divided we fall." Playing them off each other has proven to be, as they say in England, a doddle. Unless activist and resident groups come up with some sort of cohesive political plan of action, commercial interests are ahead here. From the BBC comes this article:

Climate change campaigners who have been camped at Heathrow Airport for the past week say their protest is to climax with 24 hours of direct action.

Organisers say up to 2,000 people will take part in the day of protests, which will include laying siege to airport operator BAA's nearby headquarters.

They will also mark out the route of the airport's proposed third runway.

Police have said they are confident they will be able to contain the action, which will start at midday.

Organisers of the camp - between the M4 motorway and the airport's northern perimeter in west London - expect between 1,000 and 2,000 people to join the action on Sunday.

They are campaigning against Heathrow's planned expansion because, they say, it will contribute to climate change.

Alan Gill, spokesman for the Camp for Climate Action, said members of the local community would join the protest, which would start with campaigners marking out the 3km stretch of land set aside for the airport's third runway.

"We'll be marking out the route of the third runway there, and moving in the afternoon to BAA's corporate headquarters, which is adjacent to Heathrow," he said.

"We're stopping anyone going in or out of the building."

Alex Harvey, one of the campaigners at the camp, said the siege would last until Monday morning.

But while she said it would remain peaceful, she could not guarantee it would be lawful.

"There are certainly times when unlawful action is required in order to force changes that aren't happening fast enough," she said.

About 1,800 police officers are to be deployed to the site on Sunday and Monday.

If police intervened to stop the campaigners reaching BAA's offices, they would be protecting the interests of the corporation over the needs of the people, Ms Harvey added.

On Saturday, airline pilots asked protesters to take part in "peace talks" over climate change issues.

The British Airline Pilots' Association said "an informed debate" about climate change would be better than the campaigners embarking on any action.

Protesters said they would be willing to have talks after the camp was over.

Police said up to six arrests were made on Saturday after protesters locked themselves to the gates of an Israeli firm which flies produce to the UK.

A 22-year-old man was later arrested outside the protest site on suspicion of harassment and causing actual bodily harm.

And a 28-year-old man was arrested at 2355 BST on Saturday, initially under anti-terrorism legislation. He was later released but rearrested on suspicion of conspiracy to cause criminal damage.

Police say the protesters are on the site - a sports ground belonging to Imperial College London - illegally.

The campaigners insist they cannot be evicted without a court order as long as no criminal damage is committed.

Airport operator BAA has obtained a High Court injunction banning certain protest groups from the airport.

A fifth terminal will open at Heathrow in March 2008 and a new runway has been proposed by the government for about 2020.

And here is another update care of the Beeb. The protesters should be wrapping up their activities over at Heathrow--for the time being:

Climate change protesters are continuing to blockade the offices of Heathrow Airport operator BAA.

Up to 200 activists are camping in the company's car park as part of 24 hours of "direct action" by members of the anti-aviation Camp for Climate Action.

BAA said it had told staff not to come to the offices.

Earlier, there were scuffles between campaigners and riot police and eight people were arrested after blockading British Airways' world cargo centre.

The activists say they hope to occupy the BAA site "for as long as we can".

But the BBC's Paul Moss, who is at the scene, said BAA had told its staff to work from other offices on Monday. The protesters, he added, saw this as a victory.

A police spokesman said demonstrators had passed a "quiet night" in the car park and officers would "continue to facilitate lawful protest".

He said he was "not aware" of pledges by some activists to stop BAA employees from entering the building.

The blockade is expected to end at noon on Monday as the camp itself draws to a close…

On Sunday night, a spokesman for BAA said the protest was having no impact on operations.

"If they want to spend the night in the car park, as long as they do not interfere with our passengers, we are reasonably relaxed," he added.

Organisers say 1,400 people have been taking part in the day of action, while police at the scene put the number at about 1,000.

NAFTA Summit: I Predict a Riot

Ooh watching the people get lairy, it's not very pretty I tell thee...

Poor, poor Mr. Bush. His dream of a Free Trade Area of the Americas (FTAA) has been indefinitely put on the shelf. Worse yet, it seems that even the NAFTA Agreement dating from 1994 is coming under attack from Democratic presidential candidates.

This coming Monday, the leaders of the US (Bush), Canada (Harper), and Mexico (Calderon) will meet at Chateau Montebello in Quebec, Canada for a NAFTA summit. Expectations are pretty low for this summit, especially with Bush's nearly universal political unpopularity. Also scheduled to "meet" them are anti-globalization protesters of every stripe. If you will recall, we've already had an upsurge in these kinds of protests this year as evidenced by the G-8 and Atlantica gatherings. Although protest activity kind of cooled off post-9/11, it's coming back strong this year and Chateau Montebello promises to be no different. First we have the BBC on the challenges faced by the leaders at the upcoming summit:

As the three leaders of the North American Free Trade Agreement (Nafta) meet in Canada, they face growing protectionist pressures at home…

The mood is very different from the early years of the Bush administration, when the president journeyed to Quebec to push for a Free Trade Area of the Americas, stretching from Alaska to Tierra del Fuego in Argentina and rivalling the EU in size.

But now the pressure is on Nafta, which accounts for $700bn in cross-border trade and investment, and which Mr Bush has made the cornerstone of a Security and Prosperity Partnership with his two Nafta partners.

Thousands of anti-globalisation protesters are expected to converge on the summit at the weekend, although the police have established a 25km security cordon around the site.

All the Democratic presidential candidates condemned the Nafta trade deal as unfair to workers at a rally last week organised by the US trade union federation, the AFL-CIO.

Even Hillary Clinton, whose husband Bill Clinton played a key role in getting Congress to pass the Nafta deal in 1993, expressed scepticism about whether US workers benefited from free trade deals.

"Nafta and the way it has been implemented has hurt a lot of US workers. So clearly we have to have a broad reform in how we approach trade," she told 17,000 union workers at Soldiers Field in Chicago.

Barack Obama, Hillary's main rival for the Democratic nomination for president, said US trade agreements had tilted against workers, because "corporate lobbyists" had too much influence.

US unions, who will have a strong influence on the Democratic primaries, have long held that unfair free trade deals with countries without strong labour laws have cost US workers their jobs, especially in the manufacturing sector…

It is not just in the US that there is unease about regional economic co-operation.

In Mexico, where Felipe Calderon won a narrow victory against a populist opponent last year, the costs as well as the benefits of Nafta are evident.

Mr Calderon desperately wants an immigration deal with the US to improve the rights of the millions of Mexican immigrants who have flooded across the border for a better life, despite the promise of Nafta.

But despite Mr Bush's efforts, the US Congress rejected his immigration reform plans.

At home, Mr Calderon also faces opposition from farmers to the imminent opening-up of the politically sensitive maize sector to corn imports from the US, which, it is feared, could wipe out the livelihood of many in rural areas…

Even in Canada, which has gained enormously from being able to export its raw materials freely to the US, there is frustration over the aggressive US enforcement of the trade deal.

One point of friction has been Canada's exports of softwood timber to the US housing market.

The US has long claimed that the Canadian government, which owns much of the land on which the timber was harvested, was giving its firms an unfair subsidy by not charging them enough for the right to cut down the trees.

Despite several rulings in both Nafta and the World Trade Organisation, the US has continued to pursue the matter for several years, and it is now likely to go to another arbitration court.

Canadians are worried about growing protectionist pressures in the US, and their mood has not been improved by the tight security regulations implemented in regard to cross-border travel.

Next we have the CanWest News Service on the preparations being made to isolate protesters, although some clashes have already occurred. Despite the best laid plans, I predict a riot:

The last time prime ministers and presidents gathered at Chateau Montebello, black-masked anti-globalization protesters were unheard of at international summits and the horrors of 9-11 were still 20 years in the future.

Even so, 2,000 Mounties formed a human chain around the west Quebec hotel were Pierre Trudeau, Ronald Reagan, Margaret Thatcher and other leaders met for the July 1981 G7 summit. More than 100 Quebec provincial police officers kept watch over area roads, and cars couldn't park alongside the highway into the village of Montebello for five kilometres in either direction. Ontario provincial police patrolled the opposite bank of the adjacent Ottawa River.

Rooftop snipers, police boats and military scuba divers guarded the hotel, which was booked entirely by the federal government for $350,000. More than 20 Canadian Forces helicopters ferried the leaders between the summit and Ottawa -- except former president Reagan, who used a U.S. marine chopper.

Protesters aghast at the spectre of continental integration can expect even tighter security this time when Prime Minister Stephen Harper, U.S. President George W. Bush and Mexican President Felipe Calderon arrive Monday for their North American leaders summit.

They've been told to expect two protest areas east and west of the hotel property to hold 2,000 people. Plenty of trees and fencing will separate them from the proceedings, although a live video feed will allow the leaders to see and hear the protests -- if they want.

Striking a balance between the right to protest near a meeting site and the sobering realities of a post-9-11 world remains thorny for police and security officials in western societies.

Between 1997 and 2001, there were violent anti-globalization protests in Vancouver, Seattle, Genoa and Quebec City, infernos of Molotov cocktails, pepper spray and balaclavas that are all too recent for those charged with maintaining order at Monday's summit.

Police "want complete control or else the job is considered a failure," said Willem de Lint, a University of Windsor sociology professor who studies protest policing. "They want all the contingencies to be accounted for. And that's how they're evaluated."

The Canadian government once again booked the entire 211-room resort for four days, according to general manager Werner Sapp. Only a few pre-registered guests had to be rescheduled.

"For us, it's an event like any other," Sapp said last month.

Protesters initially expected a 25-kilometre security perimeter around the village, with checkpoints turning away vehicles with more than five passengers. However, RCMP Cpl. Sylvain L'Heureux said no such plans are in place. Instead, a temporary reinforced fence is being installed near the permanent barrier that already surrounds the resort. The Quebec police force will also establish a 2.1-kilometre zone around the hotel.

Even so, government officials say they want to ensure that summit participants can hear dissident voices without endangering their security. A four-year inquiry by Saskatchewan judge Ted Hughes into police behaviour at the raucous 1997 Asia-Pacific summit in Vancouver concluded that the RCMP must ensure that demonstrators can "see and be seen" by decision-makers.

As at the 2002 G8 summit in Kananaskis, Alta., a video feed showing protesters will be streamed into the summit.

Police have themselves tried to be seen through a series of public information sessions about summit security and tips for residents and business owners.

More than 150 people filed into a scorching gymnasium at Ecole St-Michel on Aug. 1 to hear from police and government speakers about road closures and business compensation. They were told that Montebello's main thoroughfare could be completely closed if demonstrations turn tense or threaten to overwhelm the village and police.

"We don't intend to close the roads at all unless they're being blocked by protesters," said Const. Melanie Larouche of the Quebec police, the force responsible for potential roadblocks and checkpoints.

The RCMP's strategic decisions are based on intelligence and meetings with protesting groups. In 2001, the force created a public order program to train officers in the handling of large demonstrations and to share intelligence and crowd-control techniques with other police agencies.

Community liaison programs and dialogue with protesters have become commonplace for police over the past 15 years. And the Internet teems with websites, message boards and social networking platforms that shed light on protest organizers and their goals. That cyber-information is instantaneous for officers on the ground with modern technology, de Lint said.

Still, tension between police and protesters has already bubbled to the surface.

Two leaders of the PGA Bloc protest group were arrested last week after a demonstration in Ottawa, sparking angry words from supporters. And controversy erupted in July when the Council of Canadians' planned summit event at a community centre six kilometres west of Montebello was cancelled. A municipal official told the group the centre was needed for security operations.

The protest areas surrounding the hotel property will likely draw comparisons to the "free speech zone" that made headlines during the 2004 Democratic national convention in Boston.

That 8,500-square-metre area, ridiculed as a "protest pen," was set between a parking lot and trailers, underneath abandoned train tracks, and surrounded by barbed wire and plastic tarp. A federal judge grudgingly denied a First Amendment appeal by protesters to dismantle the protest zone, calling the realities of post-9-11 security "irretrievably sad."

Neither designated protest areas nor event cancellations are new methods, de Lint said. During international summits in Windsor, Ont., and Quebec City, police cancelled hotel reservations and pressured campground owners to reject certain visitors.

"The protesters would prefer to have some kind of controversy, or else there's not much to report and the demonstration in a sense fails outside of the solidarity that can be built," de Lint said.

Although the Chateau Montebello compound is enclosed, rural settings generally present special challenges for police. More private property equals less public space for authorities to block off.

In 1981, local residents were told to expect 15,000 tourists, journalists and gawkers for the three-day G7 meeting - the largest largest security operation in the country's history to that point, with a price tag of $10 million.

In the end, about 2,300 officials and journalists tagged along.

What Would Trichet Do?

The ECB's President Jean-Claude Trichet faces a quandary when he chairs that body's next meeting on September 6. Previously, the ECB had telegraphed to the markets that it would raise the Eurozone's target rate from 4.00% to a likely 4.25%. With all the commotion going on in global markets over the spreading US subprime issue, though, a raise may no longer be such a sure thing. Another consideration is that European economies aren't exactly "decoupling" from the US slowdown as many had predicted earlier. EU economies are noticeably slowing down and may slow even further with an untimely rate rise. Be reminded that the question raised here, however, is not whether Trichet will pull another Bernanke put (rate cut) but whether the ECB will raise rates. From the Wall Street Journal:

The world's central banks are flying blind in a way they have rarely had to before as they try to secure the global financial system amid the current credit scare.

On the morning of Aug. 9, when the European Central Bank's executive board decided to pump cash into a market in which commercial bank loans were suddenly drying up, it took the bold step of telling banks they could have as much money as they wanted at the bank's current 4% base rate -- without limit. The bank had never done that before.

It was a big gamble and a key test for a young institution that, in the past, has been accused of moving too slowly and conservatively. Now, some wonder whether the ECB will make another bold move and back away from its previously signaled decision to increase interest rates at its next meeting on Sept. 6 -- a move now complicated by the Fed's surprise decision Friday to cut the U.S. discount rate by half a percentage point.

The ECB has been at the front of a global liquidity infusion that's seen central banks around the world inject billions into the financial system since the credit crunch emanating from fears about the subprime-loan market hit euro-zone money markets this month. On Friday, the central banks of Russia and Kazakhstan intervened to prop up domestic money markets hit by a liquidity squeeze. Russia's central bank injected 42.4 billion rubles ($1.64 billion) into its money market.

The cash injections are nothing new for the world's monetary policy makers. In the past, the ECB and other central banks have also staged major interventions to help markets when liquidity got tight -- most significantly after the Sept. 11, 2001, terrorist attacks. But never before had the ECB told banks ahead of time the sums available were unlimited. The reason for the change: This time, as former Defense Secretary Donald Rumsfeld once put it, they knew what they didn't know.

In the current crisis, banks have been spooked by the fact they don't know who is guaranteeing bad debt from the U.S. subprime-mortgage market: These days, banks routinely lay off risk through complex and opaque investment instruments. For the ECB, the best way to figure out how much money it would take to ease euro-zone banks' nerves was to let them take what they wanted.

The banks wanted a lot. In the Aug. 9 move, the ECB gave nearly €95 billion ($127.45 billion) to 49 bidders, in a loan that needed to be repaid the next day. In the days that followed, the ECB kept injecting short-term funds. But with a clearer idea of just how much cash the market needed to keep functioning the bank was able to decide when to turn off the spigot, showing it was both willing to help the markets and in control of the situation. By early this past week, overnight rates were back to normal, around 4%.

ECB staff recognize that this is a defining moment for a very young bank. The ECB, which manages monetary policy for the 13 countries that share the euro currency, was founded on June 1, 1998. Its unexpected intervention swept aside longstanding accusations of conservatism. It also heralds the new reality of a globalized financial system that has become so complex that locating risk -- even for central bankers with reams of market information at their fingertips -- has become more art than science.

"It was exemplary central banking," says Erik Nielsen, senior European economist with Goldman Sachs in London. French President Nicolas Sarkozy, who has long challenged the ECB to focus on jobs and growth rather than just inflation, also commended the bank's actions in a letter on Thursday urging G-7 leaders to focus on finding ways to locate where risk lies in the financial system.

To be sure, not everyone thinks the ECB's dramatic move was such a good idea. Immediately after it announced it would make unlimited funds available to the markets, many investors panicked, assuming the ECB had inside knowledge of a pending crisis.

Other critics note the bank's decision to offer unlimited funds at a cost no higher than the going rate risked creating a so-called moral hazard, encouraging banks to keep taking the kinds of risks that helped to start the subprime crisis to begin with.

"Central banks are responsible for financial stability today as well as tomorrow," said Paul de Grauwe, economics professor at the Catholic University of Leuven, in Belgium. He said the ECB "maintained stability today, but created instability for the future." He thinks the ECB should have made banks pay a higher interest rate for the funds it injected.

SkypeOut (Literally Out)

If you are a Skype user--and there are legions of us out there--you are undoubtedly familiar with the SkypeOut feature of the service which enables calls not just to other Skype users but also to land lines and mobile phones. [As an aside, I prefer VoIP Stunt for computer-to-landline or cellphone calls--it's less expensive for my purposes and has better audio quality.] Yesterday, Skype had another sort of "SkypeOut" as the service went down for the entire day. The problem that the Financial Times identifies here is that many users have become used to Skype as a handy tool for business communications and the outage may have affected commerce. IMHO, the FT makes too much of this issue. If you rely on VoIP to communicate, you probably have the phone numbers of your counterparts or another service aside from Skype like VoIP Stunt:

Engineers at Skype, the internet-based telephone and message service, appeared to have solved a software problem on Friday that had shut down the system for more than 24 hours and left many of its 220m customers without service.

The Luxembourg-based company, owned by eBay, the online auction company, attempted to reassure its customers and blamed the problem, which prevented many users signing on to the service, on a software glitch rather than a cyber attack.

“The Skype system has not crashed or been victim of a cyber attack,” the company said in an online blog.

“This problem occurred because of a deficiency in an algorithm within Skype networking software. This controls the interaction between the user’s own Skype client and the rest of the Skype network.”

Nevertheless, the prolonged outage drew widespread comments from users and industry analysts, who cautioned that it highlighted the dangers, particularly for business users, of relying on a single service provider – especially one using relatively untested voice over internet protocol (VoIP) technology.

Industry experts believe the problems at Skype were specific to its service. However, some analysts speculated that Skype’s problems, coupled with the legal problems of Vonage, the leading US independent VoIP provider, and the failure of SunRocket, another internet telephony company, could undermine confidence in internet protocol communications as a whole and encourage users to return to more traditional telecoms carriers.

Mark Main, a senior analyst at Ovum, the European telecoms consultancy, said: “There is still a danger that services designed to be highly disruptive to traditional telecoms business models have been developed without sufficient regard for resilience, something we have been saying since consumer VoIP came to the fore during 2003.

“Telecoms engineering is no different to any other product development – there is always a commercial penalty to pay by compromising reliability or quality. You still broadly get what you pay for in telecoms,” he said.

Mr Main said Skype had grown rapidly, partly because of its low cost and simplicity.

“The bottom line is that while Skype is now a well established service, it has largely flourished through its simplicity, good enough quality/reliability, and user-endorsement.

“Skype will need to work hard to make this outage event a one-off or its loyal user base could be enticed away by other VoIP offerings. There is plenty of choice.”

Robert Mugabe, "Come as You Are"

There's a flurry of recent news on Robert Mugabe, under whose leadership Zimbabwe is now faced with widespread migration out of the country and Weimar Republic-style inflation. The first follows up on a op-ed in the Financial Times by Malcolm Rifkind calling for the UK to boycott the upcoming AU-EU summit in Portugal should Mugabe be allowed to attend. It appears that the Portugese do not share the same sentiment and will let Mugabe come. From Zimbabwe's News 24:

The Zimbabwean government on Friday welcomed Portugal's decision not to ban President Robert Mugabe from an EU-Africa summit in Lisbon in December despite European Union sanctions against him.

"We have got no problems with Portugal. It had no reason to deny President Robert Mugabe entry (into Portugal)," said Zimbabwe's Deputy Information Minister, Bright Matonga in reaction to Lisbon's decision.

"The message is very clear, they cannot isolate Africa as they used to do, divide and rule. That is why they cannot stop President Mugabe from going to Portugal," Matonga said.

"Africa is now united, what affects one member state has an impact on the whole continent," he said.

Earlier on Friday, Portugal's Deputy Foreign Minister Joao Gomes Cravinho, speaking from the Lusaka summit of southern African leaders, told the LUSA news agency that Lisbon "has no intention of discriminating" against Zimbabwe.

"It is not up to Portugal, current head of the EU, to invite some people rather than others," he said.

The 83-year-old Mugabe is officially barred from travelling to the 27 nations in the EU, and Britain in particular is keen on maintaining the ban.

The issue has hampered efforts to organise a second summit between the European Union and African states. The first was held in Cairo in 2000.

This rather simplistic refrain of "African unity" seems to be a common one nowadays among African leaders. They are seeing Robert Mugabe as one of their own, likely in contrast to the dreaded Europeans who were, of course, colonizers not so long ago. Mugabe seems to be playing this card very well as a recent meeting of African leaders yielded virtually no criticism of him or the goings-on in Zimbabwe:

Southern African leaders are putting no public pressure on Zimbabwe's President Robert Mugabe to solve his country's dire political and economic crises.

After a two-day conference in Zambia's capital, Lusaka, delegates said only that they welcomed "progress" in talks between Zimbabwe's rival politicians.

The US called on the region's leaders to "press vigorously" for an end to the country's "man-made crisis".

Inflation stands at about 4,500% in Zimbabwe and food shortages are common.

Increasing numbers of Zimbabweans are fleeing to neighbouring countries, leading some analysts to suggest that the Southern African Development Community (SADC) summit would put pressure on Mr Mugabe.

But the communique issued at the end of the conference made no mention of the country's economic problems.

Instead, the declaration welcomed efforts by South Africa's President Thabo Mbeki to mediate between Mr Mugabe's ruling Zanu-PF party, and the opposition Movement for Democratic Change (MDC).

It called on both sides to "expedite the process of negotiations and conclude the work as soon as possible" so that Zimbabwe's elections, planned for March next year, could be "held in an atmosphere of peace".

But MDC officials, who were lobbying in Lusaka, said Mr Mbeki was moving too slowly.

After the conference Zambia's President Levy Mwanawasa, who has previously compared Zimbabwe to a "sinking Titanic", played down the crisis facing the country.

"We also feel that the problems in Zimbabwe have been exaggerated. We feel they will solve their economic problems," he said.

He added that Zimbabwe's current voting laws were "valid to enable free and fair elections".

Earlier, Zimbabwe's justice minister had told the summit that no political reforms were needed in Zimbabwe.

"Political reform is not necessary in my country because we are a democracy like any other democracy in the world," Patrick Chinamasa said, Reuters news agency reports.

But the US state department said Mr Mugabe's government had not shown any commitment to a democratic, prosperous Zimbabwe.

"Its obstructive actions, such as lack of participation in scheduled talks and statements arguing against the need for mediation, have undermined this important initiative," spokesman Sean McCormack said.

"Moreover, we deplore the Mugabe regime's continued acts of oppression against all segments of society."

And don't forget about Mugabe's Chinese friends. He may be appalling, but Mugabe hasn't exactly stayed in power for so long by not being adept at playing the game of international politics. A modicum of support from some combined with widespread apathy by others add up to one big crisis in Zimbabwe.

Bernanke's Helicopter Drop Cometh

Well, well, well, it seems that B-B-B-Bennie of the Feds has begun to put into operation the long-rumored "helicopter drop" he alluded to in an earlier speech. The Federal Reserve has decided to cut the discount rate--the rate at which regional Fed banks lend to financial institutions to cover their reserve requirements--from 6.25% to 5.75%. To me, there is no mystery here. Financial institutions that have been behaving badly by engaging in all sorts of subprime and private-equity tomfoolery are being bailed out by the Fed. Talk about rewarding poor behavior; the Greenspan put has morphed into the Bernanke put. Meet the new boss, same as the old boss. As I've mentioned (see my sixth point), the subprime mess offers precious few lessons.

Just a few days ago, the Economist lauded Bernanke for standing pat on interest rates at the most recent Federal Reserve Open Market Committee (FOMC) meeting and not giving in to pressures to cut rates. I guess it's IPE Zone 1, Economist 0 (for now). Have a chuckle here:

Call Ben Bernanke easy and he might slap your face. The chief of the Federal Reserve and his colleagues left America’s benchmark interest rate unchanged at 5.25% [the federal funds rate at which commercial banks lend to each other, not the discount rate at which the regional Feds lend] after meeting on Tuesday August 7th. America’s rate-setters gave little indication that they were minded to cut rates any time soon. The Fed acknowledged that financial markets had been volatile, credit conditions had tightened and core inflation had “improved modestly”. But it stressed that the economy was still on course for moderate growth, albeit with greater downside risks, and that inflation remains the main policy concern...

The Fed is rightly reluctant to signal rate cuts at the first sign of turbulence in the markets. An institution that has been criticised for not tightening more aggressively during the housing boom should not want to encourage excessive risk-taking now. Inflation, if it shoves up interest rates, is arguably the biggest worry for a debt-laden economy, although concern about the impact of the housing downturn is growing. Deepening economic gloom may well mean interest-rate cuts will prove necessary to arrest a sharper downturn. But for now, Mr Bernanke is right to play hard to get.

UPDATE: I hate to gloat, but it seems even BusinessWeek was portraying ol' Helicopter Ben as an inflation hawk, a pillar of confidence, etc:

Cool, calm, and collected, Federal Reserve Chairman Ben Bernanke is driving Wall Street batty. When traders scream about a recessionary "credit crunch," the former professor acknowledges their concerns but predicts continued economic growth. When they plead for easier money, Bernanke and his fellow rate-setters firmly hold the line. "Scandalous," sputtered one North Carolina market strategist. Jim Cramer, the TV stockpicker, nearly melted in a pool of his own sweat on a recent program, saying Bernanke must flood the system with money to stop financial Armageddon. Shouted Cramer: "He has no idea how bad it is out there!"

The Street may be dismayed by Bernanke's sangfroid, but it shouldn't be surprised. This is exactly the kind of policy that Bernanke has spent his entire career arguing for. At Princeton University, where Bernanke taught from 1985 to 2002, he said central bankers should avoid getting caught up in the gyrations of the financial markets and focus instead on measures of the real economy, such as growth and inflation. He said the Fed should set a target rate for inflation and then steer monetary policy to hit that target—an approach that would change central bankers from financial demigods into something more like engineers...

Decoding Hedge Fund Euphemisms

Whew, it's been a topsy-turvy week in the financial markets with all sorts of debt-fueled shenanigans coming undone. (More turvy than topsy, IMHO.) Since it's Friday, I figured that we could all use a lighthearted look at the goings-on in the sometimes confusing world of high finance. Luckily, author/columnist/humorist Daniel Gross has a pretty entertaining feature for us here on the terminology adopted by hedge funds in describing recent market turmoil. Ah, the euphemisms they employ when all they really mean to say is "we're losing money":

In these days of market volatility, hedge-fund managers and executives at all types of money management firms have been forced to explain why their funds are shutting down, losing money hand over fist, and freezing investors' funds. When they do so, however, they frequently lapse into a strange euphemistic dialect. And so we thought it would be helpful to provide a handy Hedgie-English glossary.

Hedge-Fund Phrase: Challenging
Translation: Run for the hills!
Hedge-fund managers never piss away money. They just face challenges. "We sincerely appreciate your patience and understanding during this challenging period," Jeffrey Larson, founder of Sowood Capital, told investors last month, as he explained why the $3 billion hedge fund, having lost half its capital, was selling off its remaining positions and closing up shop. As two of its large hedge funds that invested in mortgage-backed securities were going down, Bear Stearns CEO James Cayne told investors that "the sub-prime mortgage market has been challenging for a number of months." More recently, Monday's Wall Street Journal quoted giant asset manager Barclays as saying that performance in its 32 Capital Fund had been "challenging."

Hedge-Fund Phrase: Unprecedented, unique circumstances
Translation: Stuff happens. But we had no clue.
Anyone who read the best seller The Black Swan knows that random geopolitical, financial, and economic events can cause the prices of assets to move in ways that defy history and sophisticated computer models. But it comes as a shock to the brightest minds on Wall Street, especially those who run quantitative-based funds. "Wednesday is the type of day people will remember in quant-land for a very long time," Matthew Rothman, head of quantitative equity strategies for Lehman Brothers told the Wall Street Journal last week. "Events that models only predicted would happen once in 10,000 years happened every day for three days." Strangely, these same models failed to predict the once-in-10,000-year events that roiled the markets in 1997, 1998, 2001, and 2002.

Hedge-Fund Phrase: Market volatility has produced unfair, unrealistic prices.
Translation: The market is efficient only when it works in our favor.
Several money managers blamed their temporary problems on investors' irrational collective behavior. "Investor fear has overtaken reason and has induced a period in which most securities have simply ceased to trade," said Sentinel Management, which sought to halt redemptions of some of its funds this week. And such conditions make it "virtually impossible to properly price securities or to trade them." Goldman Sachs CFO David Viniar noted that the firm's decision to inject $2 billion into its ailing Global Equity Opportunities fund "reflects our collective belief that the value of this fund is suffering from a market dislocation that does not reflect the fundamental value of the fund's positions." In other words, the losses shown by these funds isn't the fault of the managers, it's the fault of a market that just won't value assets properly. Ironically, you never hear fund managers say that their gains have been unwarrantedly large due to the market's failure to reflect stocks' fundamental value.

Hedge-Fund Phrase: Our results were affected by the selling behavior of other firms.
Translation: We made the same dumb trades as everyone else.
"We have been caught in what appears to be a large wave of de-leveraging on the part of quantitative long/short hedge funds,'' James Simons of Renaissance Technologies said in a letter to investors last week, which sought to explain losses in his highly regarded hedge fund. He also noted that the methodology used by his fund was "undoubtedly shared by a number of long/short hedge funds." Goldman Sachs similarly blamed other funds' behavior for its own losses. Of course, the premise of high-end money management is that you don't simply mimic the same investment strategy of 30 other hedge funds. That why Simons was paid $1.7 billion in 2006 (article purchase required).

Hedge-Fund Phrase: We just want to protect investors.
Translation: We just want to cover our butts.
Declining performance frequently leads investors to withdraw their funds, which can, in turn, force hedge funds to sell securities to raise cash. To forestall the ensuing death spiral, funds sometimes lock the door. French bank BNP Paribas last week froze redemptions of three funds that held mortgage-backed securities. BNP said it was limiting the liberté of its investors for the sake of protecting the Gallic virtues of égalité and fraternité. Locking up the funds temporarily is the best way "to protect the interests and ensure the equal treatment of our investors." Sentinel used the classic American trope of aligning the interests of the owners with those of the shareholders. "We don't believe it is in anyone's best interest if a run on Sentinel took place and we were in a forced liquidation mode."

Hedge-Fund Phrase: This isn't a rescue.
Translation: THIS IS TOTALLY A RESCUE!!!!!!!
Goldman Sachs' GEO fund lost 30 percent of its value in a week and was leveraged at a rate of 6-to-1. But to hear Goldman tell it, the cratering of its own fund simply presented an irresistible buying opportunity. "We are investing not because we have to, but because we want to," said Viniar during a conference call. At another point, he noted: "No, let me just clarify. This is not a rescue." And if you believe that, I've got some subprime debt I'd like to sell you.

Invest in Water, a Very Liquid Asset

Is water the new crude oil? Newsweek has yet another informative article on how the global investment community is putting up large stakes in businesses which address one of the most pressing issues of our time--the lack of water. As the likes of China and India move up the development ladder, they will require more water to keep up with consumer and industrial demand:

The new oil may be water. According to Global Water Intelligence, a U.K. consultancy, by December total assets under management in water funds could hit a record $20 billion this year, a 53 percent increase from 12 months earlier. No wonder: since 2001, shares in glob-al water companies have gone up 150 percent, according to Thomson Financial. That compares with a 50 percent rise in international blue chips.

The reason is simple: there is profit in scarcity. Buffeted by constant news of dying rivers, droughts and water shortages from China to Mexico, investors are increasingly aware that water is a threatened resource. With more and more governments handing public water systems over to the big multinationals like the U.K.'s Veolia Environnement and Thames Water, profits are rising. One of the top companies, France's Suez, saw global sales from its water unit increase 11.7 percent, helped by a 20.3 percent rise in revenue from China. These days, savvy asset-management companies have turned water-shortage anxieties into a burgeoning investment-fund business. Like the rest of the market, water stocks have fallen recently, but a lot less than, say, U.S. equities. While the Standard & Poor's index plunged by a tenth in the last few weeks, shares in global water companies are down only about 3 percent, helped by international business exposure and the view that cash-generating utilities businesses are a good defense in a downturn.

This year, much of the new money pouring into water funds is coming from Asia, where ethical investing is very new. It may also simply be that Asia is the only developing region that has a combination of remarkably acute water crises and particularly rapid growth, creating a new crop of investors who are intimately familiar with the water threat. Only seven months into 2007, there are now 27 international water funds, more than double the number compared with 2006. Of the 15 new products, nine target Asian investors in Hong Kong, Seoul, Tokyo and Sydney. Since April, when Société Générale's Lyxor Asset Management unit began inundating Hong Kong with ads touting its new water fund, it has raised $320 million from mom-and-pop investors alone, well beyond its expectations.

The price of any company's stock reflects its estimated future earnings, and the potential to make money fixing water problems is huge. In developing markets where affluence is growing, and hundreds of millions of people are set to move from rural to urban areas, water resources are under assault. The Chinese government estimates that demand will increase by 120 percent in the next 25 years, while in India, urban water needs will rise 100 percent in the coming two decades. "We see a combination of exploding demand for water per capita, growing scarcity of supply and massive pollution,'' says Anthony Wilkinson, co-principal of the CLSA Clean Water Asia Fund, which started in May, and invests most of its money in Asia-listed companies.

For major water-treatment specialists, the biggest new projects are in China. Some 1,000 wastewater plants are to be built over the next five years, as the government has pledged more than $125 billion to address the natural-resource shortage. Hundreds of billions more are expected to come from the private sector. A recent report from Macquarie, the investment bank, pegged earnings growth for Singapore-listed water-treatment companies like Epure and Hyflux, which target the China market, at between 37 and 40 percent over the next three years.

The hottest investment bets include companies engaged in desalination, recycling or infrastructure, which have the highest margins and potential profit growth. Utilities are less attractive, because water prices anywhere are usually regulated by the government and not subject to market conditions. Dieter Küffer, a senior portfolio manager with Sustainable Asset Management in Zurich—which has the second biggest water fund in the world, worth $1.6 billion—says: "We think earnings growth in water stocks overall will be 14 percent over the next five years, and Asian water-stock growth will be 50 to 100 percent.''

Investors pouring money into water funds may find, as they say in China, double happiness. The stocks themselves have had a good run. But investing in sustainability may have a larger payoff. Many economists now see environmental issues as the biggest stumbling block to continued fast growth in Asia. Already, Beijing estimates economic losses due to water shortages at $25 billion a year. Investors buying into liquid assets could help secure Asia's larger economic future.

World Bank's Megadams, Reloaded

The World Bank has taken a lot of flak from NGOs such as environmental advocacy groups over the years for its large damming projects. These large dams have been accused of (1) forcing the resettlement of local people, (2) disrupting local ecosystems, and (3) favoring the interests of construction firms over those of the impoverished. It is a challenging balancing act: yes, those aformentioned concerns are real, but so are water shortages in various parts of the world--particularly Asia. What to do? Even today, the battle still rages. For instance, the Sardar Sarovar project in India continues to be a sore point of contention between NGOs and the World Bank. Despite the Bank having lessened its involvement in the project, it was instrumental in its start-up.

Now, we have news that the World Bank is once again wading into the "megadams" arena, this time with a $1.4B project in Laos called Nam Theun 2 on the Mekong River. To lessen potential criticism of the Bank, it has been more active in approaching concerned stakeholders about minimizing deleterious effects of "megadams," though NGOs are still wary:

Dam projects in poor countries tend to wreak havoc on the communities they displace. But the $1.4 billion Nam Theun 2 dam in central Laos is a different story. Piu, a smallholder in her 30s, moved in May to a village built for some of the 1,200 families displaced by the project, scheduled for completion in 2009. "It's very beautiful," she says. Nearby, workmen finish neighboring units—wooden homes on stilts with a traditional feel.

The justification for NT2, like that for many big infrastructure projects, is to lift the locals out of poverty. Indeed, the dam's electricity will be a boon: over the next quarter century, developers expect to bring in $2 billion, paying for the dam and much-needed economic development. But unlike dams elsewhere, NT2 may represent a new generation of massive World Bank projects. Prompted by a growing awareness of the impact that megadevelopments can have, the Bank now attaches strict conditions to its aid. "It used to be accepted that some would have to lose so that the majority could benefit. But now we're asking whether anyone has to lose," says Chaohua Zhang, who oversees NT2's social and environmental projects.

As for displaced families, the World Bank and the Laotian government promise to double their incomes within four years. And where villages have been moved, communities have been kept together, transported nearby and given a role in designing their new homes. Those efforts are accompanied by new environmental protections. "We had 80 or 90 percent participation in the decision making," says Ontaa Kaakaeson, a village headman.

Bank officials say the NT2 project is the beginning of a broad trend. "The environmental and social policies we're imposing here are broadly applicable ... whether it be irrigation, ports, roads or major urban development," says Stephen Lintner, an adviser to the Bank on safeguards.

The project has its doubters: dozens of NGOs chided the Bank for not adopting even more demanding standards. But World Bank support helped keep NT2 from running to the financiers of the Merowe dam in Sudan, where, in April, 3 protesters were killed and 50 wounded.

There's a lot riding on NT2. Laos needs the boost to its economy and its human-rights credentials. The World Bank wants to prove that kinder, gentler megaprojects are possible. And advocates think it's a way to make the Bank more accountable to the locals. "The World Bank has put itself in a situation where they've given us standards to hold them to," says one. "If they fail, there will be no hiding the fact."

Daddy, is the Carry Trade a Goner?

As markets worldwide swoon like teenyboppers at an Elvis concert due to the realization that risk exists after with the US subprime contagion spreading to parts unknown, one of the favorite leveraged plays is quickly fading. The underlying mechanics of the so-called "carry trade" are not difficult to understand: Borrow in a low-yielding currency like the Japanese yen whose O/N (overnight) rate is 0.50%, convert the proceeds then lend in a high-yielding currency like the Australian dollar (AUD yielding 6.50%) or better yet the New Zealand dollar (NZD yielding 8.25%). Although it depends on the actual borrowing and lending rates you obtain, you'd pocket about (6.50%-0.50%=6.00%) on the Aussie carry trade or (8.25%-0.50%=7.75%) on the Kiwi carry trade--assuming that the AUD/JPY or NZD/JPY exchange rate keeps steady. If these currencies strengthen against the Japanese yen, then you earn more off FX gains.

Conversely, there is always a danger, underappreciated perhaps in recent times, that the AUD or NZD can weaken against the JPY. If these decline more than 6.00% (AUD) or 7.75% (NZD) respectively against the yen, then the interest rate carry would be more than negated by FX losses. The subprime crisis is putting trades of this sort under duress as risk is being reassessed. The JPY is quickly strengthening and the AUD and NZD quickly weakening as speculators fear this scenario of losing whatever possible interest rate carry because of FX losses. Have a look below at this six-month daily chart for AUD/JPY (click for larger image). As you can see, this trade has undergone a major "correction" (I just love that term: if markets undergo "correction," doesn't that imply they were "wrong" to begin with to go up by so much?) Also, notice that the relative strength indicator (RSI)--whose overbought and oversold levels are set at 70 and 30 respectively here--is at a way oversold level of 19.30. Talk about everyone heading for the exits of the carry trade at the same time, especially today with that long, long downward line. Everybody is flooding out of AUD/JPY because the drop in this price is already -6.2% so far today alone--which is of course greater than the interest rate carry of 6.00%:

Even the plain old NZD/USD (not NZD/JPY) is heading south in a hurry. Being a hardcore US dollar bear, I read the dollar's recent strength in the wake of the subprime crisis as not a sign of the dollar being a "safe haven" in times of trouble. If the dollar is a "safe haven," downtown Baghdad is a "zone of tranquility." Rather, hedge funds and other speculators have been forced to cough up dollars to cover margin calls and to pay off creditors who've suddenly become wary of high finance shenanigans like the carry trade. Thus, they have had to call in their chips from abroad. In time, the structural weaknesses of the United States and its dollar will inevitably return:
Unless you are a speculator, this development is a good one. The yen has been wildly distorted by the dastardly carry trade for so long. The Japanese macro picture never justified such a weak yen priced in the 118-121 range. May it head below 110. Sorry, you carry trading speculators and hedge funds. You've had your fun, but this party looks like it's over.

Higher Education: A Global Contest

Pardon me for my seemingly boundless interest in the globalization of higher education. As a doctoral candidate about to finish up, I am of course interested in possibly pursuing an academic career. Whereas before aspiring young academics would look to build a career in the traditional powerhouses of America and Western Europe (I have studied and taught in both places), the possibilities are much broader now. Canada and Australia offer first-rank universities, and Asian universities with money to burn are now appearing on the global scene in Singapore, Hong Kong, and India. It's certainly an exciting time for this mobile would-be academic.

Surprisingly, however, there has not been much academic research done on international higher education, and I intend to do more research into this most interesting area. Given all the sermons you hear from economists about the importance of education in development and even international "competitiveness," it is a growth area. It also concerns governments pushing their universities' interests in attracting big-spending foreign students to their shores. Of course, international education is big money. To attract donors and students, you need to have exceptional facilities and professors. Of course, these things do not come cheap. Fortunately for us, Newsweek has not been slacking off on the job of tracking the evolution of international higher education like, well, higher education (how embarrassing). Last year, Newsweek featured a series of articles [1, 2, 3, 4] on the topic and the current issue also contains more [1, 2, 3, 4]. Below is the quite comprehensive lead feature:

It looks like a rock video. as techno music pounds in the background, attractive young Asians break-dance, play guitar and pump their fists in the air. Yet this is no dance track. It's an ad: part of the U.S. government's new campaign to attract Chinese students to U.S. colleges and universities. The video—which has been shown to more than 180 million Chinese TV viewers since November—also features students taking notes in class, playing in a marching band and cheerleading. The message: America loves Chinese students. It's the first time in history that Washington has actively marketed its education system overseas, says Frank Lavin, U.S. secretary for international trade, who is heading the campaign. "Attracting the best students from around the world is more competitive than ever," explains Lavin, "So we are making a special effort to reach out."

They're not the only ones. The days are long gone when the world's best schools—Harvard and Yale, Cambridge and Oxford—could rest on their laurels and expect the best students to come to them. Today, a variety of trends are utterly reshaping the educational landscape. Governments across the globe, especially in China and India, are pouring unprecedented sums into building and improving their universities, and are spending millions more selling them abroad. Europe is unifying its fractured system to make it more attractive. Private universities are springing up where they never existed, throughout developing nations. The stakes in the ever-tightening race could not be higher: with the numbers of internationally-minded students growing exponentially, schools and nations must do all they can to lure them in—both for economic and intellectual reasons. State funding for education is falling in many places, making those fee-paying foreigners look ever more attractive. And importing intellectual capital—or fighting brain drain—can pay off richly.

Ultimately, the winners in the new global education race will be those countries with institutions that are the most international at every level. They will boast multicultural student bodies, elite foreign campuses, offer internationally recognized degrees and, no matter where they're based, will teach in English—still very much the global language of business, research and technology.

For the moment, the United States remains the undisputed world leader, consistently occupying about half the spots in most global rankings of the top 100 universities. But it was also the United States that helped the competition grow so fierce. The attacks of September 11 led to tighter student-visa restrictions—and a widespread feeling that the United States no longer welcomed foreigners. The problem was compounded by a drop in government funding for public universities, weakening second-tier schools. In the three years following September 11, international student enrollment in the United States dropped by up to 2.4 percent a year—the first such losses in 32 years.

Now, however, the United States is rebounding. It's an important comeback: providing higher education to foreign students generated more than $14 billion for the U.S. economy in tuition and living expenses last year alone.

But although the raw numbers are up, some of the changes seem set to stick, and a multipolar educational world looks likely to be the new norm. The proof: America's share of the fast-growing pie of international students—more than 2.5 million people study overseas today—is shrinking. Among the top six host countries, the United States experienced the weakest growth between 2000 and 2005, pulling in just 17 percent more students over that period, compared with 81 percent in France and 108 percent in Japan, according to a recent report from the American Council on Education. In total, America's market share of international students dropped from more than a quarter in 2000 to one fifth in 2004, the latest year for which figures are available.

More evidence of the increased competition today can be found by looking at academia's most prestigious rankings. London's Times Higher Education Supplement (THES) and the Shanghai Jiaotong list are still dominated by Western institutions, with the United States consistently taking eight of the top 10 slots and Britain picking up the remaining two. But beyond the top 10, the rankings are more diverse. "There were no less than 30 different countries represented in our top 200 list this year, and I expect that number to keep growing," says John O'Leary, editor of the THES rankings. Indeed, Beijing University, the National University of Singapore and the University of Tokyo all won top 20 status in the most recent THES ranking.

The best of the challengers are building up their international programs with foreign outposts and joint degree programs. France's famed INSEAD business school, for example, now allows its students to move freely between its French campus and its Singapore location. The international slant has proved such a success that in June, INSEAD launched a joint M.B.A. with China's Tsinghua University.

More and more schools are taking a similar approach. In May, a report by the American Council on Education found that 131 private Indian colleges have established links to foreign universities, and nearly half of Britain's higher-education institutions provide study opportunities in China. Among the dozens of universities with campuses, research labs or partnerships in Singapore are the Massachusetts Institute of Technology, the University of Chicago and Cornell. This internationalization, says the IIE's president, Allan Goodman, is exactly what all universities need to stay competitive. "Campuses should have their own foreign policies," he says, "and require every undergraduate to get a passport instead of a student ID."

Having a physical presence abroad is more important than ever. Asian countries, the biggest exporters of foreign students to the West, are now pouring resources into homegrown schools in a bid to prevent brain drain. Today, China spends an estimated 0.5 of its annual GDP on higher education, but it plans to bring that share up to 4 percent in coming years—a figure higher than both Europe's 1.1 percent and the United States' 2.7 percent. Earlier this year, Malaysia announced its goal of becoming an international education hub with 100,000 foreign students—double today's number—by 2010. To lure the best professors, Singapore's universities are offering salaries competitive with the best U.S. schools; young academics in the city-state can now earn more than $180,000 a year.

To sweeten the deal for students, many of Asia's most cutting-edge institutions have also started offering entire degrees in English. This is threatening one of the greatest advantages enjoyed by the United States and the United Kingdom. Today's youths are often as keen to gain English fluency as a topnotch diploma; indeed, a European Commission report last year found that Europe's "single major disadvantage in the eyes of Asian students is that English is not the universal mother tongue." To improve their attractiveness, many of Asia's universities are, therefore, adopting English. In South Korea, Underwood International College, Korea University and Ewha Womans University all recently created English-only undergraduate programs. Japan's Waseda University has run an English college since 2004. And many of China's top schools, including Beijing University, are increasing their English-language course offerings every year.

These efforts are paying off, as evidenced by the number of new institutions popping up throughout Asia. Consider this: China has expanded its university system so quickly that more than 20 percent of its college-age population now receives tertiary education—up from less than 2 percent a generation ago. Or this: last month India held its first formal meeting, chaired by Nobel laureate Amartya Sen, to plan the $1 billion revival of the country's great ancient university, Nalanda, which was last open in A.D. 1197. "The pace at which China and India are creating higher-education institutions is quite astounding," says Bernd Wachter, director of the Brussels-based Academic Cooperation Association. "And it's not just quantity, it's quality." Indeed, the new institutions are already proving so successful that the EU's commissioner for Education warned in a recent interview that British, French and German universities risk being "overtaken" by those in China and India within a decade if they don't modernize.

To fight back, the world's established homes of higher learning are launching international ad campaigns—something once unthinkable to these venerable institutions. In February, the United States announced that it would spend $1 million to expand its music-video-esque marketing campaign from China to India next year. In Britain, 79 percent of colleges and universities are increasing their marketing and recruitment efforts abroad this year, according to a Universities UK survey released in March. Last month, the French government declared university reform a top priority, vowing to spend €5 billion by 2012 on modernization. In Europe, the much-touted Bologna process promises to standardize higher-education degrees across the entire continent by 2010, giving an internationally recognizable seal of approval to the continent's idiosyncratic diplomas.

Through all these changes, at least one thing has remained constant: the world's biggest name institutions are still everyone's first choice. America's Ivy League universities have huge amounts of cash, and they and Britain's Oxbridge retain huge cachet, which help them continue to procure everything from the finest libraries and laboratories to the best professors and students. "The competition is hotting up, but for the absolute top universities, we can stand tall," says Tim Lankester, president of Oxford's Corpus Christi College, who recently stepped down after three years as the chairman of Oxford's admissions committee. "I don't want to sound complacent, but we offer the best."

But even Britain's best can't compete with the multibillion-dollar treasuries of the Ivy League. At the beginning of this school year, Harvard used its endowment of $28 billion (more than all of Britain's universities combined) to make a move few other schools could afford, announcing that henceforth all students from families making less than $60,000 a year would enjoy a completely free ride. That has made Harvard one of the cheapest options for working- and middle-class students, assuming they can get in, of course.

At the tier just below the very top, however, America and Europe are losing their monopoly on prestigious degrees. "Australia, Canada, Russia and Hong Kong are all higher-education hot spots now," says Catharine Stimpson, dean of New York University. "Everyone wants to be everywhere." And, ultimately, that is exactly where the most successful educational establishments of the future will enable their scholars to be. Get ready for more U.S. students making Beijing home—and more Chinese students cheerleading in Boston.

Invest in North Korea (Really)

I was kind of puzzled to find an article on limited but increasing FDI activity in North Korea while perusing the contents of the latest issue of Newsweek. But no, I am not making this stuff up. Set aside snarky thoughts about a "captive labor force" and a "CSR axil of evil." While inexpensive labor is one of North Korea's potential draws--its wages are significantly lower than those in China--North Korea also offers a well-educated labor force with a touted 99% literacy rate, plentiful untapped natural resources, and a favorable geographic location at the heart of Asian commerce.

North Koreans are not too dissimilar from their South Korean counterparts, and deserve better opportunities than those offered by their Dear Leader. Fortunately, Kim Jong-Il has been forced to (gulp!) liberalize the North Korean economy through both international pressure to discard its moniker as a "hermit kingdom" and domestic pressure for viable local sources of income. What can I say? It's a start despite mind-boggling political risk challenges for foreign investors:

Emerging markets have taken a hit over the past couple of weeks, as global market wobbles have prompted a flight from risk. So it's surprising that North Korea—a country that stretches the very definition of emerging market—has been in the news as a target for foreign investment. For example, Egyptian conglomerate Orascom recently spent $115 million to buy a 50 percent stake in a North Korean cement company. The Egyptians are by no means the only ones piling into Pyongyang these days. Since North Korean dictator Kim Jong Il began a program of pseudo-reforms in July 2002, outside investment has increased from places as diverse as Britain, Germany, South Korea and China.

Pyongyang's announcement a few weeks ago that it had shut down North Korea's sole nuclear plant in order to comply with an aid-for-weapons deal has only increased the buzz among investors, who view the country—so far off the standard investment grid—as beyond the usual emerging-market dynamics. While dicey accounting makes concrete figures hard to come by, the Seoul-based Korea Trade Promotion Corp. puts South Korean investment at $800 million, and Chinese FDI at nearly $135 million and rising fast. Other trade experts say European investment (in areas like gas, pharmaceuticals and manufacturing) is certainly in the tens of millions of euros, if not more.

Small figures, but significant considering the risk profile of the country. Investors are willing to take the bet because "this is the last frontier," says Ken Frost, a director of U.K.-based Phoenix Commercial Ventures, an investment firm that brokers deals between North Korea and the West. Current plans include a joint venture to produce DVD players and another to create software and animation. Frost cites untapped resources—the country is rich in a number of commodities, including coal, copper and precious metals—and a highly skilled work force (the literacy rate is 99 percent) as just two of the big draws. Then there's the cost of labor: the average monthly pay in North Korea is $57.50, versus $100 in China. And, says Frost, there's location. "Look at this position—you've got an ideal trade route to Russia, China, South Korea and so on."

Of course, as Aidan Foster-Carter, a senior fellow specializing in modern Korea at Leeds University, points out, "there have been many false dawns when it comes to North Korea." Back in the 1970s, European countries like Sweden extend-ed generous loans—which Pyongyang promptly defaulted on. Later the economy rebounded, thanks in part to massive gold exports. But huge floods in the 1990s plunged it back into crisis, and the death of Kim Il Sung, the Great Leader, in 1994 created chaos. "It became tough for investors to know who was legitimate," notes Colin McAskill, who runs the London-based Chosun Fund, targeted at commodity and financial ventures in the area.

While nobody would call North Korea today a transparent market, investors say things are getting better, in part because the country is starved—literally—for outside help. Orascom, which has cited the possibility of increased foreign aid now that nuke tension is easing as an encouraging sign for investors, was able to forge a Western-style governance agreement in its construction venture.

Likewise, South Korean manufacturers are eager to do more business at the Kaesong Industrial Complex, a special economic zone just north of the border where some 15,000 North Korean workers churn out close to $100 million a year worth of garments, automotive parts and watches in South Korean-owned factories, with productivity levels that top many other emerging markets.

Experts say the zone could grow much bigger if the United States allowed products from the area to carry a made in south korea label. Assuming that this happens, Western investors will have to duke it out with the Chinese, who have signed 10 major commodities deals with Pyongyang in the past year alone. Clearly, Egyptian cement makers aren't the only ones thinking about first-mover advantage.

US Drags China to Court (Again)

Hot on the heels of the US dragging China to the WTO's Dispute Settlement Mechanism (DSM) over the subsidies case (DS 358) comes this one concerning intellectual property protection (DS 362). As the US and China were unable to settle the matter in bilateral talks, the US will now ask the WTO to form a panel to adjudicate this case. (If you are unfamiliar with the dispute settlement procedure and its timeline, please view this WTO guide.) From the US Trade Representative's site:

The Office of the U.S. Trade Representative announced today that the United States has requested the World Trade Organization (WTO) to establish a dispute settlement panel, the next step in its WTO case challenging deficiencies in China’s legal regime for protecting and enforcing copyrights and trademarks on a wide range of products.

“The United States and China have tried, through formal consultations over the last three months, to resolve differences arising from U.S. concerns about inadequate protection of intellectual property rights in China. That dialogue has not generated solutions to the issues we have raised, so we are asking the WTO to form a panel to settle this dispute,” said USTR spokesman Sean Spicer. “It is in the best interest of all nations, including China, to protect intellectual property rights. Over the past several years China has taken tangible steps to improve IPR protection and enforcement. However, we still see important gaps that need to be addressed. We will pursue this legal dispute in the WTO and will continue to work with China bilaterally on other important IPR issues.”

In pursuing this action, the United States is seeking to eliminate significant structural deficiencies that give pirates and counterfeiters in China a safe harbor to avoid criminal liability. The United States is also seeking to improve enforcement procedures at China’s border, and to give copyright owners more tools to prevent the production of unauthorized copies in China. The United States requested WTO dispute settlement consultations with China over these issues in April. The United States and China held consultations in early June. China has not, however, taken any steps that address these U.S. concerns during this period.

The U.S. panel request will be considered by the WTO Dispute Settlement Body at its next meeting, which is scheduled for August 31.

The USTR also has the back story to this dispute as one of the (count 'em!) five cases the US has pending against China. With friends like these, etc:

The United States initiated dispute settlement proceedings over deficiencies in China’s legal regime for protecting and enforcing copyrights and trademarks by requesting consultations with China on April 10, 2007. Consultations were held on June 7-8, 2007. Under WTO rules, the WTO Dispute Settlement Body (DSB) will consider the U.S. request for establishment of a panel at its next meeting, which is scheduled for August 31, 2007.

The U.S. panel request alleges violations of various provisions of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPS Agreement) related to three aspects of China’s IPR regime. First, the request challenges quantitative thresholds in China’s criminal law that must be met in order to start criminal prosecutions or obtain criminal convictions for copyright piracy and trademark counterfeiting. Wholesalers and distributors are able to operate below these high thresholds without fear of criminal liability, so these thresholds effectively permit piracy and counterfeiting on a commercial scale.

Second, the panel request addresses the rules for disposal of IPR-infringing goods seized by Chinese customs authorities. Those rules appear to permit goods to be released into commerce following the removal of fake labels or other infringing features, when WTO rules dictate that these goods normally should be kept out of the marketplace altogether.

Third, the panel request addresses the apparent denial of copyright protection for works poised to enter the market but awaiting Chinese censorship approval. It appears that Chinese copyright law provides the copyright holder with no right to complain about copyright infringement (including illegal/infringing copies and unauthorized translations) before censorship approval is granted. Immediate availability of copyright protection is critical to protect new products from pirates, who – unlike legitimate producers – do not wait for the Chinese content review process to be completed.

This is one of five WTO cases the United States has brought against China and the third case against China where the United States has requested a WTO dispute settlement panel. The United States requested a panel in September 2006 to examine China’s regulations imposing local content requirements in the auto sector through discriminatory charges on imported auto parts; panel proceedings in that dispute are underway. In July 2007, the United States requested a panel regarding several subsidy programs the United States believes are prohibited under WTO rules; the panel request in that dispute is pending before the DSB. In the market access dispute , which concerns Chinese market access barriers affecting copyright intensive industries (movies, music, home entertainment videos, publications), the United States has just completed supplemental consultations with China and is considering next steps. China settled the fifth case, concerning discriminatory taxes on semiconductors, during WTO consultations in 2004.

As usual, China takes the diplomatic route and says it "regrets" the US action according to the official Xinhua news agency:

China regrets that the United States requested the World Trade Organization (WTO) to set up a dispute settlement panel to solve the intellectual property rights(IPR) disputes between the two sides.

Wang Xinpei, spokesperson of the Ministry of Commerce, made the remarks in a news conference here Thursday.

The Chinese government has always been firm in protecting IPR and tried to solve IPR protection problems through dialogues, Wang said.

China has detailed and clarified problems raised by the U.S. and showed great sincerity, Wang said.

China's laws regarding IPR protection completely meet WTO requirements, Wang said, adding China is opposed to any WTO member's move of making developing members shoulder extra obligations through dispute settlement system, Wang said.

China is studying the U.S. request and will act actively, Wang said.

The United States on Monday requested the WTO to establish a dispute settlement panel regarding so-called China's deficiencies in intellectual property protection.

The U.S. initiated the dispute over the issue by requesting consultations with China on April 10, 2007.

Under WTO rules, the WTO Dispute Settlement Body (DSB) will consider the U.S. request for the establishment of a panel at its next meeting on August 31.

Indian Outsourcing on the Ropes?

CRM Daily has a thought-provoking feature on the future of Indian outsourcing. While healthy revenues and profits are still prevalent, many challenges now confront these firms. To me, the greatest challenge is that multinational firms like IBM are now aiming to "cut the middleman" by setting up shop in India themselves. In addition, the strong rupee doesn't help things. Here is an excerpt, though the entire article is well worth going through if you're interested in the topic:

True, India's biggest outsourcing firms continue to rake in the profits, at least judging by the latest earnings season. The top five players -- Tata Consultancy Services, Infosys, Wipro, Cognizant, and Satyam -- reported robust profits in the quarter ended June, 2007. And executives generally forecast strong growth ahead.

"We're very happy with having beaten the forecast," said CEO and Managing Director S. Ramadorai of the $3.1 billion Tata Consultancy Services in Bombay. "TCS, as the leader, is doing well." Ramadorai predicts $60 billion in tech-services exports for the industry by 2010, nearly twice the current $35 billion, plus $20 billion in revenue from domestic business.

Yet behind this show of supreme confidence lurks deep unease. A confluence of adversities is at play. They include an appreciating rupee that is cutting into earnings, a severe shortage of qualified talent at home, and a cap on H-1B worker visas to the U.S., along with pre-2008 election protectionism threats.

On top of that, there is the end of preferential industry tax benefits at home and the growing success of multinational competitors such as Accenture and IBM on Indian turf. Perhaps most challenging for the Indian players is the pressing need to move up the ladder into business consulting, a domain that companies such as IBM have dominated for decades. Indian outsourcing firms need to invest heavily to secure a position in this arena, and that will erode their fat profits, at least in the short term.

For the first time, industry insiders are asking: Is the outsourcing game over for Bangalore? "The Indian I.T. companies have had an unusually long run in profits and growth," says Siddharth Pai, partner and managing director of global tech advisory TPI Advisory Services India. But that's "an anomaly," he adds. "As they mature, they can't expect the same kinds of returns."

And mature they must. For the past decade, Indian software-services firms, which pioneered the business of delivering tech services to the developed world from India efficiently and at 40% of the cost of companies such as IBM, have grown exponentially. Revenues exploded from a mere $1 billion in 1997 to $35 billion in 2007.

Test Your IPE Knowledge

For some reason, I've had a sudden inspiration to test my reader's knowledge of IPE. I don't know why but multiple choice exams do not feature much in British higher education; I miss giving these kinds of exams. Call it a stroke of inspiration or call it a stroke of madness, but I've decided to inflict my newfound fondness of multiple choice exams on you, dear readers. The questions below range in difficulty from easy to very hard. Be honest to thyself: Try not to cheat by looking at the answers at the end or by using the search engine box. Without further ado -

(1) A bond issued in Japan denominated in kiwi (New Zealand dollars or NZD) to take advantage of the "carry trade" is called a:
a. Shogun bond
b. Samurai bond
c. Uridashi bond
d. Bushido bond

(2) Mode 4 of the General Agreement on Trade in Services (GATS) concerns:
a. Intellectual property
b. Sanitary and phytosanitary measures
c. Migration
d. Financial services

(3) Basel II regulations cover:
a. Environmental laws
b. Banking supervision
c. The illegal trade in endangered species
d. Account secrecy laws

(4) Raul Prebisch is known for:
a. His contributions to dependencia theory
b. His support for Hugo Chavez's Bolivarian revolution
c. Being Subcomandante Marcos's second in command
d. Being ostracized by the Roman Catholic Church for his work on "Liberation Theology"

(5) Ousted Thai Prime Minister Thaksin Shinawatra was an adviser to which private equity fund:
a. The Carlyle Group
b. The Blackstone Group
c. The Global Arbitrage Foundation
d. Kohlberg Kravis Roberts

(6) Article IV of the IMF pertains to
a. Accounting for derivatives
b. Annual consultations with NGOs and other stakeholders
c. Accounting for the value of SDRs
d. Annual bilateral consultations with member countries

(7) The country whose remittances constitute the highest share of national GDP is
a. Tonga
b. The Philippines
c. Lesotho
d. Moldova

(8) In trade lingo, "amber box" policies are those which
a. Condone the practice of human trafficking
b. Concern product safety
c. Distort production and trade
d. Caution against exchange rate intervention

(9) Andre Gunder Frank's academic supervisor was
a. John Maynard Keynes
b. Immanuel Wallerstein
c. Robert Cox
d. Milton Friedman

(10) A bound tariff refers to
a. A tariff applied to seabound cargo
b. The least distortionary form of tariff
c. A tariff bound for legal contestation
d. The maximum tariff level allowable

Answers: 1-c; 2-c; 3-b; 4-a; 5-a; 6-b; 7-a; 8-c; 9-d; 10-d

If you scored...
10 - You have way too much free time on your hands; maybe it's time for you to enroll in a Political Science or International Relations doctoral program (or at least make your own IPE blog)
7-9 - Maybe you should read less of the Economist, Financial Times, and Wall Street Journal
5-6 - That's pretty good if you ask me
0-4 - Read more IPE Zone to improve your knowledge (shameless self-promotion :-)

The City Built on OEM

The industrial complexes (no, not military-industrial complexes!) of mighty manufacturing concerns have had storied places in the annals of economic history: Toyota City in Aichi Prefecture, Wolfsburg in Lower Saxony (Volkswagen), River Rouge in Michigan (Ford). Now, the Taiwanese original equipment manufacturer (OEM) Foxconn is staking its claim to history with its industrial complex in mainland China. The walled city where it's sited called Longhua Science & Technology Park has a given workforce ("population") of 270,000. If you own an Apple iPod or iPhone, a Dell or Hewlett-Packard desktop PC, a Nokia or Motorola cell phone, a Sony PlayStation 2 or a Nintendo Wii video game console, you have a Foxconn-made product under an OEM arrangement. That is, Foxconn manufactures electronics marketed by other firms like those mentioned. Foxconn also markets a well-respected line of computer parts--especially desktop motherboards--under its own name.

The Wall Street Journal recently featured a story on Foxconn in general and its plant in Shenzen, China where it has established a large manufacturing presence. (Hat tip: All Roads Lead to China.) It's a somewhat lengthier feature than usual so I will just post a brief snippet here, though the video clip above summarizes the main points well:

With a work force of some 270,000 -- about as big as the population of Newark, N.J. -- the factory is a bustling testament to the ambition of Hon Hai's founder, Terry Gou. In an era when manufacturing has been defined by outsourcing, no one has done more to shift global electronics production to China. Little noticed by the wider world, Mr. Gou has turned his company into China's biggest exporter and the world's biggest contract manufacturer of electronics.

Hon Hai's revenue has grown more than 50% a year in the past decade to $40.6 billion last year. It is expected to add $14 billion in revenue this year. That is roughly the equivalent of Motorola's adding, within a year, the sales of CBS Corp.

Throughout his company's rise, the 56-year-old native of Taiwan has maintained a low profile. Publicity, he says, risks helping competitors and alienating customers. "I hate that I [have] become famous," Mr. Gou said in a recent three-hour interview at Hon Hai's Taiwan headquarters. It was Mr. Gou's first interview with Western media since 2002, following more than five years of requests by The Wall Street Journal. "We are so big we cannot hide anymore."

Hon Hai, and its massive Shenzhen plant, provides a window into the sometimes-secretive world of manufacturing in China. Confidentiality is a selling point for contract manufacturers, whose customers count on them to shield their products and plans from outsiders. Secrecy has also been a central issue in China's recent tainted-product scandal, with the often-quiet relationship between U.S. companies and their suppliers complicating regulators' hunt for the source of defective goods. Recently, citing ongoing investigations, Mattel Inc. took nearly a week to identify its Chinese provider of toys believed to contain lead paint.

Hon Hai hasn't been involved in such scandals, and analysts and industry insiders say Mr. Gou has combined discretion with a solid record of quality control and competitive pricing to build a booming empire. The $43 billion market capitalization of Hon Hai -- a public company listed in Taiwan, which uses the trade name Foxconn -- is equal to that of its 10 biggest global rivals combined. Mr. Gou and Hon Hai control additional affiliates that report revenue separately. Mr. Gou is currently worth about $10 billion, a Hon Hai spokesman says.

Amartya Sen on India at 60

Nobel Prize winner in Economics Amartya Sen needs little introduction. In this new commentary in Forbes, he offers his thoughts on sixty years of Indian independence. Although he lauds the liberation of India from the dreaded "license Raj" of onerous state regulations and its spectacular growth due to economic reforms promulgated under the guidance of the equally formidable Manmohan Singh (I like calling him "The Father of India...in Ascent"), Sen sees room for improvement. Yes, it involves our favorite usuals--health and education.

Particularly enlightening to me is how Sen sees democracy complementing economic growth. Indian politics and