Pope on Globalization, Dependencia & Easterly-ism

♠ Posted by Emmanuel in , at 12/25/2008 09:01:00 PM
I've previously featured some of Pope Benedict XVI's reflections on globalization, and here is more along those lines. The holiday season usually includes a visit from me to the highly popular Vatican website, and this year is no exception. A few days back, the Vatican site posted the message of the Pope for the celebration of the World Day of Peace, 1 January 2009. Aptly enough for this blog, it concerns "Fighting Poverty to Build Peace." To say that I am very impressed by the Pope's apparent familiarity with the development literature would be an understatement. Although there are the usual church teachings rehashed here, he actually makes a very good summary of the state of the development literature. Benedict XVI starts his discussion by considering the relationship between globalization and poverty. Suffice to say, I agree that an interdisciplinary toolbox is required to analyze this problematique:
In this context, fighting poverty requires attentive consideration of the complex phenomenon of globalization. This is important from a methodological standpoint, because it suggests drawing upon the fruits of economic and sociological research into the many different aspects of poverty. Yet the reference to globalization should also alert us to the spiritual and moral implications of the question, urging us, in our dealings with the poor, to set out from the clear recognition that we all share in a single divine plan: we are called to form one family in which all – individuals, peoples and nations – model their behaviour according to the principles of fraternity and responsibility.

This perspective requires an understanding of poverty that is wide-ranging and well articulated. If it were a question of material poverty alone, then the social sciences, which enable us to measure phenomena on the basis of mainly quantitative data, would be sufficient to illustrate its principal characteristics. Yet we know that other, non-material forms of poverty exist which are not the direct and automatic consequence of material deprivation. For example, in advanced wealthy societies, there is evidence of marginalization, as well as affective, moral and spiritual poverty, seen in people whose interior lives are disoriented and who experience various forms of malaise despite their economic prosperity.
Learned man that he is, the Pope is sharing his knowledge of the phenomenon known as "social exclusion": aside from sheer material want, being unable to participate in society with dignity is another strong penalty inflicted by poverty (see Amartya Sen's backgrounder). He then continues to discuss globalization thusly:
One of the most important ways of building peace is through a form of globalization directed towards the interests of the whole human family. In order to govern globalization, however, there needs to be a strong sense of global solidarity between rich and poor countries, as well as within individual countries, including affluent ones. A “common code of ethics” is also needed, consisting of norms based not upon mere consensus, but rooted in the natural law inscribed by the Creator on the conscience of every human being (cf. Rom 2:14-15). Does not every one of us sense deep within his or her conscience a call to make a personal contribution to the common good and to peace in society? Globalization eliminates certain barriers, but is still able to build new ones; it brings peoples together, but spatial and temporal proximity does not of itself create the conditions for true communion and authentic peace. Effective means to redress the marginalization of the world's poor through globalization will only be found if people everywhere feel personally outraged by the injustices in the world and by the concomitant violations of human rights.
Now, to the juxtaposition posed in the title: the Pope proceeds to discuss poverty and globalization in line with doctrinal opposites. First, let us begin with his variation on dependency theory (dependencia) which I am absolutely certain he's referring to, albeit shorn of its Marxist undertones for obvious reasons. It is also here where he touches on the role of finance and the current financial crisis:
In the field of international commerce and finance, there are processes at work today which permit a positive integration of economies, leading to an overall improvement in conditions, but there are also processes tending in the opposite direction, dividing and marginalizing peoples, and creating dangerous situations that can erupt into wars and conflicts. Since the Second World War, international trade in goods and services has grown extraordinarily fast, with a momentum unprecedented in history. Much of this global trade has involved countries that were industrialized early, with the significant addition of many newly-emerging countries which have now entered onto the world stage. Yet there are other low-income countries which are still seriously marginalized in terms of trade. Their growth has been negatively influenced by the rapid decline, seen in recent decades, in the prices of commodities, which constitute practically the whole of their exports. In these countries, which are mostly in Africa, dependence on the exportation of commodities continues to constitute a potent risk factor. Here I should like to renew an appeal for all countries to be given equal opportunities of access to the world market, without exclusion or marginalization.

A similar reflection may be made in the area of finance, which is a key aspect of the phenomenon of globalization, owing to the development of technology and policies of liberalization in the flow of capital between countries. Objectively, the most important function of finance is to sustain the possibility of long-term investment and hence of development. Today this appears extremely fragile: it is experiencing the negative repercussions of a system of financial dealings – both national and global – based upon very short-term thinking, which aims at increasing the value of financial operations and concentrates on the technical management of various forms of risk. The recent crisis demonstrates how financial activity can at times be completely turned in on itself, lacking any long-term consideration of the common good. This lowering of the objectives of global finance to the very short term reduces its capacity to function as a bridge between the present and the future, and as a stimulus to the creation of new opportunities for production and for work in the long term. Finance limited in this way to the short and very short term becomes dangerous for everyone, even for those who benefit when the markets perform well.
Again, his statement that finance without reference to the long-term common good turning upon itself is insightful. Globophobes take note: my notion that there is nothing inherently wrong with globalization appears to have papal purchase. Trade and finance have their place in the, ah, larger scheme of things (even if they can be used to widely varying ends). After referring to dependencia, however, he launches into a William Easterly-esque trope familiar to readers of The Elusive Quest for Growth: people respond to incentives. He also adds some commentary germane to an Easterly-esque brand of aid skepticism:
All of this would indicate that the fight against poverty requires cooperation both on the economic level and on the legal level, so as to allow the international community, and especially poorer countries, to identify and implement coordinated strategies to deal with the problems discussed above, thereby providing an effective legal framework for the economy. Incentives are needed for establishing efficient participatory institutions, and support is needed in fighting crime and fostering a culture of legality. On the other hand, it cannot be denied that policies which place too much emphasis on assistance underlie many of the failures in providing aid to poor countries. Investing in the formation of people and developing a specific and well-integrated culture of enterprise would seem at present to be the right approach in the medium and long term.

If economic activities require a favourable context in order to develop, this must not distract attention from the need to generate revenue. While it has been rightly emphasized that increasing per capita income cannot be the ultimate goal of political and economic activity, it is still an important means of attaining the objective of the fight against hunger and absolute poverty. Hence, the illusion that a policy of mere redistribution of existing wealth can definitively resolve the problem must be set aside. In a modern economy, the value of assets is utterly dependent on the capacity to generate revenue in the present and the future. Wealth creation therefore becomes an inescapable duty, which must be kept in mind if the fight against material poverty is to be effective in the long term.
To say that I am amazed by the Pope's broad social science knowledge would be an understatement: he is very widely-read. Going through the passage above, you also get some of the capabilities approach-style reasoning that being and doing is more important than merely having. He also goes on to note the social dimensions of entrepreneurship. Not to toot my horn too much, but I've performed work along these lines integrating social entrepreneurship and the capabilities approach. If you have the scratch, I of course think it's worth a read. The IPE Zone proffers an interdisciplinary approach to global problems; it's humbling to know that a religious authority with the stature of Benedict XVI is thinking along similar lines.

Now China Takes US to WTO: Trade War Ahead?

♠ Posted by Emmanuel in ,, at 12/25/2008 08:42:00 AM
This seems to be a year when even IPE doesn't stop for the holidays. The US recently decided to file a case at the WTO Dispute Settlement Mechanism (DSM) concerning Chinese subsidies given to companies qualifying as "famous brands." Now, China is returning the favor by stating that it will file a case over US anti-dumping measures it believes are being unfairly applied to a number of its exports. From our favorite official publication, Xinhua:
China on Monday asked the World Trade Organization (WTO) to establish an expert panel to investigate U.S. anti-dumping and countervailing duties on Chinese products which may violate WTO trade rules. The U.S. measures at issue "appear to raise a number of WTO concerns," and China "is deeply concerned" about the compatibility of these measures with U.S. obligations in the WTO, the Chinese delegation told a meeting of the WTO's Dispute Settlement Body (DSB).

According to the delegation, China has called the United States' attention to its concerns on numerous occasions, but "thus far it has not received any concrete solution from the United States...Therefore, given its systemic concerns, China is compelled to pursue this matter further and to request that the DSB establish a panel ... to examine China's complaints," it said.

The U.S. duties at issue affect such Chinese products as circular welded carbon quality steel pipe, new pneumatic off-the-road tires, light-walled rectangular pipe and tube, and laminated woven sacks. China filed complaints to the WTO about the U.S. measures in September. Consultations between the two sides were held on Nov. 14 according to the WTO dispute settlement process, but the consultations failed to resolve the dispute.

At the DSB meeting on Monday, the United States blocked the establishment of the panel. But the panel would be established automatically if China makes the request again in January. At least half a year is needed for a WTO panel to issue its ruling on a dispute.
The US has used its right to delay the creation of a panel investigating this case. However, like anyone else, it cannot rebuff Chinese efforts to bring this case to the DSM more than once. Meanwhile, Reuters has a backgrounder on how US-China trade tensions are set to sharpen with Obama becoming US president:

Obama, who has pledged to place more pressure on China over its export subsidies and managed currency, stands to inherit a long list of trade disputes that will test already thorny relations with its second-largest trading partner. "The U.S. has set a bad example to other members of the WTO in its anti-subsidy action," said Ren Yifeng, of WTO research group affiliated to China's Commerce Ministry.

Obama's trade dispute task-list is likely to grow, as labor and industry groups push agendas that will place him on a delicate tight-rope -- to be seen to be protecting U.S. jobs while avoiding a potentially disastrous trade war with Beijing. "The new administration will come under unprecedented political pressure from its own base and from a wide range of industries," Chris Padilla, a former under secretary of international trade in the Commerce Department, told Reuters. The pressure would "force it to take decisions early in its new term," said Padilla, who expected a "large increase" in anti-dumping and countervailing cases against China, and demands for new curbs on Chinese imports.

U.S. labor and trade groups will also browbeat the incoming administration to brand China a currency manipulator, potentially opening the door for other steps to pressure Beijing, including a possible complaint to the WTO. China's exchange rate with the United States is a festering complaint of many U.S. manufacturers who say Beijing deliberately undervalues its currency to boost exports. "We are very committed to seeing some strong action on China's currency," said Thea Lee of the AFL-CIO labor group.

Obama, who said that China's yawning trade surplus with the U.S. was "directly related to its manipulation of its currency value," had backed legislation that would designate currency manipulation as a subsidy under U.S. trade remedy laws, noted Gil Kaplan, chairman of the Committee to Support U.S. Trade Laws. "That was important legislation and I hope Obama will push forward some kind of legislative solution on currency manipulation," said Kaplan.

While placing pressure on China to raise the value of its currency, the Bush administration has resisted branding China a currency manipulator. Beijing has allowed the currency to rise 20 percent against the dollar since abandoning a long held peg against the U.S. dollar in July 2005. But the currency has barely moved since the middle of the year amid worries over possible capital outflows.

With Chinese exports unexpectedly falling 2.2 percent in November, the first drop in seven years, Beijing has given short shrift to calls to further devalue the currency. "With shrinking demand in overseas markets, the role of the exchange rate in stimulating exports will be limited -- it is a measure not worth taking," Chinese Commerce Minister Chen Deming told the People's Daily newspaper on Wednesday. Beijing, conversely, has issued a raft of incentives to boost exports in recent months, including raising tax rebates and scrapping export taxes, amid concerns that rising unemployment could spark broad social instability.

As both countries' exporters scramble to compete for a shrinking pool of customers, trade frictions were inevitable, but unlikely to spark a protectionist backlash in China, said Zhang Hanlin, a professor with the University of International Business and Economics in Beijing. Protectionist actions will be our last resort if the U.S. seriously violates regulations and agreements and harms China's interests," said Zhang.

I will have more on why a trade war could be a potentially welcome development as the US and China wage a tit-for-tat strategy of faulting each others' trade practices and launching sanctions. Unlike conventional economists who view protectionism as an unambiguous bad or anti-globalization types who view trade as little more than the work of Satan, there is more to it than that. As always, the IPE Zone is less about pleasing either crowd than about forging ahead with fresh thinking on various problematiques. Yes, a trade war may just be the thing to remedy global economic imbalances currently roiling globalization. All we need is an Obama-induced escalation. Watch this space.

Brum at Xmas: Polish Migration and Other Stories

♠ Posted by Emmanuel in , at 12/24/2008 10:22:00 AM
This may very well be the last holiday note I will write about Birmingham. During Christmas last year, I took a look back at the important role Birmingham has played in economic history. This year, I will discuss the cross-currents of migration and religion in a still-evolving town with a rich and storied history. As probably everyone knows, church attendance across vast swathes of Western Europe is in decline. In Britain, this trend is very much in evidence. At this same time last year, newspapers were abuzz with news that Catholicism had "overtaken" the Church of England in mass attendance. This news was also accompanied by the story that former PM Tony Blair had become one with the Popery.

As a Catholic, I was of two minds about these events. There is no real coup here as the headlines would suggest. To begin with, attendance has been in decline for both Church of England and Catholic parishes. It's not so much that Catholicism has overhauled its Anglican counterpart. Rather, attendance at Catholic services has declined more slowly than at Anglican ones--not exactly a stellar achievement. More important for a blog about IPE, the interplay between religion and migration is the interesting one. Attendance at Catholic services has been buttressed by a large influx of Polish and Lithuanian parishioners. Unlike many of the locals who couldn't be bothered to attend mass, Eastern Europeans discouraged from practicing religion during the Soviet era find value in doing so in a reflection of the famous adage "you don't know how much you've got until it's gone."

My own church attendance in Birmingham has validated this factoid. The Catholic service I attend is at St. Michael's in the heart of Birmingham's shopping district. In distinct contrast to the mix of folks of all ages you see walking around the shopping malls, masses in English are largely populated by pensioners or those nearing pensionable age. Not that there's anything wrong with older folks being more religious, it's that churches--regardless of denomination-- need to attract a younger flock to survive.

It's at this point where our Polish parishioners come in. By my reckoning, there are now more Polish-language services and priests at St. Michael's than their English counterparts. Of course, this reflects the influx of Polish workers coming to Britain after Poland's accession to the EU. I've always had an exceedingly positive impression of the Poles--kind, hardworking, untroublesome folks any country would be proud to host (and Catholics to boot). It is precisely this influx which now sustains St. Michael's given the dwindling flock of locals, as the BBC has noted:
After years of gently declining attendance, St Michael's Polish congregation never expected that one day they would be joined in their prayers by thousands of their fellow country-men. Since May 2004, when Poland joined the EU, 20,000 Poles have migrated to the West Midlands - many of whom have settled in Birmingham. Around a third of these are thought to be practising Catholics.

This means that St. Michael’s, the city's bi-lingual 'Polish church' is busier than ever. "This is something we have never expected to happen. There are virtually hundreds and hundreds of young Polish parishioners joining our Sunday services every week" says Father Apolinary, from St Michael's. "It is a big challenge for us priests to serve such a big number of Polish Catholics who live in Birmingham now. But we are doing our best. We are very happy the Polish congregation is growing".

Official statistics claim that over 80% of new migrants from Eastern Europe are younger than 34 years old. Father Apolinary finds it overwhelming that so many of those young Poles have joined their congregation. He says: "Sometimes I cannot believe my eyes when I see all of these young parishioners attending Polish services every Sunday. It is great to see that they bring their faith with them when they decide to leave their home country".

For many Polish people religion is an integral part of their day-to-day lives. Ela is one of the new members of St Michael's congregation. She works with children with special needs in Birmingham. Ela says that her faith is often thought of as something rather unusual by her British friends: "My colleagues cannot believe that I go to church every Sunday. But this is the way my parents brought me up. If I were still living in Poland I would be in church at least once a week so why should I stop doing it in Britain?"
Of course, conditions are ever-changing. The current economic crisis has undoubtedly dimmed the prospects for Polish immigrants. Strong anti-immigrant sentiment also pervades in British politics. It is no surprise then that news reports suggest there are greater numbers of Polish expats returning and that the upcoming Euro 2012 should lure back construction workers and the like due to the need to build stadiums and roads [1, 2]. In contrast to many nearby Eastern European countries, Poland isn't faring too badly.

It is always good to contemplate the meaning of things even during the holiday season. Will atendance at Catholic churches suffer the same precipitous decline Anglican churches have suffered once less Eastern European migrants ply their trade in Blighty? I suspect the answer will only be known long after I have moved on. Regardless, I wish all IPE Zone readers a warm season's greetings wherever you are as we contemplate how our fates unfold in a highly interdependent world.

Foreign Affairs: On Doha, 'Beijing Consensus', etc.

♠ Posted by Emmanuel in ,, at 12/23/2008 11:31:00 AM
The latest issue of Foreign Affairs (January/February 2009) has plenty of timely and interesting articles for us on matters of global importance. First, Aaditya Mattoo and Arvind Subramanian discuss "From Doha to the Next Bretton Woods: A New Multilateral Trade Agenda." Something that you sometimes find missing when economists discuss trade matters is a lack of political realism. Unfortunately, that case seems to hold here as these authors suggest that LDCs are willing to make concessions they have been unwilling to make in the past. For more on this point see the IELP.) Nevertheless, it's still a thought-provoking read.

Next we get a flavor of Martin Wolf's book, Fixing Global Finance, via a review written by the respected economic historian Harold James. Martin Wolf seems to be taking his fair share of lumps for writing a book entitled Why Globalization Works. Indeed, if globalization worked so darned well, what's led us to the current situation? Wolf gives us some clues and suggests ways for enabing a globalization less besmirched by binge-and-purge cycles. As you would expect, it involves reducing global economic imbalances. Once more, though, I'd like more of a flavor of how this would be achieved instead of rehashing a commonsense economic prescription that's easier said than done.

You then get three essays on the meaning of capitalist liberal democracy under seige as demonstrated by current events. Instead of getting the end of history with all countries converging on a common model, many are contemplating alternative forms of governance such as that offered by China. Earlier on, I questioned the existence and desirability of a "Beijing Consensus"; these essays make some commentary on that. Roger Altman thus writes about "The Great Crash, 2008: A Geopolitical Setback for the West" in which he argues that there's [yawn] an eastward shift in the balance of power. Daniel Deudney and John Ikenberry demur, however, citing "The Myth of the Autocratic Revival: Why Liberal Democracy Will Prevail." Lastly, the ever-optimistic American viewpoint is represented here by Anne-Marie Slaughter writing about "America's Edge: Power in the Networked Century." So many years after the tech bubble burst, it is surprising how many American commentators still believe e-this, e-that and the knowledge economy will see to it that American predominance will continue. Somehow, I doubt whether it will be enough based on current evidence.

I must commend the CFR for putting out this fine publication. Although I most certainly do not agree with the all-too-frequent USA No.1-style boosterism from American contributors, there is still much food for thought here and a perhaps welcome counterpoint to the pessimism dished out by the likes of yours truly on a regular basis. Happy reading!*

* These five articles aren't gated at the current time, although they usually become restricted to subscribers if I'm not mistaken. It's better to save them now to read in the future if you don't have the time to read them at the moment.

Detroit 3 Go Begging in US, EU, LatAm & Canada

♠ Posted by Emmanuel in ,, at 12/21/2008 02:27:00 PM
Our American friends may get all they wish to know (and more) about the Detroit Three seeking government bailouts. Having failed to overcome opposition from Republican lawmakers to bailouts, the Bush administration decided to act on its own after some hesitation. As this purports to be a blog about international political economy, I would be remiss in not pointing out that this beggar-thy-government strategy utilized by the Detroit Three is confined not only to the United States but extends to a whole lot of other places where they have leverage. That is, where they can deploy that time-tested plea of "give us some 'bridge loans' to tide us through because we employ X amount of your citizens in this vital industry." In addition to America, you have the Detroit Three asking for money in:
  • Europe - European subsidiaries (I almost typed "subsidies") of Ford and General Motors (Opel / Vauxhall) are part of a group of companies making cars in Europe asking EU governments for handouts to the tune of EUR 40B. It seems the EU has balked at this very large sum. Instead, plans are on the drawing board to give them "only" EUR 5B [1, 2];
  • Argentina - The government in the Latin American country is giving automakers, including Ford and GM, subsidized financing for entry-level models to move cars off dealers' lots.
And now, the most recent news out of Ottowa is that the Canadian government will [zzzzzz] throw in four billion Canadian dollars to bail out GM and Chrysler. From the Globe and Mail:
Canada will provide the struggling auto sector with $4-billion in emergency loans in a bid to avoid a "catastrophic" collapse of the industry, Prime Minister Stephen Harper said Saturday, as he urged the automakers to use the funding to get their businesses in order.

The announcement by Mr. Harper and Premier Dalton McGuinty in Toronto came a day after U.S. President George W. Bush offered $17.4-billion U.S. in emergency loans to General Motors and Chrysler. "We are doing this on the assumption that we cannot afford either in the United States or Canada a catastrophic short-term collapse," Mr. Harper said. "But on the other hand, we are doing this with the knowledge that the automakers must change the way they're doing business in a very serious way and must bring their products on their costs into line with the market place."

The Canadian plan will provide General Motors Canada with loans of up to $3-billion and Chrysler Canada will receive up to $1-billion — a total based on the U.S. aid and proportional to their Canadian production. The companies will get the money in three instalments, with the first portion coming Dec. 29.

Unlike the American plan, the Canadian aid will also extend additional account receivable insurance coverage for automotive suppliers and create a new facility support access to credit to consumers.

Mr. McGuinty, who has been pushing for aid to the sector, said Ontario will provide $1.3-billion of the total emergency loans package to General Motors and Chrysler. "Here in Ontario we have 400,000 people and their families who rely on the auto industry so that they can put food on the table and keep a roof over their heads," said the Ontario premier who thanked Harper for the support. "What the Prime Minister and I are saying today is that those people and their jobs are worth fighting for."
The Detroit Three keeps using this euphemism about "bridge loans." I always like to think of Alaska's famous bridge to nowhere as an apt metaphor for these automakers. With even the most bada** European and Japanese automakers feeling the pinch (Toyota now expects its first annual loss in the postwar era), what chance do these rank amateurs have of competing in global markets?

I once joked that the US automakers needed an American Bob Geldof to push their cause, Live Aid style. It certainly appears that they've made quite an appeal to governments now spanning three and a half continents to raise so much state aid. Nevertheless, given their past histories, I doubt whether this will be enough to sustain them through the challenging years ahead. As ever, i remain convinced that the logical course of action is to sell the American automakers to the Chinese. Politically incorrect as it may seem, it's the best business choice.

US Drags China to WTO Court (Again)

♠ Posted by Emmanuel in ,,, at 12/21/2008 01:44:00 PM
Political science types like your truly more or less believe in the new golden rule: he who hath the gold maketh the rules. Until the turn of the century at least, the United States was by far the most powerful figure when it came to international affairs--including international economic diplomacy. As such, it is no surprise that the US is now taking China to the WTO's dispute settlement mechanism (DSM) and gaining the upper hand since the rulebook largely reflects America's previous predominance. First, China backed down on the subsidies case involving export tax rebates. Next, China just recently lost its appeal concerning tariffs applied against imported car parts.

Just this Friday, the outgoing USTR filed yet another case against China at the WTO. This new one pertains to China aiming to establish what it calls "Famous Brands." The USTR claims that China applies WTO-illegal measures to companies lucky enough to merit this designation. Something which continues to largely elude China is the creation of brands with international recognition. Given that it has patterned itself on previous Asian exporting powerhouses like Japan and South Korea (think Samsung and Hyundai), China hasn't been entirely happy about this state of affairs. Hence, it has deployed industrial policies aimed at creating such brands. And, these policies have now attracted the ire of the US. From the USTR's site:
U.S. Trade Representative Susan C. Schwab announced today that the United States has requested World Trade Organization (WTO) dispute settlement consultations with the People’s Republic of China regarding China’s “Famous Brands” programs. These programs appear designed to promote the development of global Chinese brand names and to increase sales of Chinese- branded merchandise around the world. The United States is concerned not only because these programs appear to incorporate export subsidies (which are generally prohibited by applicable WTO rules), but also because of the protectionist industrial policy apparently underlying these programs.

“We were disturbed to find that China still appears to be using WTO-illegal measures to promote its exports, ranging from textiles and refrigerators to beer and peanuts. We are going to the WTO today because we are determined to use all resources available to fight industrial policies that aim to unfairly promote Chinese branded products at the expense of American workers, farmers, ranchers, manufacturers and intellectual property owners,” said Ambassador Schwab.

USTR worked closely with the Commerce Department to uncover and analyze the dozens of Chinese programs at both the central and local government level. Secretary of Commerce Carlos Gutierrez stated, “While dialogue is always our preferred option, we have always stated our willingness to use WTO rules and our own laws to ensure that our workers and businesses are not subject to unfair practices. This is one of these instances. We will continue to use all of the tools at our disposal to ensure that China plays by the rules.”

The United States has discovered that China, as part of its industrial policy aimed at promoting the sale of Chinese products abroad and encouraging worldwide recognition of Chinese brand names, apparently provides numerous subsidies at multiple levels of government. The subsidies appear to include cash grant rewards for exporting, preferential loans for exporters, research and development funding to develop new products for export, and payments to lower the cost of export credit insurance. The designated Chinese brands represent a wide range of sectors, including household electronic appliances, textiles and apparel, a range of light manufacturing industries, agricultural and food products, metal and chemical products, medicines, and health products. These subsidies apply across the economy and therefore may unfairly alter the competitive landscape around the world for any industry competing with these Chinese products. The United States also has found other apparent export subsidies for Chinese products in particular sectors of the Chinese economy, available whether or not the products are famous brands. These sectors include textiles, agricultural products and products with high-technology content.

Such industrial policies promoting Chinese exports to the United States and other countries unfairly disadvantage U.S. manufacturers, farmers, ranchers and workers. China’s policies favoring domestic brands also raise questions regarding China’s commitment to providing a level playing field for foreign owners of important intellectual property rights, namely the trademark rights of U.S. brand owners. Elimination of the unfair and what appear to be WTO inconsistent aspects of the famous brands programs, as well as the sector-specific export subsidies, will help restore a level playing field for U.S. products sold in the United States and in markets throughout the world.
Like the folks at the IELP, I am at a loss as to why the USTR is filing this claim now when (a) it is near Christmas and (2) the handover to the Obama administration and his new USTR will proceed in a few weeks' time. Suffice to say, Ron Kirk and not Susan Schwab will be pursuing this bit of unfinished business. Perhaps the USTR believes it's on a roll. IELP commentators note that the expiration of China's voluntary export restraints (VERs) on clothing at the end of 2008 demanded another action be taken against the PRC to assuage China-bashing interests. In any event, do not be surprised to see yet another official Chinese proclamation of "regret" over losing this case.

I'd also like to hear what Dani Rodrik has to say about this case. Developing countries' continuing lack of clout in international affairs may mean measures aimed at preserving much-vaunted "policy space" will come under increasing scrutiny. Again, LDCs need to speak up or keep drawing the short straw in a world where the rules were not drawn up with their interests firmly in mind.

Ron Kirk, Obama's Palin-dromic USTR Pick?

♠ Posted by Emmanuel in at 12/19/2008 09:21:00 AM
Punning blogger that I am, you hardly expected me to pass this opportunity up. Earlier on, I styled incumbent EU Trade Commissioner Catherine Ashton as the EuroPalin for her lack of experience in international trade matters before assuming the post. The newswires are now buzzing that US President-elect Barack Obama will fill one of the few remaining unfilled cabinet posts by appointing former Dallas mayor Ron Kirk as his US Trade Representative. What is immediately striking is choosing someone whose experience is wholly in domestic politics--mostly at the municipal level, no less--for a very important international post. Being a political science and not an economics type, I can suggest reasons for this choice:
  1. Obama is famously noncommittal on trade matters; choosing someone with little to no history on trade matters is in line with this--don't reveal your stance until the last possible moment to keep options open;
  2. At the moment, few matters are as contentious as trade in the US (or anywhere else for that matter). Since USTR nominees will have to go through a proces of Senate confirmation, an incoming Congress with an even larger Democratic majority featuring known China-bashers will have less history to comb through with Kirk;
  3. A Google search reveals that there is criticism about Obama having few cabinet picks. Such a pick will help rectify the situation, although the same could have been said with regard to the earlier invitation turned down by Xavier Becerra (D-CA).
  4. This choice is more in keeping with the generally business-friendly crew chosen by Obama for his economic team--Summers, Geithner, etc.
Anyway, here is the Financial Times' take on the impending appointment:
Barack Obama is expected to send a reassuring signal to supporters of free trade on Friday by nominating Ron Kirk, the former mayor of Dallas, as US trade representative, according to senior Democratic officials.Mr Kirk was an advocate of free trade during his time as mayor. He backed the North American Free Trade Agreement (Nafta), which Mr Obama criticised during Democratic primaries.

Some trade experts expressed surprise over the choice given Mr Kirk’s lack of experience in international trade talks. They questioned whether he would have the clout to push through deals at a time of rising protectionist sentiment. But free-trade supporters drew encouragement from the fact that Mr Obama avoided picking someone with protectionist leanings, in spite of his lukewarm attitude towards the issue during the election campaign. Mr Obama pledged during the Democratic primaries to renegotiate Nafta, which many Americans blame for job losses and industrial decline. He has since toned down his rhetoric.

The president-elect has said he will place greater emphasis on multilateral trade negotiations, including the Doha round, rather than the bilateral deals that were often favoured by the Bush administration. Doubts remain, however, about how much priority Mr Obama will place on trade at a time when his administration faces many more pressing economic challenges.

Xavier Becerra, a Democratic congressman from California who was strongly linked with the trade job, said he preferred to stay in the House of Representatives because he doubted how much power the trade representative would have.

“My concern was how much weight the position would have and what priority it would have,” he told La Opinion, a Spanish-language US newspaper. “I reached the conclusion that it would not be priority number one and perhaps not even priority two or three.”

Trade representative is one of the last three cabinet-level positions that are expected to be filled on Friday as Mr Obama completes the nomination process before heading to Hawaii for a Christmas vacation.
Note that Kirk's most recent employer, Houston legal powerhouse Vinson & Elkins, was closely associated with Enron. If you want an "inside" pick drawn from the American power elite, Rok Kirk is as safe a choice as you can get. Despite some questionable items on his CV, Kirk shouldn't attract much controversy. Still, I doubt whether Kirk would know much about zeroing, Swiss formulas, and other trade minutiae. Like Ashton, he will have to learn fast in terms of on the job training.

Also noteworthy is Obama's other choice for Department of Labor secretary, Hilda Solis (Latin American, natch). In contrast to Kirk, her pro-labor, anti-trade positions are remarkable. Again, it shows how conflicting pressures on Obama are causing seemingly disjointed cabinet picks. You can rest assured that these conflicting forces acting on the incoming administration will continue, likely resulting in policy choices demonstrating a similarly schizophrenic quality. Which faction wins in the end will depend on how bad things get Stateside, with the more Solis-esque supporters gaining the upper hand in the event of a prolonged slowdown.

Japan's Variations on ZIRP; ¥ Intervention Ahead?

♠ Posted by Emmanuel in at 12/19/2008 08:22:00 AM
We seem to be entering a time when the official policy rates of major industrialized nations are converging on a range. That range is between zero and one percent. By historical standards, these levels are undoubtedly unprecedented. The United States, having recently gone "all in" by lowering the Federal Funds rate to a range between 0.00 and 0.25%, has laid down an example of dubious merit. First out of the chute is Japan. In its rate-setting exercise concluded earlier today, the BoJ slashed its policy rate from 0.30% to 0.10%, a twenty basis point cut. It seems to me like splitting hairs. It's not so much that rates need to be lowered so that borrowing is encouraged. Rather, lenders are so %^&£ scared to lend that you could probably make interest rates negative and these moves would not have the desired effect. That is, they'd rather conserve cash as various "assets" accumulated during the go-go era turn to mush.

The recent pop of the euro suggests the markets believe the ECB will be the most reluctant to engage in this race to the bottom. Yes, everyone is cutting, but some are far more willing to cut than others.

For academic interest, the BoJ statement contains the following on the global conditions which have prompted this move:
Exports have been decreasing reflecting a slowdown in overseas economies, and domestic demand has become weaker against the background of the declining corporate profits and the worsening employment and income situation in the household sector. Financial conditions have deteriorated sharply on the whole. Under these circumstances, economic conditions have been deteriorating and are likely to increase in severity for the immediate future. Meanwhile, the CPI inflation rate (excluding fresh food), currently around 2 percent, is expected to moderate reflecting the declines in the prices of petroleum products and the stabilization of food prices. Looking further ahead, uncertainty in the outlook for the economy to return to a sustainable growth path with price stability has increased. Given the slowdown in overseas economies and the turmoil in global financial markets, it will likely take some time for the necessary conditions for Japan's economic recovery to be satisfied.

With regard to risk factors, much depends on financial conditions in the United States and Europe as well as developments in overseas economies, and attention will need to be paid to the further downside risks posed to economic activity. In addition, if financial conditions, as reflected in lending attitudes of financial institutions and issuing conditions in the corporate bond and CP markets, should increase in severity, pressures acting to depress economic activity from the financial side may become more marked. Turning to prices, there is a possibility that the inflation rate will decline further if downside risks to economic activity materialize or commodity prices fall further.

The Bank will continue to do its utmost as a central bank to facilitate the return of Japan's economy to a sustainable growth path with price stability. It strongly expects private financial institutions to respond appropriately by taking full advantage of low interest rates and various money market operation measures introduced.
As to the question of intervention, the BoJ did some "moral suasion" (attempting to move the market in the desired direction via official commentary) ahead of the rate-setting meeting. The FT has some relevant bits on when such intervention could be expected:
In a marked sharpening of Tokyo’s language on the yen, senior government officials on Thursday highlighted the possibility of intervention to stem the Japanese currency’s rise against the dollar...

Takeo Kawamura, the cabinet chief secretary, told a news conference that the government was closely watching the yen’s movements, saying: “We have conducted currency intervention in the past, and we will take appropriate measures, which include [intervention]...”

Talking about the possibility of what would be Tokyo’s first currency intervention since March 2004, Shoichi Nakagawa, finance minister, said: “I want to refrain from commenting on whether we’ll intervene or not, but there is that option.”

However, Akira Maekawa, senior economist at UBS Securities in Tokyo, said that at current yen levels, the government was unlikely to step into the market. “We think the authorities won’t intervene unless there is a huge move in a single day,” said Mr Maekawa, adding that officials were unlikely to announce any intervention in advance. “Maybe they are just trying to do verbal intervention to slow the appreciation.”
Free market, we hardly knew ye.

Korean Lawmakers Literally Fight Over US Trade

♠ Posted by Emmanuel in , at 12/18/2008 08:00:00 AM
South Koreans have this seemingly unusual mode of protest involving self-immolation. This practice first reached my attention during the student protests of the Eighties, but it still continues. The anti-globalization set has made a martyr of Huh Se-uk, a Seoul cabdriver who died in 2007 after--you guessed it--expressing his, er, burning desire to scuttle the Korea-US free trade agreement (KORUSFTA). As an aside, it always seemed odd to me why a cabdriver would be so vehemently opposed to a trade deal: wouldn't such a trade deal result in more "foreign devil" businessmen to ferry around Seoul? Go figure.

In any event, the noteworthy point to me is that our seemingly docile Korean friends are nonetheless capable of stunning displays of anger. Those with an anthropological interest may attribute it to cultural predispositions to silence and conformity being shattered in spectacular fashion as pent-up anger is unleashed. And, of course, trade with America continues to be a flashpoint in Korea. Witness the nearly-successful attempt to oust Korean President Lee Myung-Bak over lifting import restrictions on US beef over mad cow disease concerns of years past. Combine anti-American sentiment with agricultural protectionism--it doesn't seem to me that Americans themselves are dropping dead all over the place consuming US beef as local fearmongers would have you believe--and you have resilient, mutually reinforcing drivers of protest.

Today's feature concerns Korean lawmakers brawling over the ruling party's efforts to put the KORUSFTA to a vote. This has apparently inspired all sorts of Ultimate Fighting Championship-style antics. From the Associated Press:
Brawling South Korean lawmakers tried to sledgehammer their way into a parliamentary meeting room barricaded by the ruling party as the country's National Assembly descended into chaos Thursday over passage of a free trade agreement with the United States. Opposition parties were incensed by the ruling Grand National Party's move to submit the agreement to a parliamentary committee on trade, setting in motion the process for the accord to win approval in the legislature.

Security guards and aides from the ruling party stood guard outside the room to keep opposition lawmakers away after the committee's GNP-affiliated chairman invoked his right to use force to "keep order" in parliamentary proceedings. Scuffles broke out as dozens of opposition members and their aides attempted to push their way into the office. TV footage showed people from both sides shoving, pushing and shouting in a crowded hall at the National Assembly building amid a barrage of flashing cameras.

Opponents later used a sledgehammer [shades of "pro wrestling"] and other construction tools to tear open the room's wooden doors, only to find barricades of furniture set up inside as a second line of defense. News cable channel YTN reported that an electric saw was used to open the door. YTN footage showed security guards spraying fire extinguishers at those trying to force their way inside. The opposition attempt failed, and 10 GNP legislators introduced the bill to the committee.

South Korea and the United States signed the accord that calls for slashing tariffs and other barriers to trade in April last year after 10 months of tough negotiations, though neither side's legislature has yet ratified it. The pact is the largest for the U.S. since the North American Free Trade Agreement with Canada and Mexico and the biggest ever for South Korea. NAFTA, signed in 1993, took effect the following year.

Proponents in both countries say it would not only expand trade but further cement ties between Washington and Seoul — key security allies who have cooperated on issues such as North Korea for decades. Opponents counter that it will cause pain to key sectors in both nations — agriculture in South Korea and automobiles in the United States.

GNP legislators had locked themselves in the committee room earlier in the day to head off any opposition attempts to occupy the chamber — the only place where the bill can be introduced. After a subcommittee review, the bill would be put to a vote at the committee before reaching the full parliamentary session for a final vote.

The GNP has a majority in both the committee and in the entire parliament, with 172 seats in the 298-member unicameral National Assembly. But the process is expected to be tough going because opposition parties say they will do whatever possible to stop it. The main opposition Democratic Party says the trade deal should not be approved until the government comes up with better measures to protect farmers and others expected to suffer from increased U.S. imports.

The minor opposition Democratic Labor Party joined forces with the Democrats in Thursday's attempt to block the bill [see here]. The ruling GNP says the trade pact should be approved as early as possible because South Korea — a major exporting nation — stands to gain much from the deal. Amid concern the administration of President-elect Barack Obama might ask to renegotiate the agreement [to include provisions covering labor and the environment presumably], supporters of the pact believe early ratification by Seoul could also put pressure on the U.S. Congress to do the same.
I am largely indifferent to this trade deal. There is little sympathy from me for those who invent claims about US beef being unsafe on scientifically specious grounds. All the same, I doubt whether South Korea can benefit from much "trade creation" given that the US economy is going down the tubes. Nevertheless, it will be interesting to see how the KORUSFTA proceeds for obvious reasons. On the US side, it will give an indication about how activist the Obama administration will be with regard to bilateral deals. On the Korean side, more fireworks should be in store. If these folks are already waging taekwondo over allowing KORUSFTA to be put to vote, just imagine what will happen when it is actually put to a vote in parliament.

Whoever said IPE was dull? Good fight, good night.

UPDATE: Ben Muse has a lot more on this kerfuffle.

Euro/Dollar Parity? Madoff Wannabes on Parade

♠ Posted by Emmanuel in at 12/17/2008 11:31:00 AM
I have been of the unwavering belief that the US dollar is a flawed currency. Add the US government's apparent lack of concern with towering deficits to the Fed's willingness to reduce policy rates to virtually nothing and you have a tailor-made recipe for value destruction. Due to what I call "special FX"--foreign exchange moves oblivious to fundamentals--the dollar recently mounted a rally against virtually all currencies save for the Japanese yen. Various things have been said to contribute to "special FX" including the repatriation of foreign investments, growing risk aversion, and the movement to supposedly "safe" assets such as Treasuries. Nevertheless, the recent Fed move to reduce its policy rate to zilch has once again revealed American indifference to debasing its currency.

The implications of the American iteration of ZIRP (zero interest rate policy) are tremendous. First, the US cannot without hypocrisy claim that countries such as China are engaging in mercantilist practices when America has thrown down the gauntlet in this regard with its unprecedented interest rate cut. Yes, it would be the pot calling the kettle black with regard to competitive devaluation. Second, intelligent investors should be cautious about leaving their money in greenbacks. True, other countries are likely to follow suit in cutting rates, but the Fed has signalled that it will resort to more extreme measures such as buying long-term Treasuries and junky assets to get cash flowing once again--not a good sign at all. Bernanke's helicopter drops cash again and again.

Third, I will grind my axe once more in saying that those calling for dollar strength against all apparent reason have been proven wrong and will likely be proven wrong in the future. Earlier on, I featured an op-ed by David Hale in TIME suggesting that the dollar will benefit because, as bad as things are in America, they're even worse elsewhere:
The message to dollar bears is clear: the grimmer the headlines are, the more
misleading they can be. Selling the dollar short because of the financial crisis
is not a sure bet. All economic news is relative, and right now the news is bad
all over the world. Over the next several months, the greenback could even begin
to look like a safe harbor in the midst of the global economic storm.
However, this is not the most extreme of views yet. During the recent bout of dollar strength, a whole bunch of commentators were calling for the common currency to fall to parity with the dollar, 1:1. I've been saving them among my del.icio.us bookmarks due to their sheer ridiculousness in anticipation of this moment. Indeed, I labeled them with something unprintable on this family-oriented blog. Let us begin with State Street Global Markets:
The dollar will rise to parity with the euro in 2009 as the European Central
Bank cuts interest rates and market volatility prompts U.S. investors to
repatriate funds and hedge their currency risks, State Street Global Markets

``One of the calls we have been making recently is that there's a very strong possibility that euro-dollar could reach parity,'' Carlin Doyle, a currency strategist in London at State Street Global Markets, said in a telephone interview today.
Yes, yes, it's very funny to read in retrospect, nevermind that these things were written only at the end of October. From Brown Brothers Harriman:
"European banks account for about three-quarters of the $4.7 trillion of
cross-border loans to emerging markets," said Marc Chandler, global head of
currency strategy at Brown Brothers Harriman in New York. "Despite the
finger-pointing from Europe as to how irresponsible the U.S. has been, there is
a crisis brewing of their own making that may turn out to more destabilizing
than the U.S. subprime fiasco."
And here's more from the folks at BNP Paribas, with some assistance from Morgan Stanley Research. With advice like this...
"We see the risk of hitting parity by the beginning of 2009," said Sebastien
Galy, a currency strategist at BNP Paribas in New York, referring to the euro
and the dollar. "The downside risk to the euro continues to be the financial and
economic repercussions of the credit crunch traveling through Eastern Europe." [Why should the euro be adversely affected by the fate of non-euro adopting countries?]

Stephen Jen, global head of currency research at Morgan Stanley in London, said European banks were five times as exposed to emerging markets as their American or Japanese counterparts. Bank exposure to emerging markets amounts to about 21 percent of European gross domestic product.

That compares with only 4 percent of U.S. GDP for American banks and 5 percent of the Japanese economy for Japanese banks, a recent Morgan Stanley study showed,
citing data from the Bank for International Settlements. "The emerging market downturn will be the second epicenter of the global crisis, with feedback effects hitting euroland and the U.K. particularly hard," Jen said.
Madoff-lites, eh? What they seem to share with Madoff is a fondness for lose money quick schemes by holding riffraff like dollars. And yes, one of the dollar's few remaining uses in the coming times is as toilet paper--pretty fitting given that the Treasury chief is The Great Paulsonio.

12/18 UPDATE: Stephen Jen on Morgan Stanley now says "This is a market movement that has surprised me...it is so rapid and so large, and something very real."I sure hope Jen's well-documented dollar-loving proclivities didn't cost his employer even more losses.

Ben Bernanke, The Dollar Molester, Runs Amok

♠ Posted by Emmanuel in at 12/16/2008 07:32:00 PM
B-B-B-Bennie of the Feds is unparalleled in his disregard for the value of the dollar, dropping the Federal Funds rate to a range of 0.00 to 0.25%. The market was expecting a 50 basis point cut to 0.50%, but he has gone "all in." Holders of dollars, including yours truly (unfortunately), are screwed by the unprecedented money creation now being encouraged by the Fed. Unbelievably, the policy rate for the US dollar is now below the Japanese yen's. For a country fond of citing other countries for waging competitive devaluation, the US seems to be engaging in a lot of it at this moment. Some immediate thoughts:
  • There is no guarantee that this latest helicopter drop will work;
  • Having lowered the FF rate to 0.00 to 0.25%, Bernanke has run out of rate cuts. It really is "game over";
  • If things don't turn around, this policy instrument is exhausted.
In the meantime, the dollar is dropping like a rock, with the euro flirting with the $1.40 level. Does the concept of "sound money" still mean anything in America? Call it a wacky idea, but some still believe in this principle.

China Loses WTO Auto Parts Appeal

♠ Posted by Emmanuel in ,, at 12/16/2008 06:11:00 PM
To no one's real surprise, China has lost its appeal in regard to the auto parts case (DS 339, 340, and 342) lodged by the EC, US, and Canada, respectively [1, 2, 3]. The summary and the full ruling are available on the WTO site. The main point of contention centered on discrimination against foreign auto parts makers' wares. Cars made in China having less than 60% domestic parts content were treated similary to imported automobiles and were assigned a tariff rate of 25%. Conceivably, foreign auto parts manufacturers facing slumping auto demand at home can now more easily market their wares in the Middle Kingdom given its eventual compliance. From Agence-France Presse:
China expressed regret [it always uses this term to denote diplomatic dissatisfaction] Tuesday over a World Trade Organisation ruling that its tariffs on imported car parts were not in line with global rules, and refrained from saying it would comply. Commerce ministry spokesman Yao Jian said Beijing welcomed sections of the WTO ruling on imported car kits, but was unhappy its appeal on imported parts was turned down. "We express our regret over the appeal panel's verdict over the rest of the ruling," Yao said in a statement on the ministry's website, referring to the judgement on auto parts.

The WTO's Dispute Settlement Body ruled in July that China's policies were inconsistent with WTO rules, a decision that was welcomed by the United States which brought the complaint along with Canada and the European Union.

China appealed against the ruling, but the WTO's appeal body said Monday in Geneva that it upheld the original verdict. Following the verdict the United States asked China to honour the WTO ruling and lift its tariffs.

"I expect China to comply promptly with its WTO obligations by removing an unlawful and unfair trade barrier that is harming US workers and manufacturers," US Trade Representative Susan Schwab said in a statement. Welcoming the ruling, Europe's top trade official Catherine Ashton said: "China should now put an end to the discrimination and ensure a level playing field in its automotive sector."

Beijing requires that home-produced cars contain a minimum of 60 percent local content. A vehicle that fails that criterion is slapped with the same tariff as if it had been imported completely built. China imposes an import duty of 25 percent on whole vehicles and 10 percent on auto parts. It has said the rules aim to prevent tax evasion by companies that import whole cars as spare parts to avoid higher tariff rates.
In effect, the import duty of 25% previously applied by China should be reduced to 10% to attain compliance with the ruling.

The Top 10 Migration Issues for 2008

♠ Posted by Emmanuel in at 12/16/2008 07:29:00 AM
Regular readers should not be surprised that I hold the work of the Washington, DC-based Migration Information Source in high regard. Not only is it staffed by a very international group, but it also addresses migration issues at a global level. (The New York Times recently ran a feature on this remarkable thinktank.) In contrast, many other US migration thinktanks--I needn't name them here-- frankly have neither of these qualities, mostly being "A Bunch of White Guys Thinking of New Ways to Keep Steenkin' Foreigners Out of the USA" and the Amerocentric focus that entails. The former's website is a fine resource for those interested in global migration, and it currently has a summary of migration in this tumultuous year with its list of the "Top 10 Migration Issues for 2008." What follows is a brief summary, although the entire pamphlet is well worth reading:

1. "Buyer's Remorse" on Immigration Policy
The current economic downturn has made many destination countries cautious about welcoming permanent migrants, with some expressing the policy equivalent of buyer's remorse: paying too high a price for something no longer desired.

2. The Recession-Proof Race for Highly Skilled Migrants
Gloomy economic forecasts do not seem to have slowed the hunt for highly skilled migrants or foreign students — the best near-term solution to fill shortages and enhance competitiveness.

3. Remittance Patterns in Flux
Remittances to developing countries have steadily climbed, but the economic crises this year raise the question of how those countries will fare with the United States and Europe in recession.

4. Immigration Ultimately Not an Issue in the 2008 Election
The subject of immigration was almost nonexistent in the general-election contest between Democrat Barack Obama and Republican John McCain though both candidates sought the Latino vote.

5. Xenophobia Rising
Unfortunately, 2008 brought a new wave of xenophobia, most notably in South Africa and Italy.

6. Return Migration: Changing Directions?
Due to changing economic circumstances, the prospect of return migration has gained currency in immigrant-receiving states around the world.

7. Demography and Migration Flows: Do Shrinking Populations Mean More Migrants?
Policymakers in developed countries are beginning to take the increasingly stark demographic landscape more seriously. One solution on the table: immigration.

8. Building Border Fences
Although far from foolproof in deterring would-be migrants, border fencing remained a priority for many countries in 2008.

9. Warming up to Circular Migration?
Circular migration means a continuing, long-term pattern of international mobility. The European Union set up two pilot programs in 2008 that seek to facilitate this type of movement.

10. Struggles of Iraqi Refugees Continue
An estimated 4.7 million Iraqis remain displaced either internally or in neighboring countries, and Iraq is still the leading source of asylum applicants worldwide.

ASEAN Charter: Paving the Way for a Single Market

♠ Posted by Emmanuel in at 12/15/2008 04:40:00 PM
The subprime contagion has buried a very important event that may, in time, prove as momentous for persons in Southeast Asia--half a billion strong--as it was for Europeans in 1957 with the creation of the European Economic Community. On this day, 15 December 2008, the ASEAN Charter comes into effect. It was supposed to be signed at a gathering of member countries in Thailand, but recent events there waylaid proceedings. (You can read the Charter in its entirety here.) Just as the three pillars of what eventually came to be known as the EU involve economics, security, and policing, the ASEAN has three near-counterparts: the ASEAN Economic Community, the ASEAN Political-Security Community, and the ASEAN Socio-Cultural Community. And, just as the EU has rotating heads among member countries, so too will ASEAN. Importantly for a blog discussing international political economy, ASEAN is (still) aiming for a single common market by 2015. The Associated Press has more on this angle:
The Association of Southeast Asian Nations moved to forge an EU-style community Monday, signing a charter that makes the bloc a legal entity for the first time and could pave the way for creating a single market within seven years.

ASEAN Secretary-General Surin Pitsuwan said the new charter, which was ratified by foreign ministers, accords a legal identity to the regional grouping for international negotiations and transactions. Though largely without enforcement action, it also sets out a common set of rules for trade, investment, environment and other fields.

Up until now, the 10-nation organization has been little more than a talk shop, forging agreements through consensus and steering away from confrontation.

One of the key goals of the charter, initially drafted one year ago, is to establish a single market by 2015 for the vast and diverse region of 500 million people, though the deepening global financial crisis and political instability in several member states could derail those plans. ASEAN already has been developing a free-trade zone since the 1990s, but progress has been spotty.
The AP article is right in pointing out that ASEAN has long talked about becoming an EU-like assemblage to little effect. My hope is that the Charter serves as a commitment device that inspires countries in the region to work towards a single market. I've had very little truck with Eurosceptics precisely because creating EU-like entities in different parts of the globe has occupied the dreams and aspirations of so many other people and nations. At a time of recurrent financial crises, who doesn't want a strong single currency or strong intra-regional trading links that can help sustain economic activity when Western export markets go sour? Make no mistake: for all its foibles, the EU is a model to follow, not an arrangement to avoid. Witness the line of Eastern European countries now knocking on Brussel's door.

The significance of this day for Southeast Asia will be better assessed long after this blog has become a cyber-memory. These arrangements take time to consummate. Never let it be said though that the liberal idea of countries forging past historical grievances is an idea cherished only by Westerners.

Religion: Opium of Subprime-Addled Americans?

♠ Posted by Emmanuel in , at 12/15/2008 07:58:00 AM
Religious distress is at the same time the expression of real distress and the protest against real distress. Religion is the sigh of the oppressed creature, the heart of a heartless world, just as it is the spirit of a spiritless situation. It is the opium of the people. The abolition of religion as the illusory happiness of the people is required for their real happiness. The demand to give up the illusion about its condition is the demand to give up a condition which needs illusions.

The above quote is taken from Karl Marx's Critique of Hegel’s Philosophy of Right. I was reminded of it by an article I've just read in the New York Times discussing how church attendance is spiking in the United States in the wake of the subprime crisis. Although figures indicate that attendance is increasing across all denominations, the most marked jumps are at evangelical churches. The latter finding is the most interesting one to me as it serves as a good entry point for a straightforward Marxist analysis of the situation, after having applied Marxist thought to some other situations [1, 2, 3].

There is no doubt that Americans have fallen under hard times. There is no doubt either that Americans fault President Bush to some extent for these hard times given his rock-bottom approval ratings. Now, Karl Marx and Friedrich Engel are famous for their brand of economic determinism, i.e., all history is the history of class struggle. In Marxist thought, the base of whatever society is always economic. To Marx, struggles over economic resources occur between different classes; namely, the bourgeoisie (holders of capital) and the proletariat (those who command little capital thus forced into wage slavery). The interest of the landed classes is to perpetuate a system of oppression by removing the accentuation on class conflict. Hence, to the economic base we must add other elements to keep the proletariat in line by creating an illusion that "we're all in this together": politics (to create an illusion of participation), religion (to create an illusion of a higher power), and culture (to create an illusion of shared history justifying oppression). These and other elements are incorporated in the superstructure.

Bush has famously enlisted the support of the Evangelical or "born again" movement. At the same time, he has heavily courted Wall Street interests. During the 2004 election cycle, 9 out his top 10 contributors were financial services concerns--many of which now occupy the headlines, some of which are now defunct. Marx would marvel at this ingenuity of it: Bush courted political support from those who are ultimately hurt by his economic policies. As the subprime mess lurches across the land, however, the end result is not a refutation of Bushite interests but a reinforcement of it as regular folks flock to churches in even larger numbers. Some commentators have argued that the evangelical vote is weakening, and that Republicans will no longer be able to count on this vote in the future. A Marxist mode of analysis suggests otherwise: the illusion perpetuates itself as poor economic times gather the masses into a convenient location for savvy Republican candidates to once again gather their votes.

How can the bourgeoisie improve on a situation where, the worse you make the situation for the people, the more they flock to your favored religion? Like with so many other things, Marx was indeed prescient. I will leave you with this research paper by David Beckworth at Texas State University (natch) demonstrating the relationship between attendance at evangelical churches and sour economic times. Here is the abstract:

Some observers believe the business cycle influences religiosity. This possibility is explored in this paper by empirically examining the relationship between macroeconomic conditions and Protestant religiosity in the United States. The findings of this paper suggest there is a strong countercyclical component to religiosity for evangelical Protestants while for mainline Protestants there is both a weak countercyclical component and a strong procyclical component.

Treasuries, 'Risk Free' Rate & Fed's Wicked Game

♠ Posted by Emmanuel in , at 12/14/2008 01:39:00 PM
It is hard not to marvel at the state of this lunatic assemblage collectively known as "the world economy." Treasury yield curves indicate that the US government can now borrow money repayable in one or three months' time for free or almost for free. Uber Cassandra Ambrose Evans-Pritchard of the Telegraph gleefully notes that three-month yields momentarily became negative, meaning lenders actually paid the Fed interest. This, of course, is beyond perverse. The US government, egged on by Wall Street lobbyists, lifted nearly all their unwanted rules pertaining to banking oversight. Yet in the end, even with all the rules bent in their favor, these banks only managed to mess things up while dragging the whole world down in the process. As investors of all stripes flock to Treasuries en masse, we now have the very questionable situation of the US government becoming America's sole unencumbered borrower.

Think of it this way: in a place where private-sector financing has virtually evaporated, the US government is usurping the role of what used to be known as "the credit market." You name it: the banking industry, housing finance, and soon even automaker finance will fall under the watch of G-men. The US is setting a very questionable example for the rest of the world: the Washington Consensus folks prescribe discipline for others in times of trouble--witness the Asian financial crisis--but splurge when they themselves get into trouble. Charles de Gaulle once chafed at the "extraordinary privilege" America has of being able to print unlimited amounts of dollars, still the world's foremost reserve currency. Even now, this status allows the US to escape the fiscal discipline imposed on most other countries. Indeed, it seems that America's known intention of running over a trillion dollar fiscal deficit in 2009 has only encouraged folks to invest more in Uncle Sam's IOUs.

Or is the situation as rosy as that for America, Inc.? While I doubt whether American sovereign debt will ever be downgraded, what used to be the purview of credit rating agencies seems to be becoming the domain of everyone. These agencies having lost the collective faith of investors, it is now incumbent upon us all to be the ultimate arbiters of creditworthiness. Commentator James Saft of Reuters makes good points in his most recent contribution along these lines. In business textbooks at least, Treasuries are typically referred to as offering the "risk free" rate of return. In other words, the US government is the world's most reliable borrower when it comes to repaying debt. Given its mounting and onerous obligations, however, many are questioning if rock-bottom Treasury yields are really indicative of this status or if something else is at work:
The U.S.’s benchmark status as a “risk free” borrower is based on the idea that it is the best available credit, a solid gold borrower that will not default. And of course as Treasuries are denominated in dollars and as the state ultimately can print money to fulfil its obligations, that is correct.

But investors clearly are becoming increasingly spooked that the United States’ difficult situation and its absolutely huge borrowing plans are making it a less certain risk. It now costs 60 basis points a year to buy a five-year credit default swap insurance policy against U.S. sovereign default, up from about 15 basis points in August and 100 times more than in January 2007 when it was 0.6 basis points. Clearly, somebody thinks risk free isn’t so risk free any more. This compares with a 50 basis point cost for German or Japanese debt. And remember too that 5-year Treasuries are only yielding about 1.70 percent, so a hedge against default would eat up quite a lot of one’s return.

Ironically, the Federal Reserve’s potential strategy of buying up government debt to reliquify the economy and avoid deflation may just make things worse. Federal Reserve chairman Ben Bernanke last week said the Fed could directly purchase “substantial quantities” of longer-term securities issued by the U.S. Treasury or government-sponsored agencies to lower yields and stimulate demand.

Fair enough, and it’s not as if I have a better plan for jump-starting the economy, but having the state buy up Treasuries will only put more distance between a genuine “risk free” rate and reality. Investors will be even more in the dark about what and where risk is. They will not know where Treasuries would trade without Fed intervention, nor will they know when and how quickly the Fed will roll back that intervention when growth and inflation inevitably arise again.
If true, the Fed's plan of depressing longer-term yields by buying up Treasuries is certainly worrying. If cheap and abundant credit brought us this mess, it is not clear to me how returning to conditions of cheap and abundant credit can clean matters up. Einstein once said that insanity is doing the same thing over and over again and expecting different results. He couldn't have called it better. That US sovereign debt now commands higher default premia than its German and Japanese equivalents should be a warning about the emerging folly of relying on credit ratings and yields in a world where governments, not markets, determine the allocation of credit. Caveat emptor: in the end, we alone are responsible for seeing through the follies of the Fed and other financial miscreants.

China's Currency: Yuan Blood, You Got It

♠ Posted by Emmanuel in , at 12/13/2008 09:29:00 AM

It's animal - living in a human zoo
Animal - the s--t that they toss at you

I am convinced that AC/DC was singing about the political economy of exchange rates in the abovementioned song. If you ask me, the most important price in the world economy is none other than the USD/CNY exchange rate. Of course, this price is "heavily managed," a euphemism for the Chinese government having a heavy hand in its determination via measures including unprecedented levels of reserve accumulation--all $2 trillion and counting of it. Its determination has little to do with being either "free" or "market"-based.

China has long been on a collision course with the US over this trade practice, and the incoming Obama administration will likely take a less relaxed attitude to it. During the heyday of global economic imbalances not so long ago, protectionist forces in the US were balanced by the fake prosperity of cheap consumer credit care of surplus-running countries like China. Conversely, burgeoning exports meant the PRC could appease its critics by gradually appreciating. Those restraints have since bitten the dust as weakened American industries seek a big, bad scapegoat and the Chinese government tries to blunt the social consequences of a stalling export machine. At last, we may soon be witness to a long-awaited clash--not necessarily a bad thing, some say.

This topic is a favorite one among these parts, and I have been persuaded to post again on it by two recent finds. MarketWatch is out with an article suggesting that China is set to reverse course and gradually depreciate its currency after three years of steady nominal appreciation since abandoning a hard dollar peg. The article suggests that while depreciating the yuan won't do much to encourage spending in hard-hit deficit-running countries, it will send a signal that the Communist Party still cares about its people at a time when large-scale unrest caused by migrant laborers losing their jobs is a distinct possibility:
China's currency is expected to continue to weaken against the U.S. dollar in coming months, albeit at a moderate pace, as authorities weigh the political and economic benefits of a weaker currency in propping up the export-oriented economy.

Analysts say a measured decline in the yuan lasting about six months would not be out of tune with statements by senior Chinese economic leaders Wednesday calling for the yuan to remain "overall stable at a reasonable equilibrium level."

"They want to send a message that they could depreciate the currency a little bit," said Sebastien Barbe, senior economist for Asia, Calyon Credit Agricole, in Hong Kong. "They want to avoid a shock on expectations and igniting capital outflows."

References to the currency were issued Wednesday by China's top leadership at the conclusion of the three-day Central Economic Conference, a forum which usually sets the tone for economic policies in the coming year.

Analysts said currency stability was understood by the market to mean limited movement against the dollar and other leading currencies on a weekly basis. Bigger moves, they say, could spark an exodus of investment capital, copy-cat devaluation among regional neighbors, and protectionist sentiments with leading trading partners.

"From my point of view stability means no big fluctuations, it does not mean absolute stability of the currency versus the U.S. dollar," Barbe said, adding the yuan could fall up to 6% against the dollar over the coming half year...

Further weakness in the yuan would extend a trend change that began Dec. 1 when it fell by its daily limit 0.5% against the dollar, a move that analysts say signaled China no longer viewed a stronger currency as desirable.

Economists believe currency devaluation would do little to spur overseas demand for Chinese made goods. Still, a small-scale easing might have political benefits and help shore up company earnings which are being squeezed by a "growth shock" as China's export's growth decelerates.

"It an important political message to companies and migrant workers losing their jobs," said Dong Tao, chief economist Greater China for Credit Suisse in Hong Kong. "China's problem is not losing competitiveness but that demand disappeared." Tao added that he expected China to move into deflation for a brief period next year. Falling prices, he added, would further pressure corporate earnings and damp consumer spending at a time when the economy is already slowing, presenting a major challenge for policy makers.

Data released Wednesday showed China's exports declined 2.2% in November on year, the first such contraction in more than seven years, underscoring the severity of the global slowdown. The decline was the first on a monthly basis since February 2002.
I am very sceptical that gradual depreciation of the yuan will be enough to appease American and European exporters who've long sought action on China's currency policy. If they were unhappy with the rate of yuan appreciation before, there's little reason to believe that any sort of depreciation will cheer them up now. Add sour times and the dogs of trade war look set to be unleashed.

For those who are more circumspect about an impending trade war and less interested in finding out who's mightier in geopolitical terms, I also have something for you. The news that China's exports declined on a year-on-year basis has probably been heard by many. However, a recent Bloomberg article also had a noteworthy statement from a Chinese official:
The yuan’s biggest one-day decline in three years on Dec. 1. prompted speculation that China may allow its currency to depreciate, helping exporters by making their products cheaper in overseas markets. The yuan may weaken as much as 10 percent against the dollar, Morgan Stanley said last week.

Commerce Minister Chen Deming denied last week that China would rely on the currency to help exporters, saying that “the cause of the current problem with exports is shrinking demand, not problems with currencies.”
Those leery of trade conflicts should hope Comrade Chen and like-minded apparatchiks have more influence on China's internal politics than the export lobby. Certainly, WTO negotiations coming up short once again doesn't help matters. Otherwise, cue up the AC/DC: blood on the streets, blood on the rocks, blood in the gutter, every last drop...