Posts of June 2009

HIPCs are So 2000; Meet the Debt-for-Nature Swap

♠ Posted by Emmanuel in Development,Environment,Southeast Asia at 6/30/2009 05:27:00 PM

Given the bedraggled state of US finances, it is still worth remembering that it is a large lender to LDCs. At the turn of the decade, forgiving the debts of highly indebted poor countries (HIPCs) was all the rage. With the environmental consciousness of development agencies increasing--loans and projects now have to have environmental impact assessments--it was only a matter of time before something like occurred on a larger scale.

You see, USAID has begun giving loan forgiveness under the Tropical Forest Conservation Act of 1998. This kind of debt relief is granted upon recipient countries agreeing to better protect tropical forests from deforestation in a so-called debt-for-nature swap. The US is about to embark on the largest such deal with Indonesia. From the Wall Street Journal:

The United States will sign an agreement Tuesday to forgive nearly $30 million in Indonesian debt in return for the large Southeast Asian country agreeing to protect forests on Sumatra Island, which is home to endangered tigers, elephants, rhinos and orangutan.

The deal is the largest so-called debt-for-nature swap the U.S. government has organized so far under the U.S. Tropical Forest Conservation Act and its first such pact with Indonesia, which has one of the fastest deforestation rates in the world, losing an area of forest the size of Switzerland annually.

Conservation International, the U.S.-based conservancy group, helped organize the deal, and has contributed $1 million to help reduce the debt. "This is a huge boost for people and wildlife of Sumatra, and demonstrates a forward-looking policy on the part of the U.S. government," said Jatna Supriatna, vice president of Conservation International Indonesia.

Under the deal, Indonesia will pay the nearly $30 million into a trust over eight years instead of repaying it to the U.S. government. The trust will issue grants for critical forest conservation work in 13 forest areas in Sumatra.

The U.S. in the past has organized smaller debt-for-nature swaps with countries like Guatemala, Botswana, the Philippines and Peru. Under the Tropical Forest Conservation Act of 1998, developing nations with a significant tropical forest, a democratically-elected government, and an economic reform agenda, are eligible for debt forgiveness in return for conservation efforts.

Indonesia's massive deforestation rates makes it the world's third-largest emitter of carbon dioxide behind the United States and China due to the forest fires set each year on peat lands to clear forests...

***damn Green Dam PRC Nannyware Postponed

♠ Posted by Emmanuel in China,Trade at 6/30/2009 04:26:00 PM

Our favorite official news agency Xinhua reports that the Chinese government is delaying the implementation of its "Green Dam Youth Escort" nannyware:

China will delay the mandatory installation of the controversial "Green Dam-Youth Escort" filtering software on new computers, the Ministry of Industry and Information Technology (MIIT) said here Tuesday. The pre-installation was delayed as some computer producers said such massive installation demanded extra time, said the ministry.

All computers produced or sold in China were scheduled to be installed with
such software after July 1, according to MIIT's previous announcement. The
ministry would continue to provide a free download of the software and equip
school and Internet bar computers with it after July 1, said a spokesman with
MIIT. The ministry would also keep on soliciting opinions to perfect the
pre-installation plan, he said. The software is designed to block violence
and pornographic contents on the Internet to protect minors. It could also help
parents control how much time their children spent online.

I do not think we have heard the last of this nannyware. Dramas abound over it containing stolen code as well as American manufacturers pressing the US to kill it off. I believe the Chinese government is using this delay to ensure that (a) whatever it will eventually force manufacturers to install will not contain any hint of pirated code; (b) the software is less intrusive on basic computer operation; and (c) foreign firms are given more time to install future versions.

If and when those objections are removed, it would become a more unobjectionable piece of software even if it is, at heart, a fairly brazen attack on personal privacy.

Those Fake Improvements in US Personal Saving

♠ Posted by Emmanuel in Cheneynomics,Credit Crisis at 6/26/2009 05:17:00 PM

I was puzzled by the blogs of the New York Times and the Atlantic trumpeting improvements in the US personal saving rate. Both have neglected to mention the rather important fact that disposable personal income--the denominator value in computing this rate--has been grossly distorted by ongoing initiatives related to the stimulus package. When these distortions are removed, we are likely to get a clearer picture of the situation. In the meantime, let me explain what's going on.

Stock markets are rather underwhelmed by the latest data on US personal income and personal spending. Sure, the headline numbers look impressive, with the personal saving rate for May coming in at 6.9% as opposed to an already impressive 5.6% the month before. However, the $787 stimulus bill formally known as the American Recovery and Reinvestment Act of 2009 is providing Americans with a dubious and temporary windfall largely at government's expense. On the giveaway side, it's largely down to one-time checks of $250 provided to Social Security recipients. On the takeaway side, payroll tax relief is lessening the government's take in a bid to boost consumption. While personal spending did go up by 0.3%, personal income went up by 1.4%.

What you have here, then, is largely a mirage--and an unsuccessful one at that. Stock markets are unhappy with personal income fattened up by government checks and reduced payroll taxes not translating into consumer spending--still the bedrock of the US economy. The summary of the monthly data is instructive:

Personal income increased $167.1 billion, or 1.4 percent, and disposable personal income (DPI) increased $178.1 billion, or 1.6 percent, in May, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $25.1 billion, or 0.3 percent. In April, personal income increased $78.3 billion, or 0.7 percent, DPI increased $140.0 billion, or 1.3 percent, and PCE increased $1.0 billion, or less than 0.1 percent, based on revised estimates. The pattern of changes in personal income and in DPI reflect, in part, the pattern of increased government social benefit payments associated with the American Recovery and Reinvestment Act of 2009.

The shaky foundations of this "recovery" in American savings become apparent after searching just a little:

Personal current transfer receipts increased [by an annualized] $162.6 billion in May, compared with an increase of $59.1 billion in April. The American Recovery and Reinvestment Act of 2009 provides for one-time payments of $250 to eligible individuals receiving social security, supplemental security income, veterans benefits, and railroad retirement benefits. These benefits boosted the level of personal current transfer receipts by $157.6 billion at an annual rate in May. These payments are classified in “other” personal current transfer receipts rather than in old-age, survivors, disability, and health insurance benefits because they are not benefits paid from the social security trust fund.

In simple words, the April data was already fattened with stimulus checks, and more so the May data. Absent these handouts, incomes would have increased by only 0.2% instead of 1.4%. Remember that these are one-shot deals. Unless Obama intends to shepherd through another round of stimulus packages featuring similar disbursements in FY 2009, we aren't likely to see a continuation of this trend. Returning to non-stimulus reality land, private sector salaries and wages fell by 0.2%. (These also fell for workers as a whole.) With further layoffs in store, it should become plenty evident that the emperor has no clothes aside from these stimulus package rags.

The buck is simply passing to Uncle Sam from Joe Average in the debt accumulation sweepstakes for no net improvement in overall (public and private) savings. Worse, the desired effect of encouraging consumer activity appears to be underwhelming. There is little bang for the buck here, and those savings rates are as juiced as your average WWE pro wrestler.

Obama, bring on your next gargantuan stimulus package that has no real effect other than piling more debt on the world's largest debtor nation. The American taxpayer, this ($787B) dud's for you.

US, Google, and PRC Censorship of the Internets

♠ Posted by Emmanuel in China,Economic Diplomacy,Trade at 6/26/2009 10:51:00 AM

The Tony Award-winning musical Avenue Q, a parody of Sesame Street, has a memorable song declaring that "The Internet is for Porn". Above is the music from that song set to World of Warcraft video game imagery. What brought it to mind are China's latest initiatives purportedly targeting the spread of mind-polluting pornography in the country with the world's largest base of Internet users. At first, authorities had little computer cops trundling across your computer screen whenever you visited forbidden sites. With the 20th anniversary of Tiananmen passing without much incident, PRC leadership appears to have been emboldened in asking for others to comply with more draconian censorship measures, such as American computer software and hardware providers.

Those who are skeptical-minded, like yours truly, see this initiative of targeting porn as a Trojan horse for more intrusive censorship should it become necessary. Certainly, events in Iran--especially the use of YouTube and Twitter to foment protest--are not dissuading apparatchiks keen on keeping a lid on dissent, I mean, "porn." So I bring you two stories, the first of Google being caught up in the censorship debate and the second of ongoing US efforts to scuttle the installation of nannyware in computers sold by Yanks in China.

Let us begin with Google. This company has uniquely hamstrung itself due to its motto of "Don't Be Evil." Interpreted literally, the firm ought not pay attention to the Chinese government's efforts to toe the line according to its wishes. In the past, Google has famously acceded to government intervention in order to ply their trade in the Middle Kingdom. During recent days, Google services have been beset by mysterious outages that many observers take as not-so-subtle hints of displeasure from the Politburo's minders. From Reuters:

On Thursday, a Chinese official accused Google of spreading obscene content over the Internet. The comments came a day after Google.com, Gmail and other Google online services abruptly became inaccessible to many users in China. Analysts said the service disruptions are unlikely to have major financial repercussions on Google given its presence in China, but may prompt the company to tweak its operations in the world's single largest Internet market by subscribers.

"China itself is a rounding error for Google. It's a high growth opportunity for them, but it's not a major contributor today," said RBC Capital Markets analyst Ross Sandler. Google, which gets 52 percent of its revenue from outside the United States, does not divulge China-related income. Sandler estimates Google's annual revenue from China at $200 million to $300 million, or about 1.4 percent of the $21.8 billion in revenue the company recorded in 2008.

"There's a lot of volume in China, but the monetization of the traffic, the online advertising, isn't as far along as it is in U.S. and Europe," said Richard Fetyko, an analyst with Merriman Curhan Ford.

Google's share of the Chinese search market lags Baidu, the country's home-grown Internet powerhouse which analysts believe has upwards of 60 percent market share. But with more than 200 million Internet users, China represents a market Google cannot overlook. "It's an important growth region for them," said Fetyko. "So they can't just ignore it and walk away from it."

The Chinese government has not acknowledged whether it had a hand in the recent Google service outages. Google said it is investigating the incidents but would not comment on whether it has had any contact with Chinese authorities.

This leads to important corporate social responsibility questions that Internet providers would prefer to avoid--as I would if I were in their shoes, actually:

That pragmatic approach is common among U.S. Internet companies doing business in China. On Thursday, Yahoo Inc CEO Carol Bartz answered a question about Chinese censorship at the company's annual shareholder meeting by saying that Yahoo was not created to "fix China"..."We have worked better, harder and faster than most companies to respect human rights and try to make a difference," said Bartz. "But it's not our job to fix the Chinese government."

Given the longer term importance of doing business in China, analysts said Google is now likely to figure out how to stay in the good graces of the Chinese authorities. "There's nothing that Google can do to get around it but make peace with the Chinese government," said RBC's Sandler.

There is an oft-repeated truism that the development of media is partly drive by, well, porn [1, 2]. Hence, unbelievers like me would point out that the PRC's intention is not really so much preventing porn but of information dissemination. Chairman Wen, pay heed to Avenue Q.

Next, we have more developments in the case of China trying to install truly vile software into the wares of US computer sellers like HP and Dell, making these firms ask for US action on their behalf [1, 2]. Requiring software that fouls up machine operation is a non-tariff barrier any way you cut it. My earlier inklings that this episode could foment a full-blown trade case have been realized as the following Reuters article suggests. In any event, it's a pretty stern test for the newly beamed-up US Trade Representative, Ron "Cap'n" Kirk:

The United States still hopes it can persuade China to abandon, or at least delay, its plan to require controversial filtering software on new computers, despite growing trade friction over the issue, a U.S. trade official said on Thursday. "The U.S. government will remain focused on the problem and use diplomatic and other available means as necessary to resolve it," said Debbie Mesloh, a spokeswoman for the U.S. Trade Representative's office one day after top American officials urged Beijing to drop the plan.

China's Ministry of Industry and Information Technology said on May 19 that all personal computers sold in China must have the "Green Dam" Internet filtering software as of July 1. Chinese officials said the filter is necessary to prevent children from having access to pornographic websites.

But critics say the software, sold by Jinhui Computer System Engineering Co, is technically flawed and could be used to spy on Internet users and to block sites that Beijing considers politically undesirable.

U.S. Trade Representative Ron Kirk and Commerce Secretary Gary Locke urged China in a letter on Wednesday to abandon the plan, which they said would mean U.S. companies would be required to preinstall software "that appears to have broad-based censorship implications and network security issues." They objected to the short six-week notice that China gave for the new requirement and said there were complaints from global technology companies and media groups about the software.

If unresolved, the issue is likely to be a sore spot in upcoming U.S.-China meetings, including the Strategic and Economic Dialogue planned for late July, the Joint Commission on Commerce and Trade this autumn and meetings between President Barack Obama and Chinese President Hu Jintao around the Asia-Pacific Economic Cooperation summit in November.

Locke and Kirk also hinted at a possible case at the World Trade Organization, but those can take years to resolve. One U.S. industry official, who asked not to be identified, said the Obama administration seemed to be emphasizing commercial concerns over the human rights aspect of the issue because China was more likely to respond to that.

You...up against the wall, cyber-comrade! Another trade spat is likely in the offing if China doesn't back down from this nonsense.

China v. US: Which Came First, Metal or Chicken?

♠ Posted by Emmanuel in China,Litigation,Trade at 6/26/2009 10:33:00 AM

Following news that the US and EU have requested for talks to begin at the WTO over China's use of protectionist policies giving local firms advantages in availing of domestically-sourced raw material supplies comes news that China has, in response, requested that a dispute settlement panel be formed to contest US bans on Chinese chicken over avian flu. That is, while the commodities case initiated by the US and EU has just entered the 60-day window for resolving matters through bilateral talks, that period has already lapsed for the chicken case initiated by China, meaning it can now ask for court proceedings to get underway.

This Wall Street Journal Asia op-ed says this tit-for-tat is not really going to cause significant changes in their trade relationship. Moreover, it is argued that both cases have merit:

The U.S. and the European Union raised complaints this week at the World Trade Organization over China's export restraints on raw materials. Meanwhile, China has escalated a WTO complaint against the U.S. on poultry imports. This may sound like childish tit for tat, but it's actually a grown-up conversation. Both cases have merit, and the WTO is the right place to resolve them.

The complaints brought by the U.S. and EU center around China's exports of nine raw materials, including coking coal (used in steel production), bauxite (used in aluminum production) and zinc. When China joined the WTO in 2001 it agreed to eliminate most export duties, including on the materials listed in this case. But it hasn't done so: Coke duties stand at 40%; bauxite at 15%; yellow phosphorous at 70%. The duties are designed to encourage these raw materials to stay in the country and allow domestic producers to purchase them at cheaper prices than those paid by the rest of the world.

The U.S. may have a strong legal position against China in this case, but it doesn't exactly have the moral high ground. This is the Obama Administration's first WTO complaint, and it's a convenient gift to the Steelworkers Union, which supported him during last year's election. Several of the materials are products used in steel production, and lower duties would mean cheaper inputs for U.S. steel mills and other manufacturers. That's a good outcome, but it would be nice to think that the Administration was acting on free-trade principle not because it's payback time.

Beijing was quick to hit back, announcing on the same day that it would request a WTO panel to investigate an effective U.S. ban on imports of Chinese poultry. This doesn't come as a surprise -- Beijing first announced this complaint in March -- but the timing of the announcement is a reminder of the political overtones these cases can take on. Chinese poultry has effectively been banned from the U.S. for the past two years because of misplaced concerns about avian influenza.

Although it may appear at first blush that a trade war is brewing here, both of the cases have been building slowly for years, and the good news is that the WTO dispute resolution process offers a neutral way to work through them. More worrying signs of deterioration in the U.S.-China trade relationship are coming from other quarters.

Yes, organized labor must be dinged. These are, after all, the WSJ editorial pages. However, I doubt whether the interests of Obama steelworkers are aligned with those of steel mills in this instance. Why exactly would steelworkers be keen on availing of Chinese supplies that would presumably "steal jobs" from their American brethren?

Nuclear Revival, University of Birmingham Edition

♠ Posted by Emmanuel in Energy,Europe at 6/26/2009 08:28:00 AM

The much-vaunted nuclear revival is in full swing as any number of countries have searched for alternative power sources that are both reasonably cost-efficient and non-carbon emitting. Yes, I'm talking about you, fossil fuels! Current sentiment for nuclear power is driven by a number of factors. Improvements in the design of nuclear power plants have largely removed Homer Simpson-esque fears of imminent catastrophe by bungling operators. Many years without a high-profile incident have bolstered this sentiment. Consequently, longstanding green opposition over the safety of nukes has since been outbalanced by its non-carbon-emitting nature. Meanwhile, the Great Oil Heist of 2008 when crude reached over $140 a barrel also made oil-importing countries aware of the perils of relying too much on this kind of fuel whose price may reach such heights again in the near future. While global recession has put a damper on these concerns for now, healthy debate continues on, well, the health of remaining oil reserves and whether more advanced technologies can expand the quantity of usable fuels.

My alma mater is alike many others in emphasizing hard sciences over social sciences, despite the greater concentration of students in the latter disciplines. Why this is so should be fairly obvious. For the world's leading universities (international surveys such as the Shanghai Jiao Tong and the Times Higher Education Supplement and the both place us in the world's top 100), prestigious accolades for research as well as funding usually come from hard sciences. In a way, I share this old-fashioned bias: why the heck does the world need more smart alecks writing nasty blogs when it could have people devoted to combating global warming and similarly useful stuff (did I really write that)? In academic research at least, social sciences are for the boys while hard sciences are for the men.

Aside from continuing success in global university league tables, this emphasis may be finally paying off for us in the long-neglected nuclear arena. Despite the long lean years, our nuclear program has been kept intact. Contrast this to the national controversy over the fate of the internationally well-known Centre for Contemporary Cultural Studies (CCCC). As you'd expect, sympathy for a left-leaning, administration-hating outpost in the social sciences stood a far lesser chance of surviving a lean period. Heck, there's even a fairly lengthy Wikipedia entry about its demise.

Returning to the nukes, it's a more straightforward story as would-be students are reacting to unequivocal signals about the supply-and-demand situation for those who know a thing or two about buidling and running plants. Indeed, the program is heavily funded by the industry. While this master's level program has a very pithy description on the university website in contrast to more heavily marketed courses, it turns out that ours is one of Britain's better established ones. The following comes from p. 6 of the May 2009 University of Birmingham Newsletter. Enrollments are at all time-highs:

More students that ever are studying for an MsC in the Physics and Technology of Nuclear Reactors at the University this year. The UK's most long-established course in the subject has enrolled a total of 40 students, the highest number in its 52-year history, making it the biggest course of its kind in the country. Almost 600 students have graduated from the MsC program, which started three weeks before the opening of the UK's first power station, Calder Hall, in 1956.

Dr. Paul Norman, Head of Physics and Technology of Nuclear Reactors, says: 'I think the huge demand is due to the government stance now being more in favor of nuclear, and because nuclear seems now to be a good way forward in a world threatened by global warming, increasing gas and oil prices and security of supply issues.

'Students now see a future career in industry which they wouldn't have done even just a handful of years ago. It's early days yet, but it looks like we may break the record again this coming year.'

Factor in the depletion of the North Sea oil fields and the writing on the wall for Britain is clear: Nuke 'em if you got 'em. And if you're studying to enter this field, well, come to Brum.

US, EU Go to WTO on PRC Raw Materials Use

♠ Posted by Emmanuel in China,Europe,Litigation,Trade at 6/24/2009 04:17:00 PM

From the US Trade Representative's site comes word of a joint US-EU filing regarding China's restrictions on the availability of PRC raw materials to the would-be plaintiffs. That is, there is unequal access to PRC-produced raw materials granted to Chinese firms not given to foreign ones in alleged contravention of WTO rules:

What Chinese Policies Are at Issue?

China maintains a number of measures that restrain exports of raw material inputs for which it is the top, or near top, world producer. These measures skew the playing field against the United States and other countries by creating substantial competitive benefits for downstream Chinese producers that use the inputs in the production and export of numerous processed steel, aluminum and chemical products and a wide range of further processed products. The principal measures include:

Export quotas that tightly restrict the volumes of material that can be exported from China

Export duties that raise the export price for the raw material inputs

Other export restraints, including export licensing, minimum export price requirements, and export quota administration procedures that appear, among other problems, to limit eligible exporters and require exporters to pay substantial fees for the right to export these materials

Why Is This a WTO Problem?

Export Quotas: World Trade Organization (WTO) rules generally prohibit a WTO Member from imposing restrictions on exports such as export quotas.

Export Duties: When China joined the WTO in December 2001, China also specifically committed not to impose duties or taxes on exports, except for limited duties on a small number of products specifically identified in an annex to China's WTO protocol of accession. The export duties the United States is challenging are not covered by those exceptions.

Other Export Restraints: The WTO generally prohibits export restraints such as export licensing and minimum export prices and imposes limits on the amount of export fees that can be charged. Furthermore, when China joined the WTO in December 2001, it specifically committed not to place limits on who can export products.

How do China's Export Restraints Disadvantage U.S. Manufacturers and Workers?

China's export restraints on raw material inputs can create enormous competitive advantages for downstream Chinese manufacturers and exporters in markets around the world. At the same time, the restraints seriously disadvantage U.S. and other foreign manufacturers, exporters, and workers in many downstream industries that make or use processed steel, aluminum and chemical products.

China's export quotas limit foreign access to these raw material inputs.

Because China is a leading world source of the raw materials, the export quotas can also raise world market prices for these inputs. The duties that China places on exports of the inputs further contribute to increased world prices.

At the same time, the export quotas increase the availability of the raw material inputs in China, creating lower domestic prices that can translate into significant cost advantages for China's downstream producers when they compete against foreign counterparts in China or around the world.

A prime example of the highly distortive effects of China's export restraints: the raw material input coke, a key steel input processed from a type of coal known as coking coal. In 2008, China was the world's leading producer of coke, accounting for approximately 60 percent of global production. China's production totaled 336 million metric tons (MT), but China placed export quotas on coke that limited annual exports to only 12 million MT. In addition, China imposed substantial duties on coke allowed to be exported - first, 25 percent export duties, and later in the year, 40 percent duties. The price effects were dramatic. In August 2008, when the world price for finished steel was approximately $1,150 per MT, China's domestic price for coke was $472 per MT, while the world price for coke was $740 per MT. Because it takes about one MT of coke to make one MT of steel in China, China's downstream steel producers obtained a dramatic competitive advantage by incurring input costs for coke that were $268 per MT less than their foreign counterparts.

Which Raw Material Inputs Are at Issue in This Dispute?

China imposes export restraints on numerous raw materials and partially processed raw materials. The dispute filed today addresses various unprocessed and processed forms of nine inputs of key interest to a wide range of U.S. industries: bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc.

These raw material inputs are used to make many processed products in a number of primary manufacturing industries, including steel, aluminum and various chemical industries. These products, in turn become essential components in even more numerous downstream products.

Just some of the products incorporating the raw material inputs at issue include:

- semi-finished and finished aluminum and aluminum alloy products and numerous products made with aluminum components, such as beverage cans, foil, baseball bats, windows and siding, compact discs and consumer electronics

- semi-finished and finished steel and steel alloy products and numerous products made with steel components, such as building supports and building materials, motor vehicles, equipment and major appliances

- fluorine-based chemicals, which are used in a wide variety of applications, including chemical processing, electrical products, textile laminates, automotive, consumer and industrial coatings, refrigerants, foam blowing agents and fiber products

- chemicals such as silanes and silicones, which are used in waterproofing treatments, molding compounds and mold-release agents, mechanical seals, high temperature greases and waxes, caulking compounds, contact lenses and pyrotechnics

- phosphorus-based chemicals, which are used in a wide range of applications, from flame retardants and pigments to additives and vitamins

- abrasives, cutting tools, ceramics, refractory materials, cosmetics, semiconductor chips, microprocessors, solar cells, rubber products, batteries, paints and medicines

- semi-finished and finished brass products and numerous products made with brass components, such as plumbing fixtures, door hardware and electrical accessories

------------------------
The continuation of the USTR link discusses US cases against China to date. (Baroness Ashton does not appear to have put in her comments on behalf of the EU.) The IELP also has a helpful summary of news clippings about this filing.

What is interesting to me at least is that the developed countries are now complaining of not having enough access to Chinese exports! Think about if for a minute and this does represent a change of emphasis. Instead of inadequate US/EU market access to the PRC, we have talk about inadequate Chinese access to developed markets being argued for by the developed countries. Sounds strange, no? Keith Bradsher of the New York Times discusses the story further in light of China's supposed turn towards a domestic instead of an export orientation (yeah, sure). It's a protectionism complaint still, but its resolution would have somewhat different implications for world trade balances.

A Journey to the Heart of Fabulous in Saudi Arabia

♠ Posted by Emmanuel in Middle East,Migration at 6/22/2009 08:39:00 AM

Not so long ago, Samuel Huntington warned about an impending Clash of Civilizations as cultural clashes became more frequent due to globalization making intercultural interactions more unavoidable. At about the same time, Priscilla Queen of the Desert was a hit movie about drag queens embarking on a search for identity in the Australian Outback. They've even made a musical out of it. Why am I telling you this? Well, both have come to real life in Saudi Arabia in a recent incident involving the Saudi authorities and Filipino workers. It is widely known that foreign workers constitute a large part of the KSA population--supposedly 5 out of 27 million from what I can gather on the Internets [no sic]. With recent windfalls from rising oil revenues, projects aimed at increasing energy production capacity as well as establishing centers for banking and commerce have popped up all over the place--once again necessitating an influx of foreign workers. To paraphrase Kevin Costner, if you plan to build it, will foreign workers come?

This rather ridiculous story involves some Filipino migrant workers celebrating Philippine independence day dressed as drag queens (!), while some some of their wives watched (!!), eventually culminating in a raid by the Saudi authorities (!!!) While not all those in drag were gay as proscribed by the rather uptight authorities, the Saudis nevertheless expressed great displeasure over this show. Here is the press clipping from the Philippine Star:

The Philippine embassy in Riyadh yesterday reported that the 67 Filipino workers who were arrested during a raid for holding a “gay show” last week may face 50-60 lashes and at least three months imprisonment after they were charged with “imitating women” and “display of homosexuality.”

In an interview on the weekly radio program “Para Sa Iyo Bayan” of Vice President Noli de Castro, also presidential adviser on overseas Filipino workers (OFWs), Rousell Reyes, third secretary and vice consul of the Philippine embassy in Riyadh, said the offense carries the punishment of lashing and imprisonment. The OFWs were celebrating Philippine Independence Day.

Reyes said the embassy has no information on the identities and work of the 67 Filipinos who were charged and released because no one reported the incident to the diplomatic post. An embassy case officer was sent to the police station on Wednesday after receiving reports that Filipinos were arrested during a raid last June 13 on a compound in an eastern Riyadh neighborhood.

Police confirmed to the embassy that 67 Filipino workers, not 69 as earlier reported, were arrested and detained. “Some of those arrested were reportedly wearing gowns and wigs and drinking liquor. It seems that there was a party,” Reyes said. Not all of those arrested were homosexuals, but they were at the party with their Filipino partners who were also arrested and detained. Reyes said the embassy has to give a diplomatic note to the Saudi Ministry of Foreign Affairs to be able to get the names of those arrested.

He said the filing of charges against the 67 OFWs have been reported to Saudi immigration authorities to prevent them from leaving the country. Reyes said two similar cases happened last year in the eastern part of Saudi Arabia, where Filipinos held a beauty pageant that was raided.

In a report to De Castro, Philippine Ambassador to Riyadh Antonio Villamor said the Filipinos were released after their respective sponsors guaranteed and paid for the corresponding fees. Only sponsors can bail out foreign workers who are jailed, with their assurance that the accused would attend court trial. Saudi Arabia’s laws strictly prohibit open display of homosexual behavior, with penalties including fines, imprisonment or whipping.

Wait a minute...aren't some "gays" into sadomasochism? It seems to me that the punishment of fifty or sixty lashings isn't going to set them on the straight and narrow. Globalization can get truly weird sometimes. I can only think what sort of embarrassment Philippine authorities face in freeing their compatriots from, ah, the chains that bind. The truth is stranger than fiction, indeed.

Korea to Take Japan to WTO Over Li-ion Batteries

♠ Posted by Emmanuel in Japan,Litigation,Trade at 6/22/2009 08:03:00 AM

South Korea's path to industrialization is broadly similar to Japan's: start off with easy-to-make stuff like textiles, eventually move to steel and petrochemicals, which in turn are critical for the production of automobiles and consumer electronics, etc. It is remarkable that in 2009, when many commentators like the Asian Development Bank have called the export-led growth models used by such countries as not being what they were, these two are still keen on them. Yes, exports are good--and so are mercantilist policies--as long as you apply them and not your trade partner. In the current row, the arena of contestation is in lithium ion batteries. These kinds of batteries have largely replaced nickel cadmium or Ni-Cd batteries in advanced consumer electronics applications such as MP3 players and portable computers. Among Li-ion batteries' stated advantages are slower discharge (when not in use), longer battery life (when in use), and freedom from the dreaded "memory effect" that prevents them from charging to 100% of capacity.

South Korea is set to introduce policies that it says are in the consumer interest--a time-tested protectionist staple. Korea's version of events is that exploding Li-ion batteries have become a concern as these energy storage devices have become more popular. In response, Korean firms have designed batteries that are not as prone to electro-Chernobyl. Given this development, Korean authorities have introduced what Japan believes are draconian safety rules that limit its ability to export batteries to South Korea. Are these genuine safety concerns, or merely Korea trying to gain some breathing room in the domestic market for its new technology? Whoever said export-led strategies were dead? From Agence-France Presse:

Japan is set to complain to the WTO this week over a South Korean plan to tighten safety regulations on lithium-ion batteries, accusing Seoul of protectionism, a report has said. "We will voice our concern at a committee meeting on technical barriers to trade" at the World Trade Organization this week, Economy, Trade and Industry Minister Toshihiro Nikai was quoted as saying by Jiji Press news agency. The committee meets Thursday and Friday in Geneva.

South Korea is reportedly planning to introduce new rules from July 1 on the production and sale of products using lithium-ion batteries, requiring certificates from designated South Korean inspectors. Foreign manufacturers fear the new process, which comes after some of the batteries have overheated or exploded in recent years, could significantly delay the launch of their products in South Korea.

The certification system could hamper Japanese companies who hold a 60 percent share in the global market of lithium-ion batteries, which are used in electronics including cellphones, digital cameras and laptops. "The criteria for obtaining certification aren't particularly clear," a Japanese government official was quoted as saying by the Yomiuri Shimbun daily. "We're worried that Japanese products are basically being kicked out of the South Korean market."

It's not quite a financial disclosure, but the PC I'm writing this post on is a Samsung laptop running on Li-ion batteries--both of which are proudly made in South Korea!

Industrial Espionage in US Meets PRC Nannyware

♠ Posted by Emmanuel in China,Underground Economy at 6/14/2009 10:27:00 AM

A few days ago, I mentioned in passing that China's attempt to install mandatory censorship software into the hardware of Western PC makers could be construed as a trade barrier as it has been found to foul up expected functionalities. Little did I know that a related trade dispute was already brewing. Solid Oak Software of California is now claiming that it is "99.9%" certain that parts of its CyberSitter web-filtering software have been stolen by the designers of China's so-called "Green Dam" nannyware. Naturally, the Chinese developers are vehemently denying this claim.

And here comes the fun part: Solid Oak is enlisting the help of Uncle Sam in preventing the likes of Dell and Compaq from installing this allegedly pirated software. Yes! A nice trade conflict is potentially brewing that may once again force the US and China to butt heads in the merciless arena known as world trade. However, the Wall Street Journal notes below that the American concern is the underdog since foreseeable remedies are limited. In particular, US copyright law may not be violated by computers being sold outside of American shores:

A California company alleged that an Internet-filtering program being pushed by the Chinese government contains stolen portions of the company's software. The company, Solid Oak Software Inc., said it will try to stop PC makers from shipping computers with the software.

Solid Oak said Friday that it found pieces of its CyberSitter filtering software in the Chinese program, including a list of terms to be blocked, instructions for updating the software, and an old news bulletin promoting CyberSitter. Researchers at the University of Michigan who have been studying the Chinese program also said they found components of CyberSitter, including the blacklist of terms...

The allegations come as PC makers such as Dell Inc. and Hewlett-Packard Co. are sorting through a mandate by the Chinese government requiring that all PCs sold in China as of July come with the filtering software. Representatives of the two big U.S. companies said they are working with trade associations to monitor new developments related to the Chinese software.

The Chinese software, whose name translates to "Green Dam-Youth Escort," is intended to help parents block access to pornography and other Internet content inappropriate for children, according to Jinhui. Free speech advocates have been examining the program's code because they are concerned that it also could be used to block political Web sites.

Solid Oak's president, Brian Milburn, said he will seek an injunction preventing U.S. companies from shipping computers with the Chinese software. Mr. Milburn said Solid Oak received an anonymous email Friday stating that Green Dam may contain parts of his company's code...Similarities they found include a list of CyberSitter serial numbers and an update that makes the software compatible with an old version of CyberSitter, he said. "I am 99.99% certain that if not the entire program at least a good proportion of it is stolen CyberSitter code," says Mr. Milburn.

Some lawyers said that because the software will only be sold in China, Solid Oak faces an uphill legal battle, even if it targets U.S. companies. "It's not a violation of U.S. copyright" law if the computers are only sold in China, said Jonathan Zittrain, a professor at Harvard University Law School. "The question would have to be resolved in a Chinese court under Chinese law..."

The allegation by Solid Oak could add to the outcry over the lack of transparency in the Chinese government's decision to choose this particular program to implement its filtering requirement.

I find using the words "China" and "transparency" in the same sentence troublesome. Initially, I thought that Solid Oak could invoke trade-related aspects of intellectual property rights (TRIPS). However, the case of a minor software company is not likely to merit a US filing against China at the WTO. In any event, Solid Oak may not want to gain attention as the company being pirated here since Chinese web surfers have found whatever bilge the apparatchiks are foisting on them to be exceedingly intrusive. Sometimes it's better to let things slide despite being offended...as we forgive those who sin against us.

Is China's Censorship Software a Trade Barrier?

♠ Posted by Emmanuel in China,CSR,Trade at 6/09/2009 02:38:00 AM

Former US President Bill Clinton believed that China opening up to the world via trade would result in greater personal rights and freedoms for the Chinese people. According to this line of thinking, a taste of the Western consumerist conception of the "good life" would embolden the PRC's citizens to ask for more leeway in interacting with the rest of the world without filtering through the lenses of official censors.

Let's just say that Clinton's thinking hasn't really come true. I have previously argued that export-led industrialization was ideal for PRC leadership since control of the "commanding heights" of the economy--finance, production, etc.--would remain firmly in state hands. Insofar as many other East Asian states before it have maintained such a grip, China has wanted to do the same and has largely succeeded. Likely emboldened by the non-event that was the twentieth anniversary of the Tiananmen massacre, China is reportedly asking PC makers--particularly foreign ones--to load up on censorship software.

I first saw this news break on the WSJ, though the New York Times fills in more of the preliminary details:

China has issued a sweeping directive requiring all personal computers sold in the country to include sophisticated software that can filter out pornography and other “unhealthy information” from the Internet. The software, which manufacturers must install on all new PCs starting July 1, would allow the government to regularly update computers with an ever-changing list of banned Web sites.

The rules, issued last month in a government directive, ratchet up Internet restrictions that are already among the most stringent in the world. China regularly blocks Web sites that discuss the Dalai Lama, the 1989 crackdown on Tiananmen Square protesters, and the Falun Gong, the banned spiritual movement.

But free-speech advocates say they fear the new software could make it even more difficult for China’s 300 million Internet users to obtain uncensored news and information. “This is a very bad thing,” said Charles Mok, chairman of the Hong Kong chapter of the Internet Society, an international advisory group on Internet standards. “It’s like downloading spyware onto your computer, but the government is the spy.”

Called Green Dam — a referenceto slogans that describe a smut-free Internet as “green” — the software is designed to filter out sexually explicit images and words, according to the company that designed it. Computer experts, however, warn that once installed, the software could be directed to block all manner of content or allow the government to monitor Internet use and collect personal information...

PC makers who serve the Chinese market, among them Dell, Lenovo and Hewlett Packard, said they were studying the new rules and declined to comment. But privately, industry executives in the United States said they were unnerved by the new rules, which were issued by the Ministry of Industry and Information Technology with no consultation and no advance warning.

Beyond the nettlesome issue of abetting government censorship, they said six weeks was not enough time to shift production on such a large scale. “Many of us are going to take it in the neck with this mandate,” said one executive. “It has put people into five-alarm mode.”

This is not the first time that foreign companies have been enlisted in government efforts to police the Internet. Google already removes politically forbidden results yielded by its popular search engine, Microsoft allows censors to block content on its blog service and Yahoo was widely criticized for turning over information that was used to jail a journalist. “I would advise dissidents to buy computers before July 1,” said Clothilde Le Coz, the head of the Internet freedom desk of Reporters Without Borders.

More than 40 million personal computers were sold last year in China, one of the fastest growing markets. Despite the slowing economy, industry analysts expect that figure to rise by 3 percent this year.

A group of industry representatives met with American officials Monday to express their displeasure with the new rules, said Susan N. Stevenson, a spokeswoman for the United States Embassy in Beijing. “We view any attempt to restrict the free flow of information with great concern,” she said...

Foreign computer brands have been singled out:

Although the directive is somewhat imprecise and suggests that manufacturers can provide the software as a compact disc, it also says that it must be installed on computer hard drives as a backup file. The five-point circular uses the word “preinstall” repeatedly and the first clause unequivocally states: “Imported computers shall preinstall the latest available version of the ‘Green Dam’ software before they are sold in China...”

Industry experts and civil libertarians say they are worried the software may simply be a Trojan horse for greater Internet control. The software developers have ties to China’s military and public security agencies, they point out, and Green Dam’s backers say the effort is supported by Li Changchun, the country’s chief propaganda official and a member of the decision-making body of the Communist Party, the Politburo Standing Committee...

Last week, as the 20th anniversary of the military crackdown at Tiananmen approached, the government blocked a host of Internet services, including Twitter, Microsoft’s live.com and Flickr, a photo-sharing site, though by Monday evening, these sites had become available again. YouTube has been inaccessible in China outside Hong Kong since March.

There's also the not-insignificant matter of the software being fundamentally unsound according to a number of software experts:

Even beyond ethical concerns, those who have tested the new software describe it as technically flawed. An American software engineer said it led machines to crash frequently. Others worry that it could leave tens of millions of computers vulnerable to hackers. So far, at least, there is no version for the Linux operating system and Apple’s Macintosh system.

It will be interesting to see if US PC sellers will ask the Chinese government to scotch these plans. Or, they may just back down Microsoft and Google-style rather than be hampered in accessing probably the world's largest consumer market. Ironically, instead of market access leading to greater personal rights and freedoms, Beijing has been able to dangle this very carrot to get foreigners to comply with its wishes and negate Clinton's intuition in the process.

I believe that trade remedies can be pursued here by the US if it really wanted to. For instance, technical barriers to trade can be invoked insofar as use of the software has been found to foul up machine operation. If it is true that local machines will be similarly messed around with after installing this software, there are additional market access considerations that come into play. Why would Chinese consumers pay for the privilege of having semi-functional machines?

The though police are at it again. Bill Clinton, we hardly knew ye.

Ecuador Says "No Mas" to Trade

♠ Posted by Emmanuel at 6/06/2009 12:41:00 PM

Unbeknownst to many, member countries facing considerable balance-of-payments difficulties can petition the WTO to temporarily raise tariffs on imports. Although infrequently invoked, they do exist. Recently, Ecuador said "no mas" to trade by requesting such concessions. Let's begin with this backgrounder from Reuters:

World Trade Organisation (WTO) members agreed on Thursday to allow Ecuador to impose temporary import restrictions because of balance of payments problems. The move was hailed by rich and developing countries as proof that the rules-based trading system umpired by the WTO was working well despite the economic crisis, and that WTO members could tackle the needs of developing countries in difficulties.

The members reached agreement after lengthy consultations in which Ecuador agreed to modify the restrictions and phase them out early if its economy improved, according to a draft report by the WTO's committee on balance of payments restrictions, a copy of which was obtained by Reuters.

"The good thing about this is it shows the WTO works -- it gets results," said one Ecuadorean official, who asked not to be named, after the committee meeting. "And the good thing is it's a consensus, no one is imposing anything."

WTO rules allow temporary waivers to trade agreements to countries with balance of payments problems, enabling them to raise tariffs or impose quotas. This was the first time in 10 years that a WTO member had sought such an exemption, although Bangladesh received one in 2007 in a follow-up to a previous request, trade officials said.

And here is the blurb from the WTO site:

The Committee on Balance-of-Payments Restrictions, on 4 June 2009, successfully concluded its consultations with Ecuador on trade measures taken for balance-of-payments purposes. Ecuador said the decision showed that WTO members are willing to negotiate pragmatic solutions, and that this sends a good signal for the day-to-day work of the organization.

The Committee approved its report on the consultations with Ecuador. The conclusions of the report included the following:
The trade measures applied by Ecuador covered about 8.7% of all tariff lines, affecting a volume of trade equivalent to some 23% of its total 2008 imports;
Ecuador will replace most of the quantitative restrictions for price-based measures no later than 1 September 2009;
Ecuador will progressively modify the level and scope of the measures as its balance-of-payments situation improves; and
The Committee welcomed Ecuador's commitment to remove all trade measures for balance-of-payments purposes no later than 22 January 2010.
Ecuador thanked the efforts of the Chair (Amb. Darlington Mwape of Zambia) and the WTO Secretariat, and the flexibility of members in the consultations. It said the decision showed that WTO members are willing to negotiate pragmatic solutions, and that this sends a good signal for the day-to-day work of the organization. It promised to continue to be transparent, and to listen to concerns from members.

I am interested in seeing whether Ecuador will lift these supposedly temporary measures on time. If you will recall, this is the country led by a guy who's forced bondholders to accept a 65% haircut on Ecuadorian bonds issued by his predecessor. Not exactly a confidence-inspiring reflection of Ecuador's international economic dealings, methinks.

It's a Deal: ASEAN-South Korea FTA

♠ Posted by Emmanuel in Southeast Asia,Trade at 6/05/2009 01:35:00 PM

Here is another important data point in ASEAN's (Association of Southeast Asian Nations) goal of forming a single market by 2015 . With WTO negotiations stalled, ASEAN countries have not turned their back on trade and have actively sought free trade agreements with regional counterparts [1, 2]. ASEAN can now chalk up South Korea alongside the antipodean pair of Australia and New Zealand. In the works are deals with India, Japan, and China. Think of ASEAN's activities as a hub-and-spoke arrangement. Within ASEAN, they are striving to create a single market by 2015. In turn, this is complemented by various efforts to sign FTAs with counterparts in the wider Asia-Pacific region. From the Manila Times:

The leaders of South Korea and the group of 10 Southeast Asian nations ended a two-day summit by also pledging further cooperation to boost Asia’s financial sector by supporting the development of a stronger regional bond market. In an immediate move to strengthen economic ties, Seoul and the Association of Southeast Asian Nations (Asean) signed an agreement to complete a free-trade pact they hope will nearly double trade to $150 billion by 2015.

The signing procedure comes after the two sides reached a free-trade agreement on investment in April this year, wrapping up years of negotiations to step up bilateral trade and investments. South Korea’s Foreign ministry expected that the agreement with each member of the Asean would go into effect within a year.

South Korea and the Asean have had free trade talks on four areas, such as merchandise, services, investment and dispute settlement, with the first round of negotiations launched in February 2005. The investment accord is the final plank of a comprehensive pact that also covers trade in goods and services. The trade in goods pact went into effect in 2007 and the services agreement last month after talks began in 2005.

In 2008, two-way trade was worth $90.2 billion, compared with $46.4 billion in 2004. Asean is South Korea’s fifth-largest trading partner, and that country’s investments in the region topped $5.9 billion also in 2008...

South Korea is pushing to further increase its presence and influence in Asean, which has a combined population of almost 600 million and gross domestic product (GDP) of around $1.3 trillion. GDP, a key measure of the economy, is the total cost of all goods and services produced in the country in a year.

Analysts said Seoul’s neighbors China and Japan were already ahead in engaging the regional bloc. South Korea’s Finance ministry said the country sees Asean “as an export market which can offset sluggish markets in developed countries,” especially after the global financial crisis.

Apart from exports, Asean officials said South Korean companies were expected to benefit from infrastructure spending, which is a major part of government stimulus packages in Southeast Asia. Seoul will also have better access to the region’s massive wealth in natural resources including timber, rubber and oil and gas.

The rationale for both aides looks clear: South Korea gains better access to Southeast Asian consumers to help offset falling demand in the West. Meanwhile, ASEAN countries open up more opportunities for their agricultural and natural resource exports. Whether projected trade gains materialize will be interesting to watch.

Dog and Pony Show: Geithner (F)lies to China

♠ Posted by Emmanuel in Cheneynomics,China,Economic Diplomacy at 6/01/2009 12:53:00 PM

...but more importantly, the Chinese are happy about it. Indeed, I am not making negative comments about what Geithner is doing in China as what he's saying is what his hosts want to hear. What did Christine McVie sing in that old Fleetwood Mac song? Tell me lies...tell me sweet little lies. Everyone is probably aware that US Treasury Secretary Tim Geithner is currently in Beijing peddling the idea that "China's US investments are safe." His prepared remarks actually contain much sense, especially the bits about the US consumers having to save more and Chinese consumers having to spend more. Longtime readers should hear familiar tropes:

Our common challenge is to recognize that a more balanced and sustainable global recovery will require changes in the composition of growth in our two economies. Because of this, our policies have to be directed at very different outcomes.

In the United States, saving rates will have to increase, and the purchases of U.S. consumers cannot be as dominant a driver of growth as they have been in the past.

In China, as your leadership has recognized, growth that is sustainable growth will require a very substantial shift from external to domestic demand, from an investment and export intensive driven growth, to growth led by consumption. Strengthening domestic demand will also strengthen China's ability to weather fluctuations in global supply and demand.

If we are successful on these respective paths, public and private saving in the United States will increase as recovery strengthens, and as this happens, our current account deficit will come down. And in China, domestic demand will rise at a faster rate than overall GDP, led by a gradual shift to higher rates of consumption.

Globally, recovery will have come more from a shift by high saving economies to stronger domestic demand and less from the American consumer.

But then of course come the tricky bits:

The policy framework for a successful transition to this outcome is starting to take shape. In the United States, we are putting in place the foundations for restoring fiscal sustainability.

The President in his initial budget to Congress made it clear that, as soon as recovery is firmly established, we are going to have to bring our fiscal deficit down to a level that is sustainable over the medium term. This will mean bringing the imbalance between our fiscal resources and expenditures down to the point - roughly three percent of GDP -- where the overall level of public debt to GDP is definitively on a downward path. The temporary investments and tax incentives we put in place in the Recovery Act to strengthen private demand will have to expire, discretionary spending will have to fall back to a more modest level relative to GDP, and we will have to be very disciplined in limiting future commitments through the reintroduction of budget disciplines, such as pay-as-you go rules.

The President also looks forward to working with Congress to further reduce our long-run fiscal deficit. And, critical to our long-term fiscal health, we have to put in place comprehensive health care reform that will bring down the growth in health care costs, costs that are the principal driver of our long run fiscal deficit. The President has also proposed steps to encourage private saving, including through automatic enrollment in retirement savings accounts.

Alongside these fiscal actions, we have designed our policies to address the financial crisis to carefully minimize risk to the taxpayer and to allow for an orderly exit or unwinding as soon as conditions permit. Across the various financial facilities put in place by the Treasury, the Federal Reserve, and the FDIC, we have been careful to set the economic terms at a level so that demand for these facilities will fade as conditions normalize and risk premia recede. Banks have a strong incentive to replace public capital with private capital as soon as conditions permit.

Let me be clear - the United States is committed to a strong and stable international financial system. The Obama Administration fully recognizes that the United States has a special responsibility to play in this regard, and we fully appreciate that exercising this special responsibility begins at home. As we recover from this unprecedented crisis, we will cut our fiscal deficit, we will eliminate the extraordinary governmental support that we have put in place to overcome the crisis, we will continue to preserve the openness of our economy, and we will resolutely maintain the policy framework necessary for durable and lasting sustained non-inflationary growth.

Geithner's brief is to not antagonize China--at least at the moment. For this reason, he has not reiterated his boss's famous line about the PRC being a currency manipulator. However, Geithner would probably do well to explain a couple of things to his hosts if he were more forthcoming:

Why does the Congressional Budget Office predict $9.3 trillion in US fiscal deficits over the next ten years? Is Obama's "we'll turn the spigot off after recovering" account for possibilities that (a) the US will not meaningfully recover during Obama's term or beyond and (b) Friedman's notion is more realistic--"there is nothing so permanent as a temporary government program"?
Why is the dollar selling off again with gold flirting with the $1,000/ounce level and major currencies rallying against it? Perhaps markets aren't convinced about Geithner's argument. Perhaps they agree with economist John Taylor expressing great concern about the viability of Obama's continuation of Bush's untax and spend policies.
Why are Treasuries at the longer end of the yield curve selling off despite the Federal Reserve buying massive quantities to encourage lower mortgage rates and replace dwindling demand by foreign central banks? Could private investors be demanding better returns from this purportedly AAA lender?
Why are foreign central banks--like China's--concentrating their purchases in T-bills (Treasuries maturing in less than a year) instead of T-bonds? Could it be that they expect yields to increase even more markedly than they are doing now, or that they'd like to be able to get rid of their dollar holdings at a moment's notice?

None of the answers to the above questions support Geithner's assertions. Still, good diplomats should not make their counterparts look bad. Ultimately, Geithner's visit is a face-saving exercise for all parties involved. Like awkward family gatherings where members pretend to be friendly and ignore uncomfortable truths, the international community also practices make-believe and it does so here. It goes like this: the US "soothes" China by saying its US investments are safe and that the PRC has invested wisely despite overwhelming evidence to the contrary.

Only the delusional fail to accept the consequences of their mistakes (or fail to admit making them in the first place). In the end, the US and China have no one else to blame for what's coming to them for allowing "vendor finance" get out of hand (getting walloped by debt service and getting a haircut on dollar holdings, respectively) and I think both parties are resigned to this fact. Behind this "big happy family" dog and pony show, things are decidedly grimmer. But, as diplomatic conduct dictates, that doesn't stop them from pretending that the world's largest spendthrift runs as smoothly as the Vienna Philharmonic. Who's the dog and who's the pony? Tell me lies...tell me sweet little lies.

UPDATE: If you want to an honest opinion, read Yu Yongding.

I Beat Roubini to the Punch on Rating Agencies [!]

♠ Posted by Emmanuel in Cheneynomics at 6/01/2009 08:31:00 AM

Nouriel Roubini has achieved near-cult status among those bearish on the fate of the US economy and its repercussions for the rest of the world. However, I am chuffed to report that some bozo may have beat him to the punch on the charade of US rating agencies. Here's what I wrote on 20 November 2008 (don't you love that doctored graphic?):

As an IPE scholar, I am inclined to believe that no amount of red ink will make the major credit rating agencies--S&P, Moody's, and Fitch's--downgrade US debt. The reasons are political-economic. With the exception of Fitch's, these are all US-based firms. When push comes to shove, they will try to protect the national interest, provided not-too-subtle nudges from Sammy. For instance, American authorities have sole discretion for classifying these entities as nationally recognized statistical rating organizations (NRSROs). If American authorities catch wind of an impending downgrade, it is child's play to kick them out of the US credit rating business entirely by removing this designation (despite these being American firms). Being disqualified to rate a significant portion of dollar-denominated debt would endanger credit rating agencies in a way that the Asian financial crisis and the credit crunch failed to do.

In many ways it's very ironic. NRSROs can badly misjudge sovereign debt of LDCs and financial weapons of mass destruction all they want and get away practically scot-free. But, issue an accurate assessment of Uncle Sam's fiscal depravity and there will be hell to pay. Hey, it's an unfair and messed up world, but it was that way long before I got here.

And now for Roubini of 28 May 2009:

Indeed, as pointed out above, the US is not yet at the stage where rating agencies will downgrade its rating from the current AAA, even if – by some parameters – this downgrade will be warranted in the next year or so. But over time the continuation of unsustainable fiscal deficit may lead to such downgrade. Rating agencies may delay such downgrade as their oligopoly power derives from the special and official regulatory role that the US and other governments have provided them; thus, the same conflicts of interest that led the rating agencies to mis-rate toxic assets may lead them to postpone for a long time the necessary downgrade of the US public debt. But investors should start doing their own homework – and assess the medium term unsustainability of current US fiscal policy rather than rely on rating agencies that are always doing "too little too late" and whose ratings are biased by the US government being the effective and official source of their rating power. This US government has already effectively bullied rating agencies in being lenient on US state and local government ratings in spite of the sharp deterioration of their fiscal balances. So one cannot expect rating agencies – that are effectively captured by their political masters - to provide unbiased ratings of the US public debt.

Not bad work on my part, eh? And what kind of sucker wholeheartedly trusts rating agencies anyway?