Sino-US Trade Smackdown: Even More Steel Tariffs

♠ Posted by Emmanuel in China,Litigation,Trade at 12/31/2009 08:40:00 AM

Just when I thought I'd have a nice, quiet New Year's, I am once again reminded that trade squabbles follow no set time schedule. They don't declare a holiday ceasefire and sing "Silent Night" in the trade trenches. No sir, combat in the IPE Zone is ongoing 365/24/7. This one has been expected for quite some time. American unions together with a number of domestic steelmakers had not been content with their prior victory at the US International Trade Commission (USITC) on applying punitive measures against Chinese subsidies and dumping of steel pipe. (The earlier determination is available online if you're interested.) Hence, they took the fight back to the USITC by successfully petitioning for even more punitive measures.

Before getting to today's main event, let's retrace our steps a bit. After the first USITC decision on steel pipe, the EU decided to levy a 39.2% duty on these products for a period of five years. Expressing particular displeasure with these sanctions, the Chinese recently countered by imposing its own duties on certain specialty steel products from America. From the FT:

China imposed duties on Thursday on imports of certain speciality steel products from the US and Russia, in the latest sign of trade tensions between Beijing and its main trading partners. The Chinese commerce ministry said the duties were a response to the dumping of products in the Chinese market by companies from the two countries. Beijing also alleged the US companies were receiving what were in effect subsidies as the result of “Buy American” legislation.

The ministry said it was the first time China had investigated the role of subsidies in lowering prices for imported goods, a riposte to the common claim that Beijing subsidises its companies. The case involves flat-rolled steel used in the electrical power industry.

Analysts said the duties affected only a small volume of trade, worth well below 1 per cent of the Chinese steel market. Coming at a time when China is under international pressure to let its currency appreciate, the new duties are the latest trade spat between China and the US. Tension began to escalate in September when the Obama administration imp­osed punitive tariffs on imports of China-made tyres. The US has also placed duties on Chinese steel pipes, while China has opened an inquiry into US imports of poultry, cars and auto parts.

Fun stuff. Let's now turn to today's decision which slaps even more countervailing duties on steel pipes:

The US will impose tough new duties on Chinese steel piping imports, raising tensions with its biggest trading partner and emerging geopolitical rival. With Chinese piping imports worth $2.8bn in 2008, the case is the biggest against China brought before the International Trade Commission, a US trade body, but follows other US actions to counter a flood of goods that Washington claims China is exporting at below market prices.

The Chinese Ministry of Commerce said it was ”strongly dissatisfied with and resolutely opposed” to the piping duties. ”US domestic industry has been seeking opportunities to win trade relief and protection, and shifted the blame for its hardships onto imports,” the ministry said. “Finding that Chinese oil well pipes have damaged US industry is a mistaken step that ignores the facts.”

The ITC’s ruling will hit Chinese companies with additional taxes ranging from 10 per cent to 16 per cent, and backs an earlier claim from the commerce department that argued that the US steel industry was being harmed by Chinese dumping. The US government has been under intense pressure to protect domestic industries to stem the flow of job losses...

According to the Steel Manufacturers Association, China’s trade practices had cut US steel pipe and tube production 40 per cent in the past year and cost thousands of jobs. In spite of those claims, four of the six ITC commissioners based their ruling on the threat of future harm to the industry rather than on existing damages.

Also note the context of these events as they may be mitigating factors in all this China-bashing. Steel pipe is used especially in oil drilling. When energy prices kept hitting record levels up to about one and a half years ago, Chinese producers naturally ramped up production in expectation of continued demand for these products. We of course know what happened--oil prices tanked and with it demand for oil steel pipes. Stuck with new overcapacity, the Chinese are said to have resorted to dumping these products abroad to deal with the problem:

Steel piping is widely used by the oil industry for drilling and was in great demand last year when oil prices surged. The commerce department estimated that between 2006 and 2008 Chinese pipe imports surged 203 per cent. Daniel Porter, a lawyer representing 11 of China’s largest steel pipe exporters, said the decision was not fair because US steel pipe producers notched record profits in 2008 when they could not keep up with demand, which fell in 2009 along with oil prices.

“We’re obviously disappointed,” Mr Porter said, noting that his clients would consider appealing the case to the World Trade Organisation. “Demand collapsed, but that’s not the fault of the Chinese. In our view, the Chinese were just responding to the market.”

Yes, take it to the WTO by all means. However, I don't think an argument of "We've had to dump because of our mistaken forecasts for future demand of steel pipe" holds any water. In any event, my opinion of these trade conflicts remains the same: (1) these people keep pretending there's no tit-for-tat when there's palpable mistrust between them; (2) China won't budge on bad old habits of overproduction and the US of debt orgies; (3) neither of their choices are good for the world economy. So, (4) in the absence of constructive action by either party, it's best to egg these trade combatants on in a direction that should help them go cold turkey with their respective overproduction and debt fetishes.

For the umpteenth time, America and China, why don't you just cut the crap and start fighting already? Get it over with since you obviously don't like each other much. With any luck, we'll all be better off as we're beginning to get somewhere with these skirmishes. Whatcha gonna do about it, PRC? Don't be a wuss. Fight back. Sell a few billion dollars' worth of junk American paper. Hopefully, 2010 will bring the coup de grace to subprime globalization.

UPDATE: Also see the WSJ for a nifty graphic on Commerce Department actions against China in 2008 and 2009.

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Welcome to the Terrordome: London Uni Radicals

♠ Posted by Emmanuel in Security at 12/29/2009 09:31:00 AM

[NOTE: I encourage you to cue the eponymous Public Enemy track before reading on.] Perhaps it's in the air; perhaps it's in the water. Whatever the reason, "Londonistan" remains a powerful draw for extremists seeking an education with a side helping of overthrowing the powers-that-be. I, of course, was reminded of this when the perpetrator of the attempt to blow up a Detroit-bound flight, Umar Farouk Abdulmutallab, was alleged to be a mechanical engineering graduate from UCL (University College London). Fortunately for the passengers of Northwest Flight 253, he wasn't a chemical engineering student, but his attempt was very inept in any case. I don't know him personally, but you can bet I hate his guts since I am 100% certain that us long haul passengers will be harassed even more than usual when I return to London after the holiday season.

A few weeks ago, I discussed how our more radical students decided to twin the LSE with the Islamic University of Gaza. I like to think of the LSE in particular and other University of London institutions as the real-life equivalents of Hogwarts in the Harry Potter telenovelas. Sure they graduate Harry Potters, but they also churn out Lord Voldemorts. For better or worse, our students are exposed to any number of influences at an impressionable young age in what is arguably the world's capital. Yes, our student crazies are more cosmopolitan in outlook. Look at foreign students gone mad in America: Gang Lu from China only massacred folks at the University of Iowa, while Seung-Hui Cho from Korea did the same at Virginia Tech. In other words, they simply imbibed the local culture of violence in righting perceived wrongs the American way by "going postal."

Thankfully, British imported crazies don't usually vent their anger on pissant faculty and the like. No, they have discovered ideology and prefer to vent their anger on the wider world. Honestly, I was surprised that the failed Detroit bomber hailed from UCL. If you ask me, while the majority of the University of London institutions lean left, there are gradations. On the hard left you have the School of Oriental and African Studies (SOAS), where you basically learn that nearly everything that's gone wrong in the developing world is the West's fault [dear SOAS faculty, I'm just kidding but you have to question why this stereotype exists]. If you found the LSE students' Gaza stunt revolting, see what sort of thing happens at the SOAS in treating the Israel question.

Meanwhile, UCL doesn't even hold a candle to the LSE in this department. Indeed, if you use Lord Voldemort-as-alumni criteria, this recent pathetic "terror" attempt that's only managed to screw over holiday travellers like yours truly pales in comparison to the LSE's extremist output. When it comes to radicals we'd prefer not to mention, two come to mind--and how.

Venezuelan revolutionary Carlos the Jackal studied at the LSE for a time. Indeed, you can say that he was the very first "celebrity terrorist" of them all. If he's ever released from jail, I'd even say he'd be prime material for Dancing With the Stars or any number of "reality shows." Certainly, he has the name recognition thing going for him. Fathered by a Marxist lawyer and named Ilyich while his younger brothers were christened "Lenin" and "Vladimir," his pinko credentials are nearly as impeccable as Naomi Klein's. While also a master of self-promotion--I don't call him a "celebrity terrorist" for nothing--his list of genuine achievements in the annals of terror are considerable. This, after all, was a guy expelled from Patrice Lumumba University, then the Soviet's training ground for exporting revolution to the unenlightened peoples in the far-flung reaches of this tumultuous world.

Another unsavoury LSE alum is the killer of the American reporter for the Wall Street Journal Daniel Pearl, Ahmed Omar Saeed Sheikh. Probably more so than Carlos, this guy was turned into what he is more during his stay in the United Kingdom's capital. Radicalized at the LSE, he returned to Pakistan a full-fledged Islamic militant. More recently, the Times of India wrote that tensions between India and Pakistan in the wake of the Mumbai terror attacks were almost tipped into armed conflict by this not-so-fine fellow by impersonating then-Indian Foreign Minister Pranab Mukherjee while placing a call to Pakistani President Asif Zardari:

In a shocking disclosure, it has come to light that the hoax caller who tried to spark off a war between India and Pakistan by threatening Pakistani President Asif Zardari pretending to be foreign minister Pranab Mukherjee was British jihadi and Daniel Pearl's killer Omar Sheikh.

Sheikh, currently in Hyderabad jail in Pakistan after being convicted for the the murder of Pearl, the American journalist who was working on an expose of Pak-based terror groups, used a UK registered SIM card to place a call to Zardari, according to a report in Dawn, a Pakistani English daily newspaper. The report also mentions that the London School of Economics-trained jihadi tried to also speak to Mukherjee pretending to be Zardari. Though Sheikh could not get through to Mukherjee, he managed to speak with the chief of Pakistan army, Ashfaq Kiyani.

The hoax call was made in the immediate aftermath of 26/11 when tensions between India and Pakistan ran high. The revelation ties in with the assessment of US agencies that the Mumbai attack was designed to provoke hostilities between the two neighbours so as Pakistan army got an alibi to stop helping US's drive against Taliban.

The deception had caused considerable consternation for the ease with which the caller managed to get through to Zardari as well as for the belief that the man issuing threats was the Indian minister himself...

If the Dawn report is accurate, Sheikh was able to procure and use a western SIM despite being in the dock for a serious and well-publicised crime. He called both Zardari and army chief Ashfaq Kayani after the Mumbai attacks in what is suspected to be an attempt to trigger a showdown between India and Pakistan when tensions were running extremely high.

He called Mukherjee's office saying that he was president of Pakistan but failed to get through to the foreign minister. "Omar Saeed Sheikh was the hoax caller. It was he who threatened the civilian and military leaderships of Pakistan over telephone. And he did so from inside Hyderabad jail,'' said the paper quoting investigators.

After the hoax calls last year, the Pakistani leaders had gone to town claiming that Mukherjee had threatened to strike Pakistan. The newspaper report cited the raid in Hyderabad jail on November 29 in which 12 SIM cards were seized along with mobile phones.

As you've read, Sheikh was able to make these calls while in a Pakistani prison for beheading Pearl. Aside from what this says about the state of the prison system in Pakistan, it certainly demonstrates a devious kind of resourcefulness. So there you have it: Why does this UCL grad get so much attention for hatching a harebrained plot while the LSE has full-blown revolutionaries of an altogether higher caliber? There are many paths you can take in life that intelligence can be applied to; in the pantheon of London uni radicals, this twerp rates pretty low compared to the LSE's. When I'm stuck in some giant security queue at Abu Dhabi International Airport on my way back to London, I'll be sure to wish that the American authorities let me waterboard the cretin for all the hassle he's caused for no good reason.

In any event, Welcome to the Terrordome.

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Benedict XVI, IPE Zone Person of the Decade

♠ Posted by Emmanuel in Cheneynomics,Development,Environment,Religion at 12/28/2009 06:21:00 AM

You know we've reached the end of the calendar when journalists put out their "best of" lists and name persons of the year. Like many other years in a decade many would prefer to forget, 2009 has not been a particularly memorable one for the human race. Indeed, the choices made this year for person of the year reflect this situation: TIME chose Federal Reserve Chairman Ben Bernanke, while the Financial Times chose Goldman Sachs supremo Lloyd Blankfein (who claims to do God's work). Mind you, despite my misgivings about the dramatis personae--the latter being a somewhat more inspired choice via his Horatio Alger story--both choices have merit insofar as the journalists' criteria concerns the person who most profoundly affected the course of world events in 2009. Let me say something about Bernanke before turning to today's protagonist.

I like to think of Ben Bernanke as the Caligula of Cash. That I hold him in low regard should be familiar to anyone with a passing familiarity with this blog. To me, his sycophantic tendencies were already on display when he offered his now-infamous deficits-don't-matter-because-there's-a-global-savings-glut hypothesis to put himself in the running to succeed Alan Greenspan as Fed Chairman during Bush the Younger's term. As countless others have pointed out, this piece of Cheneynomics is purposefully misleading. Also, many misunderstand my perspective while expressing disdain for Bernanke's treatment of currency issues. Unfortunately, I am still a dollar holder. As such, my primary concern as far as Fed policies go is shoring up the external value of the currency. That is, I am indifferent to whether the US unemployment rate is 5% or 50%. As long as the dollar remains a respectable store of value (fat chance of that now), I am pleased.

However, I should have known better about what'd be coming as this is a guy who's spoken of making helicopter drops of money. In this regard at least, what you see is what you get--an economolester of the first water. The results speak for themselves: now, commodity bubbles aplenty; in the future, serious doubts over America's continued economic viability as the bill for fiscal and monetary foolishness becomes even more apparent to those foolhardy enough to fund America, the world's biggest Ponzi scheme.

Simply put, the United States is a country that has run out of ideas. Inflating even bigger bubbles than those which got it into trouble is the Fed's idea of fostering economic recovery. As before, this fake prosperity is telling. Some commentators like to point out slightly improved incomes and household savings rates as signs of improvement. Both, however, are not due to wage gains. Instead, both stem from fiscal stimulus--tax cuts, rebates, and so forth. Unless these "money-for-nothing" gains are continued indefinitely, I do not see net improvements in America's economic well-being by substituting dodgy household finances for dodgy national finances.

In the final analysis, Bernanke is merely symptomatic of a country in decline. An old professor of mine--an American, mind you--used to deride people he called "fat, dumb, and happy." Putting the happy part aside for now, there are certainly plenty of fat people in America clogging their arteries and the health care system with their personal irresponsibility. As for the dumb part, well, "All Children Left Behind" is well underway as standardized college admissions scores continue dropping. It's all of a piece with what America has become: an instant gratification society. Like its former leader telling everyone to go shopping after 9/11, it all fits. Unwillingness to make sacrifices for the common good and lack of remorse in externalizing homegrown woes are the hallmarks of modern America. Don't worry, be happy; we'll just kick the can down the road and make future generations shoulder unbearable burdens. Live for today. Hey, Uncle Ben told us to do so.

In the next year, I will have more on how the rest of the world should discipline America. It is a menace to itself and everyone else that should be put in its place with undue haste.
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BENEDICT XVI, THE ANTI-BERNANKE

What I find admirable about Benedict XVI is that he's the most un-Bernanke-like character you can come across. There is no carefree (careless?) hedonism about this person. Filling the shoes of a communist-shattering titan like Pope John Paul II was always going to be a hard task, but one he's handled with considerable aplomb. While still Cardinal Ratzinger, he was absolutely right in clamping down on all vestiges of Marxist thought infiltrating the church in the guise of liberation theology. Nowadays, of course, he has many more challenges to confront than the ideological ones that bedevilled him in the past.

In stark contrast to favoured Bernanke doctrines of justification ("global savings glut") and flippancy about serious concerns with global consequences ("helicopter drops of money"), we get real gravitas with Benedict XVI on contemporary issues. As leader of the Catholic church, you also get none of the Yankee parochialism you get from Bernanke, although this may be a somewhat unfair point.

Pope Benedict's encyclical Caritas in Veritae was released earlier this year to widespread notice. After a few year settling into his role, Benedict the doctrinaire unleashed his interpretation of globalization through a Catholic lens. Finding fault with neoliberals and anti-globalizers alike, his words of wisdom should resonate with all reasonable people:

The Church has always held that economic action is not to be regarded as something opposed to society. In and of itself, the market is not, and must not become, the place where the strong subdue the weak. Society does not have to protect itself from the market, as if the development of the latter were ipso facto to entail the death of authentically human relations. Admittedly, the market can be a negative force, not because it is so by nature, but because a certain ideology can make it so. It must be remembered that the market does not exist in the pure state. It is shaped by the cultural configurations which define it and give it direction. Economy and finance, as instruments, can be used badly when those at the helm are motivated by purely selfish ends. Instruments that are good in themselves can thereby be transformed into harmful ones. But it is man's darkened reason that produces these consequences, not the instrument per se. Therefore it is not the instrument that must be called to account, but individuals, their moral conscience and their personal and social responsibility.

The Church's social doctrine holds that authentically human social relationships of friendship, solidarity and reciprocity can also be conducted within economic activity, and not only outside it or “after” it. The economic sphere is neither ethically neutral, nor inherently inhuman and opposed to society. It is part and parcel of human activity and precisely because it is human, it must be structured and governed in an ethical manner.

There is much more to gather from this tract. Although focused somewhat on Catholics (it is, after all, an encyclical), there are countless other substantial ideas offered here on topics such as multiculturalism, migration, economic governance, the environment, and more. As an aside, it's quite amusing when Tyler Cowen from the rational choice bastion George Mason University found the encyclical to be a "sprawling mess" in the op-ed pages of the Wall Street Journal. Such was to be expected. What is rat-choice in the end other than looking out for #1? In other words, you act like your own God. Moreover, Cowen's is not the most informed opinion in discussing the subject matter; he even cites predominantly agnostic Holland to offer a counter-example.

Another noteworthy work from the Pope that has received somewhat less attention is his just-released text on the celebration of the World Day of Peace, 1 January 2010. This writing is more focused on environmental matters in keeping with the recent Copenhagen climate meetings. It expands on the encyclical by offering a view of how environmentalism fits with development:

It should be evident that the ecological crisis cannot be viewed in isolation from other related questions, since it is closely linked to the notion of development itself and our understanding of man in his relationship to others and to the rest of creation. Prudence would thus dictate a profound, long-term review of our model of development, one which would take into consideration the meaning of the economy and its goals with an eye to correcting its malfunctions and misapplications. The ecological health of the planet calls for this, but it is also demanded by the cultural and moral crisis of humanity whose symptoms have for some time been evident in every part of the world. Humanity needs a profound cultural renewal; it needs to rediscover those values which can serve as the solid basis for building a brighter future for all. Our present crises – be they economic, food-related, environmental or social – are ultimately also moral crises, and all of them are interrelated. They require us to rethink the path which we are travelling together. Specifically, they call for a lifestyle marked by sobriety and solidarity, with new rules and forms of engagement, one which focuses confidently and courageously on strategies that actually work, while decisively rejecting those that have failed. Only in this way can the current crisis become an opportunity for discernment and new strategic planning.

Again, there's much more here as he links security matters to environmental ones among other things. Appealingly, he talks the talk and walks the walk. For all his affectations of environmental concern, US President Barack Obama rides around town in a car that gets less than 10 MPG and flies around the world in a jumbo jet. Methinks his carbon footprint is large--probably the largest in a famously wasteful nation. By contrast, the Pope is the head of the world's only carbon-neutral state.

Ultimately, the Pope's message is one we can believe in for good reasons: He doesn't construct naff narratives to curry others' favour but earnest ones borne of deep conviction and reflection. He doesn't believe in free lunches but in principled living. He doesn't tell others to act in a way he doesn't. As always, the straight and narrow is not always the most attractive path, but it's the one most likely to steer you away from the comfortable path to ruin. What if the Vatican were run "Anglo-Saxon" do-what-you-please style? Why, it'd be the Church of England--a mere shadow of its former selfishness. Whether in economics or religion, there are lessons here.

The evidence, then, is incontrovertible: "God's Rottweiler" mauls the competition. IPE Zone's Person of the Decade is none other than the former Cardinal Ratzinger, Pope Benedict XVI. Long may this great man enlighten us all.

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Hugo Chavez, Carmaker

♠ Posted by Emmanuel in Latin America at 12/25/2009 07:54:00 AM

Like so many other things, Latin American populismo sounds great over the airwaves but is rather horrible in practice. Once more, Hugo Chavez offers today's case in point. A few weeks ago, we had Chavez railing against corruption in Venezuela's banking system stemming from...er, him giving cronies carte blanche authority over some banking institutions. Today, we receive news that Hugo is back on the expropriation warpath. Apparently, he's targeting automakers in Venezuela for nationalization based on their supposed refusal to sell rugged 4x4s necessary to traverse the often rough terrain of Caracas. (As an aside, wouldn't nice roads be a nice demonstration of him paving the the way for Bolivarian revolution? Silly me.)

Comrade Hugo is now singling out Toyota, the world's largest automaker that's inching its way back to profitability, for not offering more Venezuelan people's cars. Fun stuff. From Reuters:

Venezuela's President Hugo Chavez has threatened to expel Japanese carmaker Toyota unless it produces an all-terrain model of 4x4 vehicles used for public transport in poor and rural areas.

The fiery socialist, in a speech late on Wednesday, also said he would not hesitate to expel and expropriate plants from other Asian and U.S. automobile companies operating in Venezuela if they failed to share technology with locals. "What's this that Toyota doesn't want to make the 'rustic' model here?" Chavez said, during a ceremony in Caracas to hand owners the keys to economically produced cars that Venezuela's government has imported from Argentina. "We must force them. And if they don't, then they should leave and we'll bring another company in ... The Chinese want to come and they make 'rustic' models."

During a decade in power, Chavez has nationalized large swathes of the Venezuela economy -- including the oil and power sectors -- as part of his "21st century revolution" but has so far left car manufacturing relatively untouched.

He turned on Toyota, the world's biggest automaker, when a transporter said there was a scarcity of all-terrain models to serve people in under-privileged areas. Caracas' poor mainly live in hillside slums, while many rural areas lack decent roads, meaning tough 4x4s are the main means of transport.

Chavez ordered his Trade Minister Eduardo Saman to carry out a "severe inspection" of Toyota, and warned other companies they must start sharing technology with Venezuelans. "You tell the people at Toyota that they have to produce this model and we are going to impose a quota, and if they don't meet it, we will punish them," he told Saman, adding that the state would not hesitate to expropriate Toyota's facilities and pay appropriate compensation...

Somehow, I am inclined to believe Toyota Motors' version of events. According to them, the government knew two years ago that Toyota's Venezuelan subsidiary would stop assembling the cars locally and would import them instead. However, the Venezuelan government has not issued a license yet for the importation of these 4x4s:

But a source at the company said Toyota had stopped assembling the model in question -- which he identified as Land Cruiser 70 -- in 2007, with the government's full knowledge. It planned to import instead, but had not received the necessary license, he added...

Absorb them or kick them out if they don't sell 4x4s, says Hugo. What's more, he adds that the likes of China, Russia, and Iran are eager to sell the required models the Japanese and Americans aren't willing to sell in the Venezuelan market:

"Companies who come here to set up must be ready to transfer technology to us," Chavez said. "If they don't want to, they should go away. I invite them to pick up their things and go," he added, saying companies from allies like China, Russia, Belorussia and Iran were ready to take their place.

Lack of access to dollars at the official exchange rate, and labor disputes, have combined with a recession to hit the automobile industry hard in Venezuela this year. According to latest figures from the Venezuela Automobile Chamber, car sales in November were down 40 percent at 10,075 units, compared with the same month last year.

What is worse run, Venezuela or the United States? Given their shared love for nationalization, I can hardly tell the difference. Venezuelan officials indulge auto fetishes bordering on the senseless (via fuel subsidies and the like) while American ones do the same for homes via unnaturally easy credit conditions as well as unquestioned guarantees on limitless loan growth. You'd think they'd have learned their lessons by now but I guess some people have near-infinite faith in unreason.

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A Global Warming Christmas

♠ Posted by Emmanuel in Service Announcement at 12/24/2009 10:55:00 AM

Dear friends, another year is almost done. However, I wish to thank all of you for your continued patronage of the IPE Zone as it's still a going enterprise that will soon celebrate its third year of existence. I never imagined that it would become Google's highest-ranked website for the search term "international political economy" after the Wikipedia entries (at least in my parts of the world). Originally, my ambition was a more modest ones of putting extra course material online for my students. However, it's kept going even after I completed my PhD at the University of Birmingham and headed to the London School of Economics and Political Science given--you guessed it--your continued patronage.

2010 promises to be another eventful year as we observe how climate change negotiations evolve. Unfortunately, I have not been able to post on the subject as much as I would like to (and my Internet connectivity remains an issue.) To motivate myself, I promise an extensive post on the Copenhagen conference and beyond. This topic is a very important one for IPE watchers since it demonstrates changes in the balance of power in global governance (towards major LDCs) and says a lot about the prospects for collective action...after American hegemony, as someone would say. As always, I intend to provide public goods by covering important current events others perhaps miss while pulling no punches. Believe me, there is far more out there of interest than I can possibly write about. May things ever remain so.

Please accept my apologies for the late posting on Copenhagen as there is still general bewilderment about what took place. For now, read about how the most powerful unelected official in Europe is setting out to change the face of higher education. The UK and US usually set trends for the rest of the world, so these changes are worth noting--especially for those of involved in academia: instructors, researchers, administrators, students, and parents.

A Merry Christmas and a Prosperous New Year to one and all! Alas, give my outlook for 2010, we are going to need it.

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Lord Mandelson, Destroyer of UK Higher Ed?

♠ Posted by Emmanuel in Education at 12/24/2009 06:26:00 AM

For those unfamiliar with him, the only thing you really need to know about Peter Mandelson is that you don't $%^& [insert expletive of your choice] with Peter Mandelson. This New Labour architect has long been known as the "Prince of Darkness" for his ability to quash opponents with ease for three--now going on four--decades. Cartoonists love a character [see picture], and few outdo him. Longtime readers will recall that I noted his return to British politics from exile in Brussels as EU trade minister with great interest. Unlike many other New Labourites, Mandelson has always been a staunch supporter of Britain in the EU, which of course puts him on my right side whatever else people make of him. To his opponents--and there are throngs of them--he is often cast as an archetypal Bond villain: impeccably mannered and coiffed despite wielding decidedly cruel intentions. While I am not exactly in agreement with the latter point, no one doubts he is a formidable character. If James Bond crossed Mandelson, odds are that the world's most famous secret agent would be condemned to permanent desk duty at MI6 headquarters.

His honorifics are as lengthy as his reputation: Baron Mandelson of Foy in the County of Herefordshire and of Hartlepool in the County of Durham; First Secretary of State; Secretary of State for Business, Innovation, and Skills; President of the Board of Trade; and Lord President of the Council. After twice resigning from the Cabinet, Mandelson now finds himself being the most powerful unelected official in the UK (and perhaps UK history). Everyone including Peter Mandelson believes New Labour is on its last legs. Given this uninspiring situation, taking the reins of power and accepting responsibility for the actions of a government on its way out are not ideal career choices for the vast majority of politicians. Peter Mandelson is not your average politician. Tough times call for tough characters, and there is none who fills the bill more than he does. The Guardian describes his current role thusly:

Mandelson is routinely described as the unofficial deputy prime minister, and it's about the only job title he hasn't acquired since returning to government. As first secretary of state and business secretary, he attends 35 of the cabinet's 43 committees and subcommittees, dwarfing the 17 Prescott used to attend as deputy PM. With 11 ministers answering directly to him, Mandelson's department is the now the biggest in Whitehall – but to describe him as Brown's de facto deputy is if anything to understate his position. He is arguably more powerful today than the prime minister himself.

In part, his power derives from a ministerial brief straddling almost every policy area of government, and in part from colleagues' eagerness to consult his advice; Ed Miliband recently described him as a "benign uncle", which Mandelson quotes to me several times with evident pleasure. His defeat of the abortive coup in June certainly made him indispensable to Brown – though interestingly, when I ask why he fought so hard to save his boss on the night of James Purnell's resignation, he says, "Because I thought it was wrong to lose a second leader in the course of a parliament. I thought the voters would not embrace it," which is not exactly a tribute to the prime minister's unique personal strengths...

All of this makes him powerful – but none of it matters quite as much as one simple fact. Mandelson has acquired all this power by virtue of not wanting to be prime minister. As his great friend Robert Harris put it recently, "He thought it was all over and now he sees every day as a bonus." He never expected to be here, so he has everything to play for – and crucially, nothing to lose.

Many have taken issue with Mandelson for usurping so much power despite being unelected. Top Gear humourist and paleoconservative Jeremy Clarkson quips, "I’m afraid he will have to be tied to the front of a van and driven round the country until he isn’t alive any more."

This long-winded character sketch brings us to today's latest manifestation of Mandelson at work. Just two days ago, Mandelson announced a 6.6% cut to university funding while most of the British higher education community (including yours truly) was lulled into the mood of the festive season. As you'd expect, his letter to Tim-Melville Ross, chairman of the Higher Education Funding Council of England (HEFCE), is a bluntly effective document detailing how comparatively free-flowing government spending on universities of recent years is a thing of the past. This Guardian editorial spells out the important changes if you're in a hurry:

Lord Mandelson's announcement marks for this generation what Tony Crosland's "the party's over" marked for an earlier era of Labour government. Though the latest cuts of £135m in the higher education settlement, on top of the £180m already signalled in the chancellor's 2009 budget, are not as swingeing as some of the recent rumours have suggested, they will still go deep. The decision to protect research funding, maintaining a pledge which Gordon Brown gave in 2004, means the impact of the cuts will be concentrated on capital spending and on teaching. In plain English, it is teachers and students who will suffer most.

Capital spending has done well under Labour, as a visit to almost any university will show. Much of this spending, however, was needed to repair decades of neglect. Now that the tap is being turned off again, the threat of a return to the pre-1997 regime is grave, and will become more so as the likely long restraint of spending continues. The most immediate victims of Labour's stop-go policies, however, are young people. There will be fewer students in 2010 than in 2009 and they will each command fewer resources than their predecessors. Universities' overdependence on foreign students' fees means that UK undergraduates will bear the brunt. The Treasury, which has to pay undergraduate fees and loans upfront, has a powerful vested interest in keeping this number as low as possible.

In contrast to the Guardian, I have held a dim view of universities being so reliant on the public purse for the bulk of their funding. Indeed, there is much to be said IMHO for the American model which seeks more funding via donations, endowments, and other non-government-related sources of revenue. The writing is on the wall: UK universities will have to rely more on international students (read: non-EU) who pay full and not subsidized tuition. Plus, universities will have to go "neoliberal" in attracting funding outside of the government. Again, these changes are long overdue if you ask me. It's only smart for them to do so since the state of UK finances going forward are abysmal.

Also on dock are two-year degrees becoming more prominent in the higher education landscape. Americans and others are already skeptical of three-year British courses being the equivalent of four-year ones in other countries. So, what more two-year ones? I haven't formed an opinion on this although the Guardian has more on shorter degrees:

The age of the traditional three-year degree could come to an end after universities were today ordered to devise two-year fast-track courses to cut the cost of higher education to students and the public purse...

Fast-track degrees were first mooted by Tony Blair in 2003 and a handful have since been piloted at five universities. Today's announcement puts them at the heart of the government's strategy to reorganise higher education in more austere times. In pilots, terms were extended by 10 weeks each year, with a more intensive teaching timetable. Two-year degrees give students the option to cut their debt by reducing fees but critics say students also lose out on the social aspects of being at university and time to mature in academia. The research intensive elite universities are sceptical of shortened degrees and have warned against compromising quality.

Like a lot of what Mandelson does, however, there is a method to the madness. First, getting British universities to fend off for themselves has been a long time coming. The circumstances should now leave them with no further choice. Second, note that most of the cuts are aimed at teaching and not research. Schlepping students at run-of-the-mill institutions will suffer, but these cuts are aimed at preserving the prestige of British universities by keeping research funding alive. It may be a sad fact to many but, like elsewhere, it's research not education that delivers status in higher education--something the UK will strive to maintain. Lastly, declaring these funding cuts on 22 December when virtually all UK universities are closed for the holidays is such a cheeky ploy that even I am amused.

So there you have it. Major changes are afoot in British higher education. Being a participant in it, I am not entirely sure what they mean for my future. Contrary to Clarkson, I believe there are other places than these worth seeking employment in. As before, I am prepared to go anywhere at a moment's notice to ply my trade. England's been fun but the game may be up for me and countless others.

As for Lord Mandelson, it makes me ponder these "evil" stereotypes assigned to him. I am of the opinion that there are few truly "evil" people. More often, people just don't know what they're doing. For instance, Bush the Younger was more stupid than evil. Buffoonery is not fearsome; contrast Dubya with someone like Mandelson or Vladimir Putin. The latter two I'd give very wide berth. With Mandelson, what you'll notice is that there's always a mind behind what he does despite how unpopular his decisions are. He acts deliberately whether making the best of a bad situation or punishing political foes. Indeed, there is something admirable here in him being willing to take the political slings and arrows for New Labour so that Labourites may experience a rebirth somewhere down the road. Whatever his opponents make of him, the pound stops with Peter Mandelson for good or ill.

And by the way, he wishes everyone the best over the holidays.

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OECD Countries: Can You Spare Us $16T in 2010?

♠ Posted by Emmanuel in Cheneynomics,Credit Crisis at 12/21/2009 04:28:00 AM

If anything else, Hans Blommstein has an interesting job as the head of the OECD's public debt management. I imagine it to be on par with being Tiger Woods' public relations manager in terms of difficulty. Nevertheless, the main difference is that the good Dr. Blommstein has actually put in an appearance in the media instead of constantly hiding away from it despite the OECD states' unvarnished lust for printing IOUs--especially that chronic degenerate Uncle Sam who should rack up $1.5 trillion next year.

Dr. Blommstein wrote an op-ed in the Financial Times talking about mind-blowing stuff in rather sedate fashion. He says instead of previous forecasts of the OECD running a collective $12 trillion tab in 2010, it will run, oh, a $16 trillion one in gross terms (or not net of maturities). From the perspective of a debt-fearing individual like yours truly--I shudder at using a credit card--these figures are utterly mad. Nevertheless, there's much interesting commentary here about the challenges in managing sovereign debt. Some are commonsensical such as issuing longer-dated bonds to lock in potential rises in borrowing costs. This eventuality is important insofar as a slowdown in central bank purchases of these debts as unconventional monetary measures wind down can result in increased interest rates. From the FT:

The surge in Organisation for Economic Co-operation and Development budget deficits and borrowing needs is creating unprecedented challenges in government bill and bond markets. Amid continued uncertainty about the pace of recovery, as well as the timing and sequencing of exit strategies, gross borrowing needs of OECD governments are expected to reach almost $16,000bn in 2009, up from an earlier estimate of about $12,000bn. In 2010, the OECD area-wide fiscal deficit is projected to peak at a post-war high of about 8.25 per cent of GDP, while the tentative borrowing outlook for 2010 shows a stabilising picture at about $16,000bn.

Another marker for the scale of the challenge is the size of outstanding debt. In 2007, for example, total marketable debt of the central governments in Japan, the US and eurozone stood at nearly $21,000bn, more than double the level a decade before. In 2009, it is projected to be more than $27,000bn. Raising large volumes of funds at the lowest possible cost has therefore become a tough challenge. Debt managers had to deal with the consequences of increased competition in raising funds, extreme volatility in markets and (potential) market absorption problems. They have therefore introduced changes in issuance procedures, including more flexible auction calendars and more flexibility in the amounts offered. The compass of debt managers is aimed at balancing the cost and increasing risk of rapidly growing debt portfolios, including refinancing, repricing and interest rate risks.

In response, OECD debt managers have sought to rebalance the profile of their debt portfolios by issuing more long-term instruments. For the OECD area as whole, the share of short-term issuance to total gross issuance peaked at nearly 70 per cent in 2008. This year it is estimated that it will decrease to about 63 per cent, with a projected further decline in 2010.

Most OECD debt managers have been very successful in financing the surge in funding needs. Less successful auctions can be viewed as “single market events” and not as evidence of systemic market absorption problems.

A looming additional challenge is the risk that, when the recovery gains traction and risk aversion falls further, yields will start to rise. Market stress may be further aggravated by exit implications of monetary policy shifts, creating additional complications for the debt management strategy. Thus far, investor demand in many OECD countries and across a variety of asset classes (including government securities) was and is (largely) driven by the central bank’s low interest rate policy (in some cases zero rates) and asset purchase and quantitative easing programmes. Exit measures, via unwinding of non-standard monetary policy measures, reverse repos, or raising official rates, must therefore be carried out with great prudence, especially in situations where significantly greater government debt issuance can be expected in future.

The termination of central bank purchase programmes and selling assets acquired by central banks during quantitative easing schemes could see greater government issuance needs but without market support, leading to an upward pressure on market rates (which may of course be desirable from a monetary policy point of view).

However, it could also rock (government) securities markets by pushing up strongly longer-term rates on government bonds (and perhaps also long-term mortgage rates). This quite complex situation requires a clear understanding by the monetary authorities of the market impact of exit programmes, a proper communication strategy, and an effective two-way exchange of information between the government issuer and central bank. With proper planning asset sales do not need to be disruptive.

Although clever debt management strategies could potentially reduce government borrowing costs, sound public debt management is no complete substitute for sound fiscal policy. Over time, a return to a prudent medium-term fiscal strategy is an essential element of any credible exit strategy to bring debt service costs under control.

Ah yes, "sound fiscal policy." I am afraid this rings as hollow as Tim Geithner's pleas that America will shore up its finances when "things get back to normal." Like America, most other OECD countries are facing the imminent retirement of the baby boomer generation that will place far greater burdens on public finances than the global financial crisis. Subprime's just a drop in the bucket compared to demographic challenges that will be ten times costlier for developed country finances to face down according to IMF estimates. Indeed, it's the biggest bill in history.

In fiscal terms, it's likely all downhill for the OECD despite Blommstein's pleas as demographic realities cannot be wished away. These debt orgies scare me senseless, especially if OECD countries expect poor countries to help absorb a lot of it in reserves which they already have far in abundance. It's a messed up world and it'll only get worse if these mindless excesses continue.

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Yuan Regional Trade? SE Asia Now Can Use RMB

♠ Posted by Emmanuel in China,Southeast Asia,Trade at 12/20/2009 12:11:00 PM

Now the game is truly on in contesting regional hegemony in the Asia-Pacific region. Formerly the bailiwick of the United States, unresolved conflicts that are not going well in the Middle East and South Asia have perhaps distracted it from conducting diplomacy there--particularly Southeast Asia. At about this same time last year, China announced that it would begin allowing the use of its own currency for trade facilitation with its territories Hong Kong and Macau as well as ASEAN on a trial basis. To be sure, the yuan (renminbi or RMB) has its share of advantages and disadvantages as a currency in terms of a currency's three traditional functions.

If you will recall, these are money as a store of value, medium of exchange, and unit of account. Store of value deals with a currency holding its value over time. Compared to some other currencies in the region, the yuan has held its value better, making it a somewhat more attractive proposition to hold. Medium of exchange deals with a currency being readily exchanged. Of course, the yuan is not readily used in foreign exchange or international transactions at the moment, although the process of experimenting with trade facilitation should be interesting to watch. Last, a unit of account in trade terms simply means it being divisible in various denominations.

China eventually making its currency readily exchangeable (or even free floating) is predicated on making small steps such as what it is doing now with ASEAN on a trial basis. The PRC is experimenting with offering regional partners RMB for trade facilitation to help gauge demand for this dollar alternative as a medium of exchange. Should the current effort prove to be popular, this role may eventually lead to RMB becoming a store of value as a reserve currency. Note that the process cannot be the other way around; first it must be readily traded before being considered as a possible reserve currency. After all, what use are reserves that cannot be used when needed? Given America's gargantuan future obligations and penchant for policies promoting dollar debasement, only a fool would rule out the RMB at least partially supplanting the dollar in the Asia-Pacific region.

Official PRC mouthpiece the People's Daily lays the groundwork for this story via the China-ASEAN FTA coming into force in 2010:

The Chinese currency yuan is expected to play a bigger role in regional trade as the China-ASEAN Free Trade Area (CAFTA) is to be realized on January 1 of 2010. "The upcoming CAFTA, which boasts the largest population among all the world's FTAs and allows zero-tariff on 90 percent of products traded between China and ASEAN, will quicken the process of RMB regionalization, "Xu Ningning, executive secretary general of China-ASEAN Business Council, told Xinhua at the 6th China-ASEAN Expo in Nanning, capital of Guangxi Zhuang Autonomous Region. Free trade demands free flow of currency, making possible the regional use of RMB, he said...

Alongkorn Ponlaboot, deputy minister of commerce of Thailand, believed RMB would play a more important role in bilateral trade between China and ASEAN in the future. He said yuan was a very stable currency and expanding its use could help reduce risks faced by the ASEAN countries in using the U.S. dollar, which has become highly volatile as a result of the global financial crisis.

Pung Kheav Se, general manager of Canadia Bank Plc. of Cambodia, echoed Thailand's deputy minister, saying trade between China and ASEAN kept growing and less risk by the use of RMB would benefit both sides.

Data from China's General Administration of Customs showed trade between China and ASEAN totaled 105.88 billion U.S. dollars in 2004, and rose to 231.07 billion U.S. dollars in 2008. China and ASEAN are currently the fourth largest trade partners to each other.

However, the use of yuan in ASEAN fell far short of the trade growth between China and ASEAN. Currently RMB settlement was mainly adopted in border trade which accounted for only 10 percent of the China-ASEAN bilateral trades, Teng Chong, board chairman of Guangxi Beibu Gulf Bank, told Xinhua...

Su Ning, vice governor of China's central bank, said financial cooperation between China and ASEAN was still at the initial phase and financial markets were not open enough. But potential for cooperation was huge as finance in China and ASEAN seeing fast development currently. China has been launching pilot RMB programs over the years, but the pace has obviously quickened since the onset of the global financial crisis as the U.S. dollar has been getting weaker, arousing concerns that an unstable dollar would lead to increased costs and risks for traders.

A Vietnamese furniture trading company named Vietnam Charity Trading Company Ltd. had attended the expo for five years. It began trades with China 22 years ago and has been exporting 70 percent of its products to China. The company buys materials from Laos and sells products to China and other countries, in which dollars, yuan and Vietnamese Dong are adopted. "That makes the process very complex and always results in losses because of the fluctuation of exchange rates," said Huang Yifan, executive director of the company.

"I really hope there is a single currency like the euro to cut off the cost of exchanging currency and make the whole process easier," she said. "I hope yuan could be the one as it has been stable and welcomed by the ASEAN people," she said, adding that yuan is very popular in Vietnam, Cambodia and Laos.

Grace See Choo, managing director of Grace Cosmetics, a Malaysian cosmetic company, said her company had been importing packing materials from China since 2000. "We always traded in yuan, which operates well," she said. "China is a huge market for us. Guangxi's market alone is larger than that in our whole country. We prefer yuan as the trading currency if the Chinese part want the same," She said. The company now is looking for a Chinese agent to explore Chinese market.

Although yuan had gained reputation among ASEAN people, efforts of the ten nations' central banks were still necessary to commit to a consensus of popularizing RMB, Teng Chong said.

Xu Ningning said new economic situation had created [a] stage in Asia for RMB. The three FTAs between ASEAN and China, Japan and the Republic of Korea, respectively, will build a wider platform for RMB exchanging. "Although it needs time to breed a new trade market or a new currency market, the CAFTA is believed to create new space for the regionalization of RMB," Xu said.

Inter alia, the Bank of China and the Hongkong Shanghai Bank have begun offering in RMB for China-ASEAN trade. A caution I need to add is the obvious one of the yuan being stuck at 6.83 to the dollar since the onset of the global financial crisis. While the yuan may be less volatile than some other regional currencies and may also be due for revaluation in the near future, its current shackling to dollar does not lend it any advantages against the greenback as a store of value. Still, that misses the point as China is more interested in exploring its use as a medium of exchange in intraregional trade at the moment.

In any event, it's a good start towards weaning the region away from Yankee-style Fritzl-nomics. May those responsible for it alike TIME's Person of the Year (and arch economolester) Ben Bernanke be doomed to a well-deserved ignominious end.

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See? PRC 'Resurrects' Protectionist Tech Policies

♠ Posted by Emmanuel in China,Trade at 12/11/2009 04:54:00 PM

Today is the last day of term and my brain is thoroughly fried. In honour of this occasion, above is a graphic from the Doom 3 expansion pack, The Resurrection of Evil. (This is not the first time I've mentioned this admittedly mindless though classic video game.) For, try as I might to get away from trade spats exploding all over the place, there is no relief as they keep being, ah, resurrected. To put this new trade spat into context, let us recall some recent history.

Many countries, especially China, have been critical about US insertion of "Buy American" clauses in the $787 billion stimulus bill of 2009. Now, the United States is a signatory to the WTO's General Procurement Agreement (GPA) that self-explanatorily encourages non-discrimination against other countries in government procurement. As the WTO's principal architect, it is no surprise that the United States has signed on to this agreement. It believes that it must honour its commitments to fellow signatories. However, China is not a signatory and is thus more subject to discriminatory measures from the American POV. Here's an excerpt from a Reuters factbox dated 13 February 2009:

The bill stipulates that the Buy American provision be "applied in a manner consistent with United States obligations under international agreements." That is further explained in separate report language on the bill to clarify that it requires the United States to comply with obligations under the World Trade Organization's government procurement agreement and under the North American Free Trade Agreement and other U.S. free trade accords...

The trade compliance language gives members of the WTO's government pact such as the European Union, Japan, Canada, South Korea and Taiwan comfort they could provide material for a public works project funded by the stimulus bill. But countries such as China, Brazil, Russia and India which are not members of the government procurement accord or do not have free trade pacts with the United States are not protected by that clause.

China has always been of the opinion that "Buy Chinese" is perfectly legitimate in response. After all, China is not a signatory to the GPA. That's the first bit of history. The next one concerns the recent row over the PRC requiring computer sellers in the country--including Western ones--to install censorship software. While officials always claimed they were filth-fighting (read: pornography) wares, Westerners read more sinister intentions in the proliferation of these pieces of code. In any event, pressure from Western firms especially has resulted in a PRC climbdown.

Or has it? Today's bit of news melds these two items. First, the Chinese are keen on slapping requirements that tech-related products sold to the government must have a certain amount of domestic content. Yes, it's "Buy Chinese" all over again. Second, giants of Western industry such as various chambers of commerce, the Business Roundtable, and tech industry associations are again applying pressure on Beijing to rescind these requirements. The Wall Street Journal notes that public procurement in China is now pretty big business--especially after the PRC government launched its own stimulus package. Interesting stuff. What follows below is the letter sent by the various bodies mentioned above to the burghers of Beijing. You can view the entire missive from the China Briefing website together with a brief writeup:
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December 10, 2009

The Honorable Wan Gang
Minister of Science and Technology

The Honorable Xie Xuren
Minister of Finance

The Honorable Zhang Ping
Chairman of the National Development and Reform Commission

Dear Minister Wan, Minister Xie and Chairman Zhang:

As heads of associations representing a wide array of companies and industries around the world, we are committed to fostering strong ties with China as it continues its more than 30-year path of economic reform. We are, therefore, deeply troubled by the joint circular (Notice No. 618) posted November 15, 2009 that would implement an Indigenous Innovation Product Accreditation system. Implementation of this system will restrict China’s capacity for innovation, impose onerous and discriminatory requirements on companies seeking to sell into the Chinese government procurement market, and contravene multiple commitments of China’s leadership to resist trade and investment protectionism and promote open government procurement policies.

We strongly believe that implementation of this program will undermine the more positive relationship that our countries have been working so hard to achieve with China.

The Indigenous Innovation Product Accreditation Program will hinder, rather than promote, China’s own goals of advancing its science and technology capabilities. Access to the best products and services from around the world is critical to spurring technological progress in all sectors of the economy, overall economic growth and higher living standards. Not only is the compressed application deadline of December 10, 2009 unworkable, but the very restrictive and discriminatory program criteria would make it virtually impossible for any non-Chinese supplier to participate—even those non-Chinese companies that have made a substantial and long-term investments in China, employ Chinese citizens, and pay taxes to the Chinese government. The result will be less efficient and more costly purchases of innovative products and services by the Chinese government and a slowing of the very technological development that China is pursuing.

Further, the criteria of Notice 618 diverge markedly from global practices and include unique requirements that the product’s intellectual property be developed and owned in China, and that any trademarks be originally registered in China. By contrast, quality, performance and value are given only a minimal role. China and the international community have a common interest in ensuring robust protection of intellectual property rights as we forge a closer economic agenda. China’s new criteria fail to recognize the truly collaborative, cross-border and global nature of R&D that produces innovation and that few if any products are developed in a single national territory. Establishing local intellectual property ownership as a market access condition would run counter to free and open trade and to fostering collaborative innovation.

The Accreditation Program also runs directly counter to the commitment of President Hu and other world leaders to pursue open trade and investment policies and avoid protectionism. Additionally, it would dilute, if not effectively nullify China’s commitment at the July 2009 U.S.-China Strategic and Economic Dialogue in which China clarified that its procurement policies were open to foreign invested enterprises (FIEs) and recognized the importance of non-discriminatory procurement policies.

For all of these reasons, we strongly urge the Chinese government not to proceed with the requirements of the joint circular. We would very much appreciate the opportunity to exchange views and share our experiences with your government on how best to advance your science and technology goals and to promote innovation through a fair and transparent selection process.

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It's me again. Will the Chinese buckle again? My colleague from the Chinese foreign ministry think it's much ado about nothing which he always does say. Also, the trade litigation route is not readily available as the PRC is not a signatory to the General Procurement Agreement. So there you are. Peace on Earth is not an option in a world of continuous trade strife. Ho-ho-ho, etc.

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"Supermax," America's Homegrown Guantanamos

♠ Posted by Emmanuel in Neoliberalism at 12/10/2009 08:02:00 PM

Americans are famously enterprising sorts. Yet, it may not always be the case that their products are desirable for them or the rest of the world. Among other brilliant Yankee ideas are: "Let's give mortgages to people who haven't a chance in hell of paying them back!" (ownership society) and "Let's sell collateralized debt obligations to slice and dice risk to those who are able to bear it!" Today, though, we have an even more sinister sort of American industry--the prison-industrial complex. What is still the most readable work on this phenomenon is Eric "Fast Food Nation" Schlosser's article which appeared in the Atlantic in 1998. Tossing people in jail is big business and one that certainly has a lot of growth potential in this day and age.

The US of A is famous for having the world's highest rate of incarceration. (I suppose this is a natural byproduct of Americans' unofficial pastime of shooting each other for the heck of it, but I digress. As President Obama puts it, perhaps many just "cling to guns.") Worse, the emphasis in not often on corrections but on purely punitive measures. The most recent and noteworthy sadistic entry in the (profitable) art of American jailing is the so-called "Supermax" prison. Though not solely an American phenomenon, you shouldn't be surprised that it has reached its fullest expression in incarceration nation. And, like the finest subprime securities, it too is being exported to all ends of the Earth. Purportedly designed to hold the most violent and risky offenders--read: terrorists--recent research here at the LSE by Sharon Shalev finds that it these "Supermax" facilities aren't often used for such purposes. Indeed, many comparatively mild cases of prisoners with mental health issues are condemned to these American Guantanamos. From the press blurb:

Supermax prisons – large prisons designed for holding prisoners in strict and prolonged solitary confinement – officially operate to protect society from its most violent and dangerous criminals but in reality are also used to house petty non-violent offenders and the mentally ill. Those who aren't mentally ill on entering supermax prisons often become so, some after quite short periods of time, and the mental trauma caused by the extreme conditions can lead to individuals, most of whom will be released back into the community, becoming more damaged and aggressive rather than less of a threat to society.

These are some of the arguments made in a new book by Dr Sharon Shalev of the London School of Economics and Political Science (LSE). Supermax: controlling risk through solitary confinement calls for an urgent review of the use of solitary confinement as a prison tactic. It is the first book to offer a comprehensive examination of the supermax phenomenon.

An estimated 25,000 prisoners in the United States are currently isolated in a supermax prison and subjected to extreme measures of control, regulation and inspection. These prisons have mushroomed across the United States since the late 1980s and can now be found in 44 states across the US, as well as in Australia, Brazil, Canada, Holland, Peru and South Africa.

Supermax prisoners typically spend 22.5-24 hours a day locked up in small, windowless cells, where they eat, sleep and spend their days isolated from human contact. They only leave their cell for one hour of solitary exercise in a barren concrete yard three times a week, and a 15 minute shower in a shower-cell four times a week. They have no access to vocational programmes, are shackled whenever they leave their cell, and are subjected to regular cell searches, which can involve the use of tear gas or other chemical agents, and dogs. Supermax prisoners may be held in these conditions indefinitely, sometimes for the duration of their natural life.

Dr Shalev said: "Supermax prisons are extreme places which brutalise both prisoners and prison staff. They are excessive, expensive, ineffective, and extremely damaging. And they don't make sense. How can it be necessary to secure prisoners behind ten layers of physical enclosures, to deny them lip balm, hair conditioner and, in one recent case, access to two of Barack Obama's books, in the interest of security?"

One argument supporting the extreme measures is that they are necessary to control the risk posed by dangerous prisoners. But the huge number of prisoners held in supermax prisons runs in the face of this argument and the reality is that many supermax prisoners are petty non-violent offenders who have simply fallen foul of rules and regulations elsewhere in the prison estate, and the mentally ill. In California, for example, a prisoner can be placed in a supermax for "possession of $5 or more without authorisation". And rather than reducing violence, the book argues that supermax prisoners often experience increased irritability, anger and unprovoked violent outbursts. In the absence of contact with others, the violence is often turned against the individual with forms of self-harm prevalent in solitary confinement.

'The practice of solitary confinement has gained considerable media and public attention, and condemnation, in the context of Guantanamo Bay, Cuba, and America's "War on Terror". But less attention has been paid to the proliferation of supermax prisons in America itself' said Dr Shalev. 'The public may or may not be concerned about the mental well-being of its prisoners, but they should surely be concerned about recidivism rates and the prospects of tens of thousands of prisoners, who have lived in a world devoid of human interaction and human contact, being released from their isolation cells to life alongside others without any preparation for the transition. 'Supermax prisons are expensive, ineffective and they drive people mad. Rather than building more supermax prisons, it is time to acknowledge the failures of solitary confinement and reject its use as a legitimate prison practice in all but the most exceptional circumstances.'

This is an utterly unoriginal idea but think of the United States as one big gated community. The prison-industrial complex is the underbelly of contemporary American inequality and "Supermax" its fullest realization in terms of architecture and surveillance--far surpassing that of Jeremy Bentham's Panopticon.

Obama and the Nobel Peace Prize committee may have deluded themselves into thinking that gradually closing down Guantanamo Bay improves America's reputation in the eyes of the rest of the world. For those with finite attention spans, this may be true. This book, however tells of another truth that gets insufficient press attention: Guantanamos proliferate throughout the heartland of the United States. There's plenty of material on the subject matter, too.

The great thing about jail as a typically American growth industry is that hard times tend to bring more "clients" to the system. Perhaps unfortunately, customer service makes these folks even worse than when they first came in. Luckily, though, more "customer loyalty" emerges as recidivism rates skyrocket. It's brilliant in a sadistic sort of way--generating business through thick and thin. I guess when all else is going down the tubes Stateside, you might as well make money off of it.

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Nearly Blanket Beating Up on Banker's Bonuses

♠ Posted by Emmanuel in Casino Capitalism at 12/10/2009 04:23:00 PM

Regardless of what you think the relationship is between banker bonuses predicated on short-term performance and the financial crisis, one thing necessary to make punitive measures to deter massive bonuses stick is that various financial centres need to coordinate their activities. That is, bankers can perform a bit of regulatory arbitrage by transferring their employment location to less heavily taxed locations. It's the new tax haven/paradis fiscaux spin: bankers go not to where tax rules are relaxed but where those on bonus rules are. We begin with yesterday's moves by the fabulously furry eyebrowed Alistair Darling--the man has his own Eyebrows Appreciation Society--hit the City of London's finest with a 50% on banker's bonuses. From the FT:

Bankers in the City of London reacted with fury to UK government plans to levy an immediate 50 per cent supertax on banks’ bonus pay-outs, saying the move played into the hands of rival financial centres. In his annual pre-Budget report, outlining government spending and revenue plans, Alistair Darling, the UK finance minister, announced a 50 per cent levy on discretionary bonus pay-outs to curb big bank bonuses that have provoked public anger. He said banks that had been battered by the financial crisis should be rebuilding their capital rather than paying out generous bonuses to their staff.

Mr Darling justified the exceptional levy by arguing that banks had generated excess profits as a direct, or indirect, result of the government’s bail-out of the banking system. The windfall tax will apply to all banks and building societies, including groups that operate in the UK under a European Union branch system. The levy, to be paid by banks, will come on top of the marginal tax applied to individuals’ bonus pay-outs. “We hope it will be a disincentive for banks to pay bonuses,” said one Treasury official.

The UK Treasury estimates the move will raise £550m and affect 20,000 bankers, although some bankers suggest it could raise up to £4bn if – as seems likely – banks press ahead with bonus pay-outs regardless. The first £25,000 of bonuses will be exempt.

Bankers said the new tax – on top of the 50 per cent top rate of tax, due to be introduced in April, and an earlier squeeze on UK-resident non-domiciled individuals – could damage the City as a global financial centre. “I can’t tell you how many people have called me from London asking to move,” a senior Wall Street banker said. “The question all the banks have now is: who the hell wants to be in the UK? Some businesses will definitely leave.”

One investment banking chief said the “contract between government and business is broken”, warning that up to 40 per cent of the City’s activities were “mobile” and would move overseas to more welcoming jurisdictions, such as Switzerland and the US. Angela Knight, chief executive of the British Bankers Association, said: “Viewed from abroad, London may well look now like a significantly less attractive place to build a business.”

The assumption among the bellyachers, of course, is that other financial centres will not follow suit in punishing those doing "God's work." Perhaps unsurprisingly, France has now joined in the bonus-bashing party with its own fifty percent levy on this heavenly profit-making. German Chancellor Angela Merkel is said to be sympathetic and is keen on applying an EU-wide levy along similar lines:

President Nicolas Sarkozy is to follow Britain’s lead and impose a one-off tax on bonus pay-outs by banks operating in France. The French government intends to include the 50 per cent tax in the budget bill going through parliament. It will be levied on bonuses above €27,000 (£24,400, $40,000) and will be paid by the banks, bringing Paris in line with London.

France and the UK want similar one-off taxes to be adopted across the European Union.

A senior French official told the Financial Times that the French government had been considering such a tax for some time but had been deterred from doing so by the threat to the competitiveness of Paris as a financial centre. “There is no obstacle to doing it now if it has been done in London,” the official said.

On Thursday German chancellor Angela Merkel joined the clamour on bankers’ bonuses saying it would help the financial sector learn from its mistakes. “The Germans always said that we want the banks and the people who work in these banks to share the burden resulting from this crisis. We should not place the burden squarely on the taxpayers’ shoulders,” Ms Merkel told reporters.

“We have committed ourselves to a transaction tax in the financial market. I think that would be a more sustainable solution to the problems,” she said. “But still, I think the idea that arose in the City of London ... to have a one-off tax on managers’ bonuses is a charming idea that maybe will produce a learning effect,” she said.

Switzerland is no longer quite the same place it was before, so refugees from EU-wide Darlingization may not quite find comfort there. The EU can apply quite significant pressure should it feel the need. So, the real major financial centre really we're waiting to fall in line is the United States.

UPDATE: I neglected to mention this Wall Street Journal op-ed co-authored by Gordon Brown and Nicolas Sarkozy discussing the rationale for taxing bonuses and getting the US to do the same.

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Western Aid Used for GWOT, Not Development

♠ Posted by Emmanuel in Development,Security at 12/09/2009 06:41:00 PM

Well this is an absolute non-surprise. Aid proceeds from Western countries destined for Afghanistan have not really gone towards relieving poverty but fighting al-Qaeda and the Taliban according to research just published by some LSE colleagues who've followed the money trail. In many ways, it's reminiscent of the Cold War era when aid--especially that from the United States--went towards propping up corrupt regimes professing adherence to democracy and the fight against communism. Why, just change the world "communism" to "terror" and you get Heroin Hamid Karzai--American puppet (and ballot stuffer) extraordinaire.

I guess some things never change. Security interests tower above developmental ones in the realist calculation even with the Soviets long gone. And, somehow, I don't expect Islamic fundamentalism to fade away as quickly. Cue Obamanite cut and run. The following blurb is from the LSE website; you can view the full paper here:

Western aid in Afghanistan is being used primarily to support the fight against Al-Qaeda and Taliban insurgency rather than focus on relieving poverty and suffering, according to a new report from the London School of Economics and Political Science.

Since the overthrow of the Taliban regime and the election of a fledgling democratic government under President Hamid Karzai, Western aid has poured into the country and now stands at an estimated 2.3 billion US dollars a year. LSE Professor Jude Howell states, 'It is now widely observed that much of this aid is being used to tackle the increasingly violent insurgency in southern Afghanistan, rather than being targeted at areas where humanitarian needs are most acute.'

In their report, Manufacturing Civil Society and the Limits of Legitimacy: Aid, Security and Civil Society after 9/11 in Afghanistan, Professor Howell and Dr Jeremy Lind, of LSE's Centre for Civil Society, draw on fieldwork carried out in Afghanistan over the past four years including interviews with key informants in Afghan and international aid agencies and other NGOs, as well as Afghan and UK government officials.

The research, published in the latest edition of the European Journal of Development Research, says: 'Although aid policy has not been wholly subordinated to security objectives, the allocation of a disproportionate amount of aid to southern parts of Afghanistan where insurgency is rife suggests that poverty reduction is not the primary criterion being used to target aid. As throughout Afghanistan's recent history, foreign aid has been used to leverage external security interests, which, since 2001, have centred on fighting elements of Al-Qaeda as well as a resurgent Taliban.'

It adds: 'In constructing a neoliberal state in Afghanistan, western governments have channeled increasing volumes of aid through Afghan government controlled programmes that necessitate the involvement of non-governmental groups in implementation. The number of NGOs in Afghanistan has mushroomed since 2001, feeding off the opportunities made available by foreign aid.'

The research explains that this has 'created political and moral dilemmas for NGOs acting on humanitarian mandate as to how to act impartially, independently and neutrally and, moreover, be perceived by the general public as doing so…Many NGOs have been reluctant to critically evaluate their own principled stance and recognize the political contradictions of their own positions in a deeply politicized and shifting political contest.'

It calls on aid agencies and other NGOs to examine more closely how they are being manipulated by the War on Terror, concluding: 'Afghanistan shows well the need for NGOs to reflect more deeply on their own positions in the highly charged situations in which they intervene, and where neutrality may be nothing more than illusory.'

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