Cargo Ship Orders, a Global Meltdown Victim

♠ Posted by Emmanuel in , at 4/30/2009 09:19:00 AM
With the WTO expecting a 9% contraction in trade volume in 2009, it is no surprise that demand for container ships is ebbing fast. Orders for vessels placed when trade was still booming--in no small part attributable to shipments to and from the Middle Kingdom--are now in danger of mass cancellation. Just as many commodity producers massively expanded capacity on expectations that commodity prices would remain at an elevated level for the foreseeable future, many shipping lines massively expanded their orders for vessels on similar expectations for world trade. First, to the WTO blurb:
The collapse in global demand brought on by the biggest economic downturn in decades will drive exports down by roughly 9% in volume terms1 in 2009, the biggest such contraction since the Second World War, WTO economists forecast today. The contraction in developed countries will be particularly severe with exports falling by 10% this year. In developing countries, which are far more dependent on trade for growth, exports will shrink by some 2%-3% in 2009, WTO economists say.
Next, to a Bloomberg article of recent vintage:
Shipowners probably canceled orders for 260 vessels carrying commodities and containers as the global recession choked demand and a credit crunch reduced funding, a consultant said.

Shipyards received new orders for 255 million gross tonnage in capacity in the past three years, and about 7 million tons in confirmed contracts may have been canceled, according to Roy Thomson, a regional marine manager in Asia for Lloyds Register, which certifies ships. Yards may have lost $20 billion in revenue from the cancellations, based on Bloomberg calculations. “We will see more cancellations,” Thomson said in an interview today at the Sea Asia 2009 conference in Singapore. “We have not gotten to the root of it yet.”

An investment boom in shipping took place in the past four years, prompted by cheap credit and China’s soaring demand for steel, ore and grains. The global economic contraction and plunge in prices of coal, ore and grains led to lower shipping rates last year.

About a third of the cancellations may have been for bulk carriers, which transport ore, grains and other commodities [read: not containerized items], said Thomson, who has more than 25 years’ experience in the shipping industry.

“The shipping industry has been hit by both supply and demand problems,” Arjun Batra, managing director for consulting at London-based Drewry Shipping Consultants Ltd., told Bloomberg News today in Singapore. “There’s a surplus of carriers and demand has fallen in China and other markets.”
Overcapacity in ship construction is considerable, and the drying up of credit is not lending anyone any favors:
There are 3,424 commodity carriers presently on order at shipyards around the world, according to data from London-based Drewry Shipping Consultants Ltd. Those vessels will have a combined carrying capacity of about 294 million deadweight tons, or 70 percent of the existing global fleet. Deadweight tons measure a ship’s capacity to carry cargo, fuel and water.

As much as 50 percent of the global order book may be canceled because of the collapse in markets and constrained financing, Carsten Mortensen, chief executive officer of Danish shipping company D/S Norden A/S, said April 7.

Pacquiao vs. Hatton? Try India vs. EU at WTO

♠ Posted by Emmanuel in ,, at 4/29/2009 02:58:00 PM
Fight fans are undoubtedly excited about this weekend's matchup between what many regard as the reigning pound-for-pound boxing champion, the Philippines' Manny Pacquiao, and hard-hitting Mancunian (British-speak for someone from Manchester) Ricky Hatton at the MGM Las Vegas. It's something of a departure as what may be this year's biggest match so far is in the junior welterweight category. Traditionally, fights in the middleweight and above classes have attracted more attention, but it seems today's boxers in those categories are not really big draws at the gate.

If you read this blog on a regular basis, you can probably count yourself as a more rarefied kind of spectator: a trade fight fan; an aficionado of mano a mano combat among inebriated Bush family members nations vying for economic supremacy in the punishing gladiatorial arena of global market share. (I have not gone realist on you all of a sudden; it just looked cool to write given some poetic license.) Anyway, I have previously written about how the bad blood emerged in this trade conflict. For a more extensive backgrounder, do refer to it.

For a shorter version, Indian generic pharmaceutical products have recently been seized at EU ports en route to other LDCs like Brazil as if they were, plainly speaking, contraband. LDCs like India maintain that they are permitted to trade generics among themselves as developing countries can under WTO stipulations--particularly those dealing with TRIPS (trade-related aspects of intellectual property rights). That is, their patent protection regimes for pharmaceutical products need not meet Western standards until 2016. Especially at a time of economic crisis, now is not the time for rich countries to become so unforgiving or so they say. From the earlier post, for instance, Western countries are accused of "forum shopping" or attempting to air their side of the pharmaceutical issue at different international organizations in search for a result more favorable to their interests. Meanwhile, EU authorities maintain that generics shipments may leak into EU markets and hence violate IP law.

The latest news is that India will take the EU to the WTO over these seizures. From the trade publication Pharmabiz:
India will soon take up the issue of seizure of drug consignments from the country en route to Brazil and Africa by European authorities, especially the Dutch officials, on the grounds of alleged patent violation recently to the dispute settlement body of the World Trade Organisation (WTO).

"We have requested the European authorities to reconsider the decision. They have already released two consignments, but after holding them for months. It is useless to get the drugs back after 90 days. We are waiting for the formal reply from EU on our request and meanwhile preparing ourselves to take the matter to the WTO dispute settlement body," commerce secretary G K Pillai told Pharmabiz.

Though the matter was raised strongly in the international fora and directly with the concerned authorities including Netherlands, India is almost ready to move the case with WTO dispute settlement body as a favourable reply from them is unlikely, sources said. The case will be pushed within a few weeks time as the EU still sticking to its stand.

India is also reportedly not very keen on the offer of the WTO director general [Pascal Lamy] to mediate in the matter between the two sides, it is learnt.

India is of the view that EU has breached the provisions of trade-related aspects of intellectual property rights and General Agreement on Tariffs and Trade that covers international trade in goods. No consideration was given that these seized consignments were destined to other countries where there were no patent protections for these drugs. "There was not an iota of evidence that any of these products were likely to be diverted to the European markets, a must as per the TRIPS Agreement for such an action," Pillai said.

"The international legislation on the subject as incorporated in the GATT and TRIPS very clearly brings out the freedom of transit for products and the range of border measures which can be taken in such cases. Even where countries can adopt measures more ambitious than this legislation, the enforcement of such measures has to be adequately influenced by the available evidence. We have brought out the illegality and inconsistencies in the European action," he said.

There were around six reported incidents of seizures of Indian drug consignments at the EU ports. These include HIV/AIDS medicines meant for Nigeria. It was being imported by Clinton Foundation. Clopidogrel bilsulphate (API) from Ind-Swift Laboratories, olanzpine tabs from Cipla, rivastigmine tab from Cipla and losartan from Dr Reddy's Labs were also among the seized consignments in the recent past.
I still think this is a PR disaster for pharmaceutical firms and their Western host countries. Seize HIV/AIDS drugs headed for Africa being imported by the Clinton Foundation? Some things are better left swept under the rug. Unlike the South Korea vs. India matter, I believe the latter has a better case here in addition to having the ear of world public opinion. Who's the favorite and who's the underdog? Trade fights are usually more intriguing in that there are several intriguing subplots: North vs. South, LDCs stated needs for affordable medicines vs. drugmakers' stated needs for returns on drug development, etc.

Russian WTO Membership? Don't be Ridiculous

♠ Posted by Emmanuel in ,, at 4/29/2009 02:55:00 PM
For reasons still unclear to me, my formative years were permanently scarred by relatives watching the US sitcom Perfect Strangers. This show's signature character was Bronson Pinchot playing "Cousin Balki Bartokomous," a shepherd from the fictional Mediterrenean island nation of Mypos transplanted to the mean streets of Chicago. Every five minutes or so, he'd deploy his signature line in a thick accent of unknown origin: "Well of course not. Don't be ridiculous!"

That, my friends, is my same exact response to the question of Russia joining the WTO. Instead of Balki, we have several WTO member countries, ah, balking at Russia's intent. A few weeks ago, Russian President Dmitri Medvedev again expressed wariness over the endless process of WTO accession. From RIA Novosti:
President Dmitry Medvedev said Saturday that Russia would like to join the World Trade Organization but added that the process of joining it should not be endless. Russia has been negotiating its entry into the global trade body for more than 15 years.

"Our position on joining the WTO is the same, it has not changed and it is the following: the Russian Federation is ready to join on normal, nondiscriminatory conditions. We have done all that is necessary. This process has been drawn out, and this irritates us," Medvedev told journalists. "The key thing is that this [process] does not turn into an endless story," he said after talks in Moscow with Chilean President Michelle Bachelet, who reaffirmed Chile's support for Russia's membership of the WTO...

Russia has finished the necessary bilateral negotiations with 60 interested countries, but has not coordinated a number of positions of principle, including on agriculture, on export duties for timber, and on regulation of the activities of some state companies.
A true international trade aficionado (with lots of free time) should welcome reading more about the proceedings on Russian accession at the WTO website. As I have said in the past, the main obstacle to Russian WTO accession that will probably terminally hinder its prospects unless somehow resolved is the earlier accession of Ukraine and Georgia [1, 2, 3, 4, 5]--countries which now resent their former master's pretensions to continued regional dominance. Since WTO membership will require that all other member countries approve of Russia's bid, do not count on Ukraine and Georgia signing on without major, major concessions.

I often feel like giving Medvedev and Vladmir Putin a Russian language translation of Dale Carnegie's classic work How to Win Friends and Influence People. As long as it wasn't translated by a bloke at the US State Department, it should work a treat. Then again, attempting to gain WTO membership after cutting off gas supplies to your neighbor during the dead of winter (Ukraine) or encouraging secession of breakaway republics that have resulted in deadly border skirmishes (Georgia) don't seem like particularly neighborly moves to me in terms of winning over key WTO parties.

So, it is of interest that Russia is once again drumming up talk of accession:
Russia expects many issues related to talks on accession to the World Trade Organization (WTO) tobe resolved by July, Deputy Russian Prime Minister and Finance Minister Alexei Kudrin told reporters in Washington on Sunday. "We're not talking about reaching all understandings once and for all, but about meaningful progress," he said.

Russia and the United States are planning a series of further meetings and measures aimed at stepping up efforts to get Russia into the WTO, and to enable some sort of agreements to be reached when their presidents meet in July. For example, areas where problems exist should be identified and a schedule of work related to this be drawn up.

Kudrin said the goal of rounding off WTO accession talks by the end of this year was still on the agenda. "We would of course like to round off all accession talks by the end of the year," he said. Kudrin said he discussed Russia's accession to the WTO and waiving the Jackson-Vanik amendment during meetings with representatives of the Obama administration. "We got assurances of their support and desire to overcome all disagreements in the foreseeable future," he said.
Recall that Jackson-Vanik pertains to the extension of US trade agreements with reference to emigration and human rights most famously invoked against China during those awkward years between the Tiananmen Massacre and its WTO accession. Overall, I believe that gaining US assent is a secondary consideration to soothing tempers of understandable aggrieved neighbors. Even America won't calm them down. "Cousin Balki Bartokomous" would understand.

South Korea Takes India to WTO Over Steel Curbs

♠ Posted by Emmanuel in ,, at 4/28/2009 01:25:00 PM
The Economic Times reports that South Korea is mulling a WTO case against India over the latter's recently imposed restrictions on certain steel imports, including some Korean ones. That is, unless Indian firms obtain import licenses, these products cannot be readily imported. Yes, it is reminiscent of times we thought we've left behind when India maintained a formidable barrier of red tape known as the "License Raj":
Late last year, India put a number of items on the restricted list, including steel products like motor vehicle parts, hot-rolled coils and seamless tubes and pipes. This means only the user industry can import these items against licences issued by the government.

But it may be difficult to explain these curbs as they were imposed without any specific reasons, said [an Indian] government official, requesting anonymity. There is already a feeling within the government that it is safer to impose special duties like anti-dumping duties or safeguard duties to check cheap imports as WTO has provisions for these.

The committee of secretaries, headed by the Cabinet secretary, has already decided that import restrictions would be imposed sparingly. Earlier this year, it asked the commerce department to get import curbs vetted by the CoS when it was necessary to impose them...

In its submission to the WTO committee on import licensing, South Korea also wanted to know the steps being taken by India to ascertain that its new licensing scheme does not restrict imports. “What measures are being taken by the Indian government to ensure that the licensing scheme does not have import restrictive effects, irrespective of whether the licensing scheme concerned is automatic or non-automatic as required in the (WTO) agreement?” states a submission made by the delegation of South Korea at WTO.

The global economic downturn has resulted in a sharp fall in international steel prices, forcing India to look at various options to protect its domestic industry.
The offending action by India is reminiscent of that taken against Chinese toys [1, 2, 3]: issue restrictions largely without explanation. From a famously verbose culture, the silence is deafening. With India's marathon elections in progress, the political-economic payoff is yet to be decided for the Congress Party's actions on toys and steel.

Must China Still Outsource Its Trade Lawyers?

♠ Posted by Emmanuel in ,, at 4/28/2009 11:16:00 AM
You know you've arrived in the world economy when you become embroiled in more and more trade disputes--at least that's the main idea from a recent Forbes article on China's recent spate of activity at the WTO. So it was for Japan in the eighties and nineties coming from a similar Confucian culture which values harmony over routinized conflict in dealing with thorny situations. Now, it's China's turn in the hot seat as it gets into almost everybody else's sights including regional export-led competitors and Western protectionists of every stripe.

Probably the best career advice I can give to anyone interested in the sorts of topics covered on this blog such as trade, international organizations, world politics, etc. is to consider becoming a trade lawyer. Given that disputes are popping up all over the place as trade slows down, the conditions are favorable to future employment. Let's face it: IPE academics are a dime a dozen, and jobs at universities are by no means guaranteed. Meanwhile, there is a real demand for trade lawyers as supplies of those knowledgeable in trade law are not especially plentiful.

Indeed, China is having trouble finding lawyers among its own people skilled in trade law. It turns out that they are actually hiring American lawyers (from the homeland of litigation) to argue their trade disputes--a significant potion of which are of course with the US of A. The entire Forbes article about China's search for expertise in trade law is well worth reading. Here is an excerpt:
"We are newcomers to the WTO. We still need some time to build up full capacity," said Xiao Jin, a WTO lawyer for the mainland Chinese law firm King & Wood, which helped defend the Chinese government in the recently decided anti-piracy case filed by the U.S. There are just three to four Chinese law firms equipped to handle WTO disputes, based on various lawyers' estimates. The U.S. has three to four top-tier WTO law firms and about a dozen other law firms that have WTO practices...

A particular challenge for China is that good WTO lawyers need strong knowledge of common law, civil law and WTO law, a solid background in economics, accounting, and other fields, and English language ability that is sophisticated enough for lengthy briefings and argumentation before the WTO court. “The WTO legal system is very difficult for the typical Chinese lawyer,” said Liu Jingdong, vice director of the international economic law division at the government think tank Chinese Academy of Social Sciences.
If you are interested in IPE topics but don't fancy genteel poverty, consider trade law. I've been trying to get some representative salary figures from our trade law colleagues but they've been mum on the matter. Must be lucrative, I venture. Think of it this way: when a country with 1.3 billion people that's the new ACME (Asian Country Making Everything) can't find trade lawyers at home worth their salt, then opportunities surely exist in the field.

What BRICs Want from IMF in Exchange for $750B

♠ Posted by Emmanuel in , at 4/27/2009 02:33:00 PM
This is to update you on the results of the IMF convocations discussing ways to raise up to $750B from member countries. There is nothing quite surprising if you've read the previous post. In a concession to something desired by would-be major LDC funders, the IMF has agreed to issue bonds whose yields are not markedly lower than those on offer from major reserve asset issuers (read: America).

Something which may raise an eyebrow though is the BRICs' stated intentions of developing a secondary market for SDR-denominated debentures. Indeed, this may be a play towards the development of an alternative (perhaps SDR-denominated) reserve currency discussed earlier with the important feature of serving as a medium of exchange in open markets as opposed to being a mere unit of account in intra-IMF transactions. (Recall the functions of money.) From the Wall Street Journal:
A push by Brazil, Russia, India and China to have the International Monetary Fund issue its first bonds has become part of a strategy by developing nations to gain a bigger say at the IMF. At the fund's annual meeting for the northern spring, the four countries said they were willing to contribute to a previously announced quadrupling of IMF resources to $US1 trillion ($1.38 trillion), mostly by purchasing bonds.

The bonds would be denominated in the IMF's quasi currency, called special drawing rights, have a maturity of about one year, and be sold only to central banks. If the so called nations of BRIC have their way, the bonds could also be sold on secondary markets to make the instruments more liquid.

The proposed purchase is meant to send a double-message, said Eswar Prasad, a former IMF official who remains close with the Chinese and Indian officials. The countries of BRIC are willing to contribute to the IMF, but they won't contribute heavily to longer-term fund resources until the world body increases their voting shares substantially. "They don't want to get locked into providing more money until they get their (shares) increased," Mr Prasad said.

The issue of voting rights and IMF bonds were at the forefront of the group’s meetings, where discussions also explored the state of the global economy and providing support for low-income countries.

In a statement on Saturday to the IMF's main advisory committee, Brazilian Finance Minister Guido Mantega said the world body "still has to address its original sin: its democratic deficit". Egyptian Finance Minister Youssef Boutros-Ghali, the chairman of the advisory group, said in an interview that he wanted to get national leaders involved in remaking the IMF voting system.

IMF voting shares are supposed to generally reflect global economic power, but now give far greater weight to countries that were powerful after World War II, especially smaller European ones.
The thing is, the BRICs' revised number of voting shares can still be said to reflect a Western dominance despite a changing world economy. What is becoming apparent is the perceived value of having a say in the IMF as LDCs are keen on participating provided more voice in its affairs, while European members threatened with share dilution now say they are willing to pony up more to justify their shares:
In March 2008, after lengthy negotiations, the IMF announced that developing nations' voting shares would increase by 5.4 percentage points and the body said it revisit the issue in 2013. For Brazil, that meant its voting share increased by 0.3 points to 1.7 per cent. China's voting share was boosted 0.9 percentage points to 3.8 per cent. Even those increases were not yet in effect. (The voting rights for Belgium and the Netherlands equal China's, even though China is a much larger economy.) The IMF now is committed to looking into the issue next year. But the BRIC countries believe the IMF's need for funds gives them additional leverage.

At the summit of leaders of the Group of 20 industrialised and developing nations early this month, British Prime Minister Gordon Brown said China was ready to lend the IMF $US40 billion. But China never committed to that amount and is now balking, said IMF and other finance officials. Instead, the Chinese are looking at contributing perhaps half that much, which would be in line with its voting share, and providing additional money through bond purchases, which are seen as less significant by the IMF because they are for a limited time; Brazil, India and Russia were also pushing bond purchases.

Indeed, Western European countries, which have pledged $US100 billion to the IMF, were now considering boosting that amount to $US160 billion, one official said, in part to help justify Europe's bigger stake in the IMF.
I am usually blindsided by invocations of social justice at the multilateral level, such as with China saying it has more of a right to pollute given that Western nations are more historically responsible for emissions that have led to global warming. In an interesting juxtaposition, European countries are now saying that they still deserve outsized shares in the IMF because of their historical contributions. What goes around comes around:
Nearly every IMF plan to revamp the voting structure foresees a smaller role for European counties, especially smaller ones like Belgium and the Netherlands. In an interview with Reuters, Belgian Finance Minister Didier Reynders said that the country should keep its seat on the IMF's 24-member governing board because European countries contributed heavily to the IMF.

How the Fed is Setting a Policy Rate of, oh, -5%

♠ Posted by Emmanuel in , at 4/27/2009 01:17:00 PM
I do not call foreign exchange movements "special FX" for nothing as they often display more nonsensical gyration than your average episode of Dancing With the Stars. Here is another case in point: the US dollar has strengthened to start off the week despite revelations that the Federal Reserve is keen on replicating easy money conditions similar to having a policy rate of -5% by the Taylor rule based on prevailing inflation and employment trends. From the Financial Times:
The ideal interest rate for the US economy in current conditions would be minus 5 per cent, according to internal analysis prepared for the Federal Reserve’s last policy meeting. The analysis was based on a so-called Taylor-rule approach that estimates an appropriate interest rate based on unemployment and inflation.

A central bank cannot cut interest rates below zero. However, the staff research suggests the Fed should maintain unconventional policies that provide stimulus roughly equivalent to an interest rate of minus 5 per cent. [Think of various facilities clogging the Fed balance sheet with bank detritus and active intervention in bond markets.]

Fed staff separately estimated what size and type of unconventional operations, including asset purchases, might provide this level of stimulus. They suggested that the Fed should expand its asset purchases by even more than the $1,150bn (€885bn, £788bn) increase policymakers authorised at the last meeting, which included $300bn of Treasury purchases.

The assessment that the US central bank needs to provide stimulus equivalent to a substantially negative interest rate is unlikely to have changed ahead of this week’s policy meeting.
What the Fed is doing is undoubtedly nasty for America's creditors given the implications of such interest rates for the US dollar going forward. Plus, it is uncertain if this debt-fueled frenzy can be turned off at the flick of a switch in the equally uncertain event of a US recovery. Was Larry Summers again sleeping on the job when he told the Chinese that the United States was a "sound steward" of PRC investments? Once more, we should ask ourselves: Who's the bigger fool--the free-spending fool or those fooled by the free-spending fool? Maybe it's just me but buying assurances that your investments are safe from a country hellbent on giving you a -5% rate of return does not seem to be a very intelligent decision.

IMF = "I'm Missing Funds" or the $750B Fundraiser

♠ Posted by Emmanuel in , at 4/25/2009 02:45:00 PM
At the last G-20 meeting, participants pledged to increase IMF funding by $750 billion to help the institution firefight various balance of payment shortfalls now befalling virtually all regions of the globe. Let us recall from the previous communique...
The agreements we have reached today, to treble resources available to the IMF to $750 billion, to support a new SDR allocation of $250 billion, to support at least $100 billion of additional lending by the MDBs [multilateral development banks like the World Bank and regional lenders such as the African Development Bank], to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries, constitute an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy. Together with the measures we have each taken nationally, this constitutes a global plan for recovery on an unprecedented scale.
Well, that was fine and dandy. Now here comes the more difficult part where rubber meets the road: who's to lend the IMF $750 billion? It seems LDCs (especially China) want a larger share of voting rights in the institution if they are to contribute--something that would of course dilute the voting shares of the US and the European countries. This, of course, is a politically contentious process as the institution retains clout in international economic affairs.

Actually, I saw the following article on the front page of Yahoo!--something which surprised me. Since when did the average Yahoo! reader start caring about international economic diplomacy? These are changing times. (As a note to bloggers and would-be bloggers, try not to link to Yahoo! news items as they expire after a while.) From the Associated Press:
Finance officials are pledging to keep the momentum going in their efforts to combat a severe global downturn but have hit a stumbling block in differences over how to boost the resources of the International Monetary Fund. The debate underscored what could be a growing divide within the 185-nation IMF, with emerging economic powers such as China, Russia, Brazil and India insisting that old-line powers such as the United States, France and Britain listen to their ideas on different funding approaches for the IMF.

At issue is how to supply a portion of the $1.1 trillion increase in resources for the IMF and other lending institutions that was set as a goal by President Barack Obama and other leaders at the Group of 20 nations summit in London on April 2.

The rich nations had hoped to get China and the other nations to commit to billions of dollars of support for that effort at these meetings. However, those countries are insisting that the IMF consider issuing bonds as a way to raise the support. The countries would buy the IMF bonds rather than extending the support in loans. The IMF has never issued bonds before, although the idea was explored in the 1980s.

While the difference would not seem that great — both the bonds and the loans would require the IMF to pay interest — the debate is also tied up in arguments emerging economies are making about the need to boost their voting power at the IMF, something that would come at the expense of the current power structure that favors the United States and Europe. [In essence, the West's approach is more conducive to maintaining their voting power at the IMF.]

Those issues and others were scheduled to be debated behind closed doors on Saturday as Treasury Secretary Timothy Geithner and other finance officials meet for talks of the IMF's policy setting board. The IMF meeting was also scheduled to discuss a proposal to increase the agency's oversight abilities to monitor global activity in hopes of preventing a repeat of the current banking crisis.

The talks began Friday afternoon with a meeting of the Group of Seven wealthy nations — the United States, Japan, Germany, France, Britain, Italy and Canada — and were followed Friday night with a dinner meeting of the Group of 20 countries, which include the seven wealthy nations plus the major emerging markets such as China, Russia and Brazil.

The G-7 issued a communique late in the day that essentially endorsed the positions their leaders had taken just three weeks ago at the London G-20 summit. However, the G-7 communique signaled that disputes evident in London, such as the battle over IMF funding and voting rights, have not yet been resolved.

Geithner and the other finance officials sought to play down the differences, insisting that the nations are pushing ahead with the ambitious agenda their leaders laid out in London to jump-start economic growth through trillions of dollars in increased government spending and tax cuts and efforts to stabilize their battered banks and get them to resume more normal lending...
Speaking of which, here are the pertinent parts of the current G7 communique:
  • We have pledged resources for the IMF and are working with the G20 and others to provide the resources it needs to help restore global financial stability. We support a substantial increase in MDB lending and full and exceptional use of MDB balance sheets in order to mitigate the effects of the global recession on emerging markets and developing countries.
  • In particular, we welcome the progress being made in mobilizing temporary bilateral financing for the IMF; this financing will be rolled over into the IMF's New Arrangements to Borrow, which in turn will be increased by up to $500 billion and see its membership expanded. We are working to implement the $250 billion general SDR allocation, as well as to use additional resources from the IMF's agreed gold sales to support the poorest, consistent with the IMF's new income model. We are implementing the initiative to provide at least $250 billion in trade finance.

Bullish on Gold? China is Now Stockpiling Bullion

♠ Posted by Emmanuel in , at 4/24/2009 02:28:00 PM
With even a mainstream commentator (albeit a pretty good one) like TIME's Justin Fox agreeing that China's dollar blank check has hindered rather than helped America, I guess it's becoming conventional wisdom that so-called dollar hegemony has to go. Here is some hopeful news for those of you on board with this commonsense suggestion: The Financial Times reports that the most inaptly named SAFE (China's State Administration of Foreign Exchange) has been quietly stocking up on bullion. So, recent bellyaching about holding non-sovereign reserves [1, 2, 3, 4] may have been more than idle talk:
China revealed on Friday that it built up its gold reserves by three quarters since 2003, making it the world’s fifth largest holder of bullion...Hu Xiaolian, head of the State Administration of Foreign Exchange (SAFE), told the Xinhua news agency in an interview on Friday that the country’s reserves had risen by 454 tonnes from 600 tonnes since 2003, when China last adjusted its state gold reserves figure. The value of its total holding was reported as $31bn...

China now holds 1,054 tonnes of gold and has overtaken Switzerland, Japan and the Netherlands to become the fifth largest official holder of gold.
Just in time, long-awaited IMF gold sales to fund its operations may find willing Chinese official buyers:
As the world’s largest gold producer, China might decide to source the supplies from local mines and through refining scrap metal. The International Monetary Fund has indicated that it wishes to sell 403.3 tonnes of its gold holdings which has raised speculation that China might try to do a deal with the IMF...

Virtually all major official sector sales have been restricted under the Central Bank Gold Agreement since 1999 but the IMF is not a signatory to this agreement so the proposed sale might provide an opportunity for China to boost its gold holdings rapidly.
And, of course, the bottom line:
Hou Huimin, vice general secretary of the China Gold Association, said China should build its reserves to 5,000 tonnes. “It’s not a matter of a few hundred, or 1,000 tonnes. China should hold more because of its new international status, and because of the financial crisis,” he said. “The financial crisis means the US dollar’s value is changing fast, and it may retreat from being the international reserve currency. If that happens, whoever holds gold will be at an advantage.”
Yes, yes--$31 billion is a comparative pittance to its dollar-denominated loser asset holdings (via depreciation and near-zero yields; please don't get me started on "investments" in US banks). However, China could be buying gold on a more pronounced scale going forward. That would be a very bullish sign for gold bugs. Perhaps in response, the dollar is taking a beating right now from even the "mighty" pound.

As I always like to say, if you're gullible enough to hold dollars, then you have no one else to blame but yourself when Uncle Sam's barber eventually comes around and gives you a haircut. In its own way, even China may be gradually weaning itself off green riffraff. Nobody likes being played for a fool, and so far, China has been the biggest one of them all.

Malaysian Affirmative Action: Recession Victim?

♠ Posted by Emmanuel in , at 4/23/2009 05:22:00 PM
It is generally well-known that businessmen of Chinese descent dominate commerce in Southeast Asia. Malaysia is hardly an exception to this reality, and this has in the past inspired race riots such as the May 13 incident of 1971. Fearing reprisals from Malays who constitute a large share of the population, Malaysia has for over four decades maintained policies favoring Malays. And so various bumiputra ("son of the Earth"; presumably in contrast to lighter-skinned Chinese) policies have been instituted giving preferential treatment. In particular, the government has aimed to have 30% firm ownership in bumiputra hands--with, it must be said, mixed success. Although Malaysia's economic fortunes have waxed and waned over the years, the Asian financial crisis affected it badly, variants of the New Economic Policy (NEP) have remained in force.

Perhaps we should add "...until now." As the Asian country with the third largest share of exports to GDP. Malaysia is once again being adversely affected. In particular, its ability to attract foreign direct investment (FDI) is coming into question. That is, does the need for 30% bumiputra ownership deter foreign investors who would otherwise consider the country an attractive investment proposition? This is an interesting question as the country begins pondering the dismantling of bumiputra/NEP to cope with a changed economic environment. Effective immediately, 27 service sectors will no longer be subject to such requirements, with the stated intention of helping develop these sectors. From the Malaysia Star:
The government has removed the 30% bumiputra equity condition in 27 services sub-sectors, with immediate effect. Prime Minister Datuk Seri Najib Tun Razak said the sub-sectors, which involved health and social services, tourism services, transport services, business services and computer and related services, would have no equity conditions imposed.

He said the liberalisation was aimed at creating a conducive business environment to attract more investments, bring in more professionals and technology, encourage competitiveness and create higher value employment opportunities. “We will be progressively undertaking liberalisation of the other services sub-sectors,” he told a press conference at his office on Wednesday.

Saying that the services sector would become a new growth sector of the economy, Najib said it contributed 55% to the GDP in 2008, and accounted for 57% of total employment in Malaysia. The Government wanted to tap the sector’s full potential and raise its contribution to 60% of the GDP, he said.
American journalists being American in being hung up on race, the Wall Street Journal covers more of the racial angle:
Malaysian Prime Minister Najib Abdul Razak announced a significant relaxation of the multiracial country's longstanding affirmative-action policies in a bid to lure foreign investors and accelerate its recovery from the global economic slump. Mr. Najib told reporters in Malaysia's administrative capital Putrajaya that foreigners investing in parts of the service sector will no longer be required to take ethnic-Malay partners, who now must own 30% of any joint venture.

The newly opened sectors include health, tourism, and business and technology services, but don't include areas in which there is heavy state involvement or which are politically sensitive, such as air travel, utilities and retail, where companies such as Carrefour SA of France and Tesco PLC of Britain have pushed for more access.

The policy change indicates how a central tenet of Malaysia's race-based political system is coming under pressure as the country struggles to cope with the global economic crisis. Mr. Najib hinted that further measures may be announced next week, including changes in the country's finance sector.

HSBC economist Robert Prior-Wandesforde predicts Malaysia -- Asia's third most trade-dependent economy after Hong Kong and Singapore -- will contract 3.5% this year, leaving the country's leaders scrambling for ways to give it a short-term boost and aim for a sustained recovery when the global economic climate improves.

"This is an area where investors have been looking for a change for a long time. There might not be an immediate effect -- there's not a lot of investment anywhere -- but over time it will help," said Mr. Prior-Wandesforde. The Singapore-based economist forecasts that Malaysia's economy will rebound strongly and grow 5.5% in 2010.

The scale of any potential backlash against Wednesday's policy shift among Malaysia's Muslim Malay community could determine whether Mr. Najib will attempt to continue dismantling the country's affirmative-action program, known as the New Economic Policy.

Malays make up 60% of Malaysia's 27 million people and demonstrators have recently staged marches in defense of Malay rights. A wholesale reversal of the affirmative-action policies could be a flashpoint in a country already divided over the issue as well as dealing with a political feud between Mr. Najib and opposition leader Anwar Ibrahim.

A Tired Story: American Steel Union Bashes China

♠ Posted by Emmanuel in ,, at 4/22/2009 01:06:00 PM
I guess this counts for more than just chicken feed in the arena of global trade contestation. I have been a bit tardy--not by much, mind you--on the latest protectionist squabble between the US and China. Once more, I believe the accretion of these sorts of trade squabbles have the potential to result in a bona fide trade war--not necessarily a bad thing if it means weaning the US off limitless Chinese capital it has clearly not put to good use. Now, American steelmakers have taken increased interest in laying into the PRC over the cost of steel products used in tire production.

Given the backing of organized labor for Obama, I for one believe that it has gotten a pretty raw deal from him so far such as with the automakers bailouts. It's so very Clinton-esque. Now, the United Steel Workers (USW) are going for the jugular by requesting that the US International Trade Commission (USITC) allow Section 421 investigations under the Trade Act of 1974 to proceed. Previous attempts to gain traction on this issue with the Bush administration failed, but the USW is betting that the political climate (i.e., a Democratic executive) is more favorable now. Let us first look at a description of Section 421 from the USITC site:
Under section 421 of the Trade Act of 1974, the Commission determines whether imports of a product from China are being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products. If the Commission makes an affirmative determination, it proposes a remedy. The Commission sends its report to the President and the U.S. Trade Representative. The President makes the final remedy decision.
Yes, it is a petition for import relief provided claims that domestic manufacturers' existence is being threatened by export dumping. The USW site has more details on the petition itself:

Petitioner & Subject Country: The United Steelworkers (USW) Section 421 trade case petition filed Apr. 20, 2009 with the U.S. International Trade Commission (ITC) shows how imports of consumer tires have surged in recent years, based on census data. The subject country for the investigation is China.

Product Description: Tires for consumer motor vehicles, including passenger cars,
station wagons, vans, sport utility vehicles, minivans and light trucks.

U.S. Tire Industry & USW: The USW represents about 15,000 tire workers at 13 plants
in nine states, which accounts for nearly half of the industry’s production capacity in 2008. The domestic consumer tire industry consists of ten producers with 27 plants located in 15 states. The tire producing states include: Alabama, Arkansas, Georgia, Illinois, Indiana, Kansas, Mississippi, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee and Virginia.

Volume of Trade: In 2008, China exported nearly 46 million consumer tires with a value of more than $1.7 billion to the U.S. The petition filing says, “Compared to 2004, by the end of 2008, imports from China had increased a staggering 215 percent by volume and 295 percent by value.”

Evidence of Market Disruption: During 2004-08, industry data shows a significant idling of capacity, with tire plant closings and layoffs in several states. Between 2004 and 2008, domestic production of consumer tires declined by over 25 percent. The domestic industry’s share of the U.S. tire market declined from 63 percent in 2004 to below 50 percent in 2008. Chinese producers’ share of the consumer tire market in the U.S. increased from less than five percent to more than 17 percent.

Domestic Job Losses: The U.S. consumer tire industry has lost 4,400 jobs during 2004-08. There have been announcements of two additional permanent plant shutdowns of consumer tire units in 2009 with total job losses of 2,400.

Relief Requested: The USW seeks an annual import quota of 21 million consumer passenger tires for a three-year period, which would return China imports to a 2005 level.

USW Multi-Industry Profile: The USW is the largest industrial labor union in North American, representing 1.2 million current and retired workers in industries that include primary and fabricated metals, mining, chemicals, paper, glass, rubber, transportation, utilities, container industries, pharmaceuticals, call centers, and health care.

I honestly doubt whether Chinese tire imports are mainly behind these industry dislocations which I believe are more attributable to a slowdown in overall demand for vehicles. That is, Chinese tires are not OEM for any major brands, be they American, European, or Asian unlike several US counterparts. The WSJ opinion pages are unsurprisingly unhappy about this petition, with it being portrayed as a test of Obama's union ties. Still, this may be a litmus test for Obama's commitment to organized labor as various "progressive" voices are already expressing disappointment in his Bushian makeover.

In any event, the USW is certainly busy on the China-bashing front as it has already filed another separate petition on tubular and pipe steel. Whatever happened to ol' China Currency Coalition Obama? Once more, his friends are counting on him. If he keeps acting Bushian, I fear for his political longevity.

EU to China: Please Dump Steel On Us (Sort of)

♠ Posted by Emmanuel in ,,, at 4/22/2009 12:47:00 PM
While tariffs have already been given the go signal from Brussels on steel used in construction, it appears that European steelmakers are now taking a more conciliatory stance for other classes of products given that Chinese imports are dwindling as economic recession tightens its grip in Europe. Originally, the EU was set to widen its inquiry into whether various Asian steelmakers were guilty of dumping. However, the current economic climate seems to have damped such calls as the original complainant has since withdrawn its request. From the Steel Guru:
Bloomberg reported that European Union ended a threat of tariffs on stainless steel from China, Taiwan and South Korea after the recession prompted EU producers to withdraw a complaint alleging price undercutting.

The European Commission closed an inquiry into whether Chinese, Taiwanese and Korean exporters sold cold rolled flat products in the EU below cost. EU makers of this kind of steel, used in everything from cars and tanks to boilers and kitchen equipment, include Germany's ThyssenKrupp AG and Luxembourg based ArcelorMittal. [The] EC said that "Demand has recently collapsed in the EU and this has also led to a decline in imports." The closing of the case removes the threat of punitive EU duties against companies including China's Shanxi Taigang Stainless Steel Co, Taiwan's Yeun Chyang Industrial Co and Korea's Daiyang Metal Co.

European steel lobby group Eurofer withdrew its dumping complaint on March 4th 2009, the second time in four months the economic slump forced the EU industry to reverse policy. In December, Eurofer withdrew a dumping complaint covering galvanized flat steel from China, prompting the commission to close a related probe in February.

The end of the galvanized and stainless-steel cases removes two potential sources of EU China friction over steel trade. The EU is pursuing two other dumping inquiries involving wire rod and steel wires from China and has introduced provisional tariffs while examining whether to impose definitive five year levies.
It's interesting to note how worldwide economic slowdown is resulting in somewhat different responses in the EU and the US.

Eurocombat Over Cross-Border EU Banking

♠ Posted by Emmanuel in , at 4/22/2009 02:26:00 AM
Bundesbank President Axel Weber is an inescapably important figure in European finance given his post. At the same time, the EU has been accused of lording it over member countries to an extent that diminishes state sovereignty. The Financial Times now notes that Weber has criticized moves from the EU that aim to stabilize the banking crisis also raging there. Once more, it's a matter with collective EU versus individual member country implications.

You are probably familiar with the woes now besetting various Western European banks that have lent not-insignificant amounts via their Eastern European operations. With efforts to shore up these banks being made contingent on scaling down their Eastern European operations, Weber is becoming wary of these being classified as "foreign" rather than "domestic" in an ever-closer union sense. It's interesting stuff that certainly will have implications for the future of European economic integration:
Europe’s competition authorities risk throwing the continent’s economic integration into reverse with their response to the financial crisis, the head of Germany’s Bundesbank has warned in rare public criticism of Brussels.

In a Financial Times interview, Axel Weber said policymakers were “at a crossroads” and might harm Europe’s growth prospects if they insisted on making lenders withdraw from foreign markets and become more nationally focused. His warning comes as competition authorities decide what concessions banks will have to make in return for state aid. Commerzbank, Germany’s second largest lender, which has been offered €18.2bn of state aid, is in talks with the European Commission over remedies, which may include disposals of businesses in other EU countries.

The comments by Mr Weber – one of the most powerful figures in European banking – reflect his fears that the crisis in financial markets will set back the economic integration deemed essential for the eurozone to thrive. “Some of the demands coming out of the competition department of the Commission have been aimed at refocusing banks on their national credit and lending operations rather than fostering their pan-European endeavours,” Mr Weber said. “I find it surprising – to say the least – that European institutions view crossborder operations within the EU as foreign operations. For me, the euro area is the domestic economy.”

Neelie Kroes, competition commissioner, has insisted that if banks get state aid they must restructure to compensate for the anti-competitive distortions created. Mr Weber said these “side effects” were “more pronounced than was originally envisaged” and might deter banks from using government help. “If banks are forced to sell off profitable businesses . . . I think this creates a problem. Dealing with rescue operations in that way, the probability of a credit crunch in the euro area increases rather than decreases due to these restructuring conditions.”

Some national governments have also insisted banks become more domestically focused in return for state help. If banking did become more nationally focused “I think Europe would forgo a lot of its growth potential”, Mr Weber said.

11/11/2001: A More Important Day Than 9/11

♠ Posted by Emmanuel in ,,, at 4/21/2009 04:31:00 PM
For better or worse, September 11, 2001 is a date known to all. Certainly, the attacks produced dramatic footage the likes of which even Hollywood disaster scenario specialists hadn't thought of. Still. I tend to think that attention given to 9/11 is more attributable to its symbolism than its financial or personal costs. By favoring the Democrats' emphasis on the economy over the Republicans' war on terror, Americans seem to agree. In general, Americans are incurious about international affairs in the Palin-esque manner; hence, this attack was quite a wake up call for them. Those of us in the rest of the world, however, have long lived with threats of terrorism and insurgency--both domestic and international--to have thought anything particularly world-altering about 9/11. There are far worse ongoing events that have taken their toll on health, hope, and homeland.

Anyway, I have just come across a picture of an almost forgotten event two months later that has greater repercussions for international political economy other than just having many more annoying security checks at airports. This is of China signing on to the WTO on November 11, 2001. Think of it: without WTO membership, would it have so quickly become the world's second largest goods exporter after Germany? Or, would it have piled on nearly two trillion in dollar-denominated assets guaranteed to lose value in an unprecedented rip-off game it is still participating in? Certainly, the development of various securitized riffraff now plaguing international finance would not have proceeded apace had there not been a country willing to lend so much so cheaply to finance others' purchases of its exports. While looking at the picture from this momentous occasion, here's food for thought: China has been as much a perpetrator as a victim of a $4.1 trillion financial catastrophe.

China Takes US to WTO Over Poultry Exports

♠ Posted by Emmanuel in ,,, at 4/17/2009 01:49:00 PM
I haven't written anything involving the WTO for the longest time. Mostly, it's because there hasn't been much action at the international organization as other, more pressing domestic matters seem to be occupying the interests of member countries at the moment. Doha? Forget it. In December, I brought news that China would contest the US decision to impose countervailing duties on steel exports it believed were being dumped on the American market. Just last month, there were rumblings that China was showing increased displeasure over US legislation aimed at limiting chicken imports over safety concerns and that it was contemplating WTO action. The antagonist here, Rosa DeLauro (D-VT) is chairwoman of the Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies. She has upheld a dubious rule against what she describes as a Bush-era quid pro quo:
In 2006, the USDA moved to allow imports of processed poultry from China -- a regulation DeLauro described as "a gift" from former President George W. Bush to Chinese Premier Wen Jiabao to try to restore U.S. beef trade to China, which had stalled in 2003 when the U.S. found mad cow disease. DeLauro's committee blocked the rule, but she said she has told the meat industry she is open to taking another look. The block by Congress is "kind of a slap in the face to the Chinese," a U.S. poultry processor told the Reuters summit.
You can now consider Chinese displeasure official. Reuters reports that China has now requested consultations with the US. As you know, if 60 days pass without sufficient movement on the issue from the Chinese POV, then it can initiate a case at the dispute settlement mechanism--WTO court, if you will:
China requested on Friday consultations with the United States over a U.S. laws affecting Chinese poultry products, launching a formal World Trade Organisation dispute on the issue. In the written request, obtained by Reuters, Beijing said it believes that U.S. limits on poultry imports from China violate Washington's international trade commitments, a particular concern at a time when protectionist fears are rising.

"By imposing these restrictions with respect to imports from China, but not similarly prohibiting the import from other (WTO) members of like products, China is concerned that the U.S. fails to accord immediately and unconditionally to China an advantage, favour, privilege or immunity granted to other (WTO) members," the Chinese statement read...

China and the United States have previously squared off at the Geneva-based trade body over issues including car parts, software piracy, copyright rules and export subsidies. The latest case centres on U.S. rules that restrict poultry products from China, a reaction to food safety scandals that have in recent years damaged the reputation of Chinese goods.

But Beijing says its poultry production meets international standards and that it exports poultry meat to other developed markets including Japan, the European Union and Switzerland.
It ought to be noted that--in food exports at least--the US runs a trade surplus with China, sending $12.16B worth to the PRC in 2008 while importing $3.45B of such goods. Hence, quite a few American agricultural producers are sympathetic to the Chinese over the ban (like I am, of course). What should we call them...communist sympathizers?
The U.S. Poultry and Egg Export Council -- fearful that the latest dispute will prompt retaliation in China, one of the biggest markets for U.S. poultry goods with sales worth $677 million in 2008 -- has expressed support for the Chinese complaint
Uncle Sam, poultry protectionism is the height of ridiculousness. If you cannot demonstrate that Chinese chicken is unsafe compared to other poultry imports, then I suggest you...[drumroll please]...let my chickens go.

4/21 UPDATE: Forbes has more on this case. Poultry exports are hardly a key part of China's export machine. Certainly, no one will make that mistake. However, given the increasing number of US-China trade rows, think of this case as an exercise in Chinese capacity-building for international economic diplomacy. In the beginning, you try your hand with smaller cases with a reasonably high likelihood for obtaining favorable results. Such formative experiences will come in handy if and when the US tries nastier tricks like slapping unilateral tariffs over currency manipulation and the like.

Eye for an Eye: US Firms Wary of PRC Stimulus

♠ Posted by Emmanuel in , at 4/17/2009 12:48:00 PM
Many countries including China have expressed wariness over "Buy American" provisions in the US stimulus package. I guess it's time we looked at the other side of the coin. Unfortunately, many American firms are now complaining that China's own stimulus package is opaque in detailing how government contracts are awarded, possibly putting foreign firms at a disadvantage. Is this by design? Don't rule out the possibility that the PRC stimulus effort may be a lot of vaporware in the smoke and mirrors sense. From Reuters:
U.S. companies are concerned that they are not getting a fair chance at contracts linked to China's 4 trillion yuan ($585 billion) stimulus package, a leading U.S. business group said on Friday.

For its part, Beijing has strongly criticized the 'Buy American' provisions of the U.S. stimulus package finalized in February, saying it is opposed to any rise in protectionist measures in the wake of the global economic slowdown.

But Myron Brilliant, senior vice president of the U.S. Chamber of Commerce, said that China's own stimulus package lacked clarity in terms of how foreign firms can bid for contracts on infrastructure projects.

"We are very concerned that the stimulus package may have a significant local bias," Brilliant told reporters in Beijing. There is certainly a perception in the foreign business community that a lot of these contracts are going to domestic providers. And there is, I think, a legitimate concern that there isn't a fair and transparent way for the foreign business community to invest in these projects and to contribute."
I hate to say it but, tough. After Paulson's largely forgotten gestures at opening up the Chinese market in certain areas for American business, I hardly think that now is the best time to renew such efforts. Plus, you need to factor in Obama's more combative rhetoric towards China.

Viva la France: Le Strike et "Bossnapping"

♠ Posted by Emmanuel in ,, at 4/16/2009 02:12:00 PM
As anyone unfortunate enough to ride Air France on a regular basis probably knows, France and strikes go hand in hand like the USA and foreclosures. The FT has an interesting take on the dynamics of French striking, which of course is reaching a crescendo during this time of economic slowdown. It seems lots of people are striking without knowing exactly what to push for. Really, they should give this "bossnapping" shtick (soon to be laid off workers waylaying executives) a go Stateside. Given Yankee lust for firepower, results should be tabloidally interesting. Anyway, returning to today's topic, this lack of definitive French collective interest is actually playing in the government's favor.

The reason is that France's level of unionization is not significantly higher than that of other industrialized countries. It just seems that way because of widespread sympathy for strikers--particularly public sector workers. It's "we're not going to take it, but we don't know what'd be better anyway." This gives the government the chance to set the agenda with higher-profile unions by channeling their energies towards interest aggregation, which is preferable to allowing more hardcore elements set the agenda:
Government officials also know that the interests of social stability are best served by not alienating the unions. In fact, in France stability will come from even stronger unions – which is exactly what the government has tried to do with the recent reform to base collective bargaining power on election results.

The problem has been that there are too many unions chasing too few members. Individually they have been so weak that their best leverage has been through strike action – largely in the public sector. The logic is that reinforcing the biggest unions, including the hardline CGT, will help to create a higher quality social dialogue and force them to negotiate, as long as the government sets down some clear rules.

That means Mr Sarkozy may throw a few symbolic crumbs to unions after this Labour Day protest. Far better that recognised unions score a small victory and continue to channel the discontent than to leave the way open for more radical, and potentially more violent, elements to profit from the malaise.

That said, there is always the chance that a single incident could spark off a flash of anger that no one will be able to control. As one official said recently, France is an eruptive country and the game will be to prevent that first incident from taking place. But equally, he admits: “The most serious incidents are the ones you cannot predict.”

Geithner Wimps Out on PRC Currency Manipulation

♠ Posted by Emmanuel in , at 4/16/2009 06:37:00 AM
The US Treasury is mandated by Congress to make biannual reports on the currency practices of America's trading partners. Just yesterday, the Treasury released its first report under the leadership of Secretary Geithner. As you are well aware, Geithner caused a ruckus in US-China trade relations by reiterating his boss Barack Obama's opinion that China was a currency manipulator [1, 2]. As I have pointed out again and again, he was not expressing his own opinion but that of Obama. Why is this difference important? Well, let's look at the statement of Geithner accompanying the latest report as to why China hasn't been branded a currency manipulator yet again:
With respect to China, which has been highlighted in the Report in recent years, our conclusion is based on the following factors. First, China has taken steps to enhance exchange rate flexibility. Chinese officials reaffirmed in January 2009 their commitment to greater flexibility and the need to allow the exchange rate to adapt to an equilibrium level. Second, the Chinese currency appreciated by 16.6 percent in real effective terms between the end of June 2008 and the end of February 2009. As the crisis intensified, the currency appreciated slightly against the dollar when most other emerging market and other currencies fell sharply against the dollar. Third, official statistics suggest the pace of China's foreign exchange reserve accumulation slowed in the fourth quarter of last year. Fourth, China has enacted a large fiscal stimulus package – second in size to that of the United States in the G-20 – which should help spur domestic demand growth and rebalance the Chinese economy. Even so, Treasury remains of the view that the renminbi is undervalued.

Given China's large and rapid increase in its current account surplus, these steps should be just a beginning to a series of policy steps to rebalance the Chinese economy so that economic growth is more dependent on domestic demand, particularly private consumption.
I have taken pains to explain why the US engaging in a trade war with China is actually desirable as the former would set into motion a process by which the US is disciplined via losing China as effective lender of last resort [1, 2]. Again, I consider the US hitting China with punitive legislation on an undervalued currency quite frankly ridiculous in that there is virtually no chance of it coming out ahead. Nevertheless, I am chuffed to note that many others--including Obama supporters who feel abandoned--are readying legislation to "punish" China. From Bloomberg:
The conclusion clashes with Geithner’s January 22 statement to a Senate panel that President Barack Obama “believes that China is manipulating its currency.” [I wish they'd stop repeating this fallacy as they aren't one in the same person.] The shift may anger U.S. lawmakers, companies and trade unions who have sought measures to punish nations perceived to have undervalued exchange rates.

“Clearly the Treasury has made more of a political decision than an economic decision here,” Republican Senator Lindsey Graham of South Carolina said in a Bloomberg Television interview. “The truth is the Chinese manipulate their currency.” Graham was a co-sponsor of a 2007 measure that would have allowed U.S. companies to ask for steeper tariffs against goods coming from countries found to have misaligned currencies.

Democratic Senator Charles Schumer of New York, another sponsor of that bill, said he would reintroduce it. “We are relying on the administration, as market conditions clear up, to keep China’s feet to the fire on this issue,” Schumer said in a statement. “To continue the effort on this front, we intend to reintroduce our legislation.”

The U.S. Business and Industry Council, which represents domestic manufacturing companies, said the decision not to label China as a currency manipulator “breaks a major commitment candidate Obama made last year to fight Chinese exchange-rate protectionism.”
Obama's "China Currency Coalition" colleagues are now expressing understandable displeasure over his finance minister coddling these trade evildoers, having hoped for much more. Although I am generally appalled by their agenda, I think they have legitimate grievances over representation of interests. They're baying for a US-China showdown at the Trade OK Corral; well so am I. They think they can come out ahead while I certainly don't think so. I guess there's only one way to find out.

Yo Ho Ho! Maritime Piracy Then and Now

♠ Posted by Emmanuel in , at 4/14/2009 11:14:00 AM
A recent post by our friends over at IPE@UNC jogged my memory about the International Maritime Bureau's Piracy Reporting Centre. (As you've probably figured out by now, I am a repository of useless information that sometimes becomes relevant ;-) Anyway--where was I--it maintains comprehensive mapped data about incidents relating to maritime piracy going back to 2005 all over the world. The IMB is the authority when it comes to reporting such incidents. For those interested in the dark side of trade transportation, it certainly makes for fascinating reading. Please visit and see for yourselves as you can click on each indicator for more info. For now, let me just show you the difference between two maps four years apart. First, here's one dating from the end of 2005. Red indicators map actual attacks while yellow ones indicate attempted attacks and blue ones are reports of suspicious vessels:

And here is the latest one for 2009:

A number of things are immediately striking. First, the number of incidences this year is high given that we are not even a quarter into 2009. The rescue of Captain Philips certainly hasn't deterred Somali pirates from mounting more attempts in recent days. Second, incidences in the historically piracy prone Malacca Straits have gone down significantly in recent years. This is attributable to coordinated efforts by Indonesia, Malaysia, and Singapore to patrol the area with serious intent [1, 2]. While the Gulf of Aden has been similarly prone to piracy, the ravages of civil war still ongoing in Somalia have certainly accelerated these sorts of happenings. Even if times are difficult, Indonesia, Malaysia, and Singapore are still fully functional states while the state of Somalia is, basically, a figment of the political imagination. Nevertheless, I am certain the Southeast Asians can lend help on how they've dealth with their piracy problem.

They say necessity is the mother of invention. Given the desperation of Somalia, it is no surprise that ever more daring raids are being mounted. Initially, I'd have advocated a tougher line of the pirates--shoot to thrill, shoot to kill--but then you have to remember that there are literally hundreds of sailors being held hostage unfortunate enough not to be white American sailors. What would be their fate if they started issuing such orders? It's a bleak situation all around.

4/21 UPDATE: An FT op-ed by a Chatham House researcher reiterates many points raised above.

Thai Rioters Can Teach Anti-Globalization Flunkies

♠ Posted by Emmanuel in , at 4/13/2009 04:02:00 AM
This is getting ridiculous. In December, an ASEAN summit that was supposed to be held in Thailand was derailed when anti-Thaksin supporters waylaid the proceedings. Now that Thaksinite influences have been purged from the government, we find another ASEAN gathering there canceled because pro-Thaksin supporters stormed the proceedings. Overwhelming numerous riot police and trashing the convention center are no small achievements. My best advice to ASEAN: do not hold any more meetings in Thailand for the time being.

The FT's Gideon Rachman is reliably entertaining and insightful; I've had him on our blogroll from day one. However, I must say tsk-tsk for him missing the most interesting point concerning the recently derailed ASEAN summit: How is it that a thousand lousy protesters can shut down a major international conference? Contrary to Rachman's description, this was far from a "mass demonstration." Aside from the Southeast Asian crew, there was Chairman Hu Jintao of the "G2" (US and China); Prime Minister Kevin Rudd of Australia; and Prime Minister Taro Aso of Japan. They came, they saw, they went home.

Granted, the Thai protesters weren't your humdrum anti-globalization regulars. These diehard Thaksinites (followers of exiled former leader Thaksin Shinawatra) weren't targeting the meetings' participants aside from PM Vejjajiva. A few days ago the Times of London ran a feature on protests that made an impact (unlike the lame G-20 ones); I suppose they should add this one.

Our Thai friends are rightly proud about never having fallen under foreign occupation. Make no mistake: supposedly pacifist Buddhists can spring into action when required. Although I am decidedly unhappy about the outcome of delaying a very important meeting for regional participants, I certainly see how anti-globalization flunkies can copy this example. Unity of purpose and organization count for something, no? To some extent, this summit being scuttled may be more a reflection of Vejjajiva being wet behind the ears at a relatively young 44--not so much in command of the all-important military. But still...a mere 1000 protesters. It boggles the mind. If you want to cause a ruckus, that's the way you do it.

I'm a (White American) Sailor, Get Me Outta Here!

♠ Posted by Emmanuel in at 4/13/2009 03:04:00 AM
Readers are doubtlessly familiar with trash TV reality show I'm a Celebrity, Get Me Out of Here! Recently, the capture of an American hostage on the high seas has upped the stakes--at least in the media arena. What we have here is the emergence of a full-blown circus, and not many concerned who've been neglected are very happy about it.

Call it the white sailor's burden: for months now, international sailors plying their trade in the lawless seas off the now-infamous coast of Somalia have fallen victim to pirates emanating from that collapsed state. However, while the media has widely reported these incidences of piracy, few media outlets have covered the personal aspects of these kidnappings. A maritime group has decided that the time is right to point out that, gee, there are far more sailors of other nationalities who've found themselves unwilling captives. What about them? From Reuters:

The international community is showing hypocrisy by suddenly focusing on Somali piracy because of the capture of one American, a regional maritime group said on Saturday. Sea gangs from the lawless Horn of Africa nation grabbed world headlines this week when they briefly hijacked the US freighter Maersk Alabama. Its 20 crew retook control, but the gunmen took Capt. Richard Phillips hostage on a lifeboat.

The global media have tracked in great detail each twist and turn of the drama as it unfolds, including a failed attempt to swim to safety by the former Boston taxi driver. But Andrew Mwangura of the East African Seafarers’ Assistance Program said it was a pity similar attention was not paid to the nearly 250 other hostages—all from poorer nations—currently being held by other Somali pirates.

The biggest nationality represented, at 92, is Filipino. “The media and the international community at large [are] just demonstrating [their] hypocrisy,” Mwangura said in the Kenyan port of Mombasa, where the 17,000-ton Alabama arrived on Saturday. “Journalists have flooded here from all over the world because of one American captain. What about all the others, from Bangladesh, from Pakistan, from the Philippines, some of whom have been held now for months?”

The story has all the front-page ingredients: Buccaneers audaciously try to seize a huge US container ship, its sailors resist, then Phillips apparently volunteers to board the lifeboat with the pirates in return for his crew’s safety. Meanwhile, a state-of-the-art US naval destroyer armed with missiles, torpedoes and helicopters keeps a watchful eye. And more warships are on the way...

“It was the same in 2005. The media went crazy when that luxury cruise liner, the Seabourn Spirit, was attacked with lots of white tourists on board. And they weren’t even hijacked.”.

Does the life of one American hanging in the balance merit more attention than those of countless unnamed (non-white) others?

Same Old: Turkey to Get $20 to $45B IMF Lifeline

♠ Posted by Emmanuel in ,, at 4/10/2009 07:23:00 PM
Turkey is a country which has never really weaned itself off IMF loans; take a look at its borrowing activity for a more or less uninterrupted history of obtaining lender of last resort support in the new millennium. Unfortunately, the current crisis is no different as it seeks another lifeline from the IMF, the last arrangement having expired in May of last year. Estimates put the size of the agreed deal somewhere between $20 to $45 billion. From Reuters:
Turkey and the International Monetary Fund have agreed in principle on the conditions of a new loan deal worth up to $45 billion to help the country weather the global crisis, newpapers reported on Friday. Pressure for an accord has mounted as the economy slumped in recent months, putting it on course for deep recession. Gross domestic product tumbled 6.2 percent in the fourth quarter and industrial production slid by a quarter in February.

The reports, citing Economy Minister Mehmet Simsek, said the deal would meet Turkey's external financing needs. Business daily Referans reported Simsek as telling reporters he hoped to have the deal approved by the IMF in two to three weeks. Newspaper Radikal reported that the deal could be worth as much as $45 billion and would be signed for a three-year term. Other newspapers quoted different amounts. The initial size of the deal was seen at $20 billion, analysts said.

Simsek was quoted as saying that Prime Minister Tayyip Erdogan and IMF Managing Director Dominique Strauss-Kahn have agreed in principle to the foundations of a deal. "We've agreed to a set of principles, within that framework our hope is to finish the work (on the deal) on Turkey's side before its spring meetings," Simsek was quoted saying, referring to the next IMF meeting in about two weeks' time.

Attack! US Steelmakers Claim Chinese Dumping

♠ Posted by Emmanuel in ,, at 4/10/2009 11:30:00 AM
The WSJ reports that US steelmakers are scheduled to bring a hefty anti-dumping case to the US International Trade Commission:
The U.S. steel industry filed an antidumping suit against China, covering $2.7 billion of imports, alleging that steelmakers there unfairly dumped specific types of tubular and pipe steel onto the U.S. market last year. The case, one of the biggest ever filed by the U.S. against China, is likely the beginning of a string of steel-dumping cases against China, say attorneys representing steel workers and manufacturers.

"I think there are going to be a lot of trade cases, steel and nonsteel, filed against China," said Roger Schagrin, one of the lead attorneys representing the seven domestic companies and the United Steelworkers union, which filed a petition with the U.S. International Trade Commission and the Department of Commerce. "China continues exporting massive amounts of products despite decreasing U.S. demand."

Within the past two years, U.S. steel companies have won antidumping cases in four other tubes and pipes trade cases against China. U.S. steel producers win more of these antidumping cases than they lose but the punishment varies. Sometimes there is a quota and other times there are additional surcharges.
What set this action into motion isn't hard to find. When steel prices were soaring worldwide, US manufacturers weren't too concerned about Chinese steel as there was plenty of demand to go around. However, with the global economy--and consequently, demand for steel--going down the tubes, American steel manufacturers are keen on protecting domestic turf from these trade evildoers. At a time when US steelmakers are cutting back, they are affronted by Chinese factories going full steam ahead, more or less. Just what will happen to all that excess production? US steelmakers are pretty certain...
The tension between Chinese and U.S. steelmakers has grown in the past several months as the downturn in the global economy puts a strain on the import/export markets. In this weak economy, Chinese steelmakers are trying to keep their plants running as close to capacity as possible as are domestic steel producers.

The problem is that there aren't enough steel buyers as automakers, equipment manufacturers, builders and commercial construction companies severely cut the amount of steel they need. [US] steel plants have been operating at about 50% of capacity. Steel prices have plummeted by half since last summer along with demand, leaving the world awash in steel and spurring steel-dumping allegations against China, a major exporter of steel.

The European Union this week made a preliminary determination that seamless pipe imports from China were dumped there. China exported more than 600,000 tons of seamless pipe into the EU last year.

Domestic steelmakers are concerned that the steel could now be diverted to the U.S., where prices are fetching somewhat higher prices than elsewhere in the world. "There haven't been very many [steel-dumping cases] in the last three to five years," said Mr. Phelps. "The steel industry has been very profitable, with 2006 a record for all-time profit."

Mr. Phelps said that the domestic steelmakers are simply trying to guard their own markets. "When the market takes off, the domestics have the playing field all to themselves again." The world steel market was so good for so long that it didn't matter much where steel was coming from. Just last year, there was shortage of steel as prices rose to their highest ever.
UPDATE 4/11: The Chinese are not taking this one in stride after already being hit with anti-dumping tariffs by the EU in recent days:
China’s government is “highly concerned” about the U.S. steel industry’s petition to the State Department and the International Trade Commission to investigate whether Chinese products were dumped in that country.

The application will have a “significant impact” on exports of Chinese steel products to the U.S., Yao Jian, a spokesman for China’s Ministry of Commerce, said in a statement posted on its Web site. “Blindly accusing importers of dumping or giving countervailing duties without proof and seeking trade protectionism won’t solve the real problems confronting the U.S. industry,” Yao said in the statement, dated yesterday.

The U.S.’s application follows the European Union’s decision to levy anti-dumping tariffs on Chinese steel products, after anti-protectionism pledges were made at the G20 meeting earlier this year. Mills in China, the world’s biggest producer of steel, benefit from subsidies for so-called oil-country tubular goods which are sold in the U.S.

The EU announced tariffs as high as 24.2 percent on steel pipes and tubes from China on April 8 to help producers including ArcelorMittal fend off cheaper imports.
Note that the EU steel tariffs have been a long time coming [1, 2, 3].