Google's Dissident CyberWoes, Vietnam Edition

♠ Posted by Emmanuel in , at 3/31/2010 11:56:00 PM
What is the deal with Google and authoritarian regimes in Asia concerning dissidents, anyway? This time around, we have intrusions noted on the privacy of those protesting the involvement of Chinese steel producer Chinalco mining bauxite in Vietnam. In this version of events, we are not concerned with Tibetan activists and the like, but with environmental and social concerns (with a side helping of Sinophobia). Especially given the sizeable Vietnamese diaspora arising from the fall of Saigon, this issue has international dimensions. Let us begin with the Google Online Security blog:
Perhaps unsurprisingly, these [China incidents] are not the only examples of malicious software being used for political ends. We have gathered information about a separate cyber threat that was less sophisticated but that nonetheless was employed against another community.

This particular malware broadly targeted Vietnamese computer users around the world. The malware infected the computers of potentially tens of thousands of users who downloaded Vietnamese keyboard language software and possibly other legitimate software that was altered to infect users. While the malware itself was not especially sophisticated, it has nonetheless been used for damaging purposes. These infected machines have been used both to spy on their owners as well as participate in distributed denial of service (DDoS) attacks against blogs containing messages of political dissent. Specifically, these attacks have tried to squelch opposition to bauxite mining efforts in Vietnam, an important and emotionally charged issue in the country.
So, once more, Google seems to be implicating the Vietnamese government in the spread of this malware that not only fouls computer operation but also launches denial of service attacks on dissidents' websites. Meanwhile, the antivirus vendor McAfee goes one further in implicating the Vietnamese government:
By now, you may have seen the Google blog post talking about the targeted attacks against the computers of Vietnamese speakers and others. The botnet, which McAfee identified while investigating Operation Aurora [see McAfee's description of Operation Aurora], has commandeered these computers in what appears to be a politically motivated attack. McAfee has been sharing the results of its investigation with Google as it unfolded.

Attackers created the botnet by targeting Vietnamese speakers with malware that was disguised as software that allows Windows to support the Vietnamese language. The keyboard driver known as VPSKeys is popular with Vietnamese Windows users and is needed to be able to insert accents at the appropriate locations when using Windows. The bot code masquerading as a keyboard driver finds its way onto computers that, once infected, join a botnet with command and control systems located around the globe that are accessed predominantly from IP addresses inside Vietnam.

We suspect the effort to create the botnet started in late 2009, coinciding by chance with the Operation Aurora attacks. While McAfee Labs identified the malware during our investigation into Operation Aurora, we believe the attacks are not related. The bot code is much less sophisticated than the Operation Aurora attacks. It is common bot code that could use infected machines to launch distributed denial of service attacks, monitor activity on compromised systems and for other nefarious purposes.

We believe the attackers first compromised, the Web site of the Vietnamese Professionals Society (VPS), and replaced the legitimate keyboard driver with a Trojan horse. The attackers then sent an e-mail to targeted individuals which pointed them back to the VPS Web site, where they downloaded the Trojan instead.

The rogue keyboard driver, dubbed W32/VulcanBot by McAfee, connected the infected machines to a network of compromised computers. During our investigation into the botnet we found about a dozen command and control systems for the network of hijacked PCs. The command and control servers were predominantly being accessed from IP addresses in Vietnam...

This incident underscores that not every attack is motivated by data theft or money. This is likely the latest example of hacktivism and politically motivated cyberattacks, which are on the rise and a topic we at McAfee have often discussed in our publications. In an excellent paper on Cybercrime and Hacktivism published this month, Researcher Francois Paget discusses the topic at length. It is also covered in our most recent Quarterly Threat Report.
I'm currently having a read of the aforementioned report on Cybercrime and Hacktivism. All the same, the activities McAfee describes appear tactically sophisticated even if they may not be as technologically sophisticated as the purported China incidents if you follow the chain of events described above. Can the Vietnamese authorities really know the vulnerabilities of international Vietnamese users so well? In the sense of being internationally targeted, this effort--whoever the perpetrator may be--certainly isn't a mug's game.

Meanwhile, this is the second time Google has suggested that an Asian government stands to gain from the use of cyberattacks. While Google has not really produced the goods on possible PRC-sponsored involvement in the China incident, it has not hesitated to do so again with Vietnam. All I can say, Google, is show us the cybercrime. If you have the goods, then do so. Otherwise, I think some circumspection is in order. After all, Google services weren't directly attacked in the latter incident.

The Carl Spackler Award for US HH Saving Analysis

♠ Posted by Emmanuel in at 3/30/2010 03:25:00 PM
License to kill gophers by the government of the United Nations. Man, free to kill gophers at will. To kill, you must know your enemy, and in this case my enemy is a varmint. And a varmint will never quit - ever. They're like the Viet Cong - Varmint Cong. So you have to fall back on superior intelligence and superior firepower. And that's all she wrote - Carl Spackler

I usually get exasperated by the America #1-style cheerleaders' infinite faith in the enduring greatness of America despite overwhelming evidence to the contrary paraded here and elsewhere on a regular basis. Recently, however, I came across an enduring, exemplary piece of American culture that should, in the future, temper some of my enthusiasm for dumping on the States with gusto. In the original Caddyshack, Bill Murray played Carl Spackler, a groundskeeper obsessed with eliminating gophers ruining the golf course. According to the histories I've read of this cult classic, Bill Murray's now-classic lines like those above were improvised. Better yet, they were designed to elicit maximum laughter via the American sense of humour. Tossing non-sequiturs at a rapid fire pace, Murray was in top form.

It thus occurred to me that America #1-style cheerleaders are using deadpan humour in that inimitable "Carl Spackler" style to entertain, not to inform us. Everyone's a comedian. Today, for our amusement, let us consider that chestnut, "deficits don't matter because US household savings rates are on the rise." Before you start rolling on the floor laughing, let's begin with the FT's take on the matter given the most recent report on personal consumption expenditures:
With consumption outpacing income growth, the US savings rate fell to 3.1 per cent, its lowest level since October 2008...Paul Dales, US economist at Capital Economics, said that while the signs of renewed demand were encouraging, it remained a concern that consumers were dipping more heavily into their savings rather than using fresh income.
There hasn't been much of a rebound in US household savings at all to fund the deficit, somewhat wild claims to the contrary. With stagnant wages, whatever increases there have been are attributable to government largesse. Which, of course, aren't really savings in the overall scheme of things as government dissavings, scheduled to hit $1.4 trillion or more this year, more than offset (marginal) private savings.

With these statistics in mind, let's hand out the inaugural Carl Spackler Award for US Household Saving Analysis to the ever-optimistic yet factually challenged Michael "Deficit Attention Disorder" Pettis. For the life of me, I cannot understand why this guy has so many followers when he hasn't really come across a "deficits don't matter"-style story he didn't like. He's a nice fellow and all--the worst he's called me is "cantankerous," but I'm afraid his brand of analysis leaves much to be desired. Here he was in November of 2008--just a month after the lowest monthly savings since the most recent one was announced:
This process [of abundant liquidity being made available to US consumers] has probably stopped. Banks are no longer willing to make consumer loans, and with stock and real estate markets down so dramatically, the US household savings rate will almost certainly rise.

By how much? With households seeing their home and equity savings decline so dramatically I think one can easily argue that we will probably go above or at least to the higher end of the “normal” range of 6-10% of GDP, but even if we assume that households will only go back to the middle of the range, that still implies an annual adjustment of at least 5% of US GDP [my emphasis].
Those double-digit savings are really great in the deadpan humour department and everything (cue Carl Spackler: "He's on his final hole. He's about 455 yards away, he's gonna hit about a 2 iron I think"), but it seems America is no better off in the savings department when Pettis tried to info--I mean, entertain us back in November 2008 with tales of frugal America. So, congratulations to Michael Pettis for winning what I am sure will become a most coveted award as I hand out more of these prizes. Really, there are so many spouting Cheneynomic rhetoric that our amusement is multiplied a jillionfold.

Next up is an IPE stalwart, Joseph Nye, Jr. Recently, I featured an op-ed of his in the Korea Times that makes a similarly fantastic claim about rising US savings:
But, as America's savings rate begins to rise, China's export-led growth model, which has promoted employment in China at the cost of global trade imbalances, may no longer be possible.
Hold. It. Right. There. What rise in savings is there to speak of? Household savings have gone, well, nowhere (cue Carl Spackler: "In the immortal words of Jean Paul Sartre, 'Au revoir, gopher'"!) Meanwhile, the US government is dissaving to the tune of a trillion and a half dollars a year. As for corporate savings, well, first you have to make profits before you retain earnings. With entire US industries on life support--housing, airlines, banks, automakers, etc.--it will not surprise you that there is so little to speak of. So, another well-deserved prize for Dr. Nye.

While I crack jokes now and again, the honest, unvarnished truths are these:
  1. Demographic trends Pettis so loves are against American savings as retirement beckons for the baby boomer generation. Retirement means further government dissaving coupled with drawing down whatever negligible personal savings an aging generation has left;
  2. There is no wage growth to speak of from which to save from;
  3. Americans are inveterate shopaholics whose credit-heavy environment exacerbates genotypical factors discouraging financial planning;
  4. Instead of armchair theorizing, it sometimes helps to look at the numbers your own government puts out once in a while.
Isn't American strip mall existence grand? Why, all you need to do is replicate this example throughout the known world and mankind would regain the Garden of Eden. Call it the End of History or something. What, someone already coined that phrase? [Bada-boom.] Take my wife pleeze, etc., etc.

My Pick for UK Campaign Ad of the Month

♠ Posted by Emmanuel in at 3/30/2010 01:27:00 AM
The deficit-loving Gordon Brown is receiving his comeuppance in the latest Tory advertising. This is, after all, the man behind the golden rule. In America, I think the Republicans will probably try a similar tack in the midterm elections; more so in 2012 by which time the US racks up some unbelievable amount of debt. Still, something the Tories share with their Republican counterparts is an unwillingness to raise taxes as part of the solution. Repeat after me: revenues less spending equals deficit (or, somewhat improbably, surplus).

Political marketing aficionados will note that these (punctuation challenged) ads are the first out since the Tories returned to Maurice and Charles Saatchi--the advertising whizzes behind many of Conservatives' pitches during the Thatcher era and even the pre-Blair era [1, 2]

Note that the brothers Saatchi have formed another firm, the self-explanatory M&C Saatchi, after they were ousted from the advertising giant they founded, Saatchi & Saatchi. Interestingly, Saatchi & Saatchi--the firm, not the brothers--is rival Labour's advertising agency. Cameron's previous ones with the tagline of "We Can't Go On Like This" have been mercilessly parodied (see below), so we'll see if these ones get a better reception. The new ones certainly look grittier, but if that's the sort of thing that works, well, you can't argue with results.

Brazil, India to Scrap Duties for Poorest Nations

♠ Posted by Emmanuel in ,,, at 3/30/2010 12:42:00 AM
In the grand scheme of things, I suppose this initiative doesn't count for much, but it still displays proactivity on the part of two of the BRICs or major developing countries. Brazil and India have always been very active diplomatic players, and this is nowhere more visible than in the trade arena. They are, of course, the leading negotiating countries representing the Global South opposite the US and EU in the WTO Doha round.

Now, we receive news of their gesture of goodwill. I am sure you are familiar with the debt forgiveness initiatives for Highly Indebted Poor Countries (HIPC)--see the IMF and World Bank for details. However, since the main dispensers of development aid to these poor countries have typically been industrialized ones, it seems the route Brazil and India have taken is to slash tariffs to zero for a select group of least-developed countries. If I remember correctly, Joseph Stiglitz proposed something similar in Making Globalization Work: a system where wealthier nations would give tariff-free access to poorer ones and so on down the line:
Brazil said that an inter-ministerial working group is finalizing implementation of the commitment made by Foreign Minister Celso Amorim at the WTO Ministerial Conference last year for duty-free, quota-free treatment for LDCs. It said that the preferential treatment will initially cover 80 per cent of the tariff lines by mid-year, and will be expanded to reach 100 per cent.

India said that it was the first developing country to offer duty-free, quota-free treatment to LDC exports in 2008. It said it is working to ensure that the scheme provide effective market access, noting that important LDC products are covered like cotton, cocoa, cane sugar and ready-made garments. It said that the scheme has become fully operational for 14 LDCs, and urged other LDCs to utilize this facility. Bangladesh underlined the importance of the scheme for LDCs, and thanked Brazil and India for their update reports on their respective programmes.

Brazil and India told the Committee on Trade and Development on 18 March 2010 that they are pushing ahead with commitments to provide duty-free, quota-free treatment of imports from the least-developed countries (LDCs). The Committee elected Amb. Erwidodo (Indonesia) as its chair for 2010 and re-elected Amb. Jean Feyder (Luxembourg) as chair of the Sub-Committee on Least-Developed Countries.
I previously thought Stiglitz's idea was unrealistic to implement on a multilateral basis, but who knows? This sort of arrangement may become more popular as others strive to look as big-hearted as Brazil and India. Kudos to both even if this is almost certainly an effort to cement their current position as leaders in representing third world interests.

WTO: Trade Will Expand 9.5% This Year

♠ Posted by Emmanuel in , at 3/29/2010 12:24:00 AM
You've got to hand it to WTO Director-General Pascal Lamy and his eternal optimism. From always seeing the completion of the Doha Development Round being around the corner to forecasting a significant rebound of trade this year, he's an upbeat chap. Hence, the WTO is predicting an expansion in global trade volume of 9.5% in 2010 after a contraction of 12.2% in 2009. Almost certainly, we will not go back to pre-crisis trade volumes just yet, but a 9.5% annual increase is nothing to sneeze at, either. The following press blurb is part of a much lengthier feature on how product and service categories and, in turn, trading nations and regions have been differentially affected by the crisis. There's also more on the never-ending debate on why trade shrunk so much so quickly last year. The chart here is of year-on-year changes in regional merchandise exports to Q4 2009, BTW:
After the sharpest decline in more than 70 years, world trade is set to rebound in 2010 by growing at 9.5%, according to WTO economists. “WTO rules and principles have assisted governments in keeping markets open and they now provide a platform from which trade can grow as the global economy improves. We see the light at the end of the tunnel and trade promises to be an important part of the recovery. But we must avoid derailing any economic revival through protectionism,” said Director-General Pascal Lamy.

Exports from developed economies are expected to increase by 7.5% in volume terms over the course of the year while shipments from the rest of the world (including developing economies and the Commonwealth of Independent States) should rise by around 11% as the world emerges from recession.

This strong expansion will help recover some, but by no means all, of the ground lost in 2009 when the global economic crisis sparked a 12.2% contraction in the volume of global trade — the largest such decline since World War II. Should trade continue to expand at its current pace, the economists predict, it would take another year for trade volumes to surpass the peak level of 2008. Measuring trade in volume terms provides a more reliable basis for annual comparisons since volume measurements are not distorted by changes in commodity prices or currency fluctuations, as they can be when trade is measured in dollars or other currencies.

One positive development in 2009 was the absence of any major increase in trade barriers imposed by WTO members in response to the crisis. The number of trade-restricting measures applied by governments has actually declined in recent months. However, significant slack remains in the global economy, and unemployment is likely to remain high throughout 2010 in many countries. Persistent unemployment may intensify protectionist pressures.

“During these difficult times, the multilateral trading system has once again proven its value. WTO rules and principles have assisted governments in keeping markets open and they now provide a platform from which trade can grow as the global economy improves. We see the light at the end of the tunnel and trade promises to be an important part of the recovery. But we must avoid derailing any economic revival through protectionism,” said WTO Director-General Pascal Lamy.

Good Riddance to US-UK "Special Relationship"

♠ Posted by Emmanuel in ,,, at 3/28/2010 09:45:00 AM
We could sail away, or catch a freight train
Or a rocketship into outer space
Nothin' left to do; too many things were said
To ever make it feel like yesterday did...

As Motley Crue perhaps unwittingly predicted for Sammy and Vicky, it's don't go away mad, just go away time as far as the famed transatlantic relationship is concerned that has helped shape the modern world in the transition from one hegemon to another. Regular readers won't be surprised when I liken current US-UK ties to an abusive relationship. On the security front, the UK has gone to bat for America time and time again despite continental European powers becoming increasingly distant. I am sure you have friends like Sammy who do not think twice about making you relive past nightmares. Think about the Empire's past excursions in Afghanistan and Iraq. While the latter has been discounted as a fiasco launched on false pretences in the UK complete with multiple circuses [1, 2], the former is still unfolding. Despite the Afghan conflict probably being better justified, there is no doubt that it's not going too swimmingly, either.

Perhaps fittingly, the straw that broke the camel's back was likely America's blind faith in another buddy with behavioural issues of its own, Israel. A few days ago, there was the spectacle of the UK expelling an Israeli diplomat for the country's alleged use of British passports to facilitate the killing of a Hamas official in Dubai. And we haven't even discussed Washington telling the UK to talk with Argentina over the current Falklands impasse.

And so the newswires here in Britain are alight [1, 2, 3] with the publication of a new policy document emanating from the UK Parliament's Foreign Affairs Committee suggesting that putting more daylight between the UK and US on foreign policy issues is for the best for all parties concerned. Are Britain's days of, pardon the term, being America's poodle nearly over? Here's the press blurb; you can view the entire report, too:
The House of Commons Foreign Affairs Committee today (Sunday 28 March) publishes its report: Global Security: UK-US Relations, the first time the Committee has looked specifically into the topic of relations between the United Kingdom and the United States since 2001. Chair of the Committee, Mike Gapes MP, says

"The UK needs to adopt a more hard-headed political approach towards our relationship with the US with a realistic sense of our own limits and our national interests. Certainly the UK must continue to position itself closely alongside the US but there is a need to be less deferential and more willing to say no where our interests diverge. In a sense, the UK foreign policy approach this Committee is advocating is in many ways similar to the more pragmatic tone which President Obama has adopted towards the UK.

"The UK and US have a close and valuable relationship not only in terms of intelligence and security but also in terms of our profound and historic cultural and trading links and commitment to freedom, democracy and the rule of law. But the use of the phrase 'the special relationship' in its historical sense, to describe the totality of the ever-evolving UK-US relationship, is potentially misleading, and we recommend that its use should be avoided.

"Yes, we have a special relationship with the US, but we must remember that so too do other countries including regional neighbours, strategic allies and partners. British and European politicians have been guilty of over-optimism about the extent of influence they have over the US. We must be realistic and accept that globalisation, structural changes and shifts in geopolitical power will inevitably affect the UK-US relationship. It is entirely logical for the US to pursue relationships with other partners who can provide support that the UK cannot. Having said that, recent minor disagreements between the UK and US do not threaten the relationship. Rather they highlight a need for better understanding between our governments to maintain its strength.

"It is likely that the extent of political influence which the UK has exercised on US decision-making as a consequence of its military commitments is likely to diminish. Over the longer-term the UK is unlikely to be able to influence the US to the extent it has in the past."
It's full of qualifiers, no doubt, but here's the question for the America #1-style cheerleaders: If America were still "all that," would its staunchest ally be signalling an end to its days of being Washington's toady, lackey, sycophant, bootlicker, and minion? There comes a time when the calculus of dissent suggests going the other way, and Britain apparently no longer feels it can meaningfully influence US policy in a way that compensates for being perceived as such. Not only is it getting so little benefit, but its global image is being hurt in being so closely allied with a washed up has-been.

I certainly hope this precedent will bring the UK closer to continental Europe, especially in the economic realm. In the past, I have made no bones about being an EU admirer and attribute a lot of Britain's woes to trying to be so slavishly faithful to the fiscally and morally bankrupt US example. Financial WMD, anyone? Perhaps some retail therapy is the cure. I will forever be wary of George Soros being the man who broke the Bank of England by forcing the UK out of the ERM and, by consequence, the Eurozone. The counterfactual I relish is of the Germans leading a crackdown on Britain's current Yankee-style fiscal hemorrhage right about now had Soros not speculated. Plus, I'd be earning real money (euros) instead of play money (pounds).

Ah, but let's not cry for yesterday for there is still hope in breaking free of Washington's asphyxiating embrace as today's events have demonstrated. Full of hubris, debt, and cellulite, the US is weighted down by its own woes. While it chews the fat, its allies are deserting it. The UK has seen this movie before with the demise of Pax Brittania. Now, it seems it doesn't want to sink together with another country hellbent on repeating this fate. The US goes its way, the UK goes another way. For the sake of Britain, embrace Europa. America is a menace to itself and others, and a strong, positive countervailing influence is what this world needs right about now. Don't go away mad--just go away.

My Boss On Why West Shouldn't Fear China

♠ Posted by Emmanuel in , at 3/26/2010 01:13:00 PM
It may be a peculiarity of those of us from Eastern cultures that we like the idea of having a boss. Whereas Westerners often disdain being told "do this, do that," we actually like the idea of being answerable to someone who can make things happen for you--if you play your part in the grand scheme of things.

And speaking of the grand scheme of things, you do not need to look far to see how activity in the global political economy is shifting to Asia. I have written in great length about how the British government is cutting the bejesus out of university funding. Being smarter than your average social science establishment, the LSE has long started to look East. Not only do we want to attract Asian students (who pay full, not subsidized tuition) and funding from regional institutions, but we also want to secure long-lasting relationships with political heavyweights in Asia. Not only do Chinese diplomats come to exchange ideas with us at LSE IDEAS, but the current Minister of Foreign Affairs, Yang Jiechi, is an LSE alum.

Hence, we have hosted the LSE Asia Forum since 2005. Today, many LSE bigwigs including my boss Arne Westad have gathered in Beijing to converse with our Chinese counterparts like Yang Jiechi. The other names should be familiar as it's another veritable who's who of business, politics, and academia: Dr Henk Bekedam, Sir Howard Davies, Professor Julian Le Grand, Deputy PBoC Governor Hu Xiaolian, Professor Hu Yonghua, Professor Wang Jisi, Liu He, Liu Mingkang, Morgan Stanley Asia Chairman Stephen Roach, Lord Stern, Professor Michael Yahuda, HRH Duke of York, and Zhu Min.

What follows below are Arne Westad's thoughts on why a more preponderant China will not look much different from today's world. Being a historian by training, he is particularly keen on how China's political and security considerations colour economic ones. Interesting stuff:
China's rise to prominence in international affairs is the big story of the past two decades. After all, how China behaves as a Great Power will determine what the global political system will look like for generations to come. Some fear China's ascendancy, both in Asia and globally, will lead to instability as it seeks to replace the United States as the dominant power. However, China's behaviour does not suggest it wants that role, and its current policies – both in terms of economics and foreign affairs – may not be able to sustain it.

On the face of it China's economy seems to faring the financial crisis quite well. It has tried to use its rather peculiar economic system to insulate itself from the effects of the crisis. Having a currency that is not fully convertible may have helped as it did during the 1997 – 1998 crisis and it has also benefitted from high degree of state intervention.

At the core of the Chinese response to the crisis is a package, unveiled in 2008, intended to stimulate domestic consumer demand through a series of measures that may have taken up to 14 – 15 per cent of China's GDP. However, Chinese consumers have proved reluctant to spend when they lack confidence in demand for China's exports, and thus in their own job prospects

Indeed there are signs that the government is shifting away from domestic stimuli and towards an export-led way out of the crisis, which of course is what drove Chinese growth during the good times. This policy assumes that the demand for Chinese goods overseas will return towards the end of 2010. This is a very risky strategy. Rather than driving the recovery process, China may be making itself dependent on recovery else where.

In terms of international affairs more broadly, if China is to be a dominant power in its region, it will have to build a solid and stable relationship with Japan – still the world's third largest economy. Some policy makers in Beijing realise this, and are trying to move beyond past grievances to economic and political cooperation. So far their efforts have been stymied by a growth in popular nationalism and a lack of daring initiatives both in Beijing and Tokyo.

China also faces a difficult situation on the Korean peninsula. There is an increasing sense that the North Korean state will collapse rather than going through any kind of transition. For now China has been trying to improve its relationship with South Korea while improving its contacts with the United States on Korean matters. What it does not want is a German style reunification that brings US troops all the way to the Chinese border.

In Mongolia and Central Asia, China has not translated trade into political influence. This may not matter much now while the region still looks to Russia, but over time the Chinese leadership may come to regret not doing more to ensure its influence there.

The big success story over the last few years has been China's increasing involvement with ASEAN in terms of trade and political consultation. But so far ASEAN has been in the driving seat. The Chinese leadership does not seem to understand that the trend within ASEAN is towards more integration, cooperation, and political consultation. If China continues to emphasise bilateral ties with the countries of ASEAN rather than regional issues, it risks getting left out.

The other major issue for China, is of course, Taiwan. Recent years have seen very positive contacts between the two sides, but true normalisation will take a long time. As the recent announcement of US arms sales illustrates, even the most cooperative government in Taipei has two main priorities that over shadow its relations with Beijing: security, and the relationship with the US that underpins security.

So does China have a grand strategy for a new world order? The answer, so far, is no. While westerners cannot imagine that a transition from a US to a Chinese dominated world will not also mean a transition to a very different world system, China does not actually have a qualitatively new system to offer. A severe regional crisis might lead Chinese leaders to think differently but China's development needs and the structures of its economy mean that even when it becomes a global power, it will want to operate in a system not too dissimilar from the one that exists today.
Amerocentric commentators (or a huge portion the blogosphere) who have neither been to China nor have interacted with its people are fond of bashing and belittling the PRC in the usual White Man's Burden-ish fashion. So, it's good to get a more informed and nuanced perspective from those with a keen sense of history and horizons broader than their computer screens.

Why Greece Breathes a Little Easier

♠ Posted by Emmanuel in at 3/26/2010 01:09:00 PM
One of the irritants the Eurozone has been encountering with the Greek tragicomedy was self-inflicted. For, a measure that has helped Greek banks stay afloat during the credit crisis is an ECB lending window allowing the aforementioned banks to use Greek sovereign debt as collateral in availing of precious euros. Earlier on, ECB President Jean-Claude Trichet announced that this lending windows would become narrower at year-end by only accepting assets rated A-or higher instead of the existing standard of BBB- or higher. The worry was that it was quite possible that Greek sovereign debt would not meet this higher threshold come the holiday season. Ho, ho, ho.

Only yesterday, however, the esteemed Mr Trichet did a surprising U-turn and said the European Central Bank would not be doing so, thus helping Greece breathe easier along with just-announced intentions to draw up a formal contingency plan for Greece:
The European Central Bank gave Greece unexpected help on Thursday when it pulled forward an overhaul of its liquidity operations that will relieve the immediate pressure on the crisis-hit country. In a surprise U-turn, Jean-Claude Trichet, ECB president, said the bank would not go ahead with plans to raise, at the end of this year, the minimum credit rating required for assets provided as collateral by eurozone banks.

His comments in the European parliament, just hours before a Brussels summit of European Union leaders, indicated the ECB saw an urgent need to help calm financial markets’ fears about the eurozone’s stability. The move substantially reduced the risk of Greek assets being excluded if they were downgraded further, which would have had a catastrophic impact on the country’s financial system. The ECB’s minimum rating requirement is currently BBB-. Before Thursday’s announcement, that was scheduled to rise to A- at the year-end.
Some started crying "moral hazard!" at this turn of events: was the ECB going soft? Perhaps not; the ever-wily Trichet envisions a more pronounced sliding scale for collateral quality. Just as you get more money hocking higher-quality items at the pawnshop, so it is at the ECB saloon:
But Mr Trichet also announced that from next year the ECB would move to a sliding scale system that could result in it distinguishing much more between the assets of different eurozone members. That could result in a bigger “haircut” – or discount applied to the value of an asset – being applied to Greek bonds than to those of more fiscally prudent countries.
Good compromise, Jean-Claude Trichet. Why is it that American leadership is so bereft of talent of this calibre?

PRC Crackdown on Hot Money: RMB Reval Imminent?

♠ Posted by Emmanuel in , at 3/26/2010 12:02:00 AM
I almost forgot to post this one. Basically, you'd expect more inflows of "hot money" into China when speculators believe the revaluation of the Chinese renminbi will occur soon. Do the yuan traffickers know something we don't--perhaps some insider information about the timing of a revaluation to, say, appease America prior to the 15 April Treasury decision? Also factor in those wanting to take advantage of asset price rises in China as well as somewhat higher interest rates in the developing world. Once more, the currency watchdog, the rather amusingly titled State Administration of Foreign Exchange (SAFE), is conducting sweeps for illegally entering hot money. From our favourite official publication bar none, China Daily:
The State Administration of Foreign Exchange (SAFE) will conduct a special investigation in 13 provinces and municipalities during the first half of this year to examine whether international "hot money" was flowing into China under the cover of trade, foreign direct investment (FDI) and foreign debt, the Shanghai Securities Journal reported Tuesday.

China faces an increasing risk of net inflow of foreign exchange in the backdrop of a more complex and volatile international balance-of-payments situation in 2010, SAFE said at its annual meeting on foreign exchange in Beijing on Monday. There are more uncertainties in cross-border money flows this year, SAFE noted. The investigation will focus on trade in goods and services, individuals, FDI, international payment transactions and cross-border money flows, and will cover major channels, projects and entities through which international speculative money comes into China, the regulator said.

SAFE vowed to punish violators of foreign exchange law and regulations as well as to avoid adverse effects on normal trade and investment activities during the crackdown. Amid stronger market expectation of a yuan appreciation, the cases of illegal use of foreign exchange have been on the rise in recent months, according to the Shanghai Securities Journal.

Lu Zhengwei, chief economist with Industrial Bank, told the Beijing News that the increasing inflow of foreign exchange was mainly due to potential lucrative returns coveted by international speculative money under current conditions. He attributed China's attractiveness to four factors: the country's quick recovery from the world financial crisis compared with Western countries; strong market expectations of a yuan appreciation; low interest rates adopted by world major economies; and a surge in assets prices in emerging economies including China.

However, Lu also warned of a possible massive exodus of international money within the year as some institutional investors were already considering withdrawing from emerging markets. Whether massive pullouts would become a reality depends on when the US Federal Reserve raises interest rates, he said.
Is a crackdown a prelude to revaluation? It's certainly food for thought.

Yes, People See Through US Treasury AAA Farce

♠ Posted by Emmanuel in , at 3/25/2010 06:10:00 AM
Burger King is not the only American concern that likes to sell Whoppers. Recently, we've asked "Where's the Beef?" with regard to the American Dream and the melting pot and have found both notions quite wanting to say the least. Returning to the realm of sovereign borrowing, let's turn our attention to that chestnut: triple-A "risk free" Treasuries. It seems the infinite appetite America #1-style cheerleaders ascribe to them as evidence of the Enduring Greatness of America is losing its lustre. To start with, the most recent TIC data release indicates that Chinese holdings of this stuff has fallen for a third straight month, unbeknownst to many of us as the FT summarizes; full summary here of the $33.4 billion decline in TIC flows for January:
Foreign governments and central banks sold a record amount of US financial assets in January as China continued to reduce its holdings of Treasuries, government figures showed on Monday. Demand for corporate debt also fell, with private foreign investors shedding a record $24.8bn of corporate bonds while also shying away from equities and US agency debt.

China sold $5.8bn of Treasury securities in January, the third month running that it cut its holdings. However, revisions to previous months helped it regain its position as the top holder of US government debt, overtaking Japan...Any move by China is closely watched because it is the biggest and most politically sensitive US trade partner. Mounting US debt levels and the need by the US to fund a record budget deficit have raised concerns that this may hit the US dollar and weaken demand for US assets...

“There is such an imbalance between trade and investment flows between the US and China, that it requires an increasing level of Chinese demand for government bonds,” said Michael Woolfolk, a senior currency strategist at BNY Mellon. “If China decides to stop purchases of government bonds, then we have a problem.” Analysts cautioned that the change in China’s monthly holdings was in part due to debt maturing. The US Treasury department pointed out that China’s investments often run through offshore entities, making it possible that its US investments were appearing as holdings in Britain or Hong Kong...

“It makes much more sense to look at the prices paid for US assets, rather than the quantities bought,” Capital Economics said...
Isn't it curious how the US Treasury is at pains to point out that China isn't deserting it? As per that last statement, we now observe that the yield on the ten year Treasury has recently spiked to 3.86%.

Accompanying this phenomenon is that of the swap spread turning negative and becoming more so on ten year dollar-denominated instruments. The swap spread is the difference in yield between an official instrument alike US sovereign debt and a swap rate of similar duration. That is, the swap rate represents the cost of entering into an interest rate swap where a stream of fixed income payments is exchanged for floating rate ones. In theory, this inversion should not happen since the latter bears the credit risk of institutions not borne by sovereign borrowers. Put differently, financial institutions' cost of funding, typically based on the London Interbank Offered Rate (LIBOR), should be higher than that of the sovereign given that banks aren't similarly rated "AAA".

Now there are many interpretations of why this phenomenon is occurring [1, 2, 3], but the most obvious one is that the markets do not believe Treasuries are "risk free." It is doubly head-scratching since many of the aforementioned banks are now ultimately guaranteed by the sovereign as the recent credit crisis has demonstrated (or, at least for those still around). Certainly, the inevitable debt tsunami of American issuance isn't helping the sovereign cause. Why would you want to enter into an interest rate swap, anyway? If your expectation is that interest rates are headed higher due to this unabated debt bonanza, then you can lock in current rates (the fixed component) and pocket the difference when prevailing rates rise (the floating component). More people starting to think this way should result in an even more negative swap spread.

At any rate (pardon the pun), America's well-deserved comeuppance should be something the world economy wishes for. Like in other areas of human endeavour, the US is a bully that thinks it can get away with all sorts of financial shenanigans and make others bear the costs of adjustment. Three pieces of evidence here--declining capital inflows, rising bond yields, and inverting swap spreads--suggest this abuse cannot go on forever, much as Uncle Sam would like. Others smiting down this chronic offender with undue haste is just deserts.

In the meantime, boys and girls, if you can't tell who the suckers of globalization are, they're those who invest in America.

Shark Tales: Int'l Institutions Fail Overfishing

♠ Posted by Emmanuel in ,,,, at 3/25/2010 12:10:00 AM
In some ways, I am a reluctant environmentalist. If we lived in a world of infinite fish stocks and immediate replenishment, there would be no problem. However, I must draw the line when overfishing threatens extinction and collective action fails to do anything about it. A few days ago, I discussed how motions to limit overfishing of bluefin tuna--an increasingly affected species as the popularity of sushi and sashimi increase worldwide--failed before the UN Convention on International Trade in Endangered Species (CITES) in the face of Japanese opposition in tandem with source countries like Libya. Now we receive news that another proposed measure to limit the fishing of sharks has met a similar fate due to the objections of countries led by (surprise!) Japan. And don't forget the whales as it believes "domino theory" is operative in endeavours to limit fishing.

As with the bluefin tuna objections, these measures were voted down by those with vested commercial interests. The popularity of Japanese cuisine doesn't need much elaboration here. However, some of you may be less familiar with the popularity of shark's fin soup--an expensive delicacy served in Chinese restaurants. In China and Chinese diaspora communities, shark's fin soup is a prestige dish often served during wedding banquets and other important events to indicate the graciousness of the hosts. The economic rise of East Asia has meant greater demand for shark's fin from middle class consumers. However, environmentalists have long bemoaned fishing sharks for this dish as the fins are basically cut off and the rest of the shark is discarded. Here is a description from Reuters of its rising popularity:
One of the world's most expensive food products, a bowl of shark fin soup can cost $100, with a single fin worth more than $1,300. Up to 10 million kg of shark fin is exported annually to Hong Kong by nearly 87 countries, according to Oceana, a marine conservation group. Demand for the soup has exploded in Asia, where an expanding middle class can now more easily afford a delicacy once reserved for the wealthy. Japan, Indonesia, Malaysia, Taiwan, Thailand and China are big shark fin consumers.
The net result is a noticeable decline in shark populations. Agence-France Presse has the post-mortem on how three out of four species marked for conservation have not made the grade; the only one making it is, to no one's surprise, that whose fin is not valuable:
The UN wildlife trade body slapped down a trio of proposals on Tuesday to oversee cross-border commerce for sharks threatened with extinction through overfishing, sparking anger from conservationists. The only marine species granted protection at a meeting of the Convention on the International Trade in Endangered Species (CITES) was the temperate zone porbeagle, a shark fished for its meat...

The shark species left exposed to globally unregulated commerce were the scalloped hammerhead, the oceanic white tip and the spiny dogfish. Millions of hammerhead and whitetip are extracted from seas each year, mainly to satisfy a burgeoning appetite for sharkfin soup, a prestige food in Chinese communities around the world. The US proposals were rejected by a narrow margin, opening the possibility that one or both could get a second hearing on Thursday when the 13-day conference ends.

Only decades ago, the two species were among the most common of the semi-coastal and open-water sharks. But incidental catch and demand for fins have slashed populations by 90 per cent in several regions. The fish are often tossed back into the water after their precious fins have been sliced away.

The scalloped hammerhead is listed by the International Union for the Conservation of Nature (IUCN) as "vulnerable" globally, while the whitetip is "critically endangered" in the north-western Atlantic, and "vulnerable" elsewhere. Once the highest level of biomass in the Gulf of Mexico, the whitetip is 99 per cent depleted there today, marine biologist Julia Baum said.

Japan led opposition to the four measures, arguing that management of shark populations should be left to regional fisheries groups, not CITES. Conservationists counter that fishing for sharks is unregulated. "The problem today is not there is serious mismanagement of trade in sharks, as for tuna, but that there is no management at all," said Sue Lieberman, policy director for the Washington-based Pew Environment Group.

The proposals called for listing on CITES' Appendix II, which requires countries to monitor exports and demonstrate that fishing is done in a sustainable manner. The scientific panel of the UN Food and Agriculture Organisation (FAO) recommend protection for all the species except the spiny dogfish which, along with the porbeagle, was also voted down at the last CITES meeting in 2007...
And if you haven't figured out the arch-villain yet -
Many NGOs said that intensive lobbying by Japan played a critical role in the measures being shot down. "We see clearly now the Japanese motivation for opposing all these marine species proposals," said Anne Schroeer, a Madrid-based economist with Oceana. "For the whales, they say we are catching it traditionally. For the bluefin tuna, they say we are eating it. But for the sharks, there is nothing but pure economic interest." All told, a third of the world's 64 species of pelagic, or open water, sharks face extinction, according to a report issued last June by the IUCN's Shark Specialist Group.
It is all quite sad, really. While Japan always says it is interested in conservation, it always leads movements to thwart efforts designed to prevent overfishing. It's not very self-enlightened, methinks, and will ultimately backfire in the long run as doing nothing and fishing these species to extinction or near-extinction is a solution acceptable only to the Bjorn Lomborg set.

The issue here comes down to one familiar with limiting trade in controlled substances--reducing demand. Consuming and producing nations will, in the final analysis, go for their interests. Fortunately, there are recent efforts such as Shark Savers and WildAid's ongoing high-profile campaign in China to increase consumer education about the hazards associated with overfishing:
During 2007-08, WildAid developed and expanded its work to reduce demand for shark products, primarily in China. This campaign included television and billboard campaigns featuring leading Olympic stars pledged not to eat shark fin soup. The advertising featured the main stars of the Olympics Opening Ceremony, Yao Ming, who carried the Chinese flag for the Chinese team, Li Ning, who lit the giant torch and musician Liu Huan, who sang the official theme song of the 2008 Olympics.

In 2009, WildAid and Shark Savers have come together to amplify the impact of this awareness and education campaign in China to reduce consumption of shark fin soup. This campaign will utilize cultural, athletic, and business heroes of China, including basketball legend Yao Ming, to deliver a message proven to make shark fin soup socially unacceptable...

We, at Shark Savers, are very excited to be working with WildAid on this campaign. No where in the world can we affect as big a change in shark consumption habits than in China. We think that, together, we have the right skills, message, and elements to 'close the sale' with the Chinese public. It is an urgent time as shark populations continue to dwindle, but we think that there are signs of real hope. With the athletic and cultural heroes and prominent businessmen that are coming together for this cause, and the already-proven message, we think we may be at a tipping point in China on the issue of shark fin soup.
You can say that marketing led us into this mess, so (social) marketing should help lead us out of it. Ultimately, there is nothing culturally ingrained about having to consume this dish and there are substitutes for it using similar recipes. There is still a chance of limits being placed before CITES wraps up later today, but if not, curbing appetite for the dish is really the way to go in the absence of collective action.

And no, I don't eat shark's fin soup.

US Incarceration Nation Faces Budgetary Pressure

♠ Posted by Emmanuel in at 3/25/2010 12:04:00 AM
He said "I ain't spending my life here
I ain't living alone
Ain't breaking no rocks on the chain gang
I'm breakin' out and headin' home"

Another thing America #1-style cheerleaders need to explain to me and others who believe that it is a shoddy example of how to run a country is its need to throw so many of its own people in jail. For, another thing America is infamous for is having the world's highest incarceration rate. Like the hopeless fraud that is the American dream, it needs some explaining why this "melting pot" is compelled to throw many of its minorities should be behind bars. It's inequality writ large all over again as the "land of opportunity" is more like one big gated community, with jails being the doghouse.

Certainly there are profit$$$ to be made throwing an increasing number of the citizenry behind bars especially in private prisons, but, pray tell, what does it do for "labour productivity" and other economistic metrics by reducing the labour force in this manner? Supermax prisons, anyone? It's hardly novel to hear that America's jails are more punitive than corrective. Albert Einstein once said that madness was doing the same thing over and over again and expecting different results. So it is with America and its preference to forget its prison mess. Alike its fiscal woes where it collectively prefers to kick the can down the road, its corrective ones are pretty much of the lock 'em up and throw away the key variety.

Or maybe not anymore. It seems that fiscal woes are bumping up against the world's most populous prison population as throwing people behind bars--no matter how badly mistreated they are --still costs money. California, the state with the nation's largest prison population, is now issuing "Get Out of Jail Free" cards for a large segment of these users of fine state facilities. From NPR:
Los Angeles County is so broke that the sheriff is cutting costs by releasing hundreds of inmates from county jails early. Over the past three months, more than 350 inmates from the nation's largest county jail have been handed what amounts to a get-out-of-jail-free card.

Anthony Vargas left the county's twin-tower jail downtown after serving half the time he was supposed to for commercial burglary and forging a prescription. "It's called day-for-day," Vargas says. "Every day you serve in jail counts as two days."

Another just-released inmate, Steve Gutierrez, was sentenced to 80 days behind bars for driving without a license and for violating a restraining order. But he served just 10 days and left jail wearing an ankle bracelet to monitor his movements. "Good for me," he says while carrying his belongings in a jail-issued plastic bag. "Who wants to shower next to all these men? Who wants to go to the bathroom next to all these guys? ... The food is terrible. And you're freezing to death in there. It's bad." The early-release program was intended for people like Gutierrez, people who are not known gang members, who don't have a violent criminal history. "People with Mickey Mouse crimes, like tickets," Gutierrez says.

L.A. County Sheriff Lee Baca says budget shortfalls are forcing him to release inmates like these early. He's trying to cut $128 million from jail operations. Baca's also eliminated overtime pay for deputies and is even getting back in a patrol car himself every Friday. "No one likes early release," says Baca. "I don't like it. I...think the governor doesn't like it, and no city wants it. The whole point of it all is — money does matter. And public safety should be the last thing cut out of government." Baca says he'd rather inmates serve at least 80 percent of their sentences...

Today, California prisons are under order to reduce overcrowding. That resulted in a new state law that's being applied to some county jails. But in Los Angeles, it's money that's driving the early releases. UCLA professor Michael Stoll says others around the country are doing the same. "Most states are experimenting with releasing nonviolent, low-level offenders in part because most states have faced the same kind of budget crisis that California is facing," says Stoll.

But some people fear the kind of scenario that happened in Sacramento, Calif., last month. The sheriff's department released 22-year-old Kevin Peterson after he had served only half his four-month sentence for violating probation. Less than a day later, Peterson was arrested for attempted rape. "Granted, you're going find in every state a case in which you release someone early from prison, and they go on and recommit a crime, some of them more heinous than others," says Stoll. "Even when people serve out their time and are released from prison unconditionally, there's always going be that risk, too."

Sheriff Lt. Kevin Kykendal says inmates are carefully screened before they're released and monitored once they get out. But he says letting them out early is still a big deal. "I think all inmates should serve 100 percent of a time," says Kykendal. "But with fiscal constraints, the economy the way it is doesn't allow us to do that."
So, maybe there's a silver lining behind Calibankruptcy as the largest America state tends to set trends for the rest of the nation. Perhaps they will finally decide that addressing social ills long kicked down the road in true red, white, and blue fashion is in order. What a novel idea. Like deficits, maybe the highly stratified and racialized society that is modern-day America does matter after all. In the meantime, how a country like this believes it can lecture the rest of the world on human rights is utterly beyond me.

Meanwhile, have a look at the abstract of this paper I found on these matters that serves as a pretty damning indictment of how things stand. Can budgetary pressures result in change we can believe in? I certainly hope so:
Disproportionate Minority Confinement: A Historical Look at Racial Incarceration

The incarceration of African Americans is not a phenomenon that occurred post the civil rights era but has been a practical fact of criminal justice administration since data on incarceration has been kept. Before crack cocaine and three strikes; before the war on drugs; before the war on poverty and the welfare state; before children born out of wedlock and the rise of single female head of households; before sentencing guidelines and getting tough on crime; before the world wars; and before the revolutionary war - African Americans have been disproportionately incarcerated in the United States. World and American history teaches us that the criminal justice system is not only an institution of retribution, rehabilitation, incapacitation and incarceration (the four theories of punishment) but is an institution of social control. This paper will review the historical rise in the incarceration of African Americans in prisons as well as some of the key explanations and proposed solutions to disproportional minority confinement.

Screw Japanese, Try Swiss Forex Intervention!

♠ Posted by Emmanuel in , at 3/24/2010 08:07:00 AM
I am one of those incurable foreign exchange fanatics who watch these movements with no small amount of disdain for their sheer nonsensical gyrations. Today's example is that of the unbelievably oversold euro against Swiss franc or EUR/CHF in trader notation. Before I get to that, it is absolutely inexplicable as to why the euro is dropping in relation to the currency of a country (America) that piles on $221 billion in debt in a single month. Forex commentators offer what are, to my thinking, logic-free arguments. Here is the Eurozone displaying a willingness to hold its members' feet to the fire by suggesting Greece resort to the IMF in conjunction with support from member countries--just as yours truly has suggested--being punished for doing so. Meanwhile, the world's largest debtor nation is rewarded for...piling unprecedented levels of debt and doing nothing about it? You must be joking; mark my words, this situation won't last and will probably peter out once Greece has inevitably been forced to the trough.

Anyway, before I get sidetracked any further, today's story concerns EUR/CHF. Apparently, the Swiss franc has been gaining big on the euro in light of the much-publicized but largely salvageable Greek woes. Although the likes of yours lie in wait in the Forex Pumpkin Patch for signs of the Great Japanese FX Intervention, we are thwarted again and again as the Land of the Rising Sun hasn't done that sort of thing since 2004. There might be less of a need to do so at the current time as Japanese exports have climbed 45% on a year-on-year basis. Meanwhile, the Swiss are naturally concerned by the erosion of their competitiveness vis-a-vis most of their Western European trading partners and have seen it fit to engage in moral suasion (talking down the Swissie and sabre-rattling about intervention) and open market operations by actually selling francs in markets worldwide. From Bloomberg:

The Swiss franc rose against the euro for the eighth straight day [make that nine if EUR/CHF falls again today; click on chart for larger image], the longest run of gains in 17 months, on bets the country’s central bank will allow the currency to appreciate amid signs of an improving economy. The franc strengthened through 1.43 per euro for the first time even as Swiss National Bank President Philipp Hildebrand said the bank has a “broad arsenal” to prevent “excessive” gains by the currency. UBS AG, the world’s second-biggest foreign-exchange trader, increased its franc forecasts, predicting it will strengthen to 1.40 per euro in three months from 1.45 previously.

“The verbal intervention today has limited impact on the franc,” said Ian Stannard, currency strategist at BNP Paribas SA in London. “With the economic recovery gathering momentum, the trend is for the franc to rise. The market will keep testing the resolve of the SNB to find out what they meant by ‘excessive.’ It’s going to be a difficult transition for the central bank...”

The SNB began selling the franc on March 12, 2009, to stem its gains and stave off deflation. [SNB President] Hildebrand, making his first public speech since taking the helm of the central bank, also said “the instruments are clear. We’re purchasing foreign currencies, and we’re able to do that to a very large extent to counter any excessive appreciation.”

The currency has gained 0.6 percent against the euro since SNB Governing Board member Jean-Pierre Danthine said on March 18 that “households and firms should prepare themselves for a return, sometime in the future, to a world of higher interest rates, with exchange rates being guided by market forces...”

UBS also said the franc may appreciate to 1.42 per euro in one month. “The justification for large-scale interventions is fading fast with deflation disappearing and economic indicators strong,” wrote UBS analysts including Mansoor Mohi-uddin in Singapore. Any “sharp and sudden” moves in the franc “could still trigger SNB intervention, but with limited speculative positioning and strong fundamental pressures this would be unlikely to have much lasting effect,” they said.
It's always interesting to see central bankers trying to game the system. Many think FX intervention doesn't work given the sheer volume of trading in today's currency markets. Perhaps Japan has learned this lesson while the Swiss are still in the process of receiving it as commentary in the above article suggests. In the meantime, please join me in the Forex Pumpkin Patch as we lie in wait for the next coming of the Great Japanese FX Intervention. Like Godot, it is proving to be rather elusive.

UPDATE: More trader talk suggests the SNB has stayed out of the market today in fears of continued action leading to Switzerland being labelled a currency manipulator during the next biannual Treasury report [!] I couldn't make this stuff up; I'd take it with a grain of salt:
The SNB's Wednesday absence in markets as the Swiss franc plunged "may well be in response to the fact that based on the U.S. Treasury's mechanistic approach to ranking currency manipulation, it is arguably the case Switzerland has a higher chance of being named a manipulator than China in the 15 April 2010 U.S. Treasury report on International Exchange rate policy," said Sue Trinh, senior currency strategist at Royal Bank of Canada, in a note to clients.

Easy Skankin': Airbus Declares WTO Win v Boeing

♠ Posted by Emmanuel in ,, at 3/24/2010 12:08:00 AM
Following on from the previous post on potential EU-US litigation over American procurement of air refuelling tankers, we now move to their older aerospace struggle over commercial jets. The FT has an extensive history of this longstanding trade conflict. Basically, Boeing charges the European Union with providing generous subsidies to the European aerospace consortium. In turn, Airbus charges Boeing with receiving equally fat subsidies from the likes of NASA and Washington state. To make a long story short, both parties filed cases against each other in 2004, with the EU filing one in immediate retribution. For true trade aficionados, view details of the case filed by the US on behalf of Boeing against Airbus (DS 316) on the WTO website. If you're really into it, go knock yourself out and also view the countersuit by the EU on behalf of Airbus against Boeing (DS 317).

However, the case filed by Boeing against Airbus has come down the pike sooner. A preliminary ruling disclosed only to the interested parties was made in September of last year. Now, the long-awaited decision--six years in the making--has once more been disclosed to the participants first. As details are just trickling out, Airbus is claiming victory, although this is hotly contested by Boeing. Especially in international economic diplomacy, it seems, spin is healthy. Moreover, the conduct of the imminent launch of the Airbus A350 model hinges on the ruling:
Airbus seized on a World Trade Organisation report issued on Tuesday to claim it had won a significant victory in a long-running US case alleging that the European aircraft maker received billions in illegal subsidies.

Although Airbus conceded that the WTO’s 1,000-page ruling had found “elements of subsidy” in past government loans, it claimed the report had found its practices had not harmed Boeing, its rival, or cost US jobs. Airbus, a division of EADS, also said the report, which is supposed to be confidential, confirmed that the WTO had rejected 70 per cent of the US claims and no payments had caused “material injury to any US interest”.

In a sign of the fierce public relations war that the WTO report was always expected to trigger between the world’s two biggest commercial aircraft makers, Boeing’s legal adviser Bob Novick said the Airbus statement was “ridiculous” and its material injury claim was “a diversion”.

“It’s as though you’re charged with 10 counts of murder, you get acquitted on one but convicted on nine – is that a victory?” he said. “They characterise it as a victory – I think of it as a loss.” Mr Novick also took issue with Airbus’s claim that the organisation had “refused the US request for remedies as legally inappropriate...That has no bearing on US request for remedies,” said Mr Novick. “The Airbus statement on that is completely false.” The two sides are also expected to clash over Airbus claims that future funding of its newest aircraft, the A350, “is not affected in any way by [Tuesday’s] report” and US attempts to include it were “specifically rejected”.

John Clancy, a European Commission spokesperson, warned against jumping to conclusions or claims of victory in the dispute, now entering its sixth year. “Cases like this are never black and white and this is just one further step in the litigation,” he said, adding that a fuller picture would only emerge once the WTO released its first findings on the European Union’s countersuit against the US over subsidies allegedly paid to Boeing. This is expected in June.

European officials, while acknowledging that the WTO found some faults, maintain that their biggest victory was a conclusion that so-called launch aid did not constitute an illegal programme against Boeing. Instead, the WTO panel seemed to conclude that each of the loans under this category had to be assessed independently and many were acceptable, according to insiders. “That was the biggest victory for Airbus,” one European diplomat said.

Airbus emphasised this point. “The panel has now reconfirmed what we have always said: reimbursable loans are a legal instrument and they have not caused one single job loss to the US aerospace industry,” said Maggie Bergsma, Airbus spokeswoman. Europe has repeatedly offered to negotiate a settlement with the US in a dispute in which some trade analysts said neither side was innocent.
My ultimate conclusion mirrors that of most observers. Both sides are hardly innocent of aiding their respective firms. In the end, both largely cancel each other out, leaving trade lawyers the only real "winners" in these litigation shenanigans. Nevertheless, details of this ruling will help determine allowable benefits extended by the state to aircraft manufacturers in Brazil (Embraer), Canada (Bombardier), and the rest who seek to export commercial jets.

UK Strikefest 2010: Let's Just Shut Britain Down

♠ Posted by Emmanuel in at 3/24/2010 12:01:00 AM
Well, the parallels to the seminal events of 1979 when the "Winter of Discontent" just keep mounting here in Blighty--as if we didn't have enough problems in these lands. Sometime ago, I discussed how rolling postal strikes were causing havoc on the many businesses that relied on timely delivery of parcels. On my usual route to work, I pass the Trade Union Congress (TUC) building. Even if I hadn't read the newspapers prior to embarking on my journey, I can rest assured that some sort of industrial action is imminent when reporters and cameramen are busy mulling outside the TUC. It appears I'm going to see a heckuva lot more of these characters as nearly every logistics, transportation, and utility concern Britain relies on is going on strike. Workers of the British isles unite! As an aside for you political economy junkies, on my daily route I also regularly pass the British Museum, in whose reading room one Karl Marx spent long hours plotting the downfall of capitalism. But for this post, his contemporaries take centre stage:
British Gas workers have voted to strike over what they call macho management and bullying, the GMB union said Tuesday. The strikes would affect gas service engineers, central heating boiling engineers and distribution depot workers. No strike dates have been set among the 8,000 GMB members and the company, part of Centrica Plc, has been given a week to respond before the union decides on its next move.

"British Gas has turned from being a reasonable employer where people had job satisfaction into one with a culture of bullying, customer exploitation and profits at all costs," Paul Kenny, GMB General Secretary, said on the union's website earlier this month. Matthew Bateman, director of heating services at British Gas, Britain's biggest household energy supplier, said "robust contingency plans" were in place to help maintain customer services.

"We remain committed to talking with the GMB and avoiding this unnecessary industrial action," he added, in a statement. A strike would be further embarrassment for Labour, already facing jibes from the Conservatives over British Airways cabin crew and planned action by National Rail signal workers, just a few weeks ahead of a national election. In addition, thousands of civil servants plan a one-day stoppage Wednesday, coinciding with the Budget.
Postmen, cabin crew, heating guys, rail workers, civil servants, university staff...the list goes on and on. It makes the French look positively workaholic by comparison.

EU Hints at Transatlantic Trade War Over Tankers

♠ Posted by Emmanuel in ,, at 3/23/2010 09:26:00 AM
Well, here is proof that it's not just my fervid imagination behind a recent post saying just the same thing. Again, I am utterly befuddled as to why other trade or IPE commentators haven't paid more attention to this issue as big, big money is at stake alongside transatlantic trade relations. Just yesterday, I attended an LSE talk where new EU Trade Commissioner Karel de Gucht spoke about evolutions in EU trade policy. While not talking directly about the lost opportunity of supplying the US Air Force with tens of billions' worth of air refuelling tankers, de Gucht made many allusions as to how the trade climate is affected by US policy. In diplomat-speak, it's as close as you can get to--pardon the expression--Yankees suck! It turns out that, somewhere else, he has expressed further thoughts on how transatlantic trade ties are not going too smoothly--especially in the realm of defence procurement:
The threat of a transatlantic trade war in aerospace after America’s decision to exclude EADS from a $50 billion (£33 billion) Pentagon contract has been raised by the European Trade Commissioner. Political tension is rising in European capitals over Washington’s decision to tilt the scales towards Boeing in a military procurement contract to build a fleet of aerial refuelling tankers.

“There will be a reaction,” Karel De Gucht, the Commissioner, said. “My impression is that Paris is not pleased.” This month, Northrop Grumman, the partner of EADS in the bid for the Pentagon aerial tanker contract, withdrew its bid, complaining that the terms of the tender clearly favoured the American aerospace giant. The Commissioner pointed to the annual trade gap between Europe and the US in military hardware, with Europe purchasing €5.5 billion (£5 billion) of equipment from America, while its imports from the EU totalled only €2.2 billion.

“If you had added the [tanker] deal, it would have been a balanced situation,” Mr De Gucht said, calling for a more unified European approach to military procurement. “One of the possible answers is to adopt EU standards for military equipment.”
Good grief. Is adopting a more unified approach to military procurement via the creation of EU standards a possible non-tariff barrier being thrown in the way of America? The rest of the article discusses how long-awaited decisions on the Boeing-Airbus countersuits at the WTO will be coming down the pike soon, so stay tuned.

Google China Still Censored, Blamed for Reneging

♠ Posted by Emmanuel in , at 3/23/2010 08:57:00 AM
So what has Google accomplished with its semi-audacious stunt of "uncensoring" search results in mainland China? Out of curiosity, I've asked some friends in China if they've experienced any changes there and they say "not really." Agence-France Presse has similar impressions regarding search results:
Chinese access to websites covering sensitive topics such as Tibet have remained blocked despite an announcement from Google that it had stopped censoring its Chinese-language search engine. The web giant announced today that it had stopped filtering results on China-based and was redirecting mainland Chinese users to an uncensored site in Hong Kong - effectively closing down the mainland site.

Searches of subjects like "Falun Gong" and "June 4" on Tuesday - referring to the Tiananmen pro-democracy protests in 1989 - from mainland computers ended with the message: "Internet Explorer cannot display the web page". Even when a list of results came up for other sensitive key words such as "Tibet riot" and "Amnesty International" not all of the sites could be opened and the response "cannot display the website" again was seen.

Websites of organisations deemed by China's ruling Communist Party to be hostile to the nation - such as the Epoch Times, Peacehall and groups supporting the Tiananmen Democracy Movement - were all still blocked. And popular websites such as Google's video-sharing service YouTube also continued to be inaccessible from Beijing despite the re-routing through

The same searches on from computers in Hong Kong displayed full results - suggesting that China was itself using its "Great Firewall" of web censorship to keep users from having unfettered internet access.
Meanwhile, Chinese official media is accusing Google of reneging on promises it made to gain access to the Chinese market:
Google has "violated its written promise" and is "totally wrong" by stopping censoring its Chinese language searching results and blaming China for alleged hacker attacks, a government official said early Tuesday morning. The official in charge of the Internet bureau under the State Council Information Office made the comments about two hours after the online search service provider announced it has stopped censoring its Chinese-language search engine and is redirecting Chinese mainland users to a site in Hong Kong.

"Google has violated its written promise it made when entering the Chinese market by stopping filtering its searching service and blaming China in insinuation for alleged hacker attacks," said the official. "This is totally wrong. We're uncompromisingly opposed to the politicization of commercial issues, and express our discontent and indignation to Google for its unreasonable accusations and conducts," the official said.

The Information Office official said relevant departments of the Chinese government talked with Google twice at its requests, on Jan. 29 and Feb. 25 respectively, to hear the company's real intentions and demonstrate sincerity of the government. "We made patient and meticulous explanations on the questions Google raised (in the talks), ...telling it we would still welcome its operation and development in China if it was willing to abide by Chinese laws, while it would be its own affairs if it was determined to withdraw its service," the official said. "Foreign companies must abide by Chinese laws and regulations when they operate in China, " the official said.
Google China, we hardly knew ye.

Geez, Even Reaganites Want to Bash China

♠ Posted by Emmanuel in , at 3/23/2010 12:13:00 AM
It may be a sign of the times when old Reagan administration hands anxiously await their turn to cast stones at China. To be sure, Reagan wasn't as much a pro-trade stalwart as many remember him to be. Still, by current standards, Obamanite dithering on trade contrasts sharply with the Reaganite example. I thus read with great interest Robert Lighthizer pillorying both the WTO Doha Development Agenda and China for not granting, get this, enough concessions to make a deal "good enough" for American interests. Since when did the world's most powerful nation start grovelling about the unfairness of the trading system it created? The larger answer, of course, is "lost hegemony," but I will save that for another time.

Whatever happened to good ol' "comparative advantage"? I honestly can't tell this Republican from your standard-issue Democrat when it comes to trade. Here are the main points from Lighthizer's NYT op-ed:
As trade ministers have chattered on for nearly a decade, the world has changed. The notion that we should adjust global trading rules to help the rest of the world compete with the West has become outdated. Since 2001, the West has suffered its worst economic crisis since the Great Depression. In the United States, we have seen our financial services sector — which accounted for 40 percent of American corporate profits in 2007 — implode. Since the start of these talks, we have run up a cumulative trade deficit with China of more than $1.5 trillion, and have lost some four million manufacturing jobs.

Meanwhile, the World Bank projects that developing countries will enjoy 5.2 percent growth in 2010 and 5.8 percent growth in 2011 — while “high income” countries will experience growth rates of only 1.8 percent in 2010 and 2.3 percent in 2011. Under these circumstances, why would we continue with the same tired agenda for trade negotiations? It is like trying to improve standard-definition TV in the world of high-def.

Unfortunately, President Obama is reading from the same nine-year-old talking points as the trade bureaucrats. On March 11, in comments echoing part of his State of the Union address, he re-committed his administration to working “towards an ambitious and balanced Doha agreement.” That is a mistake. The president should push for a new United States trade agenda suitable for a world in which the Western countries are losing ground while “developing” countries like China, Brazil and India are surging.

Any serious multilateral trade talks should address four main topics:

THE UNITED STATES-CHINA TRADE BALANCE Our trade deficit with China grew from $103 billion in 2002 (the first full year after China joined the W.T.O.) to $268 billion in 2008 — an increase of 160 percent in only seven years. Although the recession has forced American consumers to reduce their purchases of Chinese imports, our 2009 trade deficit with China was still almost $227 billion. This imbalance has become a symbol of American decline and poisoned many Americans’ view of free trade. By some estimates, China’s aggressive exports and reluctance on imports could lower global world production by 1.4 percent and cost Americans 1.4 million jobs.

CURRENCY MANIPULATION China has stockpiled some $2.4 trillion in foreign currency reserves in its determination to keep the yuan from rising — as market forces would normally require — and maintain its trade advantage. No wonder almost a third of the House demanded last week that the Obama administration take some action. Many experts believe that the artificially low interest rates caused by Chinese currency manipulation contributed directly to the real estate bubbles in the West that exploded with such disastrous results.

UNFAIR TAX RULES The United States relies primarily on income taxes to pay for government services, while most of our trading partners depend on value-added taxes on purchases. Under current W.T.O. rules, countries with value-added taxes are allowed to give tax rebates to their companies on exported goods, and to impose those taxes on imports. Companies in nations with income taxes, however, are not allowed similar treatment. Thus an American product shipped to France is effectively taxed twice, while a French product can be sent here effectively tax-free. The consequences are serious: a 2004 analysis concluded that this practice cost American exporters more than $100 billion per year.

REGULATORY DISPARITIES Foreign companies often benefit from relatively weak labor and environmental rules that enable them to operate with significantly lower costs than their United States competitors. This leaves American manufacturers with three options: lose market share, cut profit margins or move abroad. Indeed, one of the main concerns about proposed climate change legislation is that such laws would result in significant carbon “leakage,” as carbon-emitting manufacturers flee to countries with lower standards. If we want an efficient global market, we should be more serious about making sure companies in all nations play by the same rules.

Ending the Doha round will not be easy. Many trade bureaucrats, both here and abroad, will cling to the mantra that doing so would hurt free trade. But Americans would be receptive to an argument focused on their concerns: in a 2008 Rasmussen poll, 73 percent of respondents said that a free-trade agreement had had a negative effect on their families, while only 14 percent said they had benefited from such an agreement. And while other countries would undoubtedly resist changing a global trading system that puts Americans at a severe disadvantage, we have enormous leverage, in the form of the world’s largest market. We should use that leverage.

Finally, what do we have to lose? The Doha talks are never going to significantly help Americans anyway. One benefit of the recession and the pause in the Doha talks is that President Obama has a rare opportunity to re-focus our trade agenda. He should take it.
There are many readily identifiable flaws here, not the least cloaking the use of "enormous leverage" in the guise of multilateralism. Moreover, Lighthizer doesn't seem to have any qualms about introducing backdoor protectionism in the form of labour and environmental standards Democrats are so fond of into multilateral fora. If labour and environmental standards were the same in the rest of the world as the US, then wouldn't much of it be "developed" in the first place?

Once more, my final say is this: Many Americans like Lighthizer think they can cow the rest of the world into accepting US wishes. On the other hand, many developing countries are tired of high-handed American rhetoric on matters of economic governance when the US is such a dreadful example replete with double standards. Plus, who in their right mind would like to be just like America--a has-been nation whose better days are well behind it? My guess is that US power is sufficiently reduced as to make it more likely that any American attempt to force its will onto others will just reveal the emperor's new clothes.

I guess there's only one way to find out who rules the roost in the world economy, and on that the protectionists and I probably agree. It's always struck me as odd that the USA #1 blogging crowd led by Drezner doesn't want this to happen, but still. Whether it's the US or China that casts the first stone, it doesn't really matter as global economic imbalances will more likely be forced into an overdue reckoning by a short, sharp, shock than a continuation of the present situation where we all pretend everything is hunky-dory when it clearly isn't. As before, just cut the crap and start fighting already. If it requires whipping guys like Lighthizer into a frenzy, then so be it.

UPDATE: Lighthizer's profile may shed light on the turn he's taken since the days of Reagan as he's been a trade lawyer representing any number of trade-phobic interests. Still, I believe that sentiment Stateside is definitely souring:
Robert E. Lighthizer is the leader of the firm’s International Trade Department. He divides his time between traditional trade litigation, policy advice and legislative initiatives. His clients include large U.S. corporations and coalitions. He represents heavy manufacturing, agricultural and high-tech companies, as well as financial services institutions. He has been lead counsel in scores of antidumping and countervailing duty cases during the past several years and is currently active in numerous pending cases and administrative reviews. In recent years he also has focused on market-opening trade actions on behalf of U.S. companies seeking access to foreign markets. He is equally at ease devising strategies for and dealing with executive departments and congressional committees.