Posts of July 2013

'Like Saudi Leaving OPEC': Russians Ditch Potash Cartel

♠ Posted by Emmanuel in Agriculture,Russia at 7/31/2013 02:26:00 PM

Potash Corp of Saskatchewan Share Price

Fertilizer may not be the sexiest of industries, but make no mistake: Given its widespread agricultural applications which span virtually the entire globe, nearly every nation with such industries need the stuff. In the past few years, a duopoly has emerged between Russian/Belarusian firms on one hand and US/Canadian firms on the other represented by BPC and Canoptex, respectively. Until recently, both were actually successful in cornering the global market and jacking up prices. However, with the Russian BPC partner Uralkali defecting from its Belarusian one, commodity markets for potash have been rocked hard:

Russia's Uralkali quit one of the world's two big potash cartels on Tuesday, heralding a price war for the key crop nutrient and pummeling the shares of companies that produce it. The break-up of the Belarusian Potash Company (BPC), a joint venture with Belarussian partner Belaruskali, leaves North America's Canpotex as the dominant potash export venture.

It could lead to cancellations of projects by rivals as the industry weighs the effect of lower prices, but may bring better deals for farmers. "It is as if Saudi Arabia decided to leave OPEC - oil prices would fall immediately," said Dmitry Ryzhkov, equity sales trader at Renaissance Capital. In negotiations with big buyers like India and China, BPC and Canpotex usually settled for deals at similar prices, and they had no qualms about turning off the supply spigot when the buyers looked likely to gain the upper hand. Together the two accounted for almost 70 percent of global potash sales.

Divvy up two-thirds of the global market and the world's your oyster. Alike in a "stag hunt" game, though, the defection of a major player from the cartelized duopoly is wreaking havoc on the expected profits of the would-be profiteers as the fallout from Russia reaches Canada and the US:

That clubby system is now under threat after a falling out between BPC's members. Uralkali promised to bolster production and sales, even as potash prices are already in decline. U.S.-listed shares of the Canpotex owners - Potash Corp of Saskatchewan, Mosaic Co and Agrium Inc - plummeted, cutting their market value by nearly $12 billion by early afternoon [see chart above]. In the last few years, BPC and Canpotex raised potash prices well above their production cost, a senior official at a major Indian potash firm said, asking not to be identified because of the sensitivity of the matter.

There are broader geopolitical questions at stake here since Russia and Belarus are (were?) the closest of authoritarian allies. Does this indicate a wider split between the two nations? With potash being the main export earner of Belarus, this move by a Russian company to dissolve their cartel and try to make it up through volume will surely have negative effects on the Belarusians as prices normalize. Belarus has experienced economic difficulties in recent years, and this event is not a good omen:

Potash is the main export product for Belarus, Russia's staunchest ally among the former Soviet republics whose economy is stagnating after a financial crisis in 2011. Belaruskali was a partner to Uralkali for eight years in BPC, which once held 43 percent of the global potash export market. Uralkali was at one point rumoured to be interested in buying a stake in Belaruskali - which now looks unlikely.

Their joint venture started to crumble this year as rumors emerged that both were selling potash outside the partnership. The two firms previously denied those rumors. Uralkali said it pulled out because Belaruskali had made key fertilizer ingredient deliveries outside the partnership.

Me? I'm rather glad about the welfare effects of potash prices dropping worldwide for LDC farmers who've been victimized by the major producers' shenanigans these past few years. While the $20B potash market will not entirely be "freely traded" for the first time in eight years as some headlines suggest--there's the matter of the other cartel--things are definitely headed in a better direction.

Car Talk: Detroit is Dead; Long Live S Carolina!

♠ Posted by Emmanuel in Supply Chain at 7/30/2013 10:56:00 AM

Despite giving up its distinction of being the world's largest car market to China in 2009, the United States remains comfortably in second place. What's more, the average price of a passenger vehicle sold in the US remains higher than one sold in China for the simple reason that US income per capita remains higher despite income being on an opposite, downward trend. We've talked a lot about cars recently, from the demise of Detroit to its replacement by (foreign-owned and non-unionized) plants in the American South alike in Alabama. Today, let's turn our attention to another rising Southern state.

It is well known that BMW chose to site in South Carolina while deciding where to put an American factory to meet US demand (especially for super-sized SUVs popular with these super-sized people). It was only natural that key suppliers would follow BMW Stateside, such as the legendary German transmission manufacturer ZF. Despite not being widely known outside of car cognoscenti circles, its reputation for cutting-edge engineering is unimpeachable. Their latest product blows the mind: a nine-speed automatic transmission boasting superior acceleration, imperceptible shifts, superior economy and smaller size.Truly, the best of all worlds is possible. Nine speeds! When I was growing up, the move from 3- to 4-speed autos was regarded as a technical achievement, but nowadays those are primitive. As it so happens, South Carolina will once more benefit from ZF marketing more of these super transmissions to German and other automakers operating Stateside. From the press blurb:

ZF Friedrichshafen AG has opened a new plant for automatic passenger car transmissions in the U.S. Located in South Carolina, ZF Transmissions Gray Court, LLC is the manufacturing site of the 8-speed automatic transmission, which is already successful in the market, as well as the world’s first 9-speed automatic transmission [...] About 1.2 million transmissions are expected to be produced at this plant annually; this includes 400 000 8-speed and 800 000 9-speed automatic transmissions. The new plant expands the existing capacities at the Saarbrücken location to produce 8-speed automatic transmissions.

Confidence is such that ZF's largest investment ever regardless of country just so happens to be FDI in America:

So far, ZF has invested around EUR 300 million in building the new location, which is around 130 kilometers north-west of Columbia, the capital of South Carolina. A total of approx. EUR 450 million is planned for investment into the new location. “It is the largest single investment in the almost century-long history of ZF,” emphasized Dr. Konstantin Sauer, ZF Board Member responsible for finance and the North American region. This reflects ZF’s vision of great potential for the region and the company’s desire to continue expanding its successful course with adequate production capacities.

And here's an important point for ZF locating in South Carolina aside from all those incentives offered by the state. Unlike bombed-out and deserted Detroit, opportunities for hiring and training workers in German-style apprenticeships is much greater:

ZF chose South Carolina because numerous automobile manufacturers and suppliers are already located in the area, and the local government provided a number of great opportunities to build a new facility. In addition, Piedmont Technical College established a new facility near ZF to aid in the training of a skilled workforce. With Clemson University in the area, it provides a great opportunity to recruit future engineers. Furthermore, the new ZF U.S. employees have been trained in the subtleties of transmission assembly by experienced, specialized ZF workers from Saarbrücken via the “Buddy Program”. The employees, trained internally through this program, now work as multipliers in Gray Court and are passing on their knowledge to the subsequently recruited U.S. colleagues.

There's no substitute for on the job training for cutting-edge production Meanwhile, I eagerly await the 12-speed automatic transmission. [German] progress marches on.

Belo Monte, Brazil's "Ethical Megadam"

♠ Posted by Emmanuel in Energy,Latin America at 7/29/2013 12:44:00 PM

Here at the IPE Zone, we are true aficionados of oxymoronic terms, many of them wrought by those famously tongue-twisted Yanquis. For starters, try "financial stability," "Internet freedom," and my current favourite, "American savings." Today, though, we have some other (Latin) Americans engaging in these entertaining if oftentimes hypocritical exercises in linguistic flights of fancy. Still, it's perhaps a worthwhile attempt to reduce the rest of the world's gaping Orwellian doublespeak deficit with the United States.

With the cessation of large development lenders funding them (at least until recently), we are supposedly in the post-megadam age. Having courted endless controversy with them, the likes of the World Bank and various regional lenders funding these projects had become negligible. The list of no-no's is familiar and almost endless: forced relocation of indigenous communities, flooding of culturally important low-lying areas, disruption of wildlife migration patterns, destruction of natural ecosystems, etc.

It was thus with some interest that I read Brazil has not weaned itself off the megadam habit. In terms of power generation, it supposedly has 2 out of 5 of the world's largest--Itiapu and Tucurui. So awed was American composer Philip Glass by Itaipu--then the world's largest before being overtaken by China's Three Gorges Dam--that he was even inspired to compose a symphony about it. Now that development lenders have been cowed by activists, Brazil is following China's example in putting up its dam by itself (and dam[n] what the critics say).

On second thought, let me take that back. For, Brazil is styling Belo Monte, which is expected to be the world's third largest dam upon completion after Three Gorges and Itaipu, as an "ethical megadam." But first, a little about its controversial history:

Belo Monte has had a long, turbulent history of clashes between national interest and local concerns. When dam plans were first made public in 1987, they met strong public backlash and were eventually shelved. When the government revived the project in 2002, high-profile protestors such as James Cameron led the international community to halt what the opposition considered an environmentally destructive and inefficient project. Despite their efforts, today Belo Monte is becoming a reality. Opposing groups hold that Belo Monte is being constructed illegally. Local indigenous populations claim that they were never properly consulted about Belo Monte, a violation of the Brazilian constitution.

The legality of granting an installation license was also called into question when two biannual inspections by IBAMA, Brazil’s equivalent of the Environmental Protection Agency, found that Norte Energia had fulfilled only five of the 40 installation conditions. This included things such as proper disposal of felled forest, installation of basic infrastructure in impacted communities, and compensation of people facing displacement. Currently, over 50 lawsuits at all levels of court charge Belo Monte’s planners and builders with environmental and human rights violations.

Ooh, James Cameron...celebrity protesters! Hence Brazil's efforts to promote the proverbial "inclusion"--with a boatload of cash to buy acquiescence besides:

The scale of protests has created more public input on regional development, for example. A presidential decree in 2010 established a 30-member steering committee to control Norte Energia’s $233 million investment in the region. The 30 officers represent every walk of life affected by the dam, including fishermen, indigenous tribes, rural farmers, labor unions, entrepreneurs, and environmentalists, as well as every branch of government – federal, state, and municipal. Every month the committee meets for two days, hashing out the best plans for developing the Xingu. The public is encouraged to participate, making for a dynamic democratic process. “This [space] has a life of its own,” says Peter Klein, a PhD candidate in sociology at Brown University who has spent time in the communities around the dam. The conversation taking place "is constantly changing and constantly being created … it’s one of a kind," he says.

This type of community inclusion and oversight has never been attempted at a dam site in Brazil before. Environmental concerns are also being addressed in new ways. In response to environmental and indigenous outcry, Belo Monte was redesigned as a run-of-the-river dam, an emerging hydropower alternative that uses the flow of the river to generate power, eschewing large reservoirs. Scaled down from a six-dam reservoir complex, Belo Monte will now only flood 516 square km of rainforest instead of the original 1,225 square km. As a result, the dam will emit less greenhouse gases and avoid construction on indigenous lands.

Somehow I am not entirely convinced. You have to admit though that $233 million is a lot of moolah to try and buy off the protesters with--even if it's less than the forthcoming revenues from "Avatar 2" or suchlike. They must be thankful the stakeholders in question aren't A-list Hollywood directors.

Private Banking: When Will Asia Overtake Europe?

♠ Posted by Emmanuel in Southeast Asia at 7/25/2013 09:38:00 AM

As more fortunes are being built with each passing day in Asia than in Europe, it is inevitable that the former will overtake the latter as the world's top region for HNWI (high net worth individual) accounts. Remember, the Forbes Rich List already had more Asian billionaires than European ones last year. Yet for historical reasons, it appears that assets under management (AUM) in Europe exceed those in Asia still. To be sure, there is some way to go before Singapore overtakes Switzerland, or Hong Kong overtakes London in country-country / city-city comparisons. From the Financial Times:

Singapore could yet overtake Switzerland as the word’s biggest wealth management centre, marking another landmark shift in the economic balance of power between east and west. Yesterday, the MAS [Monetary Authority of Singapore] revealed that the value of assets under management in the city-state had jumped by 22 per cent last year to a record S$1.63tn ($1.29tn), from S$1.34tn a year previously.

Earlier in the month, consultancy PwC predicted that Singapore could dislodge Switzerland as early as 2015. According to the Swiss Bankers Association, which draws on data from the SNB, there were SFr2.8tn ($2.99tn) of foreign assets under management in Switzerland in 2012. The reasons for such a projection are clear. For some years, and especially since the 2008 crisis, more wealth has been created in Asia, and faster, than in any other region at any other time.

The "supercharger" for Singapore is apparently rapid wealth creation in Southeast Asia which it is a part of. Rather than leave their money at home with the accompanying political and financial risks--remember the Asian financial crisis--many in the region prefer the relative "safe haven" that is Singapore with its sounder and better-regulated financial services industry:

While North America and Japan continue to be home to huge amounts of private wealth, Asia is accumulating wealth faster because it is being created by a new generation of entrepreneurs in the rapidly growing economies of southeast Asia...Singapore has also made a virtue of its position in the centre of southeast Asia to attract wealth from families in Indonesia, Malaysia, Thailand and the Philippines.

And what I find particularly amusing is that there is a lack of (qualified, private) bankers in Asia, when most Europeans probably believe that their countries would be better off with rather fewer of them:

In addition, banks say that they struggle with a shortage of qualified “relationship managers” to attract and keep clients. That job is made harder by the fact that wealthy entrepreneurs in southeast Asia typically like to hand their business to more than one bank at a time. Unlike in Europe, loyalty is low. UBS has tackled this by training its own managers at a local “wealth management campus”, housed in former British colonial-era military headquarters. But, for many players that lack the scale of UBS, they are forced to deal with significant costs.

It's a whole 'nother ball game in Asia as the Yanks say: the names may be familiar--UBS, Credit Suisse, etc.--but the rules of play are certainly different. Perhaps the mobility of the industry's big names to Southeast Asia is a reason why Switzerland itself is not too concerned about the Orient's rise.

PRC TV Drama Viewership: The Int'l Pecking Order

♠ Posted by Emmanuel in China,Entertainment at 7/22/2013 03:09:00 AM

Popular culture has a way of reflecting preferences and biases, especially when taken from an international perspective. Commercial implications aside, the WSJ's China Real Time blog has an interesting feature on TV drama viewership habits in China, with British dramas such as Downton Abbey gaining an increasingly large audience in the mainland. As in Western nations, certain demographics are more sought after than others. Their measure? The number of threads started on discussion boards per various demographics:

Comparing levels of discussion on different social media sites, a recent study from entertainment research company Entgroup (in Chinese) found that British dramas were catching on among China’s wealthy and well-educated youth. While virtually unknown on the Chinese Internet a few years ago, British dramas now account for more than 9% of foreign TV discussion across Chinese social media sites, compared to around 28% for Korean soap operas, according to the study.

On websites that cater more exclusively to white collar workers and college students, the number for British shows jumps to more than 13%, versus less than 1% for Korean soaps, according to the Entgroup report, which found that more than half of those who followed British dramas held at least a bachelor’s degree.

Using this measure, there appears to be a "snob appeal" phenomenon at work:

That puts British shows at the top an increasingly snobbish pop-cultural hierarchy in China — described by local media as the “disdain chain.” (鄙视链 in Chinese) – in which British drama fans look down on fans of American shows, who themselves look down on Korean soap fans, who in turn look down on fans of domestic dramas.

So we have a viewership hierarchy that goes: Great Britain > United States > South Korea > China.

What determines this hierarchy is certainly up for debate: Is it storyline quality? If you watch some of the Korean dramas, the writing is really superb even if they are not watched so much outside Asian cultures given plotlines that revolve around filial piety alien to Westerners. Is it a historical continuation of an inferiority complex? The British forced China to open its markets and took over Hong Kong besides, while China successfully invaded Korea more than once. Is it production values? American dramas remain the slickest, while Korean ones are not that far behind.

My preferred explanation--and one that is consistent with the logic of snob appeal--is that cultural distance determines this hierarchy. Being steeped in historical periods, British dramas require more background knowledge about others' histories than more readily accessible US/Korean/Chinese fare that typically have contemporary settings. Add the harder-to-understand British accents to the Olde Worlde settings and you have all the ingredients of snob appeal.

In Detroit We Glimpse America's Future

♠ Posted by Emmanuel in Americana,Cheneynomics at 7/20/2013 03:50:00 PM

Just a city boy, born and raised in south Detroit
He took the midnight train goin' anywhere...

I have been to Detroit and it is not an experience I fondly remember. So, I do not question the motives of the protagonist in the Journey song above in leaving. Still, it was with some sadness that I heard this once-great American city declare bankruptcy only yesterday. In many respects it was the conclusion of the inevitable: years of outmigration and industrial decay had taken their toll on municipal finances. Contrast its decrepit state today with what it used to be. Despite the occasionally dodgy (non-)narrative, the documentary Detropia does a fine job of visually contrasting the city in its heyday with its present state. (PBS also has a neat photo essay on its faded grandeur.)

From a broader perspective, Detroit is also a microcosm of what ails America. Some will of course say that it's inevitable for unattractive cities to decay as these people forever on the move seek better fortunes elsewhere--such as in the non-unionized South. However, I would argue that removing yourself from Detroit only rewinds the clock by a few years from an inescapable American fate. That is, you can take the "midnight train" elsewhere, but you'll still end up in the US of A with all its woes. Let us now count the ways "Detroitification" is a portent for this country's future...

1. Decrepit infrastructure is a nationwide phenomenon - I enjoy video games featuring post-apocalyptic wasteland,and one of the best remains Fallout 3. (With one of its expansion packs already set in Pittsburgh, perhaps Fallout 4 should be set in Detroit instead of Washington, DC.) In real life, though, crumbling infrastructure is not isolated to Detroit but is a daily reality for most Americans. The American Society of Civil Engineers give the nation an overall mark of D+ [!], which is an unbelievably crappy mark in this age of grade inflation merited only by the most apathetic of students. The ASCE further estimates that the United States needs $3.6 trillion in infrastructure spending to maintain it in acceptable standards.

Given the current economic state of America--where economic growth is an oxymoron--it is hard to imagine massive federal or state outlays on the scale civil engineers believe is necessary. So, no matter how bad things are now, they are only likely to get worse. And, if everything everywhere is plain awful, there will not be an easy solution alike taking the "midnight train" out of Detroit when every other town looks like Dodge as the Yanks say.

2. Unfunded (and unpayable) liabilities keep mounting - One of the things which surely led Detroit to fess up to its fiscal depravity was a recent requirement for state and local governments to recognize unfunded liabilities, Depending on the assumptions you make--setting discount rates, life expectancies and so forth--local governments have a shortfall in what they owe pensioners ranging somewhere between $1 and $4 trillion. That sounds pretty dire already, but consider that the United States at the federal level has at least $61.9 trillion in unfunded liabilities by one fairly conservative estimate. Again, based on different assumptions, a former Fed governor put these at $85.6 trillion--in 2008.

Assuming no major tax increases or spending cuts are forthcoming--a most non-heroic assumption given the current state of American political paralysis--the only real cures at the federal level are effectively reneging on unfunded liabilities under some flimsy legal cover (unlike municipalities, the US government like all others cannot declare bankruptcy though) or eating away at them via inflation. Either way, the reputational damage will be huge.

It is also worth pointing out that there is this American proclivity for dumping unfunded liabilities on Uncle Sam. (As it turns out, estimates of corporate unfunded liabilities are also fairly huge.) The "GM solution" for dealing with them has of course been the government bailout, which leaves America on the hook for even more than already massive federal liabilities. Already there are suggestions that Barack Obama should fund another federal rescue a la GM for Detroit.
* * *

There will be much interest in seeing whether another federal rescue--this time of a city instead of a company--is forthcoming. Doing so would risk further bloating federal liabilities as all similarly troubled companies and municipalities resort to US government succour in the future. It will not be a pretty picture if and when the federal government is treated as a limitless dumping ground for corporate and municipal IOUs that cannot be honoured.

At present, nation-states do not have to report unfunded liabilities as corporations and now US local governments do. Still, who do they think they're fooling? Like America itself, Detroit has seen better days. The question for the rest of us is how to free ourselves of US-style misery before it drags us down to its level. Are we really as foolish as Detroit's lenders to believe that the US represents a good credit risk? Its problems are similar and differ only in terms of magnitude, where national problems are obviously far greater.

Not even RoboCop will save Detroit now...or the rest of America from "Detroitification."

UPDATE: French photographers Yves Marchand and Romain Meffre have an extensive photo collection entitled "The Ruins of Detroit."

When the IMF [Hearts] Capital Controls: PRC Case

♠ Posted by Emmanuel at 7/19/2013 05:21:00 PM

My, my, how things have changed. As late as September 1997--with the Asian financial crisis already underway--the IMF was still arguing for amending its Articles of Agreement to include regulatory powers over opening up members' capital accounts:

Last September [1997] in Hong Kong, the Interim Committee of the IMF’s Board of Governors agreed that it was "time to add a new chapter to the Bretton Woods agreement." Thus, it invited the IMF’s Executive Board to complete work on a proposed amendment of the Fund’s Articles of Agreement to make the liberalization of capital movements one of the purposes of the Fund and extend its jurisdiction over capital movements.

Understandably, though, the aforementioned financial crisis hardened attitudes of developing countries to the suggestion of wealthier countries' representatives on the IMF's Board of Governors to further liberalization. As "sour grapes" perhaps, the IMF then declared this goal infeasible because of poor economic governance on the part of developing countries:

Indeed, the problem in Asia was not that countries had opened their capital accounts. In fact, the economies in the region with the most open capital accounts—Hong Kong and Singapore—have been among the most successful in contending with the crisis. Nor was the problem so much one of the speed of reform: the countries most affected by the crisis— Korea, Indonesia, and Thailand—had taken quite distinct approaches to capital account liberalization, which in some cases had been rather gradual. Rather, their difficulties arose from the macroeconomic environment and institutional setting in which they opened their capital accounts and the way in which measures to open their capital accounts were sequenced with other reforms.

This idea--that Asian financial crisis demonstrated that premature liberalization of capital controls would expose a country's underdeveloped financial system to outsized risks--remains the IMF conventional wisdom. Nevermind that the IMF's (Western) leadership was obviously gung-ho on forcing other countries to open their capital accounts by enshrining this objective in IMF strictures during the onset of crisis, but we are where we are.

The irony is that, for a number of years now, the IMF has been discouraging China from liberalizing its capital account due to its perceived lack of financial reform necessary to obtain the benefits of such liberalization. You know what these include: market-determined exchange and interest rates are near the top of the list. In their absence, China could suffer from catastrophic capital outflows. With the PRC vowing to make major moves towards capital account liberalization in the near future, the IMF is now sounding yet more alarm bells, the contrast to its nonchalance pre-Asian financial crisis is striking:

While Chinese leaders are putting final touches on a plan to allow capital to flow more freely into and out of China, the International Monetary Fund has warned that such changes could lead to a massive exodus of money from the country if not handled properly.

Foreign investors have long clamored for greater access to China's financial markets, in part to benefit from future yuan appreciation. The IMF says financial-sector liberalization, especially for interest rates and currency, is necessary to keep China growing at a healthy clip over the coming decades. But it is wary about whether China is ready for significant capital-account liberalization.

According to IMF calculations, a speedy liberalization of cross-border capital movements could produce over several years net outflows from China equal to as much as 15% of the country's GDP, roughly $1.35 trillion [my emphasis]. Of that sum, the Chinese would send as much as $2.25 trillion overseas, while foreigners would invest $900 billion in China.

"The estimates assume a fairly large 'Big Bang' style adjustment," says Markus Rodlauer, the IMF's China mission chief. "We wouldn't advise doing this in one step. We'd advise continuing with a gradual approach." There is no indication Beijing plans a big-bang approach to liberalization. Though it isn't yet clear how it will proceed.

Given the IMF's track record on Asia, I wouldn't bet against them making a Type I error here by saying there is something amiss when there really isn't with regard to China. Prior to the Asian financial crisis, it was the other way around (Type II error)--they did not warn something was amiss when there was. (I'll leave it to you if premature regional capital account liberalization was due to IMF instigation. I believe so.)

Nevertheless, knowing the IMF's fallibility on such matters, I guess there's only way to find out Hu's right and Hu's wrong. Thankfully, the IMF cannot meddle with Chinese policy in this respect when and if it decides to open the floodgates to a yet-unspecified extent.

UPDATE: We now receive news that China will allow its banks to set interest rates below PBoC guidance. I guess that's a step towards interest rate liberalization so desired by IMFers, no matter how minor.

Badluck Shinawatra's Failed Global Thai Rice Empire

♠ Posted by Emmanuel in Agriculture,Southeast Asia at 7/17/2013 03:11:00 PM

I suppose that Thai PM Yingluck Shinawatra has received as much grief over her first name as Nigerian President Goodluck Jonathan. But oh, Yingluck, how your name has proven to be unworthy of your fate as of late! Let me explain...

Since her election, Yingluck Shinawatra has continued to court populist support from more receptive constituencies of her brother, the controversial exile Thaksin--folks in rural areas as opposed to the snooty Bangkok city slickers who have long been the most vicious Shinawatra haters. Given the need to enlist their support, what better way is there than to guarantee that the government would purchase agricultural produce at well above market prices? Thinking that they were smarter than your average global rice producer, Yingluck's advisers came up with a grand strategy whose logic went like this:

Thailand is the world's largest rice exporter, therefore its price-setting power is unmatched;
To court rural votes, the government would subsidize above-market purchases of rice;
Thailand would then hoard rice by not exporting it;
By withholding Thai rice from world markets, global prices commanded would increase significantly;
When a certain price level was reached, the Thai government would then be able to recoup earlier losses from buying farmers' rice at above-market prices (and even make a tidy profit).

As it turns out, Thailand vastly overestimated its influence on global prices since the slack was easily picked up by other producers. Further, India ruined Thailand's grand plans by re-entering the global market just as Thailand was hatching its plans. So, the Thai government is now sitting on a huge unrealized loss in the form of an estimated 17 million tonnes worth of rice reserves purchased at above-market cost:

The plan was simple: Thailand’s government would buy rice from local farmers at a generous price, some 50 percent above the market rates. It would hold the rice in warehouses, cutting off exports to the rest of the world. The sudden shortage from the world’s heavyweight champion of rice exports would cause a spike in global prices. Then, payday for the government as it swung open the warehouse doors and sold its stockpile to the world at a premium. Farmers win, the government wins, foreign consumers lose, but then they don’t vote in Thai elections, so what do they matter? The plan was a political no-brainer, except for one problem: Thailand’s government underestimated how quickly the market can kick back at any would-be puppeteers...

And it was Thailand’s great misfortune that exactly one week after it slashed exports, India lifted its export ban, flooding the market with 10 millions tons of rice. Rather than orchestrate a price hike, Thailand helplessly stood by as global prices sank.

All credit to a rating agency (yes, it is surprising) for noting the true cost of Thai shenanigans and calling them out. But still, the farmers have seemingly gotten used to selling at these ridiculously high prices so there's little turning back:

For a year, the government has shied away from public scrutiny of the program, but Moody’s, the credit rating agency, blew the lid off of the story last month when it warned that the program could swallow up an astonishing 8 percent of the national budget, forcing the agency to reevaluate the government’s credit rating. For a government already mired in debt, the warning shot from Moody’s “crystallized their thinking,” Dawe says.

Yingluck, whose Pheu Thai Party draws its support from the country’s rural northeast, has said the program has achieved its goal of boosting incomes for poor, rural farmers. She has now urged them to now give her administration the flexibility to modify the program. In a public address on a local television series, “Yingluck Government Meets the People,” she said the program would remain in place, and that the government would continue to purchase rice, but it may have to reduce its purchase price to make the program sustainable. As for the Moody’s report, she has promised to rebut the findings with a government investigation into the true cost of the program.

Thai politics remain as contentious as ever, with Thaksinite "red shirts" alike sister Yingluck & company still slugging it out with royalist "yellow shirts." I shudder to think what the backlash from the opposition will be once those losses are realized given that Yingluck vows the programme will continue. I suppose Thais have gotten used to perpetual regime change by now, so what else is new?

Markets are already on alert that Thai rice dumping on world markets may occur as soon as next week in preparation for the government having to buy the upcoming harvest:

Bangkok’s rice buying policy, designed to boost farmers’ incomes, has led to a stockpile of 17m-18m tonnes. With the new crop set to be harvested in October, the Thai government needs to dispose of its existing inventory to raise money for the new purchases.

Rice market experts are on high alert as Bangkok could issue tenders for about 350,000 tonnes of its rice as early as next week. Concepción Calpe, senior rice analyst at the Food and Agriculture Organisation in Rome, warns the effects on world prices could be serious if Thailand floods the market with its rice. “It could potentially have catastrophic consequences,” she said.

At any rate, damage control is already underway to minimize the financial fallout--including a mooted ratings downgrade.

7/31 UPDATE: Thai authorities tried selling some of the stockpiles this week, but bidders are few since there are doubts about the quality of rice that has been stored for quite some time now:

The commerce ministry said Monday that the government's first sale from its stockpile this year is likely to move less than 100,000 tons, compared with a goal of 350,000 tons, as most offers to buy were too low. Traders said market prices are about $480 a ton, while bids for government sales are coming in at about $380 a ton because of concerns over quality.

Meet America's #2 Jetliner Company...Airbus S.A.S.

♠ Posted by Emmanuel in Americana,Europe,FDI,Labor at 7/16/2013 09:57:00 AM

Mas oui! There's an old joke that the best car made in America is the (Ohio-made) Honda Accord. Similarly, we may soon hear that the best jetliner made in America is the (Alabama-made) Airbus A320. Following the lead of Mercedes-Benz, the multinational European concern has decided to set up shop in the land of the Crimson Tide to meet US demand for its bread-and-butter Boeing 737 competitor. The post below talks about how the Chinese have been continually frozen out of investing in the US over increasingly dubious "national security" grounds. Yes, there remains that brouhaha over it being forced out of a contract to make the US Air Force's next generation air tankers, but that was not really over "national security" but over "buy American" objections. The Europeans being Europeans, there are no such concerns with Airbus investment in the commercial sector despite its long-running WTO dispute with Boeing. Speaking of whom, unfavourable attention regarding the 787 Dreamliner's design faults may, by default, work in the European consortium's favour insofar as there are only two real players in this industry at present.

There is now an MSN contribution from Allan McArtor, chairman of Airbus Americas, about the consortium's selection of Mobile, Alabama as the site of forthcoming A320 manufacture after originally selecting it to build the shelved tankers:

It's the same with our relationships with the people of Alabama. When our team first started looking for an industrial base to manufacture a refueling tanker for the U.S. Air Force, hundreds of cities stepped forward. After an exhaustive evaluation process, Mobile emerged as the obvious choice.

Sure, it met our technical requirements. But so did others. A differentiator for Alabama was the unity and supportive purpose shown by every entity in the state supporting Mobile. City, state and federal representatives (Republicans and Democrats alike) came together with one goal: Show the Airbus team that Alabama would be its partner for the long term.

They spoke with one voice, which impressed our selection committees. And when the U.S. tanker project was lost, instead of hanging their heads and walking away, they said, "What else could we do?" It was indicative of the good relationship Airbus has with Mobile and Alabama—instead of giving up, we found another way to make it work. As a result, Alabama got an even better, larger-impact project.

Infrastructure was another key factor: The site was perfect, with an airport and ocean port, and adequate land at Brookley Aeroplex. Workforce was also vital. We were encouraged by the auto industry's success in Alabama because its manufacturing aspect is a trained skill similar to that of aircraft assembly.

All's well and good, but an unspoken reason here regarding human capital is that foreign investors prefer investing in the American South--the Sun Belt--is because of its largely non-unionized workforce compared to the Rust Belt. I was struck how Alabama's officialdom explicitly mentions this selling point that Mercedes-Benz there has little use for unions:

Alabama's Mercedes-Benz plant, the subject of an active organizing campaign by the United Auto Workers, doesn't need a union, Gov. Robert Bentley said. The governor was at the Tuscaloosa County plant last week to participate in a sendoff for its president and chief executive, Markus Schaefer, who is taking an executive role at the automaker's headquarters in Stuttgart, Germany.
After the event, Bentley said the plant is a close-knit organization that works well together as a team."I really don't believe they have any need for unionization and an intermediary between them and management," he said in an interview in response to a reporter's question about the UAW campaign. "I don't think it's going to happen."

The governor added that Alabama's status as a right-to-work state helps him recruit new business. Bentley's comments are the most pointed public ones to date from a state official about the UAW's latest campaign at the Mercedes plant, which launched Alabama's auto industry in the 1990s. Previous organizing attempts there have failed.

Having escaped the clutches of European unions, you'd hardly think they'd be enthusiastic about setting up shop in America only to find that it too is thick with them. Hence the continuing popularity of Southern right-to-work states; keep the unionized whingers in the Midwest (and Western Europe too for that matter).

Latest US China-Bashing: Hog Farm Protectionism

♠ Posted by Emmanuel in China,FDI,Trade at 7/13/2013 03:48:00 PM

I am a true connoisseur of all sorts of protectionism: the more obscure and inscrutable the justifications for it, the more I savour the hypocrisy. Free trade? Get outta here! In recent years, the United States has served up some of the more ridiculous examples of what is, at heart, unvarnished racism on the part of American lawmakers. (You don't see them block European foreign investment on a regular basis, do you?) When the purchase of minor American producer Unocal by Chinese SOE CNOOC, "national security" concerns were raised. There was also the matter of 3Leaf, a minor player in the server market, being subject to Committee on Foreign Investment in the US (CFIUS) harassment over interest from Huawei. Nevermind that 3Leaf was a marginal player in the server market in the same way UNOCAL was in energy, but rampant and rather irrational fears of Chinese snooping on US data were in play. After the Snowden incident, Xinhua correctly described the utter hypocrisy behind American data security concerns with the US being "the biggest villain of our age" in cyber-snooping activities.

More recently, we have had the latest twist on American "national security" concerns regarding the Chinese. It doesn't really matter that the suitor in question isn't an SOE; I guess Yanks believe once you've seen one of them you've seen them all. I am thus wryly amused by this latest form of "hog farm protectionism" as China's Shuanghui International attempts to purchase America's Smithfield International.

A Senate committee on Wednesday criticized a major merger of U.S. and Chinese agricultural interests, saying the combination of two major pork producers could have negative impacts on U.S. food and economic security.

The hearing before the Senate Committee on Agriculture, Nutrition & Forestry was exploring the impact of a proposed merger between Smithfield Foods, the leading pork producer in the U.S., and Shuanghui, China’s largest pork producer.

The $7.1 billion acquisition is the largest purchase of a U.S. company by Chinese business interests. The merger sparked skepticism from committee members who were concerned about Smithfield’s ability to maintain compliance with food-safety standards expected in the U.S.

Read more here: http://www.mcclatchydc.com/2013/07/10/196351/senate-committee-wary-of-us-china.html#.UeFeNKxjuSo#storylink=cpy

A former US trade official, Robert Herztein, added fuel to the fire by tortuously describing this "hog farm protectionism" in terms of the Chinese unleashing tainted food products on an unaware American public:

It could, of course, be a stretch to conclude that Chinese ownership of Smithfield, the world’s largest pork producer, might impair U.S. national security...Reports of egregious food adulteration in China suggest a culture where companies have little concern for safety and health standards.

While there has been an episode of a supplier providing tainted meat to Shuanghui, it has since increased its monitoring of its supply chain. (I invite Shuanghui's critics to find the smoking gun that indicates Shuanghui promoted the use of chemicals hazardous to human health instead of implying this to be the case. Moreover, Herzstein conveniently ignores that Smithfield has been scaling back use of the controversial drug ractopamine in order to meet Chinese demands to be free of this feed additive. In the last year, Smithfield has lessened ractopamine usage in half--presumably in expectation of a China deal:

This March, China began requiring third-party verification that U.S. pork products were ractopamine-free. Russia, the sixth-largest buyer of U.S. pork, had blocked imports of U.S. meat using ractopamine weeks before...The measures highlighted a sharp contrast with the U.S. Food and Drug Administration, which approved ractopamine for use in commercially-raised swine in 1999 and stands by that decision, saying its safety has been corroborated four times. It is used in more than half of the U.S. hog herd, analysts estimate.

By early May [2013], Smithfield already had moved two of its plants - including Tar Heel, North Carolina, the world's largest pork-processing facility - off ractopamine. When the third plant converts on June 1, "over 50 percent of our operations will have no ractopamine as part of their feed rations," CEO Pope said.

Shuanghui also has its own rather self-serving FAQ, but nevermind: I am honestly at a loss as to why Americans always ascribe the worst to the Chinese. Given such intense scrutiny, how likely would it be that they would (a) divert fuel supplies meant for the US to China, (b) build routers to deliberately spy on American communications or (c) risk a mass poisoning of American pork consumers? It makes no sense. Not only would they lock out other Chinese firms from investing in the US for years and years, but the ferocious backlash would ensure that their days of doing business Stateside are numbered. Forced divestiture or a massive public boycott; the result would be the same.

As a more pragmatic, less ideological sort, here's my suggestion to the Yanks: Why don't you let the Chinese invest and see what happens instead of pigging out on racist protectionism all the time? I truly doubt that egregious violations of public safety on a massive scale would occur, Snowden-style. For aforementioned reasons, getting rid of "national security" transgressors would be so very easy and set an example besides.

Is the 2013 US Farm Bill "WTO Legal"? Nope

♠ Posted by Emmanuel in Agriculture,Americana,Trade at 7/11/2013 09:52:00 AM

Ho hum--another US Farm Bill, another round of fat agricultural subsidies for American producers that hurt farmers in the developing world. Just as Brazil successfully sued the US for its cotton subsidies a couple of years back [DS 267], the 2013 Farm Bill under consideration does not do away with actionable subsidies in the form of price supports if crop prices drop significantly. Senator Pat Roberts (R-Kansas) recognizes this, although it should be pointed out that his state is not a major producer of the most-contested crops--rice and peanuts:

I also have longstanding WTO concerns. The United States lost the cotton WTO case to Brazil in part because of the decoupled target price program. It simply isn’t right to force that same risk onto other commodities when we already know the potential pitfalls. The WTO stove is hot. We should not reach out to touch it again.

The domestic debate over the inclusion of food stamps aside that is still holding up the Farm Bill, the bone of contention with America's international critics remains. Sure they may have renamed the price supports, but in this case it truly is a case of old wine in new bottles:

Both bills retain a counter-cyclical price program that makes a farm payment when prices for covered crops decline below certain levels.It is renamed Adverse Market Payments or AMP in S. 954 and Price Loss Coverage or PLC in H.R. 1947. To better protect producers in a market downturn, the price guarantees (called “reference prices” in both bills) that determine payment levels are set in statute and increased relative to current parameters (called “target prices”).

To be fair, there was some effort made last year in the Senate to remove such subsidies on all but the most sensitive agricultural products, but it all came to naught and either Senate of House versions will now retain them:

The [stillborn] 2012 Senate-passed farm bill (S. 3240) did not provide for a counter-cyclical price program, and an amendment to eliminate AMP for crops other than rice and peanuts failed during committee mark-up of S. 954. S. 954 continues current policy by making payments on 85% of historical plantings (or “base acres”), a provision designed to minimize the program’s effect on planting decisions. In contrast, the House bill pays on 85% of planted acreage to better align payments with producer risk.

All in all, the US is still living dangerously with regard to WTO-actionable subsidies. It remains a case of putting a large "KICK ME IN THE WTO" sign on yourself and hoping you avoid a swift one in the hiney.

Given how the US further disadvantages already disadvantaged farmers in the developing world while claiming it's "free trade," somebody should really make a WTO case against it soon.

Forcing Argentines to Accept Evita Peron Bank Notes

♠ Posted by Emmanuel in Latin America at 7/10/2013 11:16:00 AM

It won't be easy--you'll think it strange--when I try to explain why so many Argentinians refuse to honour Evita Peron bank notes issued a year ago. Over half a century after her early death, she remains a polarizing figure in Argentina. Peronists including the present leader of Argentina (and the person largely responsible for these bank notes), Cristina Fernandez, style Evita as a champion of the poor and women's rights besides. Others think she was simply an opportunist who was at the right place at the right time. Obviously, being associated with General Juan Peron is tough. American media labelled him a dictator; others played up his fascist sympathies.

Regardless, can you imagine what sort of controversy would occur if, say, George W. Bush's image graced the $500 bill sixty years from now? While he has his admirers--he was voted US president twice, was he not--his detractors are legion. People have long memories, and many have still not gotten over Evita in Argentina it seems:

Argentina's central bank has warned businesses to stop rejecting commemorative bank notes bearing the image of Eva Peron to mark the 60th anniversary of the iconic former first lady's death. President Cristina Fernandez, whose fiery speaking style often prompts comparisons with that of “Evita”, unveiled the 100 peso bills emblazoned with her profile a year ago.

But publicity surrounding the newly-minted notes was not wide enough to overcome doubts from small businesses where cashiers have rejected the bills for being unfamiliar. So the central bank this week launched a hotline for people to report those who refuse to accept the bills, threatening to fine those who keep turning them away.

The yuck factor remains strong after all these years among some:

Some cashiers have snubbed the Evita notes because they did not recognize them as legal tender. Others turned their backs on the bills for political reasons. “There are always people who don't like Fernandez and Evita and just don't want to touch them,” said a cash register worker in Buenos Aires, declining to give his name.

And no, I would probably not take your George W. Bush bank notes if I'm still around sixty years from now.

The Futility of Democracy, Egypt Edition

♠ Posted by Emmanuel in Middle East at 7/09/2013 02:16:00 PM

The miserable plight of Egypt post-Mubarak points out shortfalls of mindlessly championing the virtues of "democracy." Americans, already despised in the Middle East for their "elections are great...unless you elect Hamas" hypocrisy, are particularly guilty in this latest fiasco. Worthy of especially harsh condemnation is equating electoral democracy as the be-all and end-all of it.

For Western observers, the heart of the matter is that Islamic fundamentalism remains the most organized and potent political force in Egypt. While Mubarak's suppression of the Muslim Brotherhood and Salafists may not have been "democratic," the source of his brand of "extremism" was in keeping secularism in place as per Western desires. Without such restraints, it was only natural that fundamentalists would make their influence felt. After a short period of military-appointed caretaker rule, they won parliamentary elections. They won the presidential elections. They led in drafting an Islamic-tinged constitution.

Meanwhile, the military--previous guarantor of secularism--has demonstrated in the past week that it retains an itchy trigger finger when fundamentalists are in sight--whether they were isolated from politics in the Mubarak era or its central players during the current era. I thus remain wary of the prescribed cure this time around: After a short period of military-appointed caretaker rule, hold parliamentary elections. Hold presidential elections. Draft a new constitution. Is this the new spin cycle?

Egypt's interim rulers issued a faster than expected timetable for elections to try to drag the country out of crisis, a day after 51 people were killed when troops fired on a crowd supporting ousted President Mohamed Mursi. The streets of Cairo were quiet on Tuesday but Mursi's Muslim Brotherhood movement called for more protests later in the day, raising the risk of further violence. Under pressure to restore democracy quickly, Adli Mansour, the judge named head of state by the army when it brought down Mursi last week, decreed overnight that a parliamentary vote would be held in about six months. That would be followed by a presidential election.

I needn't point out the obvious: Short of banning Islamic fundamentalists from participating in yet more elections, the results of such exercises will likely resemble previous ones insofar as the opposition (if you can even speak of one) remains disorganized and fragmented. With the Muslim Brotherhood so aggrieved, will it not redouble its efforts at the ballot box? Or, won't the more politically astute Salafists pick up the slack that the Brothers may leave? Either way, the end result should look the same: Islamic fundamentalism leaving its mark on Egyptian government.

Truly, it is a lose-lose situation: Banning Islamic fundamentalists hardly seems a democratic option, but it's the best one if the intent is to shield Egypt from further ravages of their brand of politics. Meanwhile, allowing fundamentalists to run unimpeded will most likely result in yet another reality-challenged leadership configuration. It certainly makes any number of white people wish those Egyptian youths hadn't bothered with protesting against Mubarak in the first place since many of the things they desired that he provided for a long time--political stability, secularism, and a willing ally--no longer are there.

In closing, I have some pointed questions for the democratic fundamentalists in America and elsewhere:

Why advocate holding elections when you do not recognize the legitimate winners--regardless of their identities?
If the military simply carried out the "will of the people" protesting in the millions on Egyptian streets by overthrowing the democratically-elected Morsi regime, then why bother with elections and just have mob rule through selection processes determined by the thronging masses? [Call it the "Free Barabbas!" school of democracy.]

Egyptian democracy is a joke. I honestly do not think that doing the same things over and over again--quickie elections and the rest of it--until you finally end up with a suitably pliant and passably palatable regime is the answer. Egyptians have tired of being pawns in regional power politics when it is they who suffer the most in this shambolic process.

UPDATE: Is Saudi Arabia giving these bankrupts $5 B really to demonstrate how overthrowing authoritarian regimes (like Saudi's own) doesn't necessarily promote better outcomes? Perhaps I didn't need convincing.

Tennis Diplomacy? ROC-PRC Wimbledon Doubles Champs

♠ Posted by Emmanuel in China,Sports at 7/07/2013 06:41:00 PM

As a casual tennis fan, I usually don't watch the doubles matches at Wimbledon. I guess it was by luck that I caught the women's doubles final after watching France's Marion Bartoli maul Germany's Sabine Lisicki. As with most doubles events--even the finals--the crowd at Centre Court was sparse. However, the result was remarkable from an International Relations standpoint insofar as the identities of the winning players went: Hsieh-Hsu Wei of Taiwan and Peng Shuai of China soundly defeated Australian duo Ashleigh Barty and Casey Dellacqua 7-6 6-1. Despite it being 3 AM in Taipei and Beijing, you can rest assured that hordes of tennis fans there burnt the midnight oil!

How many times have you seen the ROC and PRC laud their joint achievements? Few and far between since cooperation is sparse. Remember that regular flights between the two did not exist until 2003. The officials news agencies are ecstatic. The only difference is that China Daily (Xinhua) names Peng before Hsieh, while Focus Taiwan (Central News Agency or CNA) names Hsieh before Peng!

Unlike most top women's players, neither is a product of the Nick Bolletieri's tennis academy in Florida. The TV commentator--American champion Tracy Austin--kept mentioning their "unorthodox" style of play. As a former doubles champion at Wilmbledon, she should know a thing or two about the subject. I particularly enjoyed it when she singled out a shot made by Hsieh that resembled her fanning out the racket. Austin implied that she'd never seen tennis pros make such a shot, but any table tennis fan would have recognized it as a topspin drive!

There's even a reunification story to match that concerning their non-Western ("unorthodox") approach to playing doubles tennis:

The pair, who are both 27, played a few tournaments together as amateurs but ended their partnership after turning pro. After a seven-year hiatus, Hsieh asked Peng at the 2008 US Open if she would be up for a renewed association. The duo reunited by the end of that year 2008 and won their first 11 matches, claiming titles in Bali and Sydney.

Both Peng and Hsieh play two-handed shots on both sides, like Marion Bartoli, who won the Wimbledon singles title on Saturday.

"It's probably the first time (two-handed players) win the singles and the doubles," Peng said. Peng and Hsieh said they opted for this unorthodox style of play because they were too small to hold their rackets with one hand when they were kids.

Yes, it's largely a non-story in the rest of the world since few watch doubles. But in Taiwan and China, it's big news that's been splashed on the front pages of either country. From sporting events, thawing of international relations may spring forth: Four decades ago ping-pong diplomacy heralded normalization of China-US ties when an American athlete mistakenly boarded the bus of Chinese players What more the symbolism of an ROC-PRC partnership to win one of the world's most prestigious sporting events?

After all, a doubles champion at Wimbledon is every much a winner of the event as that of the singles titles. That both China's won it is, well, unprecedented and laden with symbolism for what may lie ahead.

WSJ: What Egypt Needs is Its Pinochet

♠ Posted by Emmanuel in Middle East at 7/05/2013 05:39:00 PM

I do not need convincing that Hosni Mubarak was a better compromise for an Egyptian leader than any of the buffoons that followed him. Witness the total bankruptcy of ideas demonstrated by the Muslim Brotherhood "leadership." While I was amused by their total lack of political sophistication and economic understanding--remember those interest- and conditionality-free IMF loans--things have been quite miserable for the Egyptian people.

What remedy, then, do the WSJ op-ed pages offer post-Mursi? Assuming that military rule is inevitable in such a tumultuous nation, they are looking for [gasp!] an Egyptian General Augusto Pinochet:

Egyptians would be lucky if their new ruling generals turn out to be in the mold of Chile's Augusto Pinochet, who took power amid chaos but hired free-market reformers and midwifed a transition to democracy. If General Sisi merely tries to restore the old Mubarak order, he will eventually suffer Mr. Morsi's fate.

I cannot make up something so distasteful or positively portray such an appalling figure: Isn't Pinochet the same guy who divided a nation over extrajudicial executions, disappearances and torture?

A Chilean commission investigating human rights abuses under the former military leader Gen Augusto Pinochet says there are many more victims than previously documented. Commission director Maria Luisa Sepulveda said they had identified another 9,800 people who had been held as political prisoners and tortured. The new figures bring the total of recognised victims to 40,018.

I fail to see what's so "democratic" about these practices, but then again, the WSJ op-ed folks--erstwhile champions of democracy--have been longstanding fans of Guantanamo Bay as a shining American example of it.

By drawing a comparison with Pinochet, what we can deduce is that the WSJ op-ed writers believe Mubarak didn't kill and maim enough to be a successful leader. What further "insights" can be gleaned I cannot fathom since those pages remain one of America's few remaining bastions of neoconservatism--an obscure faith if there ever was one.

Agents of Imperialism? Bolivia Expelled USAID

♠ Posted by Emmanuel in Development,Internet Governance,Latin America at 7/05/2013 08:52:00 AM

I have become captivated by the twists and turns of the Edward Snowden real-life spy caper. While the original accusation that the US was using its advantageous position in the Internet infrastructure to spy on its own citizens and its allies was expected--absolute power corrupts absolutely--its unfolding implications are far more interesting. Call it Frederick Forsyth...on crack. The IPE implications I've covered in some detail, from Ecuador unilaterally disavowing trade preferences given to it by the US to European lawmakers deliberating on whether to delay the start of EU-US FTA negotiations. The latest word is that EC President Manuel Barroso wants negotiations to occur alongside investigations of American spying. The sideshow is at least as interesting: I enjoy the (calculated) titillation as that master of self-promotion, former Russian spy Anna Chapman, has offered to marry spyboy / boytoy [!?] Edward Snowden and thus grant him rights to remain in Russia.

Back in Latin America, though, we recently had this misadventure of Bolivian President Evo Morales being harassed on his flight home from Russia by European nations France, Italy, Portugal and Spain--allegedly on suspicion that the Latin leftist may have been flying Snowden to Bolivian asylum. Just as spying has created a US-EU row, so too has perceived maltreatment of a Latin leader occasioned (surprise!) yet another continental conflict between the US and the Latin left. Where's Che Guevara when you need him--or Fidel Castro for that matter?

The story above pointed out something I was not previously aware of, though. Did you know that Bolivia expelled the US Agency for International Development (USAID) just last month? Just a short time ago Russia did the same as it was wary of the agency's "democracy promotion" agenda when it ought to have stuck with the task of development instead. Besides, who the heck needs all of that tied aid, anyway? At any rate, different country...same result. From Missus Clinton's favourite media outlet:

Bolivian president Evo Morales has expelled the US development agency from his country for allegedly seeking to undermine his leftist government. Morales claimed on Wednesday that the USAID is involved with "alleged political interference in peasant unions and other social organisations." He made the announcement before a crowd outside the presidential palace during a May Day rally. "Never again, never again USAID, who manipulate and use our leaders, our colleagues with hand-outs," Morales said in announcing the expulsion.

Given the United States' history of interfering in Latin America, you'd think USAID would have been more circumspect about "democracy promotion": fiddling with organized groups and so on. As with many things involving these parties, there is no real moral to the story, US protestations notwithstanding. Americans can be meddlesome hypocrites, while Latin blowhards like Morales blame the Latin left's repeated failures to lift their countries out of poverty on US interference. Same old, same old.

There are no protagonists here, but it does make you wonder if Morales has set himself up for additional harassment by expelling USAID.

With (Spying) Friends Like US, Who Needs US-EU FTA?

♠ Posted by Emmanuel in Europe,Internet Governance,Trade at 7/02/2013 12:02:00 PM

It seems the Yanks have gotten themselves into yet another fine mess with their Internet Unfreedom spying activities. [Hello NSA lackeys, I hope you're enjoying yourselves reading this post in between surfing porn sites.] Over the weekend, Der Spiegel added fuel to the fire over the US National Security Agency spying on Internet communications of American friends and foes alike. (Do the Yanks treat them all that differently?) Alike most everyone else, the Germans have come under massive surveillance:

The documents prove that Germany played a central role in the NSA's global surveillance network -- and how the Germans have also become targets of US attacks. Each month, the US intelligence service saves data from around half a billion communications connections from Germany.

However, linguistic ties being paramount, there is a set of favoured Anglophone nations who are exempt from a thorough covert investigation from the American spooks:

No one is safe from this mass spying -- at least almost no one. Only one handpicked group of nations is excluded -- countries that the NSA has defined as close friends, or "2nd party," as one internal document indicates. They include the UK, Australia, Canada and New Zealand. A document classified as "top secret" states that, "The NSA does NOT target its 2nd party partners, nor request that 2nd parties do anything that is inherently illegal for NSA to do."

The allegations right before US-EU FTA are scheduled to start. European responses thus differ based on the amount of spying each nation is purportedly subject to. The French are obviously up in arms over the idea that they should ink a free trade agreement with those stealing sensitive information from Europeans:

The spying allegations come just days before trade negotiations between the U.S. and the EU are scheduled to start on July 8. But [French President Francois] Hollande raised doubts about the talks, saying there should be no negotiations with the U.S. on any matter until it guarantees that it is not spying on its European allies. "We cannot have any negotiations or deals in any domain unless we've gotten these guarantees for France, and that goes for the EU as well," Mr. Hollande said.

However, the Brits who have not been targeted as much are more relaxed about the issue, saying the trade talks should continue anyway according to a UK spokesperson. Still, particularly alarming to the Europeans are claims that spying on the European Council building is widespread and unabated in their own lands:

The EU security experts managed to pinpoint the [spying] line's exact location -- a building complex separated from the rest of the headquarters. From the street, it looks like a flat-roofed building with a brick facade and a large antenna on top. The structure is separated from the street by a high fence and a privacy shield, with security cameras placed all around. NATO telecommunications experts -- and a whole troop of NSA agents -- work inside. Within the intelligence community, this place is known as a sort of European headquarters for the NSA.

A review of calls made to the remote servicing line showed that it was reached several times from exactly this NATO complex -- with potentially serious consequences. Every EU member state has rooms at the Justus Lipsius building for use by ministers, complete with telephone and Internet connections.

Ultimately, if serious objections are raised to the US-EU FTA over American espionage, they will likely come from the European Parliament instead of the European Council despite the latter coming under more direct American data attacks. Post-Lisbon Agenda, the European Parliament has expanded powers to turn down free trade deals--especially over human rights violations such as violating the privacy of Europeans. While the Americans can probably gain the acquiescence of European leaders through the time-tested way of buying them off in any number of ways, such a trick is harder to do with the more heterogeneous and newly assertive European Parliament given its increased discretion.

The EU Parliament used to be pretty lame, but it has since gained authority in certain respects. Unfortunately for the Yanks, these include again basing FTAs on human rights criteria. Martin Schulz, the current [German Social Democrat] president of that body, is certainly annoyed by the spying:

The head of the European Parliament has demanded that the United States provide full clarification over a report disclosed by American whistleblower Edward Snowden alleging that Washington spied on EU offices. Martin Schulz said on Saturday that the revelation would have severe impacts on the ties between the EU and the US if proven true.

“On behalf of the European Parliament, I demand full clarification and require further information speedily from the US authorities with regard to these allegations,” Schulz stated.

At the very least, expect greater European Parliament scrutiny of these so-called "friends" of theirs in trade negotiations. After all, with lying and spying friends like the US, who needs enemies?

UPDATE: France is suggesting that the US be given a "time out" by delaying US-EU FTA negotiations by two weeks. However, the European Commission does not agree. As I said earlier, the most likely source of disapproval will come from the European Parliament. That will happen later on assuming that the US and EU come up with something they believe domestic audiences shall sign up to.