Lamy Cries Uncle on Doha, Will Disputes Increase?

♠ Posted by Emmanuel in , at 12/13/2008 09:10:00 AM
Once again, I cannot claim special insights into the nature of trade negotiations by being "prescient" time and time again: I simply say nothing will happen and wait for it to become reality. I need not dwell excessively on the reasons for this latest fiasco as I've already pointed out the causes as to why Pascal Lamy won't be calling a ministerial before year-end. These include (1) North-South divisions over so-called "sectoral" deals; (2) American indifference to the negotiations by administrations present and future; and (3) Indian dissatisfaction with safeguard mechanisms being offered should cutting agricultural tariffs lead to a flood of imports that hurt subsistence farmers. On the third point, India's Business Standard has a bit more:
On the contentious issue of SSMs [Special Safeguard Mechanisms], the WTO paper has proposed a three tiered structure, which specifies triggers that will allow a country to impose different levels of additional import duties. India’s position is that if imports of farm goods increase between 10 per cent and 15 per cent in any year, it should have freedom to levy the rate of additional import duty, whereas tiered system stipulates what level of import duty can be imposed for different level[s] of import surges.
Anyway, the abovementioned posts should suffice if you're trying to piece together the reasons for this most recent failure. Our good man Jonathan Lynn at Reuters offers some of the possible implications for world trade, most of which aren't good from a liberal perspective. In all honesty, he's even more pessimistic than yours truly:

WORLD TRADE AND THE GLOBAL ECONOMY
  • Many WTO members have the possibility of unilaterally raising tariffs and subsidies from current lower levels to what was negotiated in the last trade round, signed in 1994, or when they joined the WTO. [Applied rates, those actually being applied to imports, may approach bound rates, those negotiated in the previous rounds that specify the maximum allowable tariff rates which may be used.]
  • Some have already started to do that and, as jobs come under pressure, more will follow. So even if an all-out trade war is unlikely, a protectionist rise in tariffs is on the cards. Doing nothing now could see the clock turn back 10 or 15 years.
  • Global trade flows are already slowing and on some counts shrinking, along with the world economy. They are likely to contract next year, squeezed further by the tariff moves.
  • Some countries will seek more bilateral or regional free-trade deals to replace Doha -- but those often divert trade rather than creating new flows.
  • Trade contraction is bad news for all economies. For the United States exports have been one of the few bright spots. China and other Asian countries seeking to modernise through export-led growth risk social and political turmoil if their economies slow.
  • One response to slowing exports could be competitive devaluations, especially by developing countries.
THE DOHA ROUND
  • A meeting of ministers on Doha has now been put back well into 2009. An idea of next steps should come from the WTO's General Council on Dec. 18-19.
  • One option would be for countries to impose a moratorium on tariff and subsidy increases for the duration of the recession as they continue to work on the Doha round.
  • But reaching a deal next year will be much harder than now -- the momentum and goodwill that built up around the July meeting will be dissipated, and the state of the world economy will be much less favourable.
  • In contrast to July, when there was no blame game, recriminations are likely this time. Since the main stumbling blocks touched on key U.S. interests, the United States can expect to be in the firing line when the finger-pointing begins. That will sour the atmosphere for future talks.
  • The new U.S. administration of President-elect Barack Obama taking office on Jan. 20 may take time to get to Doha as it deals with other priorities. And then it may want to revisit what has already been tentatively negotiated.
  • A new EU Commission in 2009 and national elections in India in the first half of next year will affect decision-making in two of the biggest trade players.
  • More voices will be raised saying the world has changed since the Doha round was launched in the Qatari capital in 2001. They will argue the round should be dropped and new negotiations should start reflecting new priorities such as the economic crisis, food security and the climate change.
THE WTO
  • Expect a big increase in trade disputes at the WTO as members turn to litigation from the negotiating table.
  • Many of these will turn on "dumping" -- where imports are sold for less than they cost at home. China could be a particular target for the United States and EU members.
  • The WTO is also going to have to spend more time ruling on the legality of subsidies, as countries bail out industrial sectors hurt by the crisis
  • But the credibility of the body that umpires world trade will suffer. The vast majority of its 153 members wanted a deal, and leaders of the G20 rich and emerging nations had called for an outline agreement by the end of this year
GLOBAL GOVERNANCE
  • As a result the G20 has failed the first big test of its ambition to create a new global governance system replacing the G7 rich countries. The WTO decision comes less than a month after the G20 called for a trade deal this year.
  • If the United States takes much of the blame for the failure, it will increase pressure on Obama to prove his multilateral credentials.
Wow, this is a comprehensive if rather bleak list. The only thing I wish to add is that this most recent collapse should raise legitimate questions concerning Lamy running again for the post of WTO Director-General. Given that breakdowns keep occurring along North-South lines, isn't it time for a solid contender for the post from the Global South step up to the plate?
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Brazil's Amorim: Obama Must Save Doha Round

♠ Posted by Emmanuel in ,, at 12/12/2008 08:24:00 AM
The election of Barack Obama seems to have rekindled hope in America not just among Americans but the international community at large: there can be no better testament to the strength of his political marketing. With trade diplomats currently spinning their wheels in Geneva, ace Reuters trade reporter Jonathan Lynn brings us yet another story of Obamamania. Better yet, this nascent Obama messianic complex is all the rage in a way that didn't really hold for incumbent WTO Director-General Pascal Lamy [OK, I am mock serious, but look here]. Celso Amorim, Brazil's foreign minister, is now asking Obama to quit his Highlander schtick, i.e. "there can only be one President at a time," and become more involved in current negotiations.

From Amorim's point of view, this is certainly a valid request. What point is there in attempting to negotiate a global deal now when the world's largest trading nation will have a significant change of leadership in a matter of days? A sign of Obama committing to the Doha talks would represent positive encouragement that trade diplomats are't just talking hot air in Geneva. Being without fast track authority, Obama will have to shepherd any Doha deal through Congress (pun intended). All the same, I gather from the endless press articles about him that Obama has a measured and deliberate leadership style. Remember also that Obama has yet to appoint a US Trade Representative. As I suggested earlier, despite previous tough talk on China, his actual trade policies are still in a state of flux especially in the days leading up to his ascension accession to office. That's all there is to it, methinks: Obama wants to keep his political capital intact until assuming office. Once there, he will be better placed to determine how to deploy it. It's good politics for him, but perhaps not so good for the current talks. There is a point beating around the Bush:
Faltering talks at the World Trade Organization (WTO) need a positive signal from U.S. President-elect Barack Obama [part the Potomac maybe?] to save them from failure, Brazil's foreign minister, Celso Amorim, said on Thursday. Such a move would be justified because a successful Doha round deal at the WTO would offer one solution to the global financial crisis that originated in the United States, he told reporters after meeting WTO Director-General Pascal Lamy.

"I think an encouragement from the incoming administration would be a very positive signal and would be probably what we need in this very last stretch," Amorim said. Calling on Obama to show leadership and not hide behind formalities as the outgoing administration of George W. Bush handles the Doha talks, Amorim said it was up to Washington to show the maximum flexibility to help resolve the crisis. Leaders of the G20 rich and emerging nations called last month for an outline Doha deal by the end of this year to help counter the financial crisis by warding off protectionism.

Trade ministers came close in July to a deal in the Doha talks, launched in the Qatari capital in late 2001 to free up world trade. But that meeting collapsed over differences between the United States and India and China over a proposed safeguard to help farmers in poor countries withstand surges in imports. Despite progress in technical negotiations since then, the safeguard remains a particular stumbling block. So too do proposals to create duty-free zones in industries like chemicals, and the level of trade-distorting U.S. subsidies for cotton.

Lamy is holding intense consultations with ministers from the United States and other major trading powers to see if enough progress can be made on these three issues to call ministers to Geneva to seek a breakthrough. Amorim said that as far as he could judge, Lamy had not yet made up his mind. WTO spokesman Keith Rockwell said Lamy would decide on Friday whether to call a ministerial meeting next week, after a further round of calls with the major players.

But Amorim, one of the keenest proponents of a deal because of Brazil's huge food exports, said not to call a meeting would be just as much a failure as to hold one that then collapsed. And he said even if the prospects for a meeting did not look good, the dynamics would be different when ministers were negotiating in the public spotlight. "Sometimes we are here as if we were in a private game, trying to seek advantage for one or for the other, forgetting that what happens here is of fundamental importance for the world at large," he said.
The Jakarta Post--you know, published in Indonesia where Obama once lived--also has more detail on the issues at hand, especially the cuts in agricultural subsidies the US and EU are willing to make. BTW, our local bakery is serving rather popular cupcakes with Obama icing. Even in the grips of a putative global recession, this Obama guy is a marketing miracle I tell you. Now, how can I get hold of some Obama nativity figurines?
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Will "Sectorals" Sink WTO Doha Deal Prospects?

♠ Posted by Emmanuel in , at 12/11/2008 06:13:00 PM
The latest reports out of Geneva suggest that the United States, the country that has pushed the trade agenda most strongly in the postwar period, may now be the main obstacle to the completion of the Doha Round. While completing Doha at this time was bound to be difficult anyway provided Bush's lame duck status, America's insistence on adding so-called "sectoral" deals has made matters more complicated. What exactly are these sectoral deals? The International Centre for Trade and Sustainable Development (ICTSD) has this summary for us. It's taken from the ICTSD's weekly trade newsletter, Bridges, which I recommend all those interested in trade read regularly:
The NAMA [non-agricultural market access] issue on which the WTO chief will be looking for “positive results” will be “sectorals,” the term used by trade negotiators to refer to proposed initiatives under which participating countries would deeply cut tariffs on entire industrial sectors, such as chemicals, forest products, or industrial machinery.

To compensate for what they see as weak levels of overall tariff reduction for developing countries, industrialised nations like the US, Canada, and Japan want to be sure that major markets like China, Brazil, and India will participate in some sectoral liberalisation initiatives.

The developing countries counter that the negotiating mandate specifies that participation in such initiatives is non-mandatory. They are willing to commit to no more than a discussion of how a sectoral might work in terms of product coverage, exceptions, and future tariff levels for developed and developing countries.

Proposals to create duty-free zones in some industries like chemicals may turn out to be the final stumbling block for efforts to reach a breakthrough in the World Trade Organisation's (WTO) trade-opening Doha round.
The important thing to note is that sectorals are by and large industrialized country add-ons to the ongoing Doha negotiations--they are ancillary and by no means central to its agenda. While there are some LDCs pushing for them too, developed nations have been most adamant in calling for them. Here is a comprehensive list of these sectorals. The second important bit of jargon, "critical mass," refers to the percentage of world trade conducted among countries assenting to a sectoral deal required to knock tariffs down to a given level. For instance, under Norway's proposal, countries voluntarily joining a sectoral deal on fish and fish products would apply a tariff rate of zero if countries representing more than 90% of the global trade in these products sign on.

The key word is voluntary. What large, fast-growing LDCs dislike is that they are effectively being pushed into joining sectoral deals due to their size. Sceptics would say it's blackmail: "if you don't sign on, then you can kiss Doha goodbye." Like in the days of yore, negotiations are bogging down along North-South divides. As mentioned in my earlier post, American lobbying interests make an appearance. US senators are keen on major developing economies like China, India, and Brazil opening up by a significant degree to receive their consent. In other words, they need "something to show for" to their constituents. And, of course, the manufacturing lobby is one these key constituents. From Reuters:
If, as some economists say, the WTO is not about free trade but disciplined protection, then efforts to eliminate tariffs in some industry sectors could prove a step too far, at least now. What is already clear is that the sectorals have taken on a totemic significance, encapsulating both the desire of the United States for a Doha deal that cracks open new markets for its exporters and the determination of big emerging countries not to have an unfair deal foisted on them by the rich.

"Unless they're handled very, very carefully -- and it doesn't seem to me that they are being handled with the care necessary to secure a broad-ranging agreement -- then these are just adding an unnecessary complication to the negotiations at the moment," said Simon Evenett, professor of international trade at St. Gallen University.

For economists like Evenett, pushing for more market opening is yesterday's battle. As the global economy slows down or heads into recession, negotiators should concentrate on locking in present levels of trade liberalisation in a new deal. Otherwise countries will be able to use the leeway that current agreements give them to raise tariffs and subsidies up to the ceilings set by the previous agreement signed in 1994.

On the other hand, the worst economic crisis in a generation may change the calculations of some countries which were willing to let Doha die rather than sign up to sectorals. News of a shock 2.2 percent fall in Chinese exports in November, the biggest drop for nearly 10 years, could well make the leadership of China's export-driven economy reassess the value of a deal that promises to keep export markets open.

WTO Director-General Pascal Lamy and ministers from the United States and other trading powers, including the three emerging giants India, China and Brazil, are in intensive consultations this week to resolve outstanding issues in the seven-year-old Doha round -- sector deals foremost among them.

On the basis of those talks, Lamy will decide whether to call ministers to Geneva next week to seek a Doha breakthrough. Leaders of the G20 rich and emerging nations called last month for an outline Doha deal by the end of this year to help counter the financial crisis by warding off protectionism.

But diplomats in Geneva say the talks are not going well, and sectorals are the main problem. The chairman of industrial goods negotiations at the WTO, Swiss ambassador Luzius Wasescha, acknowledged members were far from consensus on sectorals when he issued a revised negotiating text on Saturday showing broad agreement in most other areas, such as overall cuts in industrial tariffs for all members.

The new text was immediately rejected by the U.S. National Association of Manufacturers (NAM), which said it was not a basis for ministers to meet and seek a deal. NAM President John Engler said the text's failure to require China, India and Brazil to participate in sector agreements was a deal-breaker.

Wasescha's response was: business lobbyists would say that, wouldn't they. "I'm not negotiating with you, the media, I'm not negotiating with associations. Members are negotiating among themselves and I'm the facilitator," he told reporters.

But NAM's backing will be essential to get any Doha deal passed by the U.S. Congress. The problem is that the U.S. stance is out of line with the agreed Doha mandate, which makes it clear that participation in the sector deals is voluntary.

The big emerging countries have fought hard to defend the non-mandatory nature of sector deals, rejecting U.S. efforts to compensate participants with smaller tariff cuts elsewhere and even challenging calls for the deals to have "critical mass", which Beijing sees as code for Chinese participation.

The latest dispute turns on a U.S. call for members to commit to participate in certain sector arrangements at the time an outline deal is agreed, which the emerging nations reject as an attempt to pre-judge the outcome of negotiations.

Since general cuts in tariffs will bring the ceiling for major developing countries' industrial duties to 11-12 percent on average, some negotiators wonder whether the row simply masks U.S. unwillingness to reach a deal for other reasons.

But U.S. officials, keen to show some benefits from a deal to a sceptical Congress, say that waivers for developing countries to the general tariff cuts mean that the overall Doha deal may not create any new business opportunities.

Options to break the deadlock include looking at "subsectors" -- for instance drugs rather than the full range of chemicals -- and deals which eliminate duties in developed countries but allow participating developing countries to retain a low tariff.

The United States is not the only proponent. Several developing countries such as Thailand and Taiwan have also come up with proposals, some of which would not be to Washington's taste.

An EU proposal for a sector deal on textiles, which could mean opening the U.S. market to duty-free clothing from China and other Asian producers, is unlikely to get Washington's support, even if that deprives the deal of critical mass.
Manufacturing lobbies of industrialized nations appear convinced that their future prosperity is strongly tied to opening up the BRICs via sectorals and other measures. Whether such demands cause Doha to buckle once again is certainly an open question. Stay tuned.
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"British ECU": Momentos In a World Gone Wrong

♠ Posted by Emmanuel in at 12/11/2008 10:12:00 AM
As a residual holder of now rather worthless British pounds, I am once more voicing my unequivocal displeasure over Britain's reluctance to join the European currency union. With respect to this kind of Europhobia at least, Gordon Brown is Tory-like. Witness the infamous "five tests" devised by Brown and Ed Balls regarding the viability of Britain adopting euro currency. Naturally, these tests have always struck me as deliberately skewing towards non-adoption.

The credit crisis has demonstrated Britain's vulnerability as a comparatively small open economy running (ho-hum) large deficits. It's even been likened to a British Iceland. As with many other countries sharing this condition, the UK is vulnerable to runs on its currency--or so thinks Tory Shadow Chancellor George Osborne, who has warned of a possible run on the pound. At a time when countless Eastern European countries now rue their decisions to put off adoption of the euro, many economic commentators are doing the same for Britain. Witness the FT's Willem Buiter [1, 2, 3] and the Economist Free Exchange, among others.

While doing some research for the previous post, I came upon an absolute gem of an artifact: a site selling pattern coins for the British ECU. The sales blurb goes like this:
As the European Economic Community, or the European Union made its moves towards a common currency, the ECU came into being. Although at first the ECU was a unit of account, it had long been expected to be converted into a circulating currency. In most European countries there were pattern coins issued exploring the design possibilities of the anticipated new coinage. Some of these issues were design exercises carried out by official mints, others were privately issued.
These coins were minted in 1992, when George Soros speculated on the pound and "broke the Bank of England" (perhaps similar to the current situtation when, er, the Bank of England is broke). Back then, it was perhaps more conceivable that Britain's future lay more in the Eurozone despite the Soros-induced setback. Arguments by the economic commentators above and suchlike have still not persuaded British Eurosceptics--there are legions of them--about the virtues of adopting the common currency. To them, the cost of lost policymaking efficacy does not adequately compensate for the benefit of becoming insulated from a run on the domestic currency.

As ever, I remain convinced that the time is never too late to join up. Certainly, the politics in Britain are against this possibility. Brown's likely Conservative successors will share his dislike of the euro. More pragmatic sorts like yours truly will always view things differently. Britain had several opportunities to ditch the anchronistic pound in favor of the shiny and new euro. Explaining regret is simple: you had euro currency in your hands, but you let it all just slip away.

UPDATE: MarketWatch has a feature on the euro at 10. Strictly speaking, this is inaccurate since physical euro currency only went into circulation in 2002. Nonetheless, there's another story on why Britain should ditch its Europhobic tendencies and board the euro train.
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Germans Take on French, British Debt Enthusiasts

♠ Posted by Emmanuel in , at 12/11/2008 08:59:00 AM
"Reagan proved that deficits don't matter" - Dick Cheney

If the Nobel Prize in Economics was awarded based on an idea's policymaking influence, then the US vice-president deserves a place alongside Arrow, Samuelson, and Friedman. While it is more fashionable to style today's fiscally profligate efforts as Keynesian "pump-priming" wherein public demand picks up from slackening private demand, this line of argument often degenerates into a Cheneysian-style one. Instead, the social costs of mountains of debt should be offset by social benefits of equal or greater magnitude. In few of the today's cases is this evident. Having (justly) lambasted the US example several times over, let us now turn to our German friends doing the same to their European counterparts.

A rift at the heart of the EU is now developing over beliefs about the idea that "deficits don't matter." In a previous blog post, I described how the Germans share my incredulity at the idea of further (public sector) indebtedness being the cure for problems caused by excessive (private sector) indebtedness. Nicolas Sarkozy is not leaving his post as rotating EU head quietly; as he goes, he is making potshots at Germany for its refusal to engage in a continent-wide spending spree. As Bloomberg notes, Sarkozy is perhaps misguided in cottoning up to a non-member of the European currency union in Brown's Britain (for however long he lasts as PM). European diplomats readily concede that it has been the postwar detente between France and Germany that has driven the EU agenda forward. Hence, further chilling of this relationship will have repercussions on an EU-wide level:
French President Nicolas Sarkozy is ending his six months as head of the European Union the way he began: by picking a fight with Germany. The French leader prepared for today’s Brussels summit by meeting U.K. Prime Minister Gordon Brown and freezing out German Chancellor Angela Merkel, who is resisting calls to spend more to spur growth as Europe falls into recession...

Sarkozy’s courting of the U.K. and downgrading of Germany is stirring concern across the 27-nation EU, which is rooted in the postwar reconciliation of France and Germany. From the single market and euro to succeeding waves of enlargement, the two countries have been behind every major EU advance since its founding five decades ago.

“We know very well from the history of the EU that the moving force of the development of the EU is good relations between France and Germany,” Lithuanian Prime Minister Andrius Kubilius said in an interview yesterday. “If that would not be the case at this moment, it would be really a pity.”

As chairman of the two-day summit, before handing the rotating presidency of the bloc to the Czech Republic, Sarkozy aims to persuade EU governments to fork over a total 170 billion euros ($220 billion) to battle recession. Another 30 billion euros would come from the EU’s central budgets.

France has committed 26 billion euros, pushing its budget deficit above the EU limit of 3 percent of gross domestic product in 2009, EU forecasts show. Brown put up 20 billion pounds ($29.6 billion) even after Britain recorded its biggest six-month deficit since World War II. “We want to do everything we can to move the economy forward,” he said yesterday.

In Germany, Merkel has resisted calls to go beyond a two- year 32 billion-euro program of construction investment and tax breaks. She’s concerned extra spending would bust a budget that will be in balance for the first time in 39 years in 2008. The point of every Sarkozy proposal is “to get us to pay more,” German Finance Minister Peer Steinbrueck told Die Zeit newspaper Dec. 7. He went on to attack “our British friends” for “tossing around billions” by cutting value-added-tax, a sales tax.

“Are you really going to buy a DVD player because it now costs 39.10 pounds instead of 39.90 pounds?” he told Newsweek magazine in an interview published today. “All this will do is raise Britain’s debt to a level that will take a whole generation to work off.”

Torsten Albig, Steinbrueck’s spokesman, refused to comment on a BBC News report that the U.K. Treasury was unhappy about the comments and saw Germany as “out of step” in dealing with the economic crisis.

Underscoring the divisions, Sarkozy broke with a tradition of French-German pre-summit consultations by meeting Brown and European Commission President Jose Barroso in London on Dec. 8. “Sarkozy played the short-term game of playing along with Brown when he should have been trying to repair bridges to Berlin,” said Peter Ludlow, a historian and author of “The Making of the New Europe.” “I don’t think the Anglo-French relationship is based on anything very serious at all.”

The German reaction to Merkel’s exclusion was swift. “I’ll tell you the truth: I don’t find it especially nice that Germany and the chancellor aren’t there,” Foreign Minister Frank-Walter Steinmeier told ZDF television.

With the Bundesbank predicting Germany’s economy will shrink 0.8 percent in 2009, Merkel isn’t just feeding tensions with France. She’s running a political risk by preaching balanced budgets. While her Christian Democrats currently share power with Steinmeier’s Social Democrats, the two are opponents in a national election set for September -- and the blame will fall on the woman in charge if the economy sours.

“The European crisis could be so grave that it’s leading her down the wrong path,” said Jan Techau, an EU expert at the German Council on Foreign Relations in Berlin. “If this works out, Merkel will be seen as a genius. If not, and things turn out worse, she’s going to fall flat on her face.”

Sarkozy-Merkel spats go beyond the issue of fiscal rectitude...Sarkozy has been “extremely adroit and very quick,” said Giles Merritt, secretary general of Friends of Europe, a Brussels research group. “His persistent problem seems to be that he doesn’t always bother to make sure that he’s got everybody behind him before stepping into the limelight.”

As the banking crisis unleashed a recession, Sarkozy turned to London to make common cause for fighting the economic storm. Britain’s economy will shrink 1.1 percent in 2009, while the euro region contracts 0.5 percent, the Organization for Economic Cooperation and Development predicts.

While flattery from France may burnish Brown’s standing, it won’t reorient policy in the U.K., where only 30 percent of the public regard EU membership as a “good thing,” according to an EU-wide poll. Only Latvia, with support at 29 percent, is more anti-EU.

Brown anchored his EU-skeptical credentials during 10 years as Chancellor of the Exchequer, when he frustrated then-Prime Minister Tony Blair’s brief flirtation with joining the euro. In the heat of an election campaign, which must be held by June 2010, the U.K. is likely to tilt further away from EU. “I don’t know of any British government which has not been opportunistic about Europe,” said Laurens Jan Brinkhorst, a former deputy Dutch prime minister. “The old saying -- there are no permanent allies, only permanent interests in Britain -- still applies.”
I am nonplussed by the idea that other parties may take advantage of Merkel's fiscal prudence in upcoming German elections. As the major parties there haven't called for splashing out Anglo-Saxon style, it is unlikely that even a change of government will result in a volte face in making this a campaign issue. Along this line of thinking, let us further explore the thoughts of Merkel's coalition partner and finance minister, Social Democrat Peer Steinbruck. To no one's real surprise, there is no real difference here with Merkel:
Peer Steinbrück launched an outspoken attack on Mr Brown's fiscal stimulus package, saying a cut in VAT would have little impact and predicting that the huge debts the Treasury is taking on will be a burden on the UK economy for a generation.

The remarks are an embarrassment for the Prime Minister, who has repeatedly claimed his plans have set the template that other countries are following. They came the same day Mr Brown was ridiculed in the Commons for declaring that his policies had "saved the world" [see here].

Mr Steinbrück's remarks, in an interview with Newsweek magazine, surfaced on the eve of a European Union summit where Germany is set to reject Mr Brown's appeals for others to follow his lead. Germany's chancellor, Angela Merkel, is a Conservative, but she leads a coalition government and Mr Steinbrück is from the Social Democrats, a centre-left party with links to Labour.

Britain's national debt is set to exceed £1 trillion as the Treasury borrows an extra £500 billion over the next five years, some of it paying for £20 billion of temporary tax cuts Mr Brown hopes will soften the blow of the UK recession. The heart of Mr Brown's package is the cut in VAT to 15 per cent until the end of next year, something that will cost the Treasury £12.5 billion.

Mr Steinbrück said the VAT cut would make little difference to consumer spending. He said: "Our British friends are now cutting their value-added tax. We have no idea how much of that stores will pass on to customers. Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90?" He added: "All this will do is raise Britain's debt to a level that will take a whole generation to work off."

The minister also suggested Mr Brown had panicked by abandoning years of fiscal discipline and budget-balancing policies in favour of Keynesian spending financed by debt. He said: "The same people who would never touch deficit spending are now tossing around billions. The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking.

Mr Mr Steinbrück even likened Mr Brown's borrowing binge to the practices that helped trigger the current financial crisis. He said: "When I ask about the origins of the crisis, economists I respect tell me it is the credit-financed growth of recent years and decades. Isn't this the same mistake everyone is suddenly making again, under all the public pressure?"
Nuff said.

12/15 UPDATE: Krugman disagrees vehemently.
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A Doha Deal by Year End? Don't Count On It

♠ Posted by Emmanuel in at 12/09/2008 01:03:00 PM
Back to our bread-and-butter subject matter: US Trade Representative Susan Schwab once opined that India and Brazil, the leading negotiators on behalf of LDCs, were out to destroy the Doha Round. In the dying days of the Bush administration, however, we have a situation where it would probably be accurate to say the same of the US. This puts dampers on earlier hopes from approximately the G-20 meeting onwards of a quick resolution. WTO Director-General Pascal Lamy was hoping to convene a full-fledged ministerial gathering in Geneva from 17-19 December. It now appears that, due to a lack of consensus, a WTO meeting will not be likely for the remainder of the calendar.

There are three main sticking points:
  1. The US is fending off complaints about its still-healthy cotton subsidies;
  2. The US and several LDCs are at odds overs tariffs applied to so-called "sectoral" deals;
  3. India has yet to agree on the level at which safeguards can be applied to protect subsistence farmers.
US senators earlier sent a letter to President Bush warning about signing a deal for the sake of signing a deal without considering the interests of American farmers:
Senators Tom Harkin (D-IA) and Saxby Chambliss (R-GA), Chairman and Ranking Member respectively of the Senate Committee on Agriculture, Nutrition and Forestry, today led a bipartisan group of 22 senators in urging a balanced agreement in the Doha Round agricultural trade negotiations in Geneva. In a letter to President Bush, the lawmakers said that if substantial improvements are not made to the July framework, any modalities agreement will not benefit U.S. agriculture, the economy and will not have Congressional support.

“We continue to support a successful completion of the Doha Round of World Trade Organization negotiations, begun in 2001, but only if it achieves the principal objectives of the United States and the ambitious goals of the original ministerial declaration for agriculture, which ‘aimed at substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and substantial reductions in trade-distorting domestic support,’” wrote the lawmakers. “A sound and balanced agreement should contribute significantly to global economic recovery, growth, and development.”
The American Farm Bureau is making similar noises:
American Farm Bureau Federation President Bob Stallman said he agrees with congressional leaders who yesterday sent a letter to President Bush opposing a December meeting of WTO trade ministers. Before such a meeting is held, he said there must be “sufficient evidence that WTO members are truly committed to granting meaningful market access.”

“Moving ahead with a deal that Congress and agriculture cannot support would be detrimental to the overall stature of the WTO as an institution and would provide no stimulus to the slumping global economy,” Stallman said. “In light of the deteriorating status of world trade talks, some member nations, especially those considered key emerging economies, still are not committed to opening their markets [cue India]. In fact several nations are hardening or revising their positions, which further reduces their willingness to make real trade reform.”

Stallman said AFBF, along with organizations representing the manufacturing and service sectors, recently communicated strong opposition to a new WTO Ministerial meeting to President Bush.

“The December timetable is arbitrary and places the Doha Round of WTO talks in jeopardy, especially given the overall lack of progress in recent discussions,” Stallman said. Stallman emphasized that “limited expectations and low ambition” are not conducive to achieving the kind of real trade reform that would help support job creation and economic growth.

“Trade talks should be about increasing, rather than decreasing trade opportunities,” Stallman said. “Any trade deal that legitimizes agricultural trade barriers and protectionist behavior is unacceptable. Until there is evidence that WTO members are committed to real trade reform to benefit the world economy, it would be counterproductive and dangerous to take any further steps.”
When the United States shows reluctance, it's probably not meant to be just yet. Roll on 2009, Obama, and whomover his USTR will be. The world is still waiting.
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Chrysler: No Chery Amour

♠ Posted by Emmanuel in , at 12/09/2008 12:28:00 PM
Traveling through Asia recently, something that struck me after being away for a long time was the profusion of Chery car dealers across the region. As with the cases of Japan and South Korea before it, China probably sees the manufacture of Chinese-brand products--not OEM ones--as the culmination of its economic resurgence. To date, however, it is fair to say that the Chinese have made limited inroads in this regard. Your average global consumer probably isn't familiar with Chery (cars), Haier (white goods), and Huawei (routers) yet.

I bring this up because it turns out that Chrysler recently approached Chery to make small cars for it under, you guessed it, OEM-style terms. Being snarky old me, it probably dawned on the Chery folks that, well, there may not be a Chrysler for much longer. Of course, what strikes me here is the waste of opportunity. What should have instead transpired was Chrysler selling its remaining interests to the Chinese. Given Chery's ambitious efforts to sell cars in international markets, buying Chrysler could have given it recognizable brands as well as an established dealer network stretching across North America. For more of my thinking on this, see the "Sell Ford and GM to the Chinese" series [1, 2, 3]. Mayhaps I should have included Chrysler too but the title would have become unwieldy. Nevertheless, the logic is the same. As inept as American car advertising is sometimes, you can't beat this mangled English for the Chery Cowin:

The dynamic body design that complies with aesthetics design concept endows the whole body a very natural look. The streamlined body reduces the wind resistivity efficiently. The new front grille is of more fashionable beauty.

The brand new one-piece cadmium plated front grille bestows the exterior with more fashionable aesthetic feeling of the modern times: everything reflects the metropolis style.

The crystal one-piece headlight gives a clear field of vision, which along with the dynamic body, makes your tour in the city ostentatious.

See? I don't make this stuff up. Anyway, from the WSJ:
Chrysler LLC has ended cooperation talks with China's Chery Automotive Co. in reaction to the global economic slowdown, Chrysler said in a statement on Monday. Chrysler had been planning to have Chery produce small cars that it could sell in China and in the U.S.

"Both companies have since gone thought major internal changes and evolution, resulting in different business directions and priorities versus a year ago," Chrysler's statement said. The statement was issued in response to inquiries by the Wall Street Journal.

"Many of the original premises the two companies had when entering into the agreement no longer apply," Chrysler said. According to a company spokesperson, coming to the end of the road with Chery will have no effect on any of the more than two dozen other alliances and partnerships Chrysler is currently engaged in. "Our partnerships are not interdependent," said spokesman David Elshoff in an email.

Neither Chrysler nor Chery are disclosing any detail about their discussions, Chrysler said. The talks began in July 2007 and lasted more than a year. Their end means what had appeared to be a promising effort to expand its overseas operations and build up its small car lineup...

Chrysler, which controlled by private-equity group Cerberus Capital Management LP, faced tough questions before Congress last week about whether it is viable in the long term or is simply looking for enough money and time to court a suitor. The auto company's November U.S. new-vehicle sales fell 47% compared to a year ago. The U.S. is by far its largest market.

Chrysler's efforts to penetrate foreign markets have sputtered in the past. It is using up cash at a rapid rate and has told Congress it needs $7 billion in loans before the end of the year or it may not be able to stay in business.
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Why China's $586B Stimulus Won't Likely Work

♠ Posted by Emmanuel in , at 12/08/2008 08:58:00 AM
Regular readers should by now be familiar with this blogger's ascetic attitude towards fiscal discipline. For the record, let me say that I am not irreconcilably opposed to the Keynesian idea of pump priming when private sector activity has gone into reverse gear. Rather, I am opposed to large-scale spending on projects whose benefits are unclear. In economist's lingo, the social benefits of any stimulus package (in terms of improved infrastructure, etc.) should exceed its social costs (in terms of additional taxes, etc.) A favorite target in this part of the blogosphere has of course been the US example. It is not apparent to me or a whole bunch of other people that The Great Paulsonio has any idea what he's doing with $700B or so. Nor is it apparent if things will improve with the Obama administration. Certainly, developing clean technologies is a worthwhile goal. That Obama thinks the Detroit Three will be in the vanguard of this green future is, however, indicative of old wine in new bottles--zombie-firm creating bailouts for companies ill-suited to making environmentally-friendly cars (or any sort of wheeled transportation for that matter).

Now, let us consider the Chinese example. Our dear Communist Party operatives have indicated that they will spend some $586B over two years to spur economic activity at home, especially as export markets dwindle. It seems to me that this mostly infrastructure-targeted expenditure is of doubtful utility as China's infrastructure is already well-developed, especially by LDC standards. Witness its ports, for instance [1, 2]. The supporting systems are not slouches either as road and rail networks have served as conduits to China's export growth. To get stuff from SEZs to ports, you do need serviceable roads and railways. Cue India for the obverse.

Recently, I highlighted how China's economy could benefit from more domestic consumer spending. Unfortunately, the PRC stimulus plan does not address the need to lessen the health, education, and retirement burdens now being borne by Chinese citizens. As long as these remain borne in large part by the private sector, it is difficult to see how regular folks can be encouraged to, well, spend a little. The WSJ article that follows describes how only a minuscule proportion of the stimulus package will go to creating social safety nets. This being a political economy blog, it is important to note how local governments frown upon having to administer social safety nets as opposed to putting up revenue-generating projects. Not only do the latter not earn anything, but they also entail more administrative costs. Add the independent-mindedness of regional governments and you begin to see why the common sense solution of adding safety nets is politically unpopular, however unfortunate the result:
In its drive to avoid a sharp economic downturn, China plans to spend four trillion yuan ($581 billion) on a stimulus package that focuses on railways, airports and other hard assets. But just 1% of that sum is going to increased social services.

That balance needs to be corrected, many scholars say, if China is to keep growing rapidly and improving living standards in the years ahead. More spending by its own consumers would both support growth and reduce reliance on exports, but that isn't going to happen unless the government eases the burden on families to provide for education, health care and old age. A healthier and better-educated populace should also be more productive. "You need investment in human capital to produce high growth rates in the future," says Khalid Malik, head of the United Nations Development Program in China.

It's easy to understand why China is investing so heavily in infrastructure. Construction is the part of the economy that has slowed most sharply, and thus is most in need of support. Putting money into infrastructure has a quick payoff and is a tested strategy that China employed in 1998 to pull out of the Asian financial crisis.

But improving infrastructure may not be enough to support long-term growth -- especially in China, which already has one of the highest investment rates of any major economy. Some worry that China could eventually go down the same road as Japan, which kept spending even after officials ran out of worthwhile projects.

Yet weaving a social safety net has proved a particularly tricky task in China. President Hu Jintao and Premier Wen Jiabao have made social programs a higher priority, but spending has usually lagged behind government promises. In 1997, the government said it would spend 4% of China's annual gross domestic product on education by 2000. The goal was never reached. Last year spending totaled 2.8% of GDP.

"We have no shortage of goals and targets. What we lack are specific policies and measures to achieve these targets," Zhao Dianguo, director of the department of rural social security at the Ministry of Human Resources and Social Security, said at a recent U.N. forum...

And increasing social spending is surprisingly difficult in China because it is often unclear which parts of government are responsible for funding and operating the programs. China is a huge country with a bureaucracy to match: It has 31 provinces, 333 municipalities, 2,859 counties and 694,745 rural villages. For decades, there has been little direction on this issue from Beijing, which generally lets local governments fend for themselves financially.

Local officials are often more interested in supporting industrial projects that boost their tax revenue than in expanding social programs that only cost them money. For instance, the program to support incomes of the worst-off -- the urban minimum living allowance, often known by its Chinese shorthand dibao -- reaches only a fraction of the people who are eligible for it, and its rolls haven't significantly expanded in recent years.

Beijing often doesn't have the means to control how money is spent locally, where priorities are different. While local officials complain of unfunded mandates for new programs, central officials worry that any money they send to the provinces will get lost. "The central government has great difficulty in monitoring local government spending," says Mark Williams of Capital Economics in London.

The lack of much of a social safety net is one reason Chinese consumers save so much. Urban households put away more than a quarter of their income, and that proportion has been gradually rising. That thrift is less a sign of virtue than of the great pressures on most families.

Many of China's public institutions collapsed in the transition to a market economy and have mostly not been replaced. In today's China, welfare for the poorest and pensions for the elderly are minimal. There is little government or private health insurance. So families need to pay for education, health care and to support aged parents -- expenses that are broadly covered in Europe and to a lesser extent in the U.S.

Optimists point out that China's government has been building up social programs for the past couple of years, such as free primary education and expanded health and welfare benefits for the rural poor. Though they are small now, the new programs mean the government may now be better able to live up to its promises.

The government says improving living standards is a priority of the stimulus plan: It has promised to increase state pensions and welfare payments to the urban and rural poor. There is also 4.8 billion yuan in new funds going to support thousands of clinics in poor rural areas. That isn't much compared with China's other spending plans, but it's a start.

And China's leaders, facing many calls for additional stimulus measures that will more directly aid consumers, could well do more in coming weeks. But a longer-term fix also requires sorting out the division of labor between central and local governments -- a messy task that could take years.
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Car, RIP: Now for Argentine Automaker Bailouts

♠ Posted by Emmanuel in at 12/07/2008 01:55:00 PM
Reading today's headlines, you cannot help but think that the days of the internal combustion engine-powered automobile are numbered. I do not base this alone on the US case: GM, Ford, and Chrysler have demonstrated no aptitude in selling cars designed for the 21st century, and I do not hold much chance that they ever will. It's sad to think that politicians are becoming the final arbiters of the commercial viability of American car manufacturing when their market performance has more than clearly indicated that closing shop is the way to go.

It is fair to note that things are not much better in other parts of the world. European carmakers are still petitioning for EUR40 billion in handouts from European governments. Even the most sophisticated automakers light years removed from Captain Caveman-style Detroit spec are feeling the pinch. The major German automakers have announced production cuts. Mighty Toyota has now convened an "Emergency Profit Improvement Committee" (EPIC for short--get it?) to shore up profitability in the face of dwindling car sales worldwide. You'd have thought that significantly cheaper gas prices as of late would've cheered up these automakers, but no.

But, don't let the endless barrage of bad news for the global auto industry get you down. It appears that even LDCs are getting into the act of propping up the living dead, AKA zombie car firms. Get this: Argentina is now embarking on a plan to provide consumer credit to finance the purchase of locally made cars. Reuters reports that, to save jobs, cars are to be sold at cost by participating automakers. Do not go gentle into that good night:
Argentine automakers will sell basic models at cost through state-subsidized loans in a plan to protect jobs in Latin America's third-biggest economy from the global economic slowdown, government officials said on Saturday. Local plants of Renault SA, General Motors, Peugeot, Ford Motor Co. and other automakers will participate in the government's plan to protect 150,000 auto industry jobs and to keep production from falling steeply next year.

"We have agreed with the plants that these cars will be offered without a profit margin and the dealerships will also reduce their profit margin," Industry Secretary Fernando Fraguio told a news conference on Saturday.

The $890 million government auto loans program is part of a $3.8 billion economic stimulus package announced on Thursday by President Cristina Fernandez. Each automaker will offer two of its most economic models for the plan, while the government will provide three different financing packages with interest rates much lower than market rates, to be funded by the social security system.

Argentina's vehicle output is seen at 600,000 to 610,000 units this year, up 12 percent from last year. Officials said some 150,000 people are employed in the sector, including auto parts and auto sales.

Argentina's auto manufacturing, which accounts for 36 percent of the country's industrial exports, has been one of the first to feel the pinch as the economy slows, and executives forecast a 15 percent reduction in output next year which is what the government plan aims to avoid.
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Goolsbee Tries Selling the Pro-Trade Obama

♠ Posted by Emmanuel in at 12/05/2008 08:44:00 AM
As I've suggested in the post immediately below, there is a battle for the heart and soul of Democratic trade policy in the incoming Obama administration. There are those who are really gung-ho on passing all sorts of protectionist measures who Obama has counted on for electoral support. OTOH, Obama's economic advisors are decidedly "non-progressive" in the left-leaning sense: largely conventional economists who buy into paeans about the virtues of free trade. My favorite case in point for the latter in Austan Goolsbee. Of course, he's the same bloke who reportedly told some Canadians that Obama's statements about renegotiating NAFTA are campaign hyperbole to win the votes of the organized labor/tradophobic set.

My intuition is that the ongoing economic crisis will prove decisive in seeing which of these two forces gain the upper hand in the Obama administration: a quick and relatively painless economic recovery would favor the Goolsbee-Summers-Geithner elements who are more moderate in their approach to trade. If a prolonged and painful recession ensues, however, expect the trade-bashers to gain the upper hand.

A new Newsweek article on why Obama may not be so bad for trade which I recommend you read features a tidbit about Goolsbee being interviewed by the CFR on the matter. Below are the relevant excerpts for you in which Goolsbee constructs what I can only call "the moderate economist's Obama":
Now on trade, the Bush administration—now followed by the McCain campaign—has been pushing a false choice in which they say either you're going to back everything that they call a free trade agreement, no matter how many loopholes are in it, no matter whether it addresses the basic concerns of people who have been left out in the opening of markets and globalization, or else you're a Smoot-Hawley protectionist [the Smoot-Hawley Tariff Act of 1930 raised U.S. tariffs to record levels]. It's completely inaccurate.

Obama's position has been extremely consistent over the many years that I've known him. If you go back and look at his book, or if you look at what he's saying now, it's the same, and that is, trade is not bad. Trade is good. And the opening up of markets and access to the fast-growing markets of the world is one of the key ways that many of our industries have grown.

At the same time, if we are not mindful of the great many people who have been left out of the bounty of opening of markets, all the political will and favor of globalization is going to dry up. You're not helping globalization if you subscribe to the Bush view that we ought to try to jam through trade agreements by a 50-49 margin by pulling out the stops and giving pork to whoever needs it in order to get them to vote for it. That strategy is dried up.

So Obama's approach has been, we ought to put labor and environmental standards—enforceable, the basic standards from the ILO [International Labor Organization] and regarding the environment, into the core of our agreements, and that we should work as much as possible to remove the loopholes and special interests, because if you look at these free trade agreements, they're a thousand pages long and 980 pages of that are giveaways to individual companies and monopolies, and very little of it looks like the economist's case for free trade.

And more broadly, to promote globalization we have to build a new consensus, and that consensus has to be built around making sure that America is ready to compete, that we can't build a moat around the country, and so we shouldn't try to. But we should invest in the capabilities of our own industries and we should be mindful of the concerns of the people who have been left out—that we can look after the health of workers, and still be pro-market. It's in the interest of developing countries too. I don't think there's any contradiction in that.
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