The Case for Singapore Rejoining Malaysia

♠ Posted by Emmanuel in at 5/31/2018 03:28:00 PM
Perhaps the only time Lee Kuan Yew cried in public was when Singapore left the Malayan Federation. Can things still work out?
Our longtime contact Andy Mukherjee of Bloomberg View recently penned a thought-provoking op-ed on why it makes sense for Singapore to rejoin Malaysia. Recall that Singapore was kicked out in 1965 of what was then known as the Malay Federation. Refusing to accept "affirmative action" laws aimed at ensuring ethnic Malays would gain preferences especially over the economically dominant ethnic Chinese, Lee Kuan Yew felt no choice but to leave. However, to the end of his life, he never gave up on the possibility of reintegrating with Malaysia.

Interestingly enough, recent events make this possibility less remote. Mainly, it makes economic sense. That said, we have to wait for  upset election victor, 92-year-old Mahathir Mohamad, giving up the reins of power to his onetime protege, 70-year-old Anwar Ibrahim. Due to Mahathir's age, it may actually happen fairly soon. The hope is that Anwar would once and for all do away with the "New Economic Policy" of Malay-favoring affirmative action that offends Singaporeans with their mix of ethnic Chinese, Indians, and Malays:
But guess what. The latest Malaysian election, with its big upset, offers a reason to reconsider Lee’s 1996 and 2007 optimism [on reunification]. Maybe the analyst in him was right all along.

Once Anwar Ibrahim is out of prison and in the Malaysian prime minister’s seat, and once he starts taking apart the system of state-sponsored racism that has existed there since 1971, the difference between peninsular Malaysia and Singapore will be of living standards. In fact, with a shared heritage of British-inspired common law and parliamentary democracy, the difference will be even less than it is between Shenzhen and Hong Kong.
There's also the added attraction of gaining a relatively populous market in Malaysia for famously low-birth Singapore. Simply, Malaysia has more of the people Singapore needs. The example of the Pearl River Delta is also an attractive example to consider in a "one country, two systems" sense that works well enough economically:
Much better institutional arrangements are possible now, taking a leaf perhaps out of the Greater Bay Area that Beijing wants for Hong Kong, Macau and Guangdong province. If the agglomeration proves to be an economic success for Hong Kong, it would again put pressure on Singapore to find the one thing it doesn't have: a hinterland.

A hinterland, and babies. Almost 25 percent of Malaysia’s 32 million population is below 14 years of age. For aging Singapore, where the figure is 15 percent, the neighbor’s demographic dividend — if harvested well by Anwar — is a valuable resource. Defense savings, should the two countries agree to share resources, are an added attraction.
The catch remains a strong one that Mahathir, who was already in a position of leadership when the "New Economic Policy" was implemented, is habituated to the old ways. Indeed, the recently defeated Najib Razak was rather more Singapore-friendly than Mahathir.
Mahathir is too wedded to the status quo to move the needle on race relations. But if Anwar does manage to plant the seed of equal opportunity and rules-based competition while clearing out the weeds of rent-seeking and cronyism, a mutually beneficial economic union with some sharing of the defense burden is possible. None of this will occur tomorrow. The shock election result has increased the odds of a loose confederacy from zero to, say, 10 percent over the coming 30 years. Still, that’s a start.
Maybe Lee Kuan Yew will still find solace over this matter in the afterlife; I for one don't rule it out day.

How OPEC Boosts US Oil Exports to Asia

♠ Posted by Emmanuel in at 5/28/2018 08:56:00 PM
Us Asians don't need Trump to force us to buy American oil. Fancy that.
As it was in the beginning with cartels, so it shall be until their end. The trouble with these things is that they only work if compliance with production limits are observed by a clear majority of the producers. I must admit that while the recent OPEC/Russia effort has been quite impressive--if you told me oil prices would reach their current levels when they started, I'd have said you're mad--there are limits.

The clear "antagonist" to these would-be petroleum oligopolists are the Yanks. Namely, the shale oil producers who have taken advantage of new production techniques to extract more oil and gas than previously thought possible from the United States. They too have been helped by the lifting of an oil export ban at the end of 2015; exports resumed in January of the next year.

The type of crude oil exported by non-American sourced is called Brent, whereas that coming from the United States is West Texas Intermediate (WTI). OPEC/Russia have succeeded in limiting supplies of Brent which they produce more of, while American WTI has been less affected. So, the price "spread" (difference) between cartelized Brent and WTI has been widening lately. The question is, why would oil customers worldwide buy OPEC/Russia's pricier Brent instead of WTI? The answer has to do mainly with bottlenecks getting US shale out of the ground and delivered to world markets. After all, you don't expect a country forty years dormant in exporting oil, the USA, to develop the necessary infrastructure overnight:
The simple reason for this is that the shale oil boom has left crude sloshing around the U.S., resulting in a local oversupply. While Brent prices have risen some 14 percent over the past three months, WTI is up just 7.5 percent and Midland crude – the version of WTI priced in the booming Permian basin rather than the benchmark delivery point in Cushing, Oklahoma -- is down 4.8 percent.

The last time we saw these sorts of spreads, there were sound legal reasons for it. The U.S. had forbidden almost all exports of crude oil for four decades until the end of 2015, so for many years its soaring shale oil production was trapped by the ban and the capacity limits of U.S. refineries that were able to convert it into exportable products.

The growing spreads now suggest that supply is pushing up against a different sort of bottleneck: A shortage of pipeline capacity between Midland and Cushing, and then a further shortage of pipeline and port capacity to get U.S. crude onto a hungry global market.
What may happen is that if OPEC/Russia keep artificially limiting oil production to boost prices, it may become even more economically viable for American shale producers to develop the infrastructure to get their oil to customers in Asia and elsewhere. Already, shale and similar sources have increased their production to almost counterbalance OPEC supply reductions:
There’s a further factor to consider, though, and it relates to what’s happening on the plains of Texas and Oklahoma. The latest period of supply restraint from Opec and Russia has in essence seen them give up market share to onshore North America. The 1.8 million barrels a day that they’ve taken off the market is almost entirely compensated for by the 1.53 million barrels a day of additional unconventional crude production from the U.S., not to mention 640,000 of additional daily barrels that have come out of Canada.

At the moment, infrastructure bottlenecks are keeping the U.S. shale boom almost as quarantined from global markets as legal restrictions did in the pre-2016 era. But, as my colleague Liam Denning has written, those widening spreads between delivery locations are driving midstream operators to seek profit from new export channels, from pipelines to the nascent capacity to load larger tankers from Louisiana’s Loop terminal.
We are already seeing the Yanks eat the lunch of greedy OPEC/Russia in Asia:
In Asia, China - led by Sinopec, the region’s largest refiner - is the biggest lifter of U.S. crude. The company, after cutting Saudi imports, has bought a record 16 million barrels (533,000 bpd) of U.S. crude, to load in June, two sources with knowledge of the matter said. India and South Korea are the next biggest buyers in Asia, each lifting 6 million to 7 million barrels in June, sources tracking U.S. crude sales to Asia said. Indian Oil Corp bought 3 million barrels earlier this month via a tender, while Reliance Industries purchased up to 8 million barrels, the sources said, although it wasn’t clear if Reliance’s cargoes would all load in June.

South Korea’s purchases are driven by its top refiners SK Energy and GS Caltex. Taiwanese state refiner CPC Corp has also snapped up 7 million barrels to be lifted in June and July. U.S. exports to Thailand will increase to at least 2 million barrels. State oil company PTT PCL is 1 million barrels of WTI Midland, while Thai Oil and Esso Thailand bought at least 500,000 barrels of Bakken crude each, said traders with knowledge of the country’s crude deals.
It's rare to find American good guys in the age of Trump, but I suppose the shale producers' contributions to punishing OPEC/Russia for introducing price distortions hurting oil consumers like you and me counts.  

Pope Francis, Do Speculators Go to Hell?

♠ Posted by Emmanuel in ,,, at 5/18/2018 03:18:00 PM
You tell 'em, Pope Francis! Here are more of his thoughts on haute finance.
Okay, so the question posed above is not definitively answered in a new papal bull on modern finance. Let's just say that certain kinds of speculative activity most likely raise your chances of eternal damnation. As a pope coming from Argentina--ground zero for IMF borrowings past and immediate future--the way financial markets impact the well-being of persons has long been on his mind. Earlier this year, an apostolic exhortation encouraged people to think about the true meaning of "security" which does not equate to "wealth":
67. The Gospel invites us to peer into the depths of our heart, to see where we find our security in life. Usually the rich feel secure in their wealth, and think that, if that wealth is threatened, the whole meaning of their earthly life can collapse. Jesus himself tells us this in the parable of the rich fool: he speaks of a man who was sure of himself, yet foolish, for it did not dawn on him that he might die that very day (cf. Lk 12:16-21).

68. Wealth ensures nothing. Indeed, once we think we are rich, we can become so self-satisfied that we leave no room for God’s word, for the love of our brothers and sisters, or for the enjoyment of the most important things in life. In this way, we miss out on the greatest treasure of all. That is why Jesus calls blessed those who are poor in spirit, those who have a poor heart, for there the Lord can enter with his perennial newness. 
Just yesterday, Pope Francis continued with this theme of countering what the world values by identifying immiserizing forms of finance that *might* make you wealthy but leave others worse off (and endanger your soul's well-being in the process). Given a reasonable premise that financial crises leave many worse off in market-based societies, derivatives attract scrutiny insofar as they may hasten such crises as witnessed during 2007-08. From the just-released Economic and Pecuniary Questions:
[26.] However, in some types of derivatives (in the particular the so-called securitizations) it is noted that, starting with the original structures, and linked to identifiable financial investments, more and more complex structures were built (securitizations of securitizations) in which it is increasingly difficult, and after many of these transactions almost impossible, to stabilize in a reasonable and fair manner their fundamental value. This means that every passage in the trade of these shares, beyond the will of the parties, effects in fact a distortion of the actual value of the risk from that which the instrument must defend. All these have encouraged the rising of speculative bubbles, which have been the important contributive cause of the recent financial crisis.

It is obvious that the uncertainty surrounding these products, such as the steady decline of the transparency of that which is assured, still not appearing in the original operation, makes them continuously less acceptable from the perspective of ethics respectful of the truth and the common good, because it transforms them into a ticking time bomb ready sooner or later to explode, poisoning the health of the markets. It is noted that there is an ethical void which becomes more serious as these products are negotiated on the so-called markets with less regulation (over the counter) and are exposed more to the markets regulated by chance, if not by fraud, and thus take away vital life-lines and investments to the real economy.
In a similar vein, other targets of the pope's ire include credit default swaps when used for the purpose of "gambling" on the eventual insolvency of firms instead of "insurance" for corporate debt holdings as originally intended:
A similar ethical assessment can be also applied for those uses of credit default swap (CDS: they are particular insurance contracts for the risk of bankruptcy) that permit gambling at the risk of the bankruptcy of a third party, even to those who haven’t taken any such risk of credit earlier, and really to repeat such operations on the same event, which is absolutely not consented to by the normal pact or insurance[...]

In fact, the process of acquiring these instruments, by those who do not have any risk of credit already in existence [i.e., those who don't hold debt securities], creates a unique case in which persons start to nurture interests for the ruin of other economic entities, and can even resolve themselves to do so.

It is evident that such a possibility, if, on the one hand, shapes an event particularly deplorable from the moral perspective, because the one who acts does so in view of a kind of economic cannibalism, and, on the other hand, ends up undermining that necessary basic trust without which the economic system would end up blocking itself. In this case, also, we can notice how a negative event, from the ethical point of view, also harms the healthy functioning of the economic system.

Therefore, it must be noted, that when from such gambling can derive enormous damage for entire nations and millions of families, we are faced with extremely immoral actions, it seems necessary to extend deterrents, already present in some nations, for such types of operations, sanctioning the infractions with maximum severity.
You may of course question my impartiality on this matter, but I do think the pope lays out a straightforward response to a highly topical issue. Risks of financial distress tend to rise in developing countries like Argentina as interest rates increase Stateside, and the current rate-hike cycle is no exception. Detached from the "real" economy, financial activity without underlying economic purpose aside from speculation is ethically questionable insofar as the lives of other persons can be subject to grave harm--especially in the developing world:
17. What is morally unacceptable is not simply to profit, but rather to avail oneself of an inequality for one’s own advantage, in order to create enormous profits that are damaging to others; or to exploit one’s dominant position in order to profit by unjustly disadvantaging others, or to make oneself rich through harming and disrupting the collective common good.

Such a practice is particularly deplorable from the moral point of view when the intention of profit by a few through the risk of speculation even in important funds of investment, provokes artificial reduction of the prices of public debt securities, without regard to the negative impact or to the worsening of the economic situation of entire nations. This practice endangers not only the public efforts for rebalancing, but also the very economic stability of millions of families,  and at the same time compels government authorities to intervene with substantial amounts of public money, even to the extent of artificially interfering in the proper functioning of political systems.
 The pope is able to relate finance's potential dangers in a manner we can easily understand.

EU Firms Main Targets of US Sanctions on Iran

♠ Posted by Emmanuel in ,,, at 5/12/2018 03:51:00 PM
I guess there are good reasons these folks don't dislike Europeans as much.
One thing the Trump administration has delivered on, for better or worse, is pursuing "unisolationism." Ask the Europeans. Withdrawing from the Paris Agreement on climate change, criticizing Europeans for not contributing enough to NATO's defense, putting the Transatlantic Trade and Investment Partnership (TTIP) on the back-burner, and now reneging on a deal to obtain Iran's compliance on not enriching weapons-grade uranium (JCPOA)...the list goes on and on.

The last is very interesting: isn't it meant to reimpose US sanctions on Iran? For all intents and purposes, American firms still had significant reservations about doing business in Iran after that deal was struck. With the benefit of hindsight--Trump's election and all that--they were right not to seek much business there. However, the Europeans did not seem to have as many reservations. The end result is that, because American firms doing business with Iran were rather few, the real Western victims of this policy change are European firms. It works indirectly: the United States will apply sanctions against firms doing business with Iran like before, and European ones are hardly exempted:
The EU is scrambling to find ways to safeguard huge business deals with Iran, amid the threat of US penalties. Washington is re-imposing strict sanctions on Iran, which were lifted under the 2015 international deal to control the country's nuclear ambitions. On 8 May President Donald Trump denounced the deal, saying he would withdraw the US from it.

Since the deal took effect in 2016 major European firms have rushed to do billions of dollars' worth of business with Iran, and now thousands of jobs are at stake. Many of those firms fear their business ties with the US could be at risk if they continue to do deals with Iran past a November deadline.
Ie there anything the Europeans can do to insulate them from American sanctions on deal-doers with Iran? The bottom line is that all the other existing parties want to keep JCPOA intact, including the Europeans. However, the mechanisms which they can use to evade US overreach are iffy:
There is an existing EU "blocking statute", from 1996, aimed at countering US sanctions linked to communist Cuba. Now EU officials say they are revamping the statute to avoid the latest US restrictions on firms doing business with Iran.

But there are doubts about the statute's legal power. Reuters news agency says Shell and some other European firms with big operations in the US prefer to push for US waivers on a case-by-case basis. US authorities have imposed hefty fines on banks for processing Iranian transactions, including UK-based Standard Chartered, HSBC and Lloyds. France, Germany and the UK all say they remain committed to the nuclear deal with Iran and to expanding business ties, provided Iran sticks to its commitments.
Well, good luck with that. Speaking of which, here's a list of European deals now at risk:
  • Total (French) signed a deal worth up to $5bn to help Iran develop the world's largest gas field, South Pars
  • Norway's Saga Energy signed a $3bn deal to build solar power plants
  • Airbus clinched a deal to sell 100 jets to IranAir
  • European turboprop maker ATR (an Airbus-Leonardo partnership) agreed to sell 20 planes to Iran
  • Germany's Siemens signed contracts to upgrade Iran's railways and re-equip 50 locomotives
  • Italy's state rail firm FS signed a $1.4bn deal to build a high-speed railway between Qom and Arak
  • France's Renault signed a joint venture deal, including an engineering centre and a production plant, to boost Renault's production capacity in Iran to 350,000 vehicles a year
Going by the amounts proceeding the dollar signs above, it's not going to be a small loss of business for European firms if they comply with American sanctions. Many were particularly appalled when the US ambassador to Germany told German firms to start drawing plans to withdraw from business deals with Iran. However, the course of action European firms will take obviously depends on how much they business they stand to lose in America should they ignore America's reimposition of sanctions. Chinese firms not doing much business Stateside are not under pressure, and may even pick up business once the Europeans leavee, for example.

To Lower US Drug Prices, Raise Them Abroad?

♠ Posted by Emmanuel in , at 5/12/2018 02:48:00 PM
Trump's new health plan: Make Foreigners Sicker Than Americans.
With the exception of diehard Trump fans who would applaud anything he does [like bragging about grabbing women's private parts], his recently-released plan to reduce drug prices was met with mostly negative reviews by those who actually understand what it consists of [1, 2]. To non-Trump fans, this is as disappointing as it is predictable. Like American leaders before him, to be fair, Trump's plan doesn't involve making Big Pharma squirm. It neither drains the s wamp nor provides evidence that Trump alone can fix spiraling health care costs. Indeed, the relatively bulletproof nature of the drug giants is evident, as politicians have been unwilling to offend their interests (and bottom lines) once more.

How much do American politicians take the interests of Big Pharma to heart? When Trump helpfully suggests (rather unforcefully) that they make token price concessions, he still has their best interests at heart by suggesting that they sock it to foreigners instead by raising prices for them. This, of course raises several pointed questions, followed by a New York Times excerpt:
  • Aren't there ethical concerns for pricing drugs significantly higher outside the world's richest country--especially developing countries?
  • If foreign countries have successfully negotiated bulk discounts while buying for their national healthcare systems, then why should they be made to follow the abysmal US model wherein such bargaining is not practiced?
  • Why should the US set policy setting the prices charged by American pharmaceutical firms abroad? Isn't the US a believer in a "market-based" economy?
[The Trump administration] has an idea that may not be so popular abroad: Bring down costs at home by forcing higher prices in foreign countries that use their national health systems to make drugs more affordable...

“We’re going to be ending global freeloading,” Mr. Trump declared at a meeting with drug company executives in his first month in office. Foreign price controls, he said, reduce the resources that American drug companies have to finance research and develop new cures. The White House Council of Economic Advisers fleshed out the idea three months ago in a report that deplored the “underpricing of drugs in foreign countries.”
The council said that profit margins on brand-name drugs in the United States were four times as high as those in the more regulated markets of major European countries and Japan. The United States, it said, needs to “address the root of the problem: foreign, developed nations, that can afford to pay for novel drugs, free-ride by setting drug prices at unfairly low levels, leaving American patients to pay for the innovation that foreign patients enjoy.”
Moreover, there are no guarantees that increased profits abroad would translate into savings at home:
“There is absolutely no reason to believe that trade policies designed to raise prescription drug prices overseas will result in equivalent or any decreases in prices in the United States,” six House Democrats, led by Representatives Jan Schakowsky of Illinois and Rosa DeLauro of Connecticut, said in a recent letter to Mr. Trump.

People who work in the industry said it was unlikely that consumers would go to the pharmacy counter and see a meaningful reduction in drug prices before the end of the year.
Just because your "health care system" [sic for the United States] is supremely dysfunctional in no small part because of political inaction to confront price gouging, it doesn't mean that matters would be "improved" if you strong-armed other countries into making their systems as pathetic as America's.

The Hippocratic oath states that, first, medical professionals should do no harm. By the Trump administration's reckoning, a lot of harm should be done elsewhere to compensate for the ineptitude of American government officials unable to get their act together and extract meaningful concessions from drug firms who've been exceedingly successful at lobbying against rational drug pricing Stateside. 

BTW, I still recommend Marcia Angell's book on my virtual bookshelf on how Big Pharma actually doesn't put in most of theresearch for drugs but rather takes advantage of publicly-funded institutions. They only make profits afterwards by commercializing others' work.

5/15 UPDATE: See the New York Times for more on the decrepit state of the US health care system.

A Geneva Showdown on the WTO's Future

♠ Posted by Emmanuel in , at 5/08/2018 06:54:00 PM
The WTO's future is being decided right now at its Geneva headquarters as the US and China duke it out.
The World Trade Organization has often been derided as an instrument for the world's most advanced nations to advance their interests at the expense of others. This is especially so for the United States, which has largely been responsible for setting up the world trade system as we know it. The election of Donald Trump has upended this narrative in a number of ways--so much so that some commentators question the institution's viability going forward absent American support. What will become of the WTO is especially important to ponder while a meeting is underway at its Geneva headquarters. Without much surprise, US-China fisticuffs were front and center.

Similar to what Trump's minions have done at other international organizations--the International Atomic Energy Agency, the UN Framework Convention on Climate Change and so on--his WTO representative is reneging on multilateralism in the hopes of undermining the concept's practical viability. The way America has tried to do this is to gum up the WTO's legal mechanism. By sabotaging it as a forum for solving trade grievances, the world returns to a pre-WTO or even a pre-GATT world where might makes right, and the US is presumably still strong enough to get its way:
U.S. Ambassador Dennis Shea, addressing the WTO’s General Council for the first time, began by attacking the judges of the WTO’s Appellate Body, whom he blamed for a “steadily worsening rupture of trust”. “Something has gone terribly wrong in this system when those charged with adjudicating the rules are so consistently disregarding those very rules,” Shea said, according to a copy of his remarks provided to Reuters.

The United States has vetoed new appointments to the Appellate Body, causing a crisis at what is effectively the supreme court of world trade. Shea said the judges had over-stepped their authority and had broken the rules by failing to observe a 90-day timetable for judging appeals. Many experts say the delays are caused by ever-more complicated disputes piling up in a congested system.
Having created thought up the legal mechanism in the first place, the reality is that the United States wins a majority of the cases it is involved with at the WTO. Instead of it being "unfair" to America, there must be a more plausible reason for American obstructionism in not appointing enough judges for it to perform its functions. China obviously takes exception to what the Americans are doing:
Chinese Ambassador Zhang Xiangchen, who had put the issue on the agenda, began by warmly welcoming “our new colleagues, especially Dennis”. But the cordial opening gave way to criticism of the “dangerous and devastating” U.S. actions. “By taking the selection process as a hostage, the U.S. is abusing the decision-making mechanism of consensus,” Zhang said.

The U.S. veto, along with steel and aluminum tariffs and a threat to put $50 billion of tariffs on Chinese goods for alleged intellectual property theft, had systematically challenged the WTO’s fundamental principles, he said.

“Any one of these, if left untreated, will fatally undermine the functioning of the WTO. But the reality is that the WTO is currently confronted with ‘three hard blows’,” Zhang said. The United States was reportedly seeking export limits from countries in return for exemptions from its steel tariff, which was “explicitly prohibited” by the WTO rules, he added.
Others also notice the ongoing sabotage:
WTO spokesman Keith Rockwell said many WTO members joined the debate, many expressing concern that the U.S. actions could make the system dysfunctional, and prepared to discuss its views while rejecting any linkage between judicial appointments and reforming the WTO. “It was extraordinary in its intensity,” Rockwell said. “It was unusual to see these two very prominent members laying it all on the line in terms of what they think ... This was a discussion that we had to have.”
That the Trump administrations other trade actions contravene the spirit of the WTO is evident enough. These actions are consistent with wanting to return the world to a pre-WTO or even pre-GATT era. Trump's appointment of the Reagan-era fossil Robert Lighthizer as US trade representative is part of that:
President Ronald Reagan tapped Lighthizer to be deputy U.S. trade representative in 1983. One of his accomplishments in that position was to persuade Japan, South Korea, Mexico and the United Kingdom to limit their exports of cheap steel to the United States. That action was later found to be in violation of World Trade Organization regulations.
The Trump administration would like nothing better than to render the WTO insignificant and return us to the mid-Eighties of Lighthizer's prime replete with Section 301s and other WTO-illegal measures.. The question for the rest of us is, who will take the lead in upholding this institution (if any)? Just as the other signatories of the Trans-Pacific Partnership went ahead anyway without the US, is there still a "coalition of the willing" that sees value in keeping the WTO functional? US obstructionism can be overcome, but there is a collective action problem that needs solving first.

Will it be China, the EU, or some other folks? Supposing that others do see value in it, there may be a combination of countries willing to champion the WTO at this point in time. Otherwise, the best its proponents can do may be to wait for a more trade-friendly US leadership. The danger though is that the WTO may become too irrelevant by then if others do not come to the WTO's aid in its time of need.

Self-Humiliation & US-China Trade Talks

♠ Posted by Emmanuel in , at 5/06/2018 05:55:00 PM
Their underlings got nothing unaccomplished during trade talks, unsurprisingly.
During negotiations and bargaining, you are taught to never begin with your most generous offer, but rather your least generous one to "anchor" talks in your favor. In the recently-concluded US-China trade negotiations, the participants apparently took this lesson to heart. So much so that, well, it is almost impossible to see any common ground achievable that would accommodate their respective starting positions at the current time. Instead of working on plausible starting positions, they have effectively begun with fantasy-themed requests that their respective trade grievances with one another be addressed in full and as soon as possible.

The reported details understandably ended with basically no agreement on anything substantial insofar as each party is asking the other to make politically unrealistic and unrealizable concessions--more so the United States. Here's what the American negotiators asked for, among other things:
  • Reduce the US-China bilateral trade deficit by $200B by 2020 
  • Withdraw current cases filed against the US at the WTO, including those concerning PRC designation as a non-market economy
  • Further, take no retaliatory actions to forthcoming US trade policies (i.e., these aimed at China)
  • Reduce Chinese tariffs in "non-critical" sectors to corresponding ones applied by the US
  • Be subject to tariffs and other restrictions on Chinese products if the PRC does not comply with America's laundry list of demands 
It's pretty obvious that this long list of demands would become contradictory in places. So the United States believes that China should still be classified as a "non-market economy" by the WTO. At the same time, it believes the PRC has the discretion to reduce the bilateral trade deficit by over half through striking an agreement with the Chinese government. Moreover, it accuses the Chinese of using non-market interventions to distort world trade. Which is it, then? If China is supposed to act more like a market economy, then its officials should have limited discretion over the actions of its exporters. That is, global supply-and-demand would determine trade balances instead of the active meddling of the Chinese and American governments. Asking PRC officials to intervene to staunch Chinese exports would constitute a non-market distortion of the sort Americans are accusing the Chinese of practicing (and we presume want to stop). 

Alike what the US is trying to do with steel exporters in the EU and NAFTA, it also seeks to humiliate China by making it unable to file cases against the United States at the WTO over perceived trade violations. Again, what dignified trade partner would choose self-abrogation of one's rights--here as a WTO member--and leave oneself vulnerable to US trade actions without international recourse? Further, effectively asking China to apply the same tariff rates as the world's wealthiest country would also be asking it to abrogate its rights to special and differential treatment accorded to developing countries.

China would be giving up a lot for...uncertain benefits in the age of the mercurial Trump.

That said, the Chinese also presented their own list of unrealistic demands, including:
  • Opening of US government procurement to Chinese electronics firms
  • Stop hindering Chinese technology firms buying US ones on "national security" grounds
  • Allow Chinese e-payment services to operate Stateside
  • Remove the export ban on the allegedly Party-affiliated ZTE
To be sure, the Chinese are not exactly responsive to accusations that it's using unfair means of government support to bolster its technology industry since most demands concern maintaining the status improving market access of Chinese technology firms to the US market as well as removing obstacles to buying American IT concerns. Without having allayed American security fears first, however contrived these are, the Chinese are unlikely to receive better market access Stateside. Indeed, despite PRC firms already receiving increased scrutiny--they hardly got a free pass during previous administrations for buying US firms over "national security" concerns--they are set to receive even more scrutiny.

I get the sense that this was more an event of talking over each other to score with domestic audiences about the other's inflexibility and stubbornness instead of being a realistic exercise in coming up with creditable starting points for eventually striking a deal. As such, a trade war is seemingly inevitable unless drastic changes in both these nations' stances occur fairly soon.   

Self-Humiliation & Exemption From US Steel Tariffs

♠ Posted by Emmanuel in , at 5/01/2018 12:34:00 PM
VERs and evil feels oh so 1980s.
The self-made deadline of the United States to make permanent 25% tariffs on steel and 10% on aluminum imports has come and gone with no small amount of confusion. That is, we are now in June 2018 with no better indication of who will be permanently hit with what. It's particularly true for EU countries, Canada and Mexico. While this phenomenon--uncertainty created by the Trump administration--is par for the course nowadays, it does create a lot of unease for America's trading partners that does not sit well with them.

What is it Americans are asking for? At the moment, they are offering a choice between [a] limiting the amount of steel exports to the United States and [b] being subject to the aforementioned tariffs if such restraints are not agreed upon. Here is what the Americans have said:
”In all of these negotiations, the administration is focused on quotas that will restrain imports, prevent transshipment, and protect the national security,” the White House said. “These agreements underscore the Trump administration’s successful strategy to reach fair outcomes with allies to protect our national security and address global challenges to the steel and aluminum industries.”
Previously, the United States got the South Koreans to make a concession of reducing steel exports by 30% to gain an exemption. Now, it wants to do "pattern bargaining" with its other trade partners. So, what's the problem here? Well, WTO members--of which all the countries concerned are--should not be forced to make such concessions. What the United States is now asking for is not new. For all intents and purposes, they are "voluntary export restraints" [VERs], a euphemism for the United States "asking" trade partners to self-limit the number of exports they send to the US. Of course, it is coercive in nature because there is an "or else" element in being hit by trade sanctions if not followed. Article 11.1(b) of the WTO's Agreement on Safeguards states:
Furthermore, a Member shall not seek, take or maintain any voluntary export restraints, orderly marketing arrangements or any other similar measures on the export or the import side. These include actions taken by a single Member as well as actions under agreements, arrangements and understandings entered into by two or more Members.
So what you are in effect doing if you agree to what the US wants with regard to steel and aluminum exports is voluntarily giving up your rights under the WTO to kowtow to the US. While this may be fine with some like South Korea for reasons only they know, for others it is an act of self-humiliation. So, it comes as no surprise that those more reluctant to implement these things are the larger trading partners like, say, Japan:
The lack of retaliation threats from Japan, despite anger and frustration at the US president’s decision to target a close ally, reflects confidence that many of the country’s steel exports can win product-by-product exemptions from the tariffs. Japan’s calculated response highlights its determination to keep good relations with Mr Trump and the difficulty of using tariffs as a tool to force trade concessions when so many US industries rely on imports.
The same with the European Union:
European officials have said the U.S. tariffs violate international trading rules, and they have threatened to retaliate with levies on iconic American brands such as Harley Davidson motorcycles and Kentucky bourbon.
“The EU should be fully and permanently exempted from these measures, as they cannot be justified on the grounds of national security,” the European Commission, the 28-nation bloc’s trade authority in Brussels, said in an emailed statement on Tuesday. “The EU has also consistently indicated its willingness to discuss current market access issues of interest to both sides, but has also made clear that, as a longstanding partner and friend of the US, we will not negotiate under threat.”
Who's gotten a pass aside from South Korea? To no one's surprise, they are countries with smaller trading volumes who have presumably agreed to VERs as well:
The administration has reached agreements-in-principle with Argentina, Australia and Brazil, according to the statement, which the White House released late Monday night. The details "will be finalized shortly," the statement added.
We'll know if they did agree to VERs shortly. 

While China and Russia are perceived as security threats of the highest order and would naturally be unable to conform to US national security interests as this issue is being made out to be, it is notable that India and Japan have not managed to obtain exemptions. Ultimately, for countries other than China or Russia, it ultimately boils down to whether you'd want to self-humiliate yourself by abrogating your WTO rights to not be subject to VERs. This point brings us to another fine point on whether these VERs are admissible at the WTO, but I presume that having been bamboozled into agreeing to these VERs that you wouldn't turn to the WTO anyway.