Costly Fuel: Born to Be Mild Meets Queasy Rider

♠ Posted by Emmanuel in at 6/06/2008 01:34:00 AM
The tagline for the now-legendary 1969 movie Easy Rider goes, "A man went looking in search of America / And couldn't find it anywhere." In 2008, what we seem to have in the US and the UK is "A man went looking in search for affordable petrol / And couldn't find it anywhere." My memory of Easy Rider was jogged by two Internet video clips which should be of interest in this fuel-starved age. Heck, if things get any worse, I may even be forced to reference Mad Max: a post-apocalyptic vision of those surviving a nuclear holocaust fighting for the precious last few drops of oil.

First up is this offering from the Times of London. On Thursday, a bunch of motorbike riders jammed the highway leading into Manchester in protest of high oil prices. Peter Fonda and Dennis Hopper they ain't. (The Beeb also has footage of this pseudo-hooliganism.) With a gallon of the stuff in double digit figures in US dollar terms, even the nominally more fuel-efficient cyclists have had enough. Oddly enough, other motorists whose progress was impeded by the cyclists voiced their approval. Given that about two-thirds of fuel costs go to the exchequer in the form of either gasoline taxes or VAT, the political angle is not one that can be taken lightly. This is the second mass action to hit in the UK over fuel. A few days ago, truckers jammed central London. In a short while, there may be an even bigger action:

Hundreds of bikers were cheered on by drivers as they brought roads to a standstill in the North West today in protest against the soaring cost of fuel. More than 500 motorbike riders revved off in convoy from a service station outside Manchester at 8am and staged a “go-slow” demonstration against escalating prices at the petrol pump. Onlookers – and even those caught in the disruption – applauded in support as they sat in the major tailbacks on the M62 and M60 around Greater Manchester caused by the protest.

The Highways Agency warned motorists to find alternative routes but most did not seem too put out by the added journey time and seemed to be enjoying the spectacle. Roads into the city were severely jammed as a series of rolling road blocks put in place by the Highways Agency and aimed at curtailing the protest served only to lengthen the delays. One organiser said onlookers were getting out of their cars to wave and take pictures of the bikers. “They’ve embraced this traffic jam today, that’s what we wanted,” he said.

The bikers are heading for Salford Quays. Michael Clearly, 56, a Salford garage owner, said: “I think it’s brilliant. It’s a pity they’re not blocking off Downing Street and London too.” The demonstration was the latest in a string of fuel price protests across the country as Labour backbenchers called on Gordon Brown to scrap plans for a 2p increase in fuel duty this autumn.

One of the organisers, a 24-year-old known only as 'Maverick' said: "Too many people are happy just to sit watching the news and to accept the fact that fuel prices and taxes are going up." With average prices for a litre of unleaded petrol and diesel now about 114p and 126p respectively motorbike clubs in the north arranged the protest via the internet and word of mouth. "We've decided that we can make a change and that we're going to do something about it”, 'Maverick' told the Manchester Evening News, “We're going to be that voice that stands up and fights back. We'll make a difference."

The latest figures from the RAC indicate that 67.2 per cent of every litre of petrol consists of tax and VAT. A national fuel protest is planned for June 22 when vehicles of all kinds will take to roads across the country for a “peaceful driving protest” organised via the social networking website Facebook.

The second video is on the silly side but is informative nonetheless. Here, a Georgian traffic officer laments the growing number of times he needs to provide a gallon or two to stranded motorists on Georgia's highways as they overestimate their ability to get from point A to point B by running their cars on fuel vapours, it seems. Aside from creating obvious traffic hazards, it sticks the government with a tab for injudicious parsimony.

Me? I'll take the train, thank you very much. Never before would I have thought that the internal combustion vehicle in its current form would be subject to extinction, but the signs of the end are all over the place as motoring as we know it becomes increasingly uneconomic. Next personal transportation technology, please.
Read More

SWFs Wising Up: Temasek Rebuffed Bear Stearns

♠ Posted by Emmanuel in , at 6/06/2008 01:15:00 AM
The Federal Reserve-arranged purchase of Bear Stearns by the House of Morgan is still being vigorously debated, and it is unlikely that a satisfactory consensus will be reached on the matter in the near future. Was it a massive case of "moral hazard" legitimating the "too big to fail" mentality of financiers flirting with disaster through financial securitization, or a necessary step in preserving the American or even the world financial system from meltdown? Go figure. In a recent article, the Financial Times notes that Bear Stearns approached the Singaporean sovereign wealth fund Temasek with its over $100B stash prior to the Fed-JP Morgan arrangement. To Temasek's credit, it turned down Bear Stearns' proposition that it be the investment bank's "white knight."

The issues faced by Temasek are well-known: Western governments were/are becoming leery of foreign ownership by "unaccountable" foreign governments pursuing "strategic" instead of "investment" opportunities and all that. Worse, SWFs that invested in Wall Street banks reeling from the mortgage crisis in late 2007 subsequently discovered that these concerns' stock valuations still had room to fall:

Bear Stearns sought rescue financing from Temasek of Singapore in the days before its sale to JPMorgan Chase but was rebuffed, underscoring the growing reluctance of sovereign wealth funds to make high-profile investments.

Temasek received the request for money late in the day Singapore time on March 14, the Friday of the weekend when the deal to sell Bear was brokered by the Federal Reserve and other US regulators, people familiar with the matter say. Temasek, which is considered one of the few sovereign funds with the internal capability to vet complex transactions, declined for practical and political reasons.

Bear’s advisers at Lazard Freres told Temasek it needed to respond before Monday morning in New York, which would have made it hard to do any real due diligence. Temasek also feared that an investment in Bear could generate controversy given “how American” the bank was.

Temasek’s response to the Bear deal was mirrored by the response of sovereign wealth funds from the Middle East and Asia that were asked to provide capital for Wachovia – another US bank with a strong domestic orientation – but refused. Wachovia declined to comment.

People familiar with sovereign wealth funds say they are growing reluctant because they worry about being seen as “dumb money” and because they fear triggering a political backlash. Kuwait Investment Authority executives have asked companies that seek money from it to “clear our name with politicians before you talk to us”, says a top fund executive. This reluctance could become more significant if the credit crisis forces banks to raise fresh capital. Lehman Brothers is considering such a step, people familiar with the matter say.

“The availability of money from sovereign wealth funds was exceptionally helpful to a limited number of US and other financial institutions around the world but since the spotlight has been put on them, they have pulled back dramatically,” Stephen Schwarzman, founder and head of Blackstone, said this week in a video interview with the Financial Times. “They don’t want to be members of a club that doesn’t want them as members. They’ve pretty much withdrawn.”

Read More

Sex Ratios in LDCs: Amartya Sen 1, Freakonomics 0

♠ Posted by Emmanuel in ,,, at 6/05/2008 12:32:00 AM
I am somewhat late to this story (apologies), but I do believe that it warrants additional commentary. In the past, I have covered the increasingly lopsided gender imbalances in China and India [1, 2, 3]. Conventional wisdom holds that traditional preferences in these societies for male offspring--continuing the family name, receiving and not paying dowry in marriage, having better economic return potential, etc.--have been exacerbated by the widespread availability of ultrasound techniques in LDCs. Sex selective abortion has been identified as a culprit. Also, women are not given as much attention as their male counterparts after they are born. China's so-called one-child policy may have further exacerbated matters. Nobel Laureate Amartya Sen garnered widespread notice for estimating that there are 100 million missing women if normal sex ratios held instead of the lopsided ones observed in LDCs:
In view of the enormity of the problems of women's survival in large parts of Asia and Africa, it is surprising that these disadvantages have received such inadequate attention. The numbers of "missing women" in relation to the numbers that could be expected if men and women received similar care in health, medicine, and nutrition, are remarkably large. A great many more than a hundred million women are simply not there because women are neglected compared with men. If this situation is to be corrected by political action and public policy, the reasons why there are so many "missing" women must first be better understood. We confront here what is clearly one of the more momentous, and neglected, problems facing the world today.
You should be familiar with the popularity of Freakonomics that currently grips the economics profession. It has spawned a very popular book and blog. While some in the economics profession and beyond have disparaged the Freakonomics phenomenon and there has been a back-and-forth on it already, I tend to be indifferent to the controversy. As long as it produces worthwhile research output, then I would welcome it. Freakonomics owes a good measure of its popularity either to tackling offbeat topics and/or to offering non-intuitive explanations. A few years ago, Emily Oster, an economist who was then completing her PhD at Harvard, offered an explanation of lopsided sex ratios in LDCs which was indeed non-intuitive in the Freakonomics sense. She attributed a considerable part of the "missing women" phenomenon to to parents carrying Hepatitis B as suggested by Baruch Blumberg, a Nobel Prize winner in Medicine. Hepatitis B is said to promote lopsided sex ratios alongside more unsavoury factors alluded to above. Here is the abstract of her academic paper:
In many Asian countries the ratio of male to female population is higher than in the West: as high as 1.07 in China and India, and even higher in Pakistan. A number of authors (most notably Amartya Sen) have suggested that this imbalance reflects excess female mortality and have argued that as many as 100 million women are “missing.” This paper proposes an explanation for some of the observed overrepresentation of men: the hepatitis B virus. I present new evidence, consistent with an existing scientific literature, that carriers of the hepatitis B virus have offspring sex ratios around 1.50 boys for each girl. This evidence includes both cross-country analyses and a natural experiment based on recent vaccination campaigns. Hepatitis B is common in many Asian countries, especially China, where some 10–15 percent of the population is infected. Using data on prevalence of the virus by country and estimates of the effect of hepatitis on the sex ratio, I argue that hepatitis B can account for about 45 percent of the “missing women”: around 75 percent in China, between 20 and 50 percent in Egypt and western Asia, and under 20 percent in India, Bangladesh, Pakistan, and Nepal.
As with pretty much everything else, academia is very much a marketing-driven endeavour, and I do not think many would bother to argue with this point. Novelty is treasured, and I recall reading advice given to would-be academics that soliciting a "gee, that's interesting" response increases one's chances of being published in respected academic journals. (To no small degree, the appeal of Freakonomics due to its novelty has also spilled into the commercial realm.) Now, the Journal of Political Economy is among the major titles in the economics oeuvre, and therefore landing a publication there was a coup for Emily Oster. During that time, author Steven Levitt of Freakonomics fame was the editor for the JPE based at the University of Chicago. He wrote a laudatory piece on Oster's work in Slate as well. Subsequently, she took up a post at Chicago.

As you would expect, many have come forward to contest the explanation offered by Oster. It now turns out that she was wrong, and she has admitted so herself for reasons you can read about in what is, in effect, her mea culpa: "Together, the data suggests that the interaction between hepatitis B and offspring is more complicated than that posited in the original papers from the1970s and 1980s, and in Oster (2005)." In the meantime, Levitt has lauded her academic honesty. The whole episode raises questions on a number of fronts. While I am again indifferent to the Freakonomics phenomenon, these are things which should be asked:

(1) Editors of academic journals are supposed to act as impartial arbiters. Should Levitt have trumpeted the now-discredited findings of Oster in Slate in his capacity as a JPE editor?
(2) If Emily Oster's PhD was granted on the basis of research on Hepatitis B and the missing women which she now has cast doubts on, should the degree now be rescinded?
(3) In light of this episode, should academia--particularly in the social sciences--place less value on novelty?

These are important questions, and the reputations of the persons involved have probably been affected already. From the point of a political science major such as yours truly, however, more helpful research would have gone towards investigating more meaningful things with policy implications than searching for esoteric explanations for the missing women. These may be not be "freaky," but may have more practical utility in the long run. These include:

(1) To what extent have the attitudes of families in China and India shifted over time on gender issues? Have these attitudes been affected by the rapid economic growth in these countries?
(2) China and India have instituted policies aimed at discouraging sex-selective abortion. Have these been effective?

There are many meaningful questions to ask regarding this touchy topic--some of whose responses can probably benefit from the use of advanced econometrics that the Freakonomics gang is proud of using. However, asking the right questions may be more important than coming up with novel explanations in helping reduce these unfortunate occurrences. There are indeed limits to the value of novelty and number-crunching unique data sets. (If you are further interested, the Wall Street Journal has a story and a pair of blog posts [1, 2] on the subject here.)
Read More

PRC: "Don't Blame Us for the Food Crisis"

♠ Posted by Emmanuel in , at 6/05/2008 12:21:00 AM
Appropriately, given changing global conditions, the UN Food and Agricultural Organization (FAO) is currently hosting its Food Summit in Rome. As you may already know, the presence of one Robert Mugabe at the summit has caused considerable consternation as he is held by many to be responsible for Zimbabwe's troubles over hunger. Anyway, while visiting China Daily, I came across the explanation below offered by Chinese officialdom at the conference as to why China is not to blame over high food prices. It is noteworthy that India and now China are taking similar strategies in passing the buck, especially to biofuel usage. As with all things, there are partial truths in these matters as high food prices are more likely to be a combination of several factors including Chindian and biofuel demand. But, don't take that line with the PRC:

Developed nations should not blame the developing countries for the rising demand for food and the surge in food prices across the globe, China's top agricultural official said Wednesday. Minister of Agriculture Sun Zhengcai said that as a developing nation, China has contributed greatly to world food security by providing for nearly a quarter of the world's population.

Some developed countries have blamed developing countries, including India and China, for the global food crisis. "The surge in food prices has been caused by multiple factors," Sun told the high-level conference on World Food Security, which began in Rome on Tuesday. He blamed rising crude prices, climate change and speculation for the food crisis. "It's not right to attribute the growing demand for food worldwide to the growth of developing countries or to specific policies of some countries."

The UN Food and Agriculture Organization (FAO) is hosting the three-day summit at a time when the world is experiencing a dramatic rise in food price. Food security is facing a threat from non-traditional sources, too, such as biofuels. More and more food products, especially corn, are being used to make biofuels, and this has the potential of creating more far-reaching problems.

A report jointly issued by the FAO and the Organization for Economic Cooperation and Development recently said the major reason behind the surging food prices is the increase in biofuel production by some developed countries.

Sun said China has succeeded in providing for its 1.3 billion people mostly from its domestic production. "And it has the capability to ensure long-term food security from domestic production." Thanks to its preferential agricultural policy, the country has reaped a bumper harvest in the last four years, with its production crossing 500 million tons last year.

China is committed to contributing to world food production and agriculture. "The country is using its expertise in agriculture, such as cultivating hybrid rice, to help other developing countries to increase their food production," he said.

Read More

Visa & Mastercard: Today USA, Tomorrow the World

♠ Posted by Emmanuel in at 6/04/2008 12:26:00 AM
Like many, I hold the business channel CNBC in contempt. To me, CNBC is to financial journalism what "pro wrestling" is to sports. Lo and behold, however, I have actually come across a rather helpful article from [gulp!] the CNBC folks--wonders never cease. It concerns how Visa and Mastercard stand to make a ton of $$$ despite US consumers being in rather dire straits. Yes, revolving debt, the sort borne by credit card users, is near a trillion dollars Stateside. The CNBC article describes how credit card debt may be the next shoe to drop as more Americans are forced to use plastic for everyday purchases and are hit by high interest rates on revolving credit in the process. Note though that credit risk is not borne by Visa and Mastercard, but by financial institutions which underwrite this sort of consumer credit.

Meanwhile, the credit card companies amass revenues per transaction using their branded cards. So, hapless Americans forced to resort to Visa and Mastercard more frequently are fattening up these companies' wallets, but it is the banks who will ultimately suffer from rising credit card delinquencies. Yes it's twisted, but it's also genius in a demented sort of way. Better yet, these companies are setting their sights abroad to replicate the American model. That means you, BRICs (Brazil, Russia, India, and China). Although consumers in those countries may be more wary of falling into debt traps than lemming-like Americans, "The World's Debt Lovers"®, there are still fortunes to be made as they do away with cash and use debit cards for everyday transactions to take advantage of cashless convenience and/or incentives for their use. Priceless, as they say. From CNBC:

"Right now what we're seeing is the US consumer losing their disposable income as they have to spend more and more on necessities because of higher prices for gas and food," says Ron Ianieri, a market strategist and co-founder of the Options University investor education center. "Normally when you have a certain budget and you can't keep up with the budget one of the easy steps is to extend that budget using credit."

One of the main problems with that is US consumers--and their counterparts in Europe as well--already are delinquent on their credit card payments in numbers not seen in six years. The Federal Reserve last week said credit card delinquencies hit 4.86 percent in the first quarter in 2008, while revolving debt--or the type used in credit purchases--hit $957.2 billion in March, a 7.9 percent increase.

As all that risky, high-interest debt keeps accumulating, consumers will find themselves deeper in a hole that threatens to keep the economy in its sluggish state. Economists worry that the problems are being exacerbated by consumers using credit not only to buy big-screen TVs and patio furniture, but also to pay their mortgages and shop for groceries.

"There's a significant risk to people who are using credit cards to help them try to bridge the gaps that they're facing," says Sean Snaith, director of the University of Central Florida's Institute for Economic Competitiveness. "The reality is the economic picture isn't going to clear up instantaneously."

Meanwhile, the banks that underwrite the credit card debt stand to lose as the delinquencies continue to rise. Standard & Poor's on Monday issued a dour forecast for banks in 2008, in part because of their exposure to bad debt. Ianieri ranks his "starting five" in terms of exposure to risky debt: Lehman Brothers, Citigroup, Bank of America, UBS, and Merrill Lynch.

"It's a disaster, it's a time bomb," Ianieri says. "The credit crisis is a lot more severe than it's being made out to be. I think the government is doing everything it can to keep the severity of this situation under wraps from the general population. I think they're just trying to bide time for these banks."

For the credit card companies, though, it's a different story. Visa and Mastercard back comparatively little of the credit actually issued through their cards, meaning they have a low level of risk for defaults and other payment issues. They get paid a fee each time someone uses their cards, and the banks that issue the cards assume responsibility for the debt.

As such, investors and analysts are fawning over the two companies in the face of consumer cash issues and the growth of emerging markets, where credit cards are only beginning to find popularity. "The reality is probably some of it is hype, but some is based on fact," Snaith says. "'Check or cash' has been replaced by 'debit or credit' and that's going to be a continuing trend not just in the US but spreading worldwide."

In a note issued last Thursday, Lehman Brothers raised its outlook on Mastercard, escalating its price target to $335 from $300. Other analysts have joined in the enthusiasm, with Stifel Nicolaus on Tuesday jacking up its price target from $312 to $367. Visa has gained from the enthusiasm for Mastercard. As of noontime trade Tuesday, both Visa and Mastercard were up more than 12 percent since May 23.

"They have no risk. It's per transaction," says Nadav Baum, managing director of investments at BPU Investment Management. "That's why Visa and Mastercard are bucking the trend when it comes to the other financial companies. Even though they group them as a financial company, they're really not."

Lehman analyst Bruce Harting, in his research note on Mastercard, pointed out that the company believes it can duplicate its US business model in countries including Brazil, Hungary, Poland, Russia, India and China, nations where it projects 39 percent revenue growth.

Similarly, Americans shopping abroad might be more inclined to use their plastic as the dollar begins to gain ground against other currencies. A purchase in euros now could cost fewer dollars by the time the next monthly bill rolls around if the US currency continues to appreciate. "That's another reason why Mastercard and Visa will continue to do well," Baum says. "It's all hand-in-hand."

Finally, there are the responsible consumers who pay their bills in full every month and are joining the legions of people who no longer want to carry cash. They enjoy taking advantage of the rapid growth of retailers and restaurants offering debit options, plus using points they can accumulate by utilizing their cards.

"The danger is in painting with a broad brush and casting all consumers as reluctant or unable to spend," says Greg McBride, senior analyst at Bankrate.com. "There are a lot of consumers that are not in the state of distress and can continue to spend in a manner that's not very different than a year or two ago when the economy was stronger. The card-holders that pay their balance in full every month, the incentive is for them to use the cards as much as possible."

Read More

The New World Order: Saudi Exceed London IPOs

♠ Posted by Emmanuel in at 6/04/2008 12:10:00 AM
With more economic activity headed for the developing world, the London Stock Exchange has become rather subprime. For a measure of how far London has fallen, consider that the volume of initial public offerings (IPOs) on the Saudi Stock Exchange (Tadawul) has exceeded that on the London Stock Exchange through the first five months of 2008. Indeed, if it weren't for the Visa IPO, the global leader in IPO volume would be Saudi Arabia and not the New York Stock Exchange. Go East, young man, go East. From Reuters:

The Saudi Stock Exchange surpassed London to be the world's second busiest market for initial public offerings in the first five months, Thomson Reuters data showed.

The New York Stock Exchange, thanks to the $19.7 billion listing of Visa Inc, topped the global IPO league table with 12 new issues raising a combined $24.4 billion, up 173 percent year on year.

The total of Saudi Stock Exchange IPOs jumped 322 percent from a year earlier to $8.5 billion as it welcomed Alinma Bank 1150.SE, which raised $2.8 billion in the country's biggest IPO in April.

The Saudi bourse also benefited from the $1.87 billion listing of mobile phone company Zain Saudi Arabia, an affiliate of Kuwait's Mobile Telecommunications Co, and Petrochemical firm PetroRabigh's 2380.KE $1.2 billion float.

Despite growth on some exchanges, global IPO activity fell 36 percent to $65 billion in the first five months as the global financial crisis dented investor appetite for equity.

IPOs on the London Stock Exchange's main market were down 74 percent to $5.6 billion, while Hong Kong Stock Exchange, which ranked fourth in the global IPO market, attracted IPOs totalling $5.2 billion, a 57 percent decline from 2007.

Read More

Dead Horses II: WTO NAMA Negotiation in Reverse

♠ Posted by Emmanuel in at 6/03/2008 02:12:00 AM
Despite Pascal Lamy's best efforts at presenting a positive outlook on the current state of WTO negotiations, the wheels of the Doha wagon are coming off fast. With the agricultural market access negotiations already in a parlous state, it is perhaps unsurprising that things are no better on the non-agricultural market access (NAMA) front as negotiations are going nowhere there, either. Or, to be more precise, they may be going somewhere--backwards. Canada's ambassador to the WTO Don Stephenson, who is the chief negotiator over NAMA, says that there is no point in further talks given the current state of affairs. From Thomson Financial:

The WTO's chief negotiator on freeing up access for industrial products said on Monday he sees no point in further talks until member states are ready to compromise over tariffs and other key sticking points. The 152 members of the WTO need to 'work among themselves to bridge their positions and until they do that, it is pointless to convene NAMA negotiating group sessions,' ambassador Don Stephenson said.

Industrial products come under the rubric of 'non-agricultural market access' (NAMA) as part of World Trade Organisation talks launched in 2001 on liberalising the global trading system. Stephenson said that member states were more divided than ever after he had issued a fresh text aimed at spurring stalled negotiations that are key to any success in the WTO's long-running Doha trade round.

'Over the course of the week of discussions, things actually got worse rather than better. We got farther from a text that could be put before ministers rather than closer,' he told reporters. 'Some issues that were either resolved or at least nearly resolved were reopened, some extreme positions were maintained, some positions were perhaps even arguably made more extreme,' he added.

The NAMA text proposes that about 30 emerging market countries would agree to reduce their customs duties to a maximum level of 19 to 26 percent. The more the tariffs are lowered, the greater would be the right of these governments to protect certain 'sensitive' areas. Developing countries have been particularly forthright in their criticism, with India slamming the proposed tariff cuts on industrial goods as a 'total mess' that need to be redrafted.

Washington also cast a downbeat note, with top trade official Susan Schwab describing the new texts on NAMA and agriculture as 'disappointing'. 'Unfortunately recent developments in Geneva have moved the negotiations in the direction of less balance and less market access,' she said.

But Stephenson, who is also Canada's ambassador to the WTO, said it was high time for countries to take 'responsibility' for the negotiations and strive to bridge the gaps in their positions. 'It's their lack of work to try to reach a consensus, it's their lack of engagement in the process, it's their failure to negotiate' that has led to the current impasse, he charged.

Around 30 ministers are set to hold an informal meeting on the sidelines of a summit by the Organisation for Economic Cooperation and Development (OECD) in Paris on Thursday, with WTO director general Pascal Lamy also attending. 'He'll have to ask them whether or not they're ready to negotiate amongst themselves,' one diplomat said last week -- adding that he expected a negative answer.

Read More

Dead Horses I: US Loses Cotton Appeal at WTO

♠ Posted by Emmanuel in at 6/03/2008 01:19:00 AM
To no one's real surprise, the US has lost its appeal over cotton subsidies at the WTO involving Brazil. Just posted on WTO site are the findings and conclusions of the WTO appeals court on the matter. DS 267 has been a long drawn out case, but it appears that we have reached the bitter end. Although the US claims it has since removed the offending supports, that apparently did not sway the opinion of the WTO's appellate body. Brazil will thus be able to impose sanctions worth $1B a year on US imports, likely involving intellectual property (IP). Towards the end of the following Reuters article, there are also hints at potential difficulties with the new farm bill over cotton. Not only does the new farm bill seem to reinstate contested subsidies, but there will also be more trouble down the road if and when cotton prices fall again:

The United States lost an appeal on Monday in its long-running dispute with Brazil over U.S. subsidies for cotton farmers at the World Trade Organization (WTO). The ruling opens the way for Brazil to seek WTO approval for more than $1 billion a year in sanctions on U.S. imports, which it has suggested it could impose on services or by suspending U.S. intellectual property rights.

In a 184-page ruling, the appeal body, the WTO's top court, recommended that the WTO's dispute settlement body should request the United States to bring its measures into line with international trade rules. The appeal body backed findings on almost all counts, issued in December last year by another dispute panel, that the United States had not complied with earlier rulings in the case brought by Brazil in 2002.

Last December's compliance ruling confirmed that U.S. marketing loan and counter-cyclical payments had led to an increase in U.S. production and exports of cotton that depressed world prices. Washington had appealed the ruling, arguing that changes to its farm programs had brought them into line with WTO rules.

The Bush administration on Monday said it was "very disappointed" by the new ruling, suggesting that higher cotton prices made the case irrelevant. "The United States has not been, and is not, making any payments tied to cotton production. Therefore, there is no basis to say that U.S. payments are today having any impact on cotton prices," Sean Spicer, a spokesman for U.S. Trade Representative Susan Schwab, said in a statement.

U.S. cotton subsidies have become one of the most contentious issues in the WTO's Doha trade talks, which seek to expand world trade and give a leg-up to developing countries. Developing country producers, especially in Africa, believe the U.S. subsidies depress prices and squeeze their own poor farmers out of the market. African producers are calling for an 82 percent cut in the round to U.S. trade-distorting cotton subsidies -- bigger than the 66-73 percent proposed for other U.S. farm supports.

Washington has yet to file a counterproposal, but there is strong political backing across Southern states for continued support for the politically influential industry. The U.S. government paid cotton farmers $2 billion to $4 billion in trade-distorting subsidies in most recent years.

But price-linked subsidies have fallen in step with higher cotton prices, which have risen over the past year due mainly to lower cotton sowings and expectations that world cotton demand will increase at a steady cadence. Based on the spot price of cotton futures in New York, fiber contracts were trading around 46 cents a lb in May 2007. They hit a 12-year top over 90 cents in March and closed last Friday at 65.74 cents.

The U.S. cotton industry said the ruling was "out of date and out of touch with existing market conditions. It is simply not the case that world cotton prices are currently suppressed or were ever suppressed," the National Cotton Council said in a statement. The Memphis-based group also noted that one trigger for subsidies, the cotton target price, had been lowered in the 2008 U.S. farm law enacted in late May.

The new farm law sets the target price for upland cotton at 71.25 cents per lb from 2008, down slightly from the earlier level of 72.4 cents per lb. But the new law also introduces an incentive of 4 cents a lb for cotton mills, which critics complain is merely a revival of a subsidy eliminated after Brazil's earlier WTO victory.

Read More

WTO DG Pascal Lamy = Don Quixote?

♠ Posted by Emmanuel in at 6/02/2008 01:37:00 AM
As I've said before, WTO Director-General Pascal Lamy has one of the most difficult jobs around in pursuing the successful completion of the Doha Development Round. Jonathan Dingel over at Trade Diversion points us in the direction of this useful paper on what has brought the WTO to its current impasse. Needless to say, there are easier jobs than selling further global trade liberalization in 2008 like selling copies of "Guitar Hero III" to the Amish or making Amy Winehouse look presentable. Anyway, my current miscellaneous ramblings have been jogged by yet another statement by Pascal Lamy that, yup, a deal is juuuuust around the corner. It may be inescapable as the WTO boss to have to make such statements at regular intervals despite resounding evidence to the contrary. However, it all begins to sound as if the WTO headquarters is not in Geneva, Switzerland, but in Don Quixote's La Mancha. So, let us begin with Pascal Lamy for the optimistic take on matters via Reuters:

World Trade Organization Director-General Pascal Lamy said on Sunday developed and developing nations could still wrap up the Doha round of talks on a global trade deal this year.

"I still believe it's doable this year," Lamy told Reuters on the sidelines of a meeting of trade ministers from the 21-member Asia-Pacific Economic Cooperation forum in the southern Peruvian city of Arequipa. "We know how to get there. We need to cross this bridge of agricultural subsidies, industrial tariffs and agricultural tariffs soon, now, because otherwise we will not have enough time to cross this bridge to finish the road."

The WTO's Doha negotiations to bring down barriers to global trade are now in their seventh year but face a crucial test in the next few weeks, after which the U.S. presidential election may cause years of further delay. APEC trade ministers issued a manifesto in Arequipa on Sunday urging negotiating nations to take immediate steps to prop up the limping Doha round.

The round has sputtered and gained momentum a handful of times since it was launched in November 2001, snared usually on differences between developed nations and major developing countries like China and India.

"We have been working on these for years and years and there's now something on the table that with a few adjustments can materialize and I don't think that there is a sort of trade-off between ambition and timing," Lamy said. Intense negotiations this year have helped push along talks, especially on agricultural issues that are key to a successful round. In industrial goods, the other key hurdle, diplomats say WTO members are at last starting to engage seriously.

Lamy said countries were progressing and all the actors were ready to smooth out remaining issues, including areas like anti-dumping rules, fishery subsidies, environmental goods and environmental services. "Does this mean success is guaranteed? No. It remains a negotiation and we still have to try and clean the ground," he said.

I do not need to point out that Pascal Lamy has made nearly similar, rather optimistic statements over and over again. Facts on the ground, though, are rather bleaker than this. As Indian industrialist Rahul Bajaj notes, it is curious that the chairpersons of the agricultural and non-agricultural market access discussions are from developed countries in what is supposed to be a "development" round. As Agence-France Presse notes below with far more circumspection than Reuters, this is turning out to be a rather quixotic enterprise. It also appears to be a more accurate representation of the status quo:

The WTO has finally created unity among its 152 members -- but unfortunately for head Pascal Lamy, the only thing all states agree on is that the prospect of a new trade deal is still as far away as ever. Lamy said the publication of new texts on agriculture and industrial goods -- key sticking points for nearly seven years of torturous negotiations -- clarified remaining obstacles to an agreement in the Doha trade round. "These revised negotiating texts illustrate clearly where convergence lies among the WTO members ... we are getting closer to our end game," Lamy said.

The round was launched in the Qatari capital in November 2001 with the aim of reaching a deal by 2004. But it has foundered ever since, mainly over disputes between developed and developing countries on agricultural subsidies and industrial tariffs.

The WTO chief has long said a deal is "doable," and has made it clear he would like to see Doha wrapped up before US President George W. Bush leaves office early in 2009. But his was a lone voice of optimism this week as key WTO members made clear their objections to the texts, casting further doubt on the likelihood of any imminent breakthrough.

"The new draft texts on agriculture and manufacturing are disappointing," said top US trade official Susan Schwab. "Unfortunately recent developments in Geneva have moved the negotiations in the direction of less balance and less market access," she bemoaned.

The European Union has been a main advocate of trade liberalisation but there are increasing signs of hostility among some of its 27-member states. French trade minister Anne-Marie Idrac said that "we have a lot of questions" about the agriculture proposals and "for us French there's no improvement on market access for our industrial goods to emerging markets."

Ireland, where farmers constitute a significant political lobby, cast doubt on the wisdom of a deal at all costs. "Our view is you need substance. It's not about completing this just because there's six months left for the US presidency," new foreign minister Michael Martin said in Brussels this week. Asked if he thought therefore that it would be wise to wait until after the US election he replied "that would be my view, yes."

Developing countries were also forthright in their criticism, with Indian commerce secretary G.K. Pillai slamming proposed tariff cuts on industrial goods as a "total mess" that need to be redrafted.

The latest text on industrial goods -- known as non-agricultural market access (NAMA) in WTO parlance -- proposes that about 30 emerging market countries would agree to reduce their customs duties to a maximum level of 19 to 26 percent. The more the tariffs are lowered, the greater would be the right of governments to protect certain "sensitive" items.

WTO sources sought to portray the various reactions to the texts as just posturing, but other observers believe that time is rapidly running out for any deal this year. Lamy had initially hoped to bring ministers to Geneva over Easter to hammer out "modalities" -- the key numbers for tariff cuts that would form the basis for any comprehensive deal.

The timetable has repeatedly had to be put back as the WTO's 152 member states prove incapable of reaching consensus despite intensive technical discussions. "We've got the impression that the conditions are less than ever in place for a ministerial meeting in the short term that would meet European interests," France's Idrac said.

However, some ministers will hold an informal meeting in Paris on Thursday on the margins of a summit by the Organisation for Economic Cooperation and Development, which Lamy will also attend. "He'll have to ask them whether or not they're ready to negotiate amongst themselves," one diplomat said -- adding that he expects a negative answer. "We are very far from having the basis for a serious discussion. On industrial goods, we're not there at all," he warned.

Read More

Do SWFs [Heart] Subprime? The UBS Caper

♠ Posted by Emmanuel in at 6/02/2008 01:16:00 AM
This post is a follow-up to a post I made earlier about "SWFs Not Seeking (Ineligible) Wall Street Firms." Although various sovereign wealth funds more or less proved to be the funders of last resort to these subprime-laden banks towards the end of 2007, SWFs have been remarkably silent in 2008 on the equity stakes front. As stock prices of these banks have fallen markedly since the late 2007 round of official purchases, foreign buyers have stayed away in droves so far this year. You could say that they are waiting for the subprime detritus to work its way out of the financial system before taking another plunge. Once bitten, twice shy.

Recently, however, the Financial Times notes that SWFs may be on the prowl for, of all things, distressed mortgage securities offloaded by the likes of UBS. In particular, half of the funding for investment firm BlackRock's deal to buy $15B in UBS mortgage securities is said to have come from SWFs. Interesting? It certainly is so. Although it may fuel optimists' notion that the mortgage mess is nearly "bottoming out," the market timing of SWFs has not exactly been exemplary as of late:

Sovereign wealth funds have provided more than half the equity for the BlackRock fund that bought $15bn of troubled mortgage debt from UBS this month, people with knowledge of the matter say.

The BlackRock deal highlights the rapidly evolving strategies of the sovereign wealth funds, which initially sought to take advantage of the turmoil in global markets by investing directly in beleaguered financial institutions. However, these rescue financing deals led to fears of losses by the funds – and a political backlash in the West. This has led sovereign wealth funds to look for lower-profile opportunities, often by investing through private equity funds.

The BlackRock deal marks one of the first big forays into mortgage debt by the sovereign wealth funds, providing ammunition for analysts who argue that the mortgage market is recovering. BlackRock raised $3.75bn in equity for the fund that bought the UBS mortgage debt. The rest of the money was borrowed from UBS itself, UBS has said.

Some of the more sophisticated sovereign wealth funds, such as Kuwait Investment Authority, have been looking at acquiring real estate assets in the US, either directly or indirectly. KIA also has acquired stakes in real estate investment trusts, which are trading at bargain levels.

BlackRock has long-standing ties with Middle Eastern and east Asian sovereign wealth funds such as Government of Singapore Investment Corporation. Next week, BlackRock’s founder, Larry Fink, is taking his board on a swing through the Middle East with a stop in Kuwait, the KIA said in a press release.

Read More