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Trade Matters - ECIPE Global Economy Blog
Up one levelWelcome to Trade Matters - ECIPE's institute blog. Here you can find opinions and commentary by ECIPE scholars. You are encouraged to join the discussion by posting a comment or sending feedback to the author. All blog posts are made in a personal capacity and only represent the views of the author.
Will the Real Barroso Please Stand Up!
Barroso’s speech in the European Parliament yesterday reached headlines this morning because of confusions over a reference to Eurobonds (see below for some thoughts on Eurobonds). What I take away from this speech is a much alarming observation: Barroso confirms the weak leadership of the Commission, and of Brussels institutions more generally, and offer next to no leadership on a growth agenda that can help take Europe out of the long period of turmoil and aneamic growth it is in for. The Barroso appearing before the European Parliament is a different one than the Barroso that sought a second term by delivering a good speech and agenda before the Parliament two years ago.
One of the key contributions that the Commission can give to Europe’s economic and financial problem is to launch a bold agenda for growth. One can say much about the 2020 agenda that Barroso spearheaded through EU institutions and member states last year, but one thing should be clear: in the unlikely event that a good deal of this agenda actually will see the daylight, it will give a small contribution to growth. In fact, some of it may rather hinder growth.
So what I have been expecting from Barros in recent months is a fresh start with an agenda that on the one hand is much bolder than the current growth agenda but on the other hand will use the classic EU approach to foster growth: reduction of barriers between countries.
What Barroso delivered in terms of policy substance was self-serving reviews of some of the recent proposals the Commission has made on financial regulations, for instance on derivatives. He also confirmed that new steps would be taken – and the one step he preferred to mention was the idea of introducing a financial transaction tax, a so-called Tobin tax.
You can have a long debate about a Tobin tax, but two things are obviously clear. First, it will not help to bring financial stability. Second, if other regions of the world will not establish similar taxes, the main effect of an EU tax is that financial trade will migrate to other countries. In other words, this is a proposal which is bound to lower Europe’s growth and growth potential.
One could also have a long discussion about the merits of some of the Commission’s proposals on financial regulations. What seems clear to me, however, is that few of the proposals made so far have actually addressed the sources of the crisis or real problems in the financial sector experienced during the crisis. Apart from the institutionally oriented legislations – the establishment of pan-European supervisory authorities – the financial regulations have either addressed imagined problems (alternative investment funds) or gone for the easy wins with little pay off for the real economy (derivatives, OTC, et cetera). What remains to be done is the big task: better regulation of banks and ways to wind down banks that cannot survive.
Barroso did not say that the Commission would propose Eurobonds in the way people recently have thought about Eurobonds – that is, a mutualisation of all or a substantial part of Eurozone debt that will equalize the bond yields across the currency union. This is a non-starter. Even if we assumed it would stand a chance to pass constitutional reviews and referendums in some or all Eurozone countries, which is a very optimistic assumption, it is something that could perhaps be a reality five years from now. Hence, it will make no contribution to the problems at hand now.
So what should Barros have done? Well, he should have put leadership behind the strategy he launched in 2009 when seeking parliamentary approval for a second term as president of the Commission – and gone a few steps farther: a real single market for services; break up of state monopolies in key sectors like energy; a trade agenda that targets big markets and that can offer big boosts to export and import; a radical overhaul of the EU budget, with substantially bigger cuts in farm subsidies (the annual 3.5 bn EUR in farm subsidy to Greece, could not that sum be used better in Greece…?); sweeping changes in red-tape and a moratorium on any regulation that stifles growth by adding new regulatory burdens on firms and entrepreneurs; and, finally, an acknowledgement that poor economic development in EU member states also must be reflected in the expenditures of EU institutions, e.g. a ten percent cut in total expenditures in the next five years.
Now, I can already hear you saying: that’s naïve and wishful thinking. Perhaps it is. But big things in the history of the EU have never been achieved by leaders nervously reading the tea-leaves of European politics. Difficult political conditions for a fresh start are only excuses for people without genuine leadership ambitions. At a time of smooth economic sail one could live with a leadership with no grander ambition than to get a conference room in the Parliament named after him or her. But it does not work at a time like this.
Barroso is a good man with good convictions. He has the capacity to achieve greater things. I think he wants it to. So will the real Barroso please stand up.
Intellectual struggles over genetic resources and traditional knowledge
The increasing interest in natural ingredients from the cosmetic industry implies risks. New methods of developing medicines for the pharmaceutical sector and the growing number of biotechnological companies interested in agricultural improvement are the threats to biological diversity. The commercialization of traditional knowledge is also controversial with respect to the right of indigenous communities. The problem exists all around the world, but particularly is voiced by Brazil and India – an IP main opponent. The extent of the use of genetic material and traditional knowledge by the industries is hard to estimate because of the lack traceability and data. However, according to UNDP calculations private companies might “earn” up to $US 5 billion per year in terms of unpaid royalties. It is estimated that up to 50% of pharmaceutical market is based on genetic resources.
Since the Rio Earth Summit in 1992, the concerns about global biodiversity and the future of the environment have become a central issue in the North-South debate and Intellectual Property Rights. During this meeting, the parties created the Convention on Biological Diversity and urged the discussion on the provisions of sustainable access to biological diversity and protection of indigenous people. The aim is twofold; to stop illicit access and misappropriation of genetic resources with actual or potential value, and to protect the indigenous knowledge of local communities.
The Convention on Biological Diversity established the sovereign rights of a state on access to natural resources. Based on this convention, countries can fight illegally granted patents by establishing sui generis systems of protection in the form of public - private contracts and databases collecting all traditional knowledge. For instance, a system of bio-prospecting contracts was introduced in 1991 by INBio and Merck cooperation. It is an example of new mechanism to improve the R&D process and protect local biodiversity. This kind of contracts usually includes obligations of royalties sharing and technology transfer to develop the possibility of local value processing as well as, screening capabilities. It also obliges private companies to contribute financially to protect the biodiversity.
However, the sui generis system is not sufficient for indigenous communities claiming the need to establish stronger legal protection for their knowledge. These groups have been supporters of the actions taken at the World Intellectual Property Organization (WIPO) forum but also in the World Trade Organization (WTO). While the WIPO is working on legally bounding documents, which aim to protect the rights of indigenous communities and states-holders, the WTO tries to reform the TRIPS. WIPO efforts are currently focused on establishing the rules of Access and Benefit Sharing mechanism, Prior Inform Consent (PIC) to access GR and TK, and disclosure requirements during patent application process. In WTO, the stakeholders demand stronger disclosure requirements and also call for exemptions allowing governments to exclude some plants, animals and ‘essentially’ biological processes from patenting. Yet, the conflicting interests make the pace of negotiation in WIPO slow; the discussions have actually stalled in WTO.
Despite the ongoing work in WIPO, which has become the main forum for the matter, many questions still need to be answered and many problems remain to be solved. How will the final document look like? What will the implications be for private companies and how will the R&D process be affected? Will the indigenous groups be adequately protected? How are the provisions going to be executed? What will be the impacts on global patent system? With many stakeholders the situation is extremely complex; private companies’ interests, economic inequalities, lack of political capacity within indigenous communities, legal disputes are just few of the aspects adding to the density of the issue. It might be too early to provide an answer already but it is definitely worth following what is now going on in Geneva...
The Meaning of the Unsaid: Raw Materials and International Regulations
When reflecting upon the conference ‘Commodities and Raw Materials: challenges and policy responses’, organised by the European Commission on June 14, it might be more interesting to consider what was left unsaid, rather than what was said...
‘It is time for the G20 to take its responsibility’, stated French Presidency Sarkozy, suggesting that regulation is crucial in order to respond to the problem of price volatility in the market for raw materials. The French President proposed a centralised system to register transactions in the international market for raw materials, and a cash deposit obligation for investors acquiring shares in production companies, to avoid speculation.
What Sarkozy did not mention in his speech was the word WTO. Neither did Commission President Barosso. The latter advocated nevertheless greater transparency in the interaction between the physical and financial international markets for raw materials, while praising France for putting the issue on the agenda of the G20.
Is the WTO losing its role as the primary forum for establishing the rules of international trade? Speakers at the conference, Arvind Subramanian, Peterson Institute for International Economics, and Pier Carlo Padoan, OECD, recognised that there is a weakness in the WTO system in dealing with scarcity. In their view, the WTO system is primarily designed to cope with situations of surplus or abundance – the member countries have a range of measures at their disposal to deal with import surges through safeguard mechanisms, anti-dumping duties and CVDs. In contrast, the system is rather weak when it comes to situations of scarcity – export restrictions on for instance rare earth or precious metals are difficult to address efficiently with the current regulatory instruments. Mr. Subramanian recalled however that the WTO system is weak because of the fact that countries have not agreed to cooperate further on this issue.
The question is what to do next. ‘This is not a North-South issue’ reminded Karel de Gucht, EU Trade Commissioner, saying that ‘we are all interdependent’. At the same time, he renounced the idea that everything can be solved with trade. Many challenges remain in his view, particularly related to environment and development.
‘The world needs to come up with a package of issues related to scarcity of raw materials’, said Mr. Subramanian, suggesting that the interdependence of resources necessitates cooperation beyond the current Doha agenda. Political leaders appear however to focus on the G20 for the moment, leaving the WTO out of their speeches...
ECIPE Intern post: "A new look at NTBs in trade agreements"
Participants of the ECIPE internship programmes are required to publish a piece on the ECIPE blog before the end of their internship, and following post is a submission by Oscar Guinea Ibanez. He joined the ECIPE internship programme after a tenure at DG Trade, and is now joining ECORYS after his internship with ECIPE. In this blog post, Oscar Guinea Ibanez looks at non-tariff barriers (NTBs) in EU FTAs and south-south trade.
A trade policy of least common denominators?
Six months have passed since the 2010 Trade Policy Communication, which contained some promising assurances of continued commitment to trade talks, but we are yet to see any signs of actions since. While the EU hardly carries all the blame for the dead-end in the Doha round, the EU bilateral strategy is clouded by uncertainties – and a fear of the big FTAs. Is European trade policy becoming americanised, and slowly moving towards a dire state of impasse?
Internet Freedom of Expression
It only takes a few hours to travel by train between Deauville, the French seaside resort where G8 meets this week, and Brussels. But yesterday they were worlds apart. In Deauville, G8 governments gathered to discuss President Sarkozy’s latest whim – laws and regulations for what he calls a “civilized Internet”. More modestly, in Brussels we hosted a conference with some leading Internet freedom people to call for fewer restrictions of online freedom of expression.
Who should be the Next IMF Chief?
It is remarkable to see how little past pledges by European leaders is worth when they are now bargaining over the appointment of the IMF chief. Not long after it was clear that DSK was not going to return to the IMF, leaders of Europe expressed strong and firm views on the need for a European to head up the IMF. Now they also lobbied in a new argument: as the IMF is so heavily invested and focused on crises in Europe, the new IMF head must be someone who understands European politics and the plight of the governments now in trouble.
Let me beg to differ.
First and foremost, the key job of the IMF chief is to lead an international organisation making sound judgments on economic grounds and to protect the integrity of that institution. Having a European at the helm of the IMF – and especially one who has participated in the bailouts and remarkably flawed economic management in the eurozone in the past year – is likely to in opposition to that criterion. Worse, it is more than likely to be in opposition to the key criterion. It would be better to have someone who, in the first place, will not (or cannot be suspected to) protect past and recent decisions over the bailouts – hence, someone who could look at them dispassionately without prejudices and attention to the way things have proceeded in eurozone politics. This clearly speaks for a non-European.
My view is that the nationality and political aspirations of DSK actually was a problem. He was planning for a presidential run in France. That may or may not have interfered with his view on how to deal with Greece and other countries – but the fact that many people had those suspicions, me included, was a problem.
Whatever the individual merits of candidates, it is absolutely clear that there will have to be a turnaround in the position taken by the IMF and the eurozone over Greece. It simply is impossible to sustain the current approach. Is it likely that a European who has been heavily invested in the current approach would be the one to lead that turnaround in a way that supports the integrity of the IMF? I don’t think so.
The Doha Trade Round: Euthanasia, Homicide or Resurrection?
The 10 year old patient that is the Doha Round of trade negotiations has been close to death before – according to a previous Indian Commerce Minister “half way between intensive care and the crematorium” at one stage. But it has always come back from the brink. As recently as last November at a meeting in Seoul, eminent doctors – the G20 Leaders – pronounced the patient’s health to be improving and indeed undertook to work together to ensure that full recovery was successfully completed through concluding the negotiations by the end of 2011.
The latest check-up at a clinic on the shores of the lake in Geneva – known as the World Trade Organization - just over four months later, reveals that the patient has had a sudden relapse and is now, once again, in very serious danger. Director-General Pascal Lamy reports a “grave situation”. There is a “clear political gap” between the leading economies in some of the sectoral negotiations to cut customs duties on industrial goods. The patient’s condition is rapidly deteriorating and some are calling for euthanasia - or is it homicide? What happened?
The G20 doctors simply have not delivered. Their diagnosis may have been correct, and they talked a good plan for treatment. But they just have not been able to work together to produce the promised results.
What signal does this send the world? It sends the signal that the G20 countries – and, among these, especially the United States, the European Union, Brazil, India and China – are not collectively committed to delivering the international economic cooperation that is absolutely essential to the wellbeing of the globalizing world economy in these troubling times. While making all the right sounds, the governments of the major trading economies have so far shown themselves unwilling or unable to tackle narrow sectional interests.
What are the prospects for Doha now? Increasingly, there is talk of the need for a “soft landing”. The permutations vary but most commonly the elements appear to be delivery of a few sparse results, combined with an admission that Doha cannot be concluded this year and a work programme aimed at completing the negotiations when conditions are right.
This should fool no one. In the first place, it is not at all clear whether a consensus could be found at this stage on a small “Doha Light” package. What would amount to a de facto suspension of the negotiations would be bound to last a very long time, at least until well into 2013 (allowing the dust to settle from major political events in the United States, China, France and possibly elsewhere), and probably much longer. The Doha Round will be in a deep coma by then. An agenda conceived in 2000/01 will look substantially outdated. There is no reason to believe that the geopolitical environment in 2013 or beyond will be any more conducive to doing a deal than it is now. It’s more likely that the plug on the life support machine will be pulled.
To be sure, some of the organs of Doha may be harvested from the corpse in due course. Even if “new” negotiations take place, it’s difficult to see how at least some of the “old” subjects, including duties on industrial goods, can be avoided. Exactly the same problems that exist today will exist then : procrastination will not solve them.
It will in all likelihood take a number of years starting in 2013 for governments to define a new WTO negotiating agenda. Which of those old subjects to revive; which new subjects (there are so many good candidates) to bring in; how to handle the negotiations in the light of the failure of Doha? These are not easy questions upon which to find consensus among the large number of governments that constitute the membership of the WTO. It could be 2020 before new negotiations get under way.
A recent study by a group of eminent international analysts details the dangers to the global trading system of such delay – among them, undermining the WTO dispute settlement system, regionalism filling the trade governance vacuum, the rise of protectionism and, not least, delivering a serious blow to developing and least developed nations*.
The trading landscape will look very different by 2013 and beyond . It may well prove to be very difficult to break out of a web of preferential trade agreements and a fragmented trading system. While businesses, given the multiplicity of inputs in modern production processes, increasingly want to refer to their products as being “Made in the World”, governments will still be trying to force them into national, bilateral or regional straitjackets. Moreover, in the event of another economic crisis, traders will be protected by a system designed in the 1980s.
The reality is that a so-called “soft landing” for Doha in 2011 would effectively condemn the trade round to a lingering death without saying so, while steering the global trading system into dangerous waters.
Key governments must now face up to the difficulties, prove themselves capable of working together to provide a healthy international trading environment, and start to deliver on their promises. They must show that their commitment to a common cause is sufficiently strong to enable them to find solutions to the differences which exist. If they do not, their credibility in international trade and economic cooperation will be seriously undermined.
* See “Why World Leaders Must Resist the False Promise on Another Doha Delay”, edited by Richard Baldwin and Simon Evenett, available at http://www.voxeu.org/index.php?q=node/6433
Stuart Harbinson was chairman of the WTO General Council at the time of the launch of the Doha Round. He is now an adviser with a law firm in Geneva.
Fredrik Erixon is Director of the European Centre for International Political Economy in Brussels.
April 28, 2011
Euro-Mediterranean Trade Relations: A Rain of Investment on the Horizon?
Following the storm of demonstrations and political tornados in the North African and Arab countries, one might want to reflect for a moment upon the role of the EU, their main trading partner, in promoting economic growth in a long-term perspective.
The Sendai catastrophe and the Japanese Economy
Japan was today struck by a 8.8 magnitude earthquake and a devastating tsunami over a vast areas in the northern prefectures of Honshu. While people are still waiting to be saved, or searching for their loved ones, the world economy prepares for possible implications on the economic recovery. As petty as the economy seems in the brink of human tragedy, markets reacted immediately to the catastrophe. In matter of minutes, the Yen appreciated to ¥81.8/$; Nikkei index had dropped 1.7% by closing time. It is obvious that the fragile Japanese recovery and exports are at risk - with little means to deal with them but by boosting external trade.
Environmentalism and green protectionism
Environmentalism is Europe’s new religion and I have to admit that I had a green religious epiphany a few years ago. At a conference in the Far East about sustainable development I sat next to a famous green European salvationist on a bus to a conference dinner. As we were chatting away, in a friendly tone, the bus stopped at a traffic light and just outside our open bus window a young girl, not more than six years old, begged us for some money to see her monkey, which was tied to a pole, do some acrobatics.
“My blood starts to boil whenever I see this”, the greenie said, pointing at the scene just outside our window.
“I agree”, I said, “it is heartbreaking to see someone, especially so young, in such poor condition”. And then I went on about how the girl – dirty, malnourished, aneamic, and bruised – probably would not live for much longer.
“What do you mean?” the greenie asked in a surprised and slightly vexed tone. And after a long silent pause, she said “Oh, you mean the girl. Yes, that is of course sad, too”.
Her outrage had not concerned the poor child but the captive monkey. I shouldn’t have been surprised. Her talk at the conference the previous day had been about the moral obligation to conserve forests and how she would like to see two entire countries (sic!) in the region to be turned into outdoor nature museums. Yet even a cynic like me could not get it into my head – not until the epiphany came to me in the bus: these extreme greenies really do value the life of a monkey higher than that of a fellow human.
Ever since I have been armed with two questions to fire away at every greenie I meet: how many gorillas remain in the wild, and how many young children are in the wild (meaning poor and orphaned/living without protecting adults)? Most of the greenies get it right. Close estimates of the gorilla population (and there are several) suggest it to be around 115000, but no one knows how many children that are living in possibly the most vulnerable situation one can imagine. I don’t mind people spending money on measuring the gorilla habitat – in fact, I regularly give money to causes that aim to recover the population of endangered species. But the environmentalist God must seriously have distorted our value system when, as my quiz aims to reveal, we care more for knowledge about the gorilla population than poor children without a protecting adult.
Fast forward five years and I had, if not a new green epiphany, a Yogi Berra moment (“déjà vu all over again”) when I was working on the new European Union policy on biofuels. It is an area infected by green ideology and a wicked value system – yet this time spiced up with noxious protectionism. It is a simple story. European leaders wanted to reduce carbon emissions by increasing access to biofuels. It is a good ambition to increase competition between energy sources, but the hidden agenda of this policy was to provide, as one document put it, European farmers with “new opportunities for sustainable rural development in a more market-oriented common agricultural policy”. It garnered support from friends as well as critics of Europe’s wasteful policy for agricultural subsidies. Critics saw it as an opportunity to reduce subsidies to farmers, and friends viewed it as a way to save high levels of subsidy, now by producing a common environmental good.
But there were two problems. The Northern hemisphere doesn’t offer good conditions for farming of biofuels crops, and Europe needs to turn a lot of land into crops for biofuels if the grand scheme of turning agricultural welfare queens into green foot soldiers should work. But converting land for inefficient crops is a tricky thing as a lot of carbon is omitted; the reduction of the amount of carbon saved from switching from fossile fuels to biofuels will then be embarrassingly small. And secondly, Europe’s biofuels farmers are generally not competitive and the entire biofuels industry needs to be heavily subsidized and protected from foreign competition for the grand strategy to survive. In fact, total support to EU biofuels production adds up to such absurd levels that it would be twenty times cheaper to use fossile fuels and then buy carbon offsets on the European Climate Exchange rather than switching to EU biofuels.
Yet EU producers remain uncompetitive, despite all the subsidies, and it recently dawned on policymakers that the industry needed new protection against foreign biofuels competitors. This new protection has just been established, in the form of an environmentalist measure that should keep out foreign biofuels that cannot meet some invented sustainability criteria. Called the Renewable Energy Directive, its proper name should be the Green Protectionism Directive, because it will be the first trade restriction ever on the grounds of climate change.
This directive will disqualify import of the main competitors to biodiesel produced in Europe (which is made of rapeseed). To really ensure that foreign production will be unfairly treated, the EU engineered two different methods for estimating greenhouse gas savings (one of the sustainability criteria) through the use of biofuels: one best-case method for EU biofuels and one worst-case method for foreign biofuels. To add insult to injury, this blatant discrimination has been justified as a way to help other countries improving their biofuels industry.
So what we’ll end up with is a grand ambition to reduce carbon emissions by switching to biofuels, but a policy designed for the opposite as it discourages imports of cheap biofuels and props up expensive EU biofuels produced with crops from France and Spain. Moreover, it seriously reduces the opportunities for farmers in poor countries to expand biofuels production and grow with the help of exports. That, however, has not deterred its supporters from scrapping the entire policy. As was explained to me by a British official devoutly in favour of the new policy: “we owe it to the orangutans to stop forestry from expanding”.
Spot on. Monkey say monkey do.
Will the CAP be reformed?
In the new series "ECIPE asked the expert" we have asked Valentin Zahrnt to give us a stock take on the contentious debate over CAP reform.
EU food supply remains safe despite new food price peak
In the wake of the 2007/08 food price surge, food security has become the most pervasive and powerful argument of those calling for the protection of EU agriculture. As the FAO world food price index exceeded its 2008 peak in December 2010, the argument will gain further strength. But food security is a weak argument for a ‘strong’ Common Agricultural Policy.
Europe, the crisis and growth
Summing up disappointments and EU economic policy in the past year
Obituary for the Estonian kroon
Or two cheers for the kroon and Estonia's euro entry...
Delinking geopolitics and economics: Korea's FTAs and China
South Korea dominated the world news in the final weeks of 2010. As the dark columns of smoke rose to the sky over Yeonpyeong, they reminded the world of the adjourned peace on the peninsula, impeded by predictable erraticism of North Korea. These news images superseded the headlines of Obama administration’s success in finalising the Korea-US free trade agreement (KORUS) - as the United States and the European Union are racing to forge stronger trade relations with the fast-growing markets in Asia, starting with Korea.
Risks and Rewards of Russia in the WTO
Will Russia finally join the WTO - and would it help Russia to reform its economic model?
Herr and Frau German, the Big Spenders!
Germany, demographics and current account effects.
After Seoul: Institutionalisation of G20?
Rethinking the expectations of the Seoul G20 Summit - and what could or should happen in France?
Transatlantic Summit: Please Press the Reset Button
A new agenda for transatlantic economic cooperation.
Europe in the G20
Regardless of we are talking of reinstate the gold standard or quantitative goals for current account balances, the Seoul G20 summit is about trade. So it is hardly a coincidence that European Commission released its trade policy communication the day before the summit - but who plays the lead and speaking for the EU, who has been caught in the cross-fire between China and US, and the friendly fire from the populist sentiments at home?
Freytag and du Plessis: Gold Standard or Political Discipline?
Uncomfortable exchange rate adjustments associated with very large capital flows in the wake of the international financial crisis is straining international economic co-operation. Policy proposals to resolve the tensions have not been in short supply either, whether in the form of capital controls, guidelines for current account balances, or most recently a return to the gold standard. Robert Zoellick, the President of the World Bank, suggested a platform of proposals for consideration by the G20 that would be pro-growth and maintain an open trade regime with exchange rate co-ordination. Gold, he suggested, could play the role of a reference point for major exchange rates in a reformed and co-operative international monetary system. An interesting idea, say Andreas Freytag and Stan du Plessis, but it would not achieve the professed goals.
The G20 Summit and Current Account Targets
Should the G20 summit agree on current account targets? No, says Fredrik Erixon in this blog post. The alamism over current account deficits is exaggerated, and the problems that do exist cannoit be dealt with by such targets. The G20 should drop the idea.
G20 and currency controversies: Where do we go from here?
The world economy has travelled far since the G20 summit in Washington, DC on a cold November day in 2008, writes Fredrik Erixon in this post about the G20 summit. The G20 was helpful to arrest potentially noxious developments amid the crisis, but that momentum has now ebbed out. Current calls for the G20 to engineer grand redesigns of global economic policy are misplaced - and based on a flawed view of the factors behind global imbalances, conclude Erixon.
Roderick Abbott: Climate Change and the G20 Summit
This is the second post in a series of blog posts that ECIPE will publish ahead of the G20 summit in Seoul next week. Author of the first blog post is Roderick Abbott, Senior Adviser at ECIPE and a former Deputy Director General at the European Commission and the World Trade Organisation.
Roderick Abbott: Trade and the G20 summit.
This is the first in a series of blog posts that ECIPE will publish ahead of the G20 summit in Seoul next week. Author of the first blog post is Roderick Abbott, Senior Adviser at ECIPE and a former Deputy Director General at the European Commission and the World Trade Organisation. He ends with a through-provoking suggestion – rather than repeating messages from past G20 summits, which have all failed, G20 leaders should perhaps say in the communiqué: Trade Ministers should review current policies and start rescuing the trading system.
Figuring out Ukraine
Next step for EU policy towards Ukraine
Why urging China to re-evaluate currency is futile – a phantom of currency war?
Participants of the ECIPE internship programmes are required to publish a piece on the ECIPE blog before they finish, and following post is a submission by Michal Krol. As a Ph D candidate with research experience on China's rural development and economic reforms, Michal was an invaluable member of our team and our research on China. In the following blog post, he explores why RMB exchange rate issue will not fix the imbalances – how all balances must start from the inside.
Ukraine – Ossification and Russification?
Taking stock of the government's reform programme
Dispelling Myths about the EU-Korea Free Trade Agreement
The EU-Korea Free Trade Agreement is the most ambitious trade agreement negotiated so far by the European Union. In contrary to the myths presented by its critics, the EU has negotiated an agreement with emphasis on getting new market access rather than exposing domestic industries to greater competition, argues Fredrik Erixon and Hosuk Lee-Makiyama in their assessment of the FTA.
US RMB Policy: Shooting Yourself in the Foot
The US House of Representatives voted this morning (European time) in favour of trade penalties to be introduced against China for manipulating its currency (RMB). The bill has been circling round the US Congress for many years – and has many powerful supporters in key Democratic Party constituencies. It is believed by supporters of the bill that the US is losing export gains because production moves to China when the Chinese exchange rate is manipulated. Penalties against China, they think, will be a shot in the arm for American firms who could sell more on the US well as foreign markets.
I am not surprised we have come to a point when the House is endorsing this policy. But it is a stupid policy. Not only will it trigger a proper trade war – this penalty is no small thing like an antidumping duty. It will hurt American welfare and increase the import costs for all the firms operating in the US that rely on cheap intermediary inputs from China to remain competitive on global markets. Furthermore, if the House bill is turned into law – which I don’t think it will – American firms in China, or selling to China, will feel a hard smack of retaliatory measures.
So the policy is stupid because the effects of the bill will be radically different from what the Hosue supporters think they will be. But it is also ignorant in that it is based on a view of how trade works that became outdated twenty years ago.
Take the example of an iPod. The average consumer in the US – or the EU, for that matter – buys an iPod that is “made in China”. Trade statistics will tell you a similar story: an iPod is exported from China to other countries. But this is a simplistic story that neglects key facts. First, for a product like an iPod, with 451 components that are all light and cheap to trade, the final assembly is based on imported components from many countries. In fact, only a handful of the components come from China. Second, production and assembly of components is only one part of the production; product development, marketing and retail are equally important from the viewpoint of GDP. In trade- volume terms, an iPod is considered a product of China. In GDP (or value added) terms, however, it is not. Only a few percent of the price of an iPod can be attributed by Chinese value added. The vast part of value-added is actually done in the US. And if you penalize the assembly or the input cost with a tariff – the first casualty will be all that value added in the United States.
Hence, in a world of fragmented and globalised supply chain you are more likely to shot yourself in the foot if you introduce tariffs.
There is another vexing undercurrent in the US: that it is central to the US economy at large that the Renminbi appreciates. I don’t buy most of the arguments used to support this view. I think it would be good for Chinese citizens if the RMB gradually appreciates – it will increase the purchasing power of the Chinese. But the effect of it for US welfare will actually be negative – at least in the short-to-medium term. Import cost will go up – for consumers and firms. For a country that relies heavily on import for China, that’s no small thing. There are other things required for the US to rebalance – savings will have to remain at high levels and overall competitiveness needs to improve. None of these measures, however, will much affect the US bilateral trade deficit with China.
Higher than the Sun (the woes of Yen and Japanese exports)
During the post-War years, Japanese business liked to make apocalyptic prophecies that the country would come to an end if the Yen rose beyond 300/200/150 yen (etc) against the Dollar. Well, Japan did pretty okay despite Yen crossing those barriers in the 70s and 80s. In the past months, forex traders talked 85 yen as the final demarkation line before Prime Minister Kan and BoJ governor Shirakawa would have to act. These speculation came to an end early this week.
Online Censorship as 21st Century Protectionism
How to address growing problems with online censorship.
The public debt crisis and the CAP
The CAP has been distorting the European economy and international trade for half a century. But the crisis – which has turned from a financial to an economic to a public debt crisis and may still provoke a crisis in European integration – can be counted upon to transform the CAP.
A new strategy for Britain in Europe
The new Con-Lib government in the UK has a narrow window of opportunity to launch a new Europe strategy. Unlike previous Labour and Conservative governments, David Cameron and his team are taking office when there is a power vacuum and a dearth of ideas in the EU. There is no hard EU inner core to oppose them. Germany and France are at loggerheads; their blundering leaders are in no position to lead in Europe. The European Commission is stymied. These factors plus enlargement, financial turmoil and the eurozone crisis have put paid to the “project” of a centralised, federal Europe. That is a will-o-the-wisp, a dream for diehard Utopians.
Poor Europe: Why a tough Europe 2020 strategy is needed to stop the EU from falling behind
Who is the richest and who is the poorest amongst the EU, Korea and Taiwan? The common thinking says: emerging economies are growing more quickly, so we have to make an effort to stay ahead. The reality is that Taiwan already has a higher gross domestic product (GDP) per capita in purchasing power standards (PPS) than the EU – and Korea will follow this example soon. The problem is not that other countries are growing fast - it's that the EU fails to live up to its potential.
‘made by non-European labor’ or ‘made without child slave labor’
Country of origin labeling is in fashion in the EU. The European Parliament is pushing for mandatory origin labeling of a basket of imports, including leather goods, textiles, footwear, ceramic products, furniture and jewelry. In another initiative, the European Parliament wants to make the indication of the country of origin obligatory for fresh agricultural products, and, in the case of single-ingredient processed products, of the provenance of the agricultural raw material.
Germany Needs a Liberal Trade Policy Agenda
Germany depends on the world economy, and Germans pride themselves for their export performance. It is time for Germany to contribute more actively and consistently to the global economic order on which its wealth rests. Germany should adopt a more liberal trade policy position within the EU and enact domestic policies that are more open and market-oriented.
Testimony by H. Lee-Makiyama to the Subcommittee on Human Rights of the European Parliament
Statement delivered by Hosuk Lee-Makiyama to the Subcommittee on Human Rights of the European Parliament on the June 2nd, 2010
It’s comparative advantage, stupid!
On the French agricultural minister
Russia and Visa Liberalisation
As the EU and Russia prepares for a bilateral summit in Rostov-on-Don next week (see Iana’s blog post below), there are heightened activity in Brussels to hammer out positions and secure mandates from member states for making new deals. The European Voice has an article today about internal conflicts over visa liberalization, and it has been rumored in Brussels for a couple of days that EU diplomats had a “full and frank exchange of views” over visa issues at the Coreper meeting last week.
EU Russia - Plus ça change
Let's not be naive about Russia's modernization programme
Naked, misbegotten Germany
Germany took the world and European leaders by surprise when announcing its unilateral ban against so-called naked short-selling (securities that are not owned or are borrowed) on Euro-bonds, credit-default swaps (CDS) and ten financial firms, maintaining it is a clampdown on speculative trading. The move raises many questions – and one, which has not yet figured in the commentary, is whether Germany can do so without flaunting its commitments in the World Trade Organisation (WTO) on market access in financial services.
Europe and its 2020 strategy
Why the new strategy will wither away as its predecessor
China - your move.
Few hours ago, Google announced that it will now shut down its services in China and link its Google.CN domain to its services in Hongkong (Google.com.hk). Although de facto trade implications are limited, it reveals the reasoning of a modern multinational enterprise when faced with multiple choices in trade policy.
The public goods paradigm in agriculture
A host of studies has brought the message home: EU agricultural policies should not fiddle with prices, micromanage farm investments or support farm incomes; instead, they should deliver public goods, such as clean water and biodiversity. One cannot reject these studies as ivory-tower research – many of them have been conducted by non-governmental organizations and public advisory councils. Furthermore, many of Europe's leading agricultural economists – seasoned heavy-hitters with experience in pragmatic policy advice – have expressed their commitment to the public goods paradigm in a declaration. What have we learned from this debate, and what are the implications of the paradigm for the CAP?
Exports: it's a whole new world
By chance the IHT at the weekend (Feb. 20/21) had an article under this title. Quite a surprise that they actually publish an article in the area of trade which is generally not considered to be of consumer interest.
World trade creeps up the agenda after a year adrift
This is a headline in today’s Int.Herald Tribune and with a Washington byline, so probably in the NYTimes also. Verily, miracles will not cease. Not only a headline in a US newspaper on trade, but on page 1.
A response to a Gazprom response
Gazprom responded to an article I placed in the European Energy Review. The article calls Brussels for antitrust cases in Central and Eastern Europe as a means to address energy supply security problems and to discipline Gazprom’s behaviour so that it avoid shutting the gas taps again in future. That an article by a modest analyst receives such an honour shows that the matter the article raised goes to the heart of a very important issue.
Increasing prosperity through services trade: Putting things right
In his article “An order of prosperity, to go” (Feb. 18, IHT), Michael Cox, who is director of the Center for Global Markets and Freedom at the Southern Methodist University’s Cox School of Business, rightly points out that increasing services exports are crucial for the future development of the US economy and that services should therefore not be overlooked.
EU Eastern Partnership - Can it Ever be Effective?
The EU should simplify its approach to its "Eastern partners" by adopting more low-key, targeted, unilateral policies to open its markets. Simple, practical, generous but targeted solutions for political realities of today should be the approach. Brussels should be bold in offering a solid FTA to Ukraine NOW. Cumbersome Association Agreements, a relic of the glorious past of EU Enlargement, should be sent to the dustbin of history.
EU 2020 Strategy
Long time, no see. The Brussels campaign for a competitiveness agenda for the European Union is yet again revving up – this time for the so-called EU 2020 strategy. The economic crisis, some say, forced governments to deprioritise long-term issues such as competitiveness, but with the recovery looming they can now afford to look at conditions for long-term economic growth. That is to put it gently. The Lisbon agenda, the predecessor to the EU 2020 strategy, was a confused strategy with conflicting ambitions that silently left the centre of EU politics long before the crisis started. It existed as an agenda item – and its importance was praised by everyone. But it was honoured in the breach rather than observance. It was, to use Alastair Campbell’s memorable phrase about a Tory leader, forgotten but not gone.
Google vs. Chinese censorship: What are the trade options for the US government
Following the much-anticipated speech by Secretary of State Hilary Clinton's on Internet freedoms last week, there is intense pressure on the US government to launch a case at the World Trade Organization (WTO) against China over its Internet censorship. The attention from media, free speech groups and governments has been overwhelming — and many point towards to a showdown in the WTO.
International trade and emerging protectionism since the crisis
A stocktake of trade policy in 2009 -- Two thousand and nine was a crisis year for international trade, which suffered its steepest decline since the 1930s. Protectionism returned, reversing an almost three-decade trend of trade liberalisation. But, contrary to expectations, it has not returned with a vengeance, rather creeping to the surface in subtle ways. Time, therefore, to take stock of trade policy after the crisis, and consider its outlook at the beginning of this century’s second decade.
Why I have never been in love with President Obama
The American love affair with Barack Obama ended in Massachusetts with the shock upset victory of a Republican to take Edward Kennedy’s old seat in the US Senate. The global love affair with President Obama is not over, though it has lost its lustre. Cerebral commentators – including some whose judgement I used to trust – are still lovestruck, having suspended their critical faculties since the 2008 election campaign. I have never been in love with Mr. Obama, and can only say “Thank you, Massachusetts.”
What the EU South Korea Free Trade Agreement Reveals About the State of EU Trade Policy
edited on 13/01/10 The EU South Korea agreement is the most ambitious bilateral trade agreement the EU has agreed to sign up to. But it is likely to be an exception, given that current EU trade policy is rather in dire straits.
All set for the next gas crisis in the EU?
Despite supply security initiatives launched after the last gas crisis in January, there are many reasons to remain worried about a new gas crisis. Gazprom has not suddenly mutated into just a normal market player, and the EU’s gas market is as weakly structured as ever.
Harold James on financial deglobalisation
Review of Harold James, The Creation and Destruction of Value, Harvard University Press, 2009 In October ECIPE hosted a book forum for the Princeton historian, Harold James. These are my comments on his new book, The Creation and Destruction of Value.
Transparency and human rights: the WTO's threat to sovereign bad governance
Strengthening the WTO’ Trade Policy Review Mechanisms is not an easy task. Governments happen not to like transparency in trade politics, and even less international scrutiny. Three little quotations show that vividly.
Light on a Dark Art
On shoes, the sun and stupidities.
The EU's view of China
A little while ago I gave a talk in Hong Kong on the EU’s view of China. This is what I had to say. The EU views China with a combination of awe, ignorance, fear, confusion and ambition. It is awed by China’s rise. It is largely ignorant of China. Real knowledge of China, and Asia more generally, is pathetic in Brussels, as it is in all European capitals with the partial exception of London. European sophisticates constantly disparage American insularity, but knowledge of Asia is far superior inside the Beltway, and in think tanks and universities in the United States, than it is anywhere in Europe. Ignorance mixed with arrogance is not an American preserve; it is found in abundance on the Old Continent, as any visit to a Parisian intellectual salon will reveal.
A Transatlantic Free Trade Area?
It is perhaps time to revive the idea of a transatlantic free trade area (TAFTA). This is the gist of two papers, one by ECIPE’s Fredrik Erixon and Gernot Pehnelt (http://www.ecipe.org/publications/ecipe-working-papers/a-new-trade-agenda-for-transatlantic-economic-cooperation/PDF ), the other by GEM-Sciences Po’s Patrick Messerlin and Erik van der Marel (http://www.gem.sciences-po.fr/content/publications/pdf/Messerlin-VanderMarel_services07062009.pdf ). A TAFTA initiative was floated in the 1990s, only to sink; and the Transatlantic Economic Council (TEC), established at the initiative of Chancellor Merkel to tackle regulatory barriers, has got bogged down in micro-detail and hardly made progress. Sure, political obstacles are great, but it is worth stepping back to coolly assess costs and benefits, and then decide whether to go ahead with a new initiative.
Biofuels Policy as Industrial Policy
What happened to the ambition to switch from fossil fuels to biofuels? Environmental policy became industrial policy. But Europe's new drive to support its biofuels producers flies in the face of WTO rules.
Protectionism will not help solve climate change
Is it a bad omen – or only a sign of times – that hotel staff in Copenhagen is about to get a much higher Christmas bonus this year than their colleagues in Geneva?
Let's welcome Russia to the world economy
Russia was found to be bound by the Energy Charter Treaty. This could be the start of a new era for energy relations in Europe. It is also good for Russia. Joint comment by Fredrik Erixon and Iana Dreyer
Hurray, we got ONE Commissioner for trade
Two Belgians will serve the European Union in its highest ranks. Herman Van Rompuy, the European Union’s first President, is known as a mediator, Karel De Gucht, who has been nominated as Trade Commissioner, is notorious as an outspoken defender of his strong views. The press is satisfied that with De Gucht, Europe’s voice will be powerful in the WTO negotiations in Geneva. His resolve will be needed even more in Brussels, where he will have to fight for trade-friendly European policies.
Protectionism, Regulations and Globalization
A story of deglobalization...
An Asian regional bloc?
Last month I gave a paper on Asian regional integration at a gathering of Asia-Pacific economists in Taipei. In it I expressed scepticism of the bulging menu of regional-integration initiatives, on the grounds of political improbability and economic discrimination. The bottom line is that Asia's regional integration is closely tied up with its global integration. Here's a summary of my argument. Another version was published in the Wall Street Journal at http://online.wsj.com/article/SB10001424052748703574604574500453145217202.html?mod=googlenews_wsj
Online Protectionism
A recent meeting at the WTO highlights many of the fundamental questions raised in the recent paper "Online Protectionism" by Erixon, Hindley and Lee-Makiyama. Some WTO members have unknowingly committed to liberalization of their internet markets depending on how internet services and e-commerce should be categorized. China's interpretation lead to some puzzling implications - like how a bank is in fact a phone company.
Confessions of a GATS negotiator
Service negotiators are a funny breed. Even by WTO-standards, their work reminds one of King Sysifos - repeatedly pushing the same rock up on the mountain just to see it roll down again. Their Agriculture and NAMA colleagues greet them with ridicule every morning by asking if they are going to do any 'signaling' today. And as a token of appreciation for their work, the governments of service-lead economies let them fly economy. It is time services came out of the shadows of Agriculture and NAMA - and go plurilateral.
Your hopeless trade geek’s poem
Who said doing trade policy analysis is a dull, dry, job? (Or: More comments on EU South Korea)
EU South Korea - Free trade in cucumbers... and many many other products
First impressions of the EU South Korea free trade agreement
Misadventures of the Most Favored Nation
Review by Guy de Jonquières of Paul Blustein's new book Misadventures of the Most Favored Nation: Clashing Egos, Inflated Ambitions and the Great Shambles of the World Trade System (PublicAffairs, 2009).
Improving the trade climate with China - a few musings
If the EU wants to achieve market opening results with China, it will need to take the lead and be ready to restrain its antidumping practices.
Should and Can the US Fast-Track Russia into the WTO?
By asking the US to let it into the WTO, Russia reveals it has run itself into a corner and is seeking a desperate way out. The response should be cool-headed.
Domestic transparency and protectionism
In its ‘Message to the G20: Defeating protectionism begins at home’, the Lowy Institute advocates a strengthening of domestic tranparency mechanisms around the world. The study also presents the example of the Australian Productivity Commission that is conducting independent, economy-wide analysis of trade (and other) policies. The study rightly stresses that improving transparency is crucial for trade liberalization. Poor governance practices contribute to protectionist policies, and, vice versa, politicians and bureaucrats become dependent on the opacity created by their poor governance practices in order not to be held accountable for the results.
Healthcare sustainability: the oxymoron of government cost-containment
The healthcare battle is raging in the US. President Obama's election promise to reform healthcare has kicked off the familiar 'great healthcare debate'. He is facing criticism not just from all over America, but from all over the world. He has had warnings not to follow the routes taken by the French, Canadians, the British NHS (who would wish that on anybody?), the Germans.....everyone, it seems, knows how not to run a cost-efficient, equitable, high quality health service.
How would society look like if all of it was run like the CAP?
Hayek, Schumpeter, and Friedman – some of the great liberal thinkers of the 20th century – are not to everybody's liking. Even less so in times of economic crisis where markets are condemned for their volatility and government is called upon to regulate and protect. But everybody should listen to what these thinkers have to say on the importance of economic freedom, for long-term growth but also for civic rights and political liberty. One may disagree with their specific conjectures and the fundamental value they attribute to freedom, but one must not ignore their basic tenet: that state intervention has hidden costs which cannot be fully appreciated one by one for they together shape the society we live in.
From the WTO General Council
As the General Council of WTO commenced its sessions few hours ago, it didn't take long before it became clear that this session becomes another solemn affair.
Trade remedy use up by 12.1%
Recent findings from the Global Anti-dumping Database show that, compared to the same time period in 2008, the second quarter of 2009 saw a 12.1% increase in initiated anti-dumping, safeguard and counterveiling duty investigations. India and the US are the most active countries, wtih the most common target still being China - named in a massive 82.6% of investigations.
The data indicates that much of this rise is attributable to the use of global safeguards, not necessarily anti-dumping. If the current rate of increase continues, 2009 will see the most prolific use of safeguards since the WTO's inception in 1995 after the "steel safeguard epidemic" in 2002. Reasons for this rise are not clear, but continuing research will track the trends and underlying causes.
G8 and the Pledge to Boost Aid
The Independent asked me yesterday to write a short comment on G8 aid giving. I can't find it on their website - but below you find my text:
The G8 Summit – no Fireside Chats with Silvio, Please
A few months ago I gave a presentation to a group of Italian politicians who had asked me to give them my take on international economic institutions, their relevance (or irrelevance), and what the future holds for international economic cooperation. I started my talk with an analysis of the WTO and the Bretton Woods twins, and 15 minutes into the talk I could see how several of them had problems keeping their eyes open. I went on talking about one of the G’s – the G-20 – and rounded off with 5 minutes on the G-7, talking specifically about its anachronistic structure of membership and the inability of every member government to use the G-7 for something useful, for the sort of fireside chat summits it was intended for. The problem with the G-7, I said, is that the leaders themselves, and the circuit around the summits, expect them to actually achieve results and be a forum for a decision making.
China, Internet Censorship and Trade Law
Recent campaigns by governments in Iran and China to shut down access to websites have heightened international conflicts over online censorship. For ages undemocratic governments have stifled freedom of speech to exert greater control of opposition forces. Yet online censorship is now about to move to the centre of world trade policy. Lately online censorship has become a tool of industrial policy, blatantly discriminating against foreign suppliers. Repressive and disgraceful, current methods to censor online content are also protectionist.
Does Russia really want to join the WTO?
What to do of Russia’s sudden decision to drop its WTO application, and to reapply, but jointly with Belarus and Kazakhstan, when it was apparently so close to reaching a final deal with the EU and the US? One thing is certain: don't count on Russia joining the WTO anytime soon.
The man who did not want to go out into the dark (or: How the WTO could tackle hidden protectionism)
There is a story of a man crawling in the middle of the night under a streetlight. He sees a policeman watching him and explains: ‘I am looking for my keys.’ The policeman: ‘Are you sure that you have lost them right here?’ The man responds: ‘No, I have lost them over there. But here the light is better.’ Psychologists like this story.
US Healthcare reform: lessons from Europe
President Obama has re-committed the US government to healthcare reform after a long-standing reluctance to tackle the sensitive issue. Healthcare spending is now one of the largest and fastest growing areas of the US budget. But they are no closer to achieving quality, affordable healthcare for every citizen. Balancing healthcare costs, access and quality is a fine art no government in the world has yet mastered. Europe’s experience can be a lesson in how not to run an affordable universal healthcare system.
INDIA AFTER THE ELECTIONS
The Indian election result surprised everybody, but the response to it was predictable. Business and the media share a new optimism that Dr. Manmohan Singh and his “dream team”, now about to lead a strong, stable Congress government, will roll out the market reforms that eluded them during the last five years. First the good news. The election result has clipped the wings of venal, populist caste-based parties in north India, and dealt a blow to Hindu chauvinism coming from the opposition BJP. Indian secularism and cohesiveness have emerged stronger. But the prevailing bullishness on economic reforms is misplaced.
South African trade policy at the crossroads
I have just returned from a week in South Africa, where President Jacob Zuma’s new administration is bedding down, and on my return to London gave a talk at South Africa House on South Africa’s trade diplomacy. This prompts the following thoughts.
Re-orienting China’s economic growth – do we really want it?
How come many people with scant knowledge about China’s economy, and about international economics in general, often express strong views about what reforms it should undertake?
A reset-button strategy for Europe’s Russia policy
Few issues can release as much passion and anger in otherwise sterile European politics as Russia and EU’s energy dependence on Russia. Any contemporary diplomatic guide to Brussels on ‘how to lose friends and infuriate people’ should start with having a consistent view on Russia. In the past year, concerns over the big Eastern neighbor have provoked more summits for European leaders than all other European matters counted together. Yet too often Europe’s collective approach has oscillated between short-sighted interest for the next energy deal and utopian beliefs over its capacity to influence Russia’s strategic political development.
Sarkozy's promises for (or threats to) Europe
In a recent speech (Nîmes, May 6), Nicolas Sarkozy encouraged us to have great ambitions for Europe and not to be afraid of confrontation. The economic crisis has given us, we were told, the freedom to rethink (d’imaginer, de penser, d’inventer) our future – and this is what we should do:
Pascal Lamy reappointed
Pascal as was expected was reappointed. Although he was the only candidate, he was apparently ‘obliged’ to meet with groups of members – in the sense that it was part of the procedure but less vital in the case of an incumbent generally thought to have done as good a job as members allowed (Doha). They wanted to hear his vision of the future …..
Mercifully, for him, this meant he could forget about how to resume Doha for a week or so (and the principle that it could not be allowed to fade away was presumably acquis). The statement delivered at the GC on 29th generally reads pretty well, but it is of course an election manifesto – to please everyone and upset nobody. The remarks about Ministerial meetings at the end are sensible and make a useful distinction between two kinds of meeting (although it begs the question: how do you review WTO activities without commenting on the Doha collapse?). I am rather less convinced by the statement that ‘this is a true Development Round’, based on the old ‘duties foregone’ measure. What does that prove on subsidy cuts?
On ‘how to resume Doha’ he gave nothing away: “we need to reset the process … building on where we left it last year”. This could mean all things to all men, and no doubt it does. My hope is that ‘reset’ and ‘building on’ mean some real change in the agenda for negotiation – or at least in its presentation. Developing countries need to feel ownership of the DDA, which they clearly have not felt so far, and absent that, where does the consensus come from?
The business interest in radical reform of the CAP
The Common Agricultural Policy (CAP) is a bureaucratic monster with a tremendous appetite for EU money. But it has been there for two generations, and nothing can bring that beast down. One has to live with it – or so many have reluctantly concluded. But this is wrong. Times of change have come, and the business community has every interest to take on leadership.
EU-China: The Dialogue of the Deaf
Is the upcoming "High Level Trade and Economic Dialogue" meeting between the EU and China likely to deliver? Not if both sides don't start talking for real. And not if the EU is not prepared for a give-and-take, nor if it continues to leave out the member states.
Anti-dumping: and still they continue...
New World Bank figures show that, since their meeting on April 2, G20 countries have initiated 8 new anti-dumping investigations; imposed 7 new provisional duties and a massive 17 new definitive duties. On the offenders list are Argentina, Brazil, EC, India, Japan, Russia, South Korea and US.
The EC has been responsible for 6 of these new initiatives, of which 4 are unsurprisingly targeted at Chinese products - candles, molybdenum wires, iron and steel pipes and aluminium foil to be exact.
These are the sorts of dry facts that speak volumes about the continuing contradictions between what the EC says and does about 'resisting protectionism'. Sure, this also applies to the rest of the G20. But is "everybody else is doing it" a good enough reason to impose impose trade-restricting, price-increasing duties on imports at a time when we are confidently stating that that is not the answer to the global crisis?
Medvedev Unveils the New Energy Treaty
Earlier this week, the Russian President unveiled his idea of a new global treaty for trade in energy. This new treaty, Medvedev suggested, should cover most energy sources (including nuclear power) and countries, and it is portrayed to comprise the entire supply chain. As far as one can tell, the proposal is void of any strong legal disciplines against countries violating the proposed treaty. This is not surprising. Russia has avoided ratifying the Energy Charter Treaty because it has legal provisions with clout. What Russia ideally wants is disciplines on transit rights, which is of central importance to Russia and the business model of its energy majors, but it remains unwilling to give other countries what they want: strong protection for foreign investments Russia’s energy sector. Arkady Dvorkovich, an economic aide to Medvedev, said Russia was ‘flexible’ on the legal format of the treaty, which of course Russia would not be if the proposal had been bona fide.
Russia is fully aware that its proposal is never going to fly. So why has the proposal been made?
Russia is in need of building up its reputation as a reliable energy provider. The gas crisis in January made even the staunchest defenders of Russian commercial practices in the energy sector hesitant to the idea of allowing Russia to make new inroads in Europe’s energy supply. Russia is keen to get two new pipelines to Europe, Nord and South Stream, up and running as soon as possible. Both pipelines will reduce the importance to Russia of the Ukrainian corridor; they will also enable Gazprom to increase supply to countries that are not highly dependent on Russian gas today. As Gazprom increasingly moves into the energy retail sector, it is even more important for Russia to be seen as a trustworthy supplier. A global treaty, even if it is of little relevance at a time of a dispute, is considered by Russia to be necessary to get the greenlights it needs to press ahead with its plans.
The proposal should also be viewed in the context of the Energy Charter Treaty. Russia has signed the ECT but not ratified it. An ECT arbitration tribunal is currently at work on a complaint against the Russian government from former shareholders of Yukos, and the key issue in front of the tribunal is the applicability of the ECT on matters involving Russia. Russia has not ratified the ECT, but the fact that it has signed it, and hence agreed to apply the treaty provisionally till it has been ratified, is probably a sufficient condition to make the treaty applicable to Russia. As the tribunal is getting close to issue a ruling, the Russian government is, and should be, getting nervous. If the tribunal rules in favour of applicability, former shareholders of Yukos is likely to get legal support for their demand to get the money back that was stolen when the energy giant was stripped of its assets five years ago. Furthermore, there are many other dubious acquirements of energy resources from foreigners that are likely to end up in court if Russia is ruled to be covered by the ECT.
European governments should flatly refuse to take part in any discussion of a new energy treaty till the tribunal has issued its ruling. It should also refuse to enter any agreement on energy as long as it does not have strong legal provisions. With the inability of Europe to press ahead with investments and reforms that would make Europe – and a dozen of individual European countries in particular – less dependent on Russian gas, the only vehicle for increased energy security is external commercial policy (a k a trade policy) that establishes strong rules for cross-border exchange. Europe is today unable to make itself less dependent on import of Russian gas – dependency is rather likely to increase in the next decade – and current investments in import diversification and in energy-source diversification is at best a policy for increased energy security in the 2020s or 2030s. Until diversification has improved energy security, the only method to improve energy security is by having commercial energy relations with Russia, and others, subjected to strong, legal trade rules.
Ambition and Ambivalence
The London G20 summit, soon in hindsight
Manmohan Singh's "dream team" and a zero-reform government
This entry is a comment on Arun Shourie’s Wincott Memorial Lecture, NAVIGATING REFORMS: SHOALS IN AND LESSONS FROM INDIA, delivered in London last October. It’s rather long, but for those interested in the Indian economy in the maelstrom of a general election campaign, I hope it’s worth reading. Dr Shourie was arguably the leading market reformer in the last Indian government led by Atal Bihari Vajpayee. At different times, he held the portfolios of communications, commerce and industry, and disinvestment. He spearheaded India’s telecoms reforms in the late 1990s.
The G20 Summit – What to Make of it?
I have not made up my mind yet what to think about the result of the G20 summit. True, it was a great photo-op, but I think there were some good news coming from London late last week. However, they were few, wildly exaggerated and had been in the making for quite some time. But my feeling of goodwill has perhaps more to do with the fact that all the naïve, hyperbole beliefs in G20 global economic governance fell flat on the ground. We did not see anything of “global fiscal stimulus co-ordination” or global attempts at “fixing the banks”. Nor did they G20 leaders claim they had built a new Bretton Woods structure or “civilized the raw nature of capitalism”, which was president Sarkozy’s ambition for the summit. In contrast to this positive account stands the failed effort to do anything meaningful on emerging protectionism and trade policy.
I think it is important that the IMF has been promised more resources. There are quite a number of emerging markets on the brink of defaults – for the banks or the country as a whole – and there is practically no other alternative available than to bail them out. I have been critical of the use of the bailout instrument in the recent past, and remains so today. But at a time of worldwide financial crisis you can’t just bailout banks in the advanced economies and leave the financial system in emerging markets to collapse. The bailout instruments need to be reformed, but such reforms must come after broader and deeper reforms of the financial system which makes the banks truly private entities or public utilities. In the current regulatory system, you don’t have any other alternative than to bail out financial firms. Beefing up the resources of the IMF was important in that regard: financial markets do not have to take positions accounting for emerging market collapses just because the only kid on the block who could bail them out doesn’t have the resources to do it. Current IMF resources – around 250 bn USD – are tied up in recent bailouts; the new money (probably less than what the G20 communiqué says) will give the IMF some new room for action. This new discretion (especially the new allocation of SDR drawing rights) must, however, be monitored closely by outside parties. The IMF is sometimes all too happy to issue credit (it would not exist if it did not lend money to countries). With a French interventionist at the helm of the Fund, and with bailout-Larry in the White House, there is an even stronger case for close monitoring to ensure the IMF is not using the new support for excessive interventions and lending.
The G20 language on protectionism and trade is appalling. The G20 could have made a significant effort to prevent emerging protectionism from escalating; there is a clear danger that protectionism will increase as the global economy continues to deteriorate (although at a slower pace than in Q4 and Q1) and as the fiscal expansion have little effect. Remember, the most appalling bailouts of automotive firms have so far not been taken. But the G20 only did a few lip-service statements about the need to keep markets open and avoid protectionism. They did not specify what this means (can WTO authorized protectionism be imposed?) and this is probably not an unintended mistake. If governments were really, really serious about avoiding protectionism, commitments would have been more precise and there would have been a process to ensure compliance. Now the communiqué only causes confusion and will not prevent any country from imposing new protectionist policies. (Here is the agenda I suggested to the G20, if you are interested.)
After the words, some action please
"The world is too complex for the instant gratification demanded by 24-hour rolling news channels"
- Philip Stephens in today's FT, defending the results of yesterday's summit. The fact that it was the G20 he argues, and not the G8, meeting yesterday signifies as much if not more than the number of dollars pledged to reinvigorate the global economy. Summits like this one can never be expected to produce radical results.
I agree. But there must come a point when leaders stop repeating hollow pledges. We have heard endless promises that the Doha Round will be completed "by the end of this year" - no one believes that any more. We have already heard commitments to resist protectionism - thanks to the recent World Bank study, no one believes that either.
And why not be radical? The phrase 'don't waste a good crisis' has been ringing around some, more alternative, circles. The opportunities for real action don't come much bigger than this. So how about unilaterally dropping all barriers that distort trade, reforming policies and processes that are clearly protectionist and saying to the world "we're ready to trade even if you're not". Instead of more words, lets have some action please.
To Conclude EU-South Korea or Not to Conclude EU-South Korea?
In late 2006, the EU Commission launched an ambitious strategy to go out there and conquer sizeable market shares in a booming Asia that seemed to be evading European business. It was called Global Europe and included negotiations with China to open markets further, and three free trade agreements in Asia: South Korea, India and ASEAN. It looks like this strategy is failing. I wrote a small post on the matter in my personal blog and already put in some sceptic notes at that time. A deep analysis of the strategy by Razeen Sally in 2007 already foresaw many of the current troubles. Rod Abbott wrote an elegant little paper on the matter with Chatham House last summer. The strategy’s architect, Trade Commissioner Peter Mandelson could not help leaving the impression of hopping off a sinking boat when late last year he announced he would return to the UK to be nominated Secretary of State for Business, Enterprise and Regulatory Reform and a peer in the House of Lords. He then set out to support the UK car industry.
Trade relations with China have reached an unprecedented low. Talks with ASEAN are stalled over format – who will be in, who will be out? Talks with India haven’t even seriously started. The only hope lies with South Korea because of the moderate market size of Korea making it less of a perceived threat for the EU economy, and in particular its government’s seriousness about a strong, meaningful and deep FTA. The EU Commission has been pushing hard to get that South Korean deal done. This is now a question of credibility, as nothing else, neither a deal in Doha, nor a single really important free trade agreement, has been achieved in the last years. Now that the global crisis is raging and it is G20 season, the South Koreans and the Commission have made marathon-like efforts be able to announce the conclusion of the deal. The political symbolism of the successful conclusion of a free trade deal amidst rising protectionist pressure across the globe would have been welcome.
But EU-South Korea is now with the EU member states for ratification and apparently stuck. Germany leads now a coalition of countries opposing the deal because of what it says is an imbalanced outcome on trade in automobiles. The EU has comparatively high tariffs on cars: a whopping 10% it agreed to eliminate against elimination of Korea’s 8%, and some efforts on Korea’s notorious standards- and regulatory non-tariff barriers. Maybe it is not such a good idea to push a deal that puts head-to-head a very competitive emerging market car industry – Korea’s KIAs and Hyundais are having a great success in the EU - and an ailing but lobby-savvy EU car industry that is currently being bailed out in many a EU country, not least in Germany. We tend to think at ECIPE that the protectionism that is now emerging in developed economies is hidden in the details and consequences of rescue packages . That’s exactly what is happening in the case of EU-South Korea. The deal is said to be very strong and go beyond what the US have negotiated in the – now equally beleaguered - KORUS. It appears as it could offer opportunities for where the future of the EU’s competitiveness lies, namely services, and high-tech machinery, not mid-range Volkswagens. Yet what is happening corresponds to the typical interest-group scenario in moves to open trade: while the benefits are wide-spread and generally taken for granted, those who need to bear a few of the adjustment costs tend to be better at collective action and block the whole process.
The EU’s strategy is now stuck in its own contradictions. If member states want their businesses to get a stronger foothold in Asia and mandate Brussels to go out there and negotiate they will need to be ready to set free (and set themselves free from) the industries of yesterday and force them to adapt to new times.
MEPs back cross-border healthcare directive
Amidst the confusion of the global financial crisis and worries over how the G20 will contain spiralling protectionism, a slice of good news today for European citizens (although they may not know it) - MEPS voted 31-3 in favour of a proposed law which will make it easier to access medical treatment abroad. The law will pave the way for greater cross-border healthcare delivery in Europe, something that can only be good for bringing down heatlhcare costs and raising quality. More to follow....
The G20: who is protesting what?
Reports of massive protests at the G20 and NATO summit meetings this week prompt recollections of 1999 (Seattle) and 2003 (G8 at Evian = Geneva). But then it was anti-globalisation and anti-WTO; what is their problem now? Are anarchists a law unto their own?
How many gold medals will EU win at the G20? (The last postcard from Tokyo)
As the taxi effortlessly accelerated into weightlessness of the Tokyo pre-dinner rush, we engaged into chit chat with our gentle mannered driver who is impeccably outfitted with white gloves and a quasi-military uniform (as required by anyone in the Japanese service industry). As I am accompanied by friends visiting from London and Sweden, the topic turned into the economic crisis as the driver looked into the rear view mirror and said: "Pardon my inquisitiveness, why are the Europeans not very serious about G20?"
G20 – why is trade not a bigger part of the plan to save the global economy?
All roads lead to London. At least, they do for world leaders ahead of next week’s G20 summit with the unenviable aim of saving the global economy. Gordon Brown has been in a ‘flurry of activity’ this week, trying to drum up support for positive outcomes and spread the message of global inter-dependence as the foundation for the summit. Mr Brown said the EU has taken an anti-protectionist stance that it will carry into the G20 negotiations. But actions speak louder than words.
The Crisis Seen from Down Under
The Australian prime minister, Kevin Rudd, has penned a 7000-word essay on the global financial crisis (The Monthly, February 2009). Mr. Rudd fancies himself as a bit of an intellectual – usually a sure vote-loser in blokeish Oz. In this essay he cogitates on the failure of thirty years of neoliberalism, and on the necessity of a social-democratic revival. Mr. Rudd indulges in the usual caricatures of “the great neoliberal experiment”. He says it was driven by blind ideology, and resulted in a wrecking-ball of regulation and a nightwatchman state. His antidote is an activist, redistributive government that reduces inequalities generated by the market. He leans on Keynes for his underlying philosophy.
Signs of things to come (Part II)
As the Japanese fiscal and school year is coming to an end in a few days, we can see the light go out on the Japanese economy from the temporary office of ECIPE in Tokyo on the 34th floor overlooking the glitz of Shibuya.
We have already seen the Nikkei take the sharpest turn downward since its start in 1973 and predictions for massive losses for the auto and electronics industry, who both were once the monoliths of Japanese export industry. Toyota nose-dived into its first losses ever after defying gravity effortlessly for 70 years. They are appending the sacred pledge of lifetime employment with the words ‘Full-time Japanese Employees Only’ in brackets in the staff handbooks starting from April. The combined losses of the seven largest electronics firms is expected to be staggering 2 trillion Yen ($20 billion) as shrinking global demand and the Yen appreciation is taking its toll. Under these conditions, Japan is starting to give up its fixation with domestic manufacturing and may venture into outsourcing and large-scale imports of components - under the supervision of the worried, motherly eyes of METI of course. This could lead to a rethinking of Japanese policies on import restrictions and intra-Asian trade; if so, it will be the first economic crisis to do so.
Even non-export driven sectors like machinery and construction materials have come to a complete halt. With almost 10% monthly drop in industrial output during the last three months, few are expecting anything less than a continued double-digit shrink of GDP in the first quarter and an aggregated drop in corporate net profits of 85-100% – just one year after they climbed to a historical record.
The need for new capital is rampant to absorb the record losses. This week saw the dollar future prices climbing; mergers, massive restructuring and plant closures in Japan are expected. Toshiba (who needs $3 bn to stay afloat) and others may issue new stock, which the Japanese banks will be ‘advised’ to buy by the Government.
Even as the cherry trees blossom, April is still the cruellest month indeed.
ASEAN Charteritis
The Association of Southeast Asian Nations (ASEAN) recently held its annual summit in Thailand. ASEAN leaders signed an FTA with Australia and New Zealand; promised to achieve an ASEAN Economic Community (AEC) by 2015; and pledged to keep borders open to trade, services and investment. In light of the global economic crisis, they agreed to refrain from erecting new trade barriers and to take “assertive action” against protectionism. ASEAN is also armed with a new “charter”. The ASEAN Charter gives the group a common legal personality; it contains (minor) institutional innovations; and it houses an ASEAN Political-Security Community, an ASEAN Socio-Cultural Community and the afore-mentioned AEC.
Is industrial contraction a sign of things to come?
Reports released today show European industrial activity plunging. Industrial production in France fell dramatically by an annual rate of 13.8 per cent in January, and by 5.6 per cent in the UK in the three months up to the end of January. German exports fell by 4.4 per cent in January, contributing to an annual decline of 20.7 per cent.
These most recent figures have not been caused by the struggling car industry, but apparantly by a decline in the manufacture of electrical, electronic and transport goods. With reference to my post on March 5, it will be interesting to see whether a rise in anti-dumping cases involving these sorts of goods follows. Allowing a short time lag, the latter half of 2009 could be interesting for anti-dumping observers.
European Healthcare - a case of supply and demand
The UK government came under pressure yesterday from medical associations demanding the abolition of prescription charges in England. These types of charges are part of a strategy of cost-containment found in most Member States, designed to restrict the supply of healthcare and quell demand in order to ease growing budgetary deficits. If governments were willing to consider cross-border alternatives for increasing the supply of healthcare they would see that more equitable and efficient alternatives exist. But they are ignored or rejected.
US biodiesel tariffs - "a protectionist ploy"?...
...the words of George W. Bush in April 2008 when European biodiesel producers complained that heavily subsidised US biodiesel was being dumped in the European market. Well if it was a ploy, this week European governments decided it is one worth pursuing in order to save another struggling European industry. They voted apparantly overwhelmingly in favour of temporary anti-subsidy and anti-dumping tariffs, to come into force on March 13. Not surprisingly, they have backed their own industries in this dispute, regardless of any 'global' pronouncements of 'global' solidarity in a time of global crisis. What else really would we expect them to do?
The current decision is only temporary while further investigation is carried out. But now that the investigation has been started, the EC's track record (in anti-dumping at least) places the odds strongly in favour of definitive import duties being imposed for at least 5 years, most probably a lot longer. Whether the investigation convincingly proves that dumping has caused injury to European producers, or indeed that anti-dumping duties would benefit them, becomes somewhat irrelevant once the political wheels of EU anti-dumping are in motion. Forget also that duties would increase the price of biodiesel for European motorists, a move diametrically opposed to EU environmental policies. But add the global crisis and spreading paranoia from bail-out after bail-out to the mix, and you have all the ingredients for a successful protectionist ploy by a troubled, but influential, EU industry - whatever the consequences. And since they are the ones shouting loudest in the ears of their governments, they usually get their way.
This latest move by the EU is particularly riling to to the Americans, coming as it does hot on the heels of Gordon Brown's lesson in resisting protectionism in the US Congress. But, for their part, the US government have been pouring money into biodiesel production in the form of subsidies and production quotas, under the thumb of an unholy alliance of agricultural and environmental lobbies. Subsequently they have over-production and rely on export markets to mop it up. But environmentalists are by no means united over the benefits of biofuel production - there is evidence that its use can actually increase CO2 emissions. In this case in the US, it is large farmers that really have the ear of their government.
This is no clear-cut case of right and wrong. But there will certainly be losers, not least because this is yet another notch in the protectionist bedpost, at a time when we could all do without such a futile scrap. Whichever angle you come at it from, it doesn't look good. Except, you might think, those European biodiesel producers who are going to benefit from import tariffs being slapped on their strongest competitors. But you might think wrong. Ongoing ECIPE research is revealing that anti-dumping duties do very little to boost the profits of already inefficient and uncompetitive industries. The fact that we are almost guaranteed an EC decision to impose long-term duties on US biodiesel could then throw up one scrap of hope. Perhaps a way to expose the fallacies of anti-dumping, even as a protectionist tool. We will be watching.
Medvedev's New Energy Treaty
The Russian President Dmitry Medvedev is planning to propose (possibly at the G20 summit in London) a new Energy Charter. It remains unclear what should be covered by this new charter – reports are saying that Medvedev is talking to Russian energy firms about what exactly to propose.
The Moscow Times reported earlier this week:
President Dmitry Medvedev plans to present proposals for a new Energy Charter to help resolve disputes such as the gas conflict between Russia and Ukraine that disrupted Europe's supplies in January.
The new accord should "address the concerns of producers and transit states," in contrast to the current "consumer-oriented" agreement, Medvedev said in an interview with Spanish media, according to a transcript posted on the Kremlin web site Sunday.
An Energy Charter is not such a bad idea. I only have two major objections.
First: there is already a “producer-oriented” treaty covering energy. It is called OPEC. It is good for everyone, except consumers.
Second: there is already an Energy Charter. Russia has signed it, too. The Russian government and the Duma are doing what they can to avoid it. They say, correctly, that Russia has not ratified the ECT. They also say, incorrectly, that the ECT therefore is not applicable to Russia. By signing the ECT Russia agreed to a “provisional and full application of the treaty for an indefinite period of time”.
True, the applicability of the ECT on matters concerning Russia is currently being tested. Former shareholders of Yukos have sued the Russian government for stealing the assets of the former Russian energy major. A decision by the arbitration tribunal is expected later this year. It would, however, be very surprising if the tribunal decided Russia is not subject to ECT disciplines. Russia has not made use of the opt-out clause and in another case in front of a tribunal, involving Georgia, it was ruled that the signature on the treaty has legal obligations even if ratification is pending.
This is also what I concluded in a study from November last year.
Keynes and Protectionism
“New protectionism” is on everyone’s lips. The global economic crisis has magnified protectionist threats. The G20 and G7 have pledged to fight it by not erecting new trade barriers and completing the WTO’s Doha Round. A new conventional wisdom has formed: shock-and-awe fiscal stimulus, sealed by global policy coordination, is needed to boost aggregate demand and prevent a slide into protectionism. However, such Keynesianism on steroids is dangerous. The underlying economics is highly doubtful; the political economy is appalling.
Emerging protectionism today is very different from the in-your-face tariff protectionism of the 1930s. For example, tight cross-border linkages in global corporate supply chains and WTO agreements make escalating tariff hikes highly unlikely. The danger rather is of creeping protectionism by other means – chiefly more subtle non-tariff barriers. Governments around the world have bailed out domestic banks and car industries. The air is thick with governments’ nods-and-winks to banks to lend at home, not abroad, and to car companies to ensure that their subsidies are spent on production and employment at home, not abroad. The EU has relaxed its state-aid rules and opened the door for “subsidy protectionism” to spread across many sectors. “Buy America” provisions on government procurement have been attached to the US fiscal stimulus package. "Buy local" regulations are proliferating.
Creeping protectionism has surfaced elsewhere. Anti-dumping actions are on the march. There is a backlash against migrant workers. In the EU and US, there is talk of imposing “carbon tariffs” on developing countries that do not limit their carbon emissions. This is but one sign of “standards protectionism”, with governments resorting to onerous product and process standards to restrict imports, especially from developing countries. “China-bashing” is getting worse, with accusations of “unfair trade” linked to “currency manipulation” and bilateral trade deficits.
These symptoms have their parallels with the 1970s, not the 1930s. Back then, external shocks triggered more government intervention. Labour and capital-market regulations proliferated. Subsidies were sprayed at ailing import-competing firms. This spawned protectionism. Industry after industry, coddled by government subsidies at home, sought protection from foreign competition. The result was the “managed trade” of the 1970s and 1980s.
That is precisely the danger today: Big Government at home is the response to a severe economic downturn; and it is inexorably spilling over into protectionism.
The economics of a Keynesian stimulus are problematic enough in the context of open and globalised economies. Its consequences for borrowing, taxation, inflation and crowding out of private capital are extremely worrying. Even more so as hyper-Keynesian policies have been enacted primarily by governments that could not balance their budgets during the boom years and that suffer from large fiscal deficits. These governments are rapidly unlearning hard-learned lessons from last era of Keynesianism.
The politics of a Keynesian stimulus are as worrying. It is a leap of faith to expect bigger government expenditure, in the name of fiscal stimulus, to be temporary and well-targeted to boost aggregate demand, while avoiding longer-term entitlements and wasteful pork-barrel spending. The latter is inevitable; and it is bound to spill over the border into protectionism. Indeed, fiscal-stimulus packages are already providing cover for industrial-policy activism at home and protectionism abroad. Those who profess shock and horror at such developments are -- to put it charitably -- childishly innocent. They also overlook one important historical marker: Keynes himself turned to national self-sufficiency policies and protectionism in the 1930s – not least to make activist macroeconomic policies work at home.
Another shibboleth of the new conventional wisdom is that the speedy conclusion of the Doha Round is essential to deal with emerging protectionism. A Doha deal would be nowhere near enough. Current Doha proposals have been whittled down to a very low common denominator; and they are a dog’s breakfast of exemptions and loopholes. An agreement with stronger tariff bindings for developing countries would be a positive outcome. But WTO agreements have much weaker disciplines on subsidies and other non-tariff barriers. This will not change with a Doha deal.
Finally, faith in the Doha Round usually extends to faith in other international institutions – now including the G20. Indeed, the “global governance” mantra has become more fervent in the wake of economic crisis, alongside the mantra of activist government at home. But, realistically, non-binding promises from the G20 and other large, unwieldy multilateral forums will not do the trick either.
What is the alternative to crude Keynesian fiscal stimulus, misguided WTO optimism and global-governance hubris? Domestically, fixing banking systems and extending competition-enhancing supply-side reforms are more important than supersized fiscal-stimulus packages. Externally, a “ceasefire” agreement on new non-tariff barriers among today’s big economies – especially the US, EU and China – is at least as important as a Doha deal, and much more important than G7 or G20 pledges. Overall, limits to government intervention and a well-functioning market economy at home are of a piece with open markets, economic globalisation and international political stability.
Fredrik Erixon and Razeen Sally
Global Governance and World Government: Where Have All the Realists Gone?
This is again the high season for “global governance”. The global economic crisis has shifted the climate of ideas decisively against free markets and in favour of Big Government. Even the pro-market, pro-globalisation political centre has lurched to the left. The new consensus espouses a renewed compact of “Keynes at home and Smith abroad”. Greater government macro and micro interventions at home are needed to stimulate recovery, reduce inequality and preserve social stability. And stronger international cooperation (or global governance) is needed to make this work in tandem with open markets abroad. A new generation of Platonic Guardians – high-powered intellectuals and technocrats – is charged with fine-tuning this package and engineering desirable outcomes.
Votaries of global governance aver that since more and more problems are global, solutions should also be global. That means strong cooperation among governments, Big Business and NGOs, and extra authority invested in international institutions. In recent years, climate change has been the lightning-rod issue for global governance. After all, it is a “global commons” problem that demands a global cooperative solution. Hence loud calls for a United Nations-centred post-Kyoto developed-developing country grand bargain, with a road map of carbon-reduction targets, inter-country transfers and side-payments – all to be enforced with a paraphernalia of administrative instruments. The science and economics of climate change are problematic enough. But its political economy is even more problematic. Every realist knows that a post-Kyoto global compact on tackling climate change, even if agreed, will neither be strong nor enforceable. But that does not stop the bien pensant climate-change commentariat from dreaming out loud.
Now, with the onset of a global economic crisis, clarion calls for global governance have become shriller and more insistent. New faith is invested with a new kid on the block: the G20. Inter alia, it is supposed to foster global cooperation on fiscal-stimulus packages and financial-market regulation, as well as contain emerging protectionism. The WTO is charged with concluding its God-forsaken Doha Round, also to contain emerging protectionism. The IMF may have its resources at least doubled alongside plans to reform its voting rights. The World Bank and other donors demand lots more cash to lend to developing countries, now back in dire straits.
International economic cooperation is welcome in principle and often in practice. But, to be workable, its goals and instruments should be realistic, not hubristic. The new faith in global governance is mostly wishful thinking, full of flatulence and fluff. The G20 is highly unlikely to be much more than a chat forum given to non-binding pledges. That is the record of the G7/G8. Even in the improbable event of a Doha Round conclusion anytime soon, it will not come close to containing emerging protectionism: what is on the table is a very low common denominator and a dog’s breakfast of loopholes and exemptions. Given their track records, it is not a good idea to place too much faith and too many resources in the Bank and the Fund. As for most organisations in the UN system, they are dysfunctional bureaucracies peopled by third-rate mediocrities in sharp suits and power dresses. They are boondoggles for the perfumed elites of poor countries and well-heeled consultants from rich countries. The notion that the UNCTADs and UNDPs of this world can be instruments of effective global governance is a sick joke.
So, in this high season of global governance, we can expect formerly level-headed commentators like the FT’s Gideon Rachman to go off the deep end, hinting at the need for a world government. We can expect Robert Zoellick, who once rightly warned us against “therapeutic multilateralism”, to inject weekly doses of the latter into the international body politic as head of the World Bank. It is sad to see someone who used to be plain-spoken, hard-boiled and perspicacious reduced to voicing easy platitudes on the G20, climate change and foreign aid. We can assuredly expect high-octane global-governance nonsense from Ban Ki-Moon and Al Gore. And perhaps it won’t be long before Pascal Lamy succumbs to his Parisian-Cartesian itch and opines on the pressing need for a new global-governance architecture.
All the more reason for global-governance sceptics – yet realistic multilateralists -- to think of Kipling’s injunction to “keep your head when all about you are losing theirs”.
Nationalization, Swedish Style
In the past weeks there has been a lot of talk about nationalization of banks or entire banking system. Citigroup and Bank of America are two major banks in the US considered to be in need of nationalization. The proposition has also received much support – also unexpected support from people like Alan Greenspan.
Almost every time such a radical measure to solve credit problems or alleged insolvency in banks (or entire banking systems) is suggested, there is a reference to Sweden’s successful experience in the early 1990s with nationalization of banks. The Swedish example is also used as a motivation for nationalization: if Sweden, the mother of soft democratic socialism, nationalized banks without permanently socializing the banking sector, why can’t we do it?
I don’t think nationalization of the big US financial behemots will work. But one itchy part of the argument I have particular problems with is the references to the Swedish experience. They are often put in very sweeping terms: Sweden nationalized its banks and reprivatized them when they had been cleaned up. Is this really correct? No. There are many things to be learned from the Swedish crisis policy in the early 1990s. Nationalization of banks is not on the top of the list. In fact, it is not on the list at all: Swedish policy in the early 1990s had very little to do with nationalization.
Let me cut a long (and interesting) story short.
- The Swedish financial crisis in the early 1990s required actions by the government that went beyond the typical lender -of-last-resort liquidity measures performed by central banks. There was no unified response to banks on the brink of collapse. The government treated banks asking for government support in different ways. One common thread, however, was to avoid nationalization. This was not primarily an ideological call; evidence from other countries hardly suggested governments to own banks.
- The government set up a council to manage the banking crisis. This council inherited some measures that already had been undertaken, such as a government-backed loan guarantee to the foundation which owned Första Sparbanken, one of the high-street banks. They also had a panoply of measures it offered to banks which could not raise capital to stay above the capital adequacy ratio of 8 percent.
- The Swedish government bailed out Nordbanken (what is today Nordea), one of the main banks. However, one cannot say the government nationalized Nordbanken – the government already owned it! Nordbanken was built on the various government banks that in the early 1970s were put together into the so-called PK Bank. In the late 1980s, the PK bank bought Nordbanken, which was then a conglomerate of former small, regional banks. To create a positive commercial atmosphere around this bank, they preferred the name Nordbanken to keeping the name of the buyer, which sounded socialistic and old-style.
- At an early point in the crisis, Nordbanken issued new shares which were mostly bought by the government. The government increased its ownership to 77 percent of the bank, but a year later stronger measures were called for. The government bought out all private share holders (partly to avoid being sued for misinformation to share holders when new shares were issued) and split up the bank in two parts (one part became a so-called “bad bank”, Securum; another part, with the healthy credit stock, remained as Nordbanken). Incidentally, the Swedish government still is the major share holder in Nordea. It has sold some of its shares, and through mergers with other Nordic banks its ownership has declined. Yet it still owns 20 percent of Nordea.
- There were several motivations for this move. Nordbanken was a fairly sizeable bank (one of the Big Five) and a collapse could have thrown the entire payment system into chaos. Another motive was to avoid a malign scenario of falling credibility if the government let its own bank go bust. Furthermore, Nordbanken was the bank used by many government authorities, and in case of a bankruptcy they could have lost a lot of money (at this point Sweden did not have a deposit insurance).
- The Swedish government also bought the holdings of the bankrupted Gota Bank. Gota Bank was a fairly small regional bank (it was named after a Swedish region), but together with Nordbanken it was the bank most exposed to the collapse of the 1980s credit-housing boom. The healthy part of Gota Bank was soled cheaply to Nordbanken; the rest was put in Retriva, another “bad bank” created by the government.
But this is as far Sweden’s experience of bank nationalization goes. And it is hardly a bed-time story for friends of bank nationalization today in the US or the UK.
So – what are the lessons from the Swedish banking crisis for crisis responses today?
First, all the big banks had big credit losses, but they survived without being taken over by the government. Nor did they become zombie banks; the profitability of these banks returned to high levels only a few years after the crisis started. Hence: if you are looking to Sweden for experiences of how to avoid Japanese-style Zombie banks, the banks that were not nationalized should be the first stop.
Second, one key element of the response to the banking crisis was to avoid nationalization. The government preferred to use other tools, and they did walk the extra miles needed to avoid nationalization of some of the banks.
Welcome to ECIPE’s New Blog!
Welcome to ECIPE’s new blog Trade Matters.
This is an institute blog run by me, Razeen and our ECIPE colleagues. We will regularly post pieces – short and long – that are opinionated, thought provoking and challenging. Please stay in touch with the blog and post comments (critical or appreciative) as we hope to stimulate to discussion and exchange of views.