Deglob, Reglob?

For several years, disagrements at the WTO and other international organizations have been leading to pessimism about the sustainability of an integrated world economy.

Less than a year ago, peaking oil prices caused a lot of buzz that high transportation costs would spell the end of globalization.

This week, even the Economist is saying that the "integration of the world economy is in retreat on almost every front."

Criticism of globalization is rising everywhere. One China anlayst summed up the growing frustration in China by saying, "globalization was largely a fraud where Americans could endlessly consume and Chinese factories could endlessly manufacture without any adherence to economic fundamentals and creating a false and bloated version of prosperity and rising living standards."

The thing is, globalization is both desirable and necessary, and we simply can't go back. Without globalization rich countries still trade with each other, but poor countries are shut out or are unequal partners in any agreements they can get into. The WTO brings everyone to the table and even gives vetos to every member country, thus greatly reducing the ability of G20 countries to call all the shots.

Globalization increases prosperity for everyone and it levels the playing field, but it is also just an institutionalization of what is going to happen anyway. The only way global trade is going to stop is if civilization fails and we return to the dark ages. We are an integrated world. Some sorts of trade may become less affordable, but the movement of goods, capital, people and ideas will continue.

I'm for globalization, but I'd like to see some very major tweaks in the way we institutionalize it. We need better mechanisms for democratic control of economic activity. Globalization should be about responsible world governance, not a new way for national elites to circumvent their local laws to further enrich themselves. There should be more transparency and accountability. Globalization was supposed to make the world less vulnerable to business cycles, but it seems that the opposite has happened: world organizations should address this issue explicitly. In addition, transport should truly reflect costs, including the massive pollution caused by ships.

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Who Will Stand Up to the Cuban-American Lobby?

Will any of the candidates for president stand up to the Cuban-American lobby in Florida and promote the idea of lifting the embargo against Cuba?

Now that Fidel has resigned the US government is revving up to make Raul the next Great Satan.

The US government could take advantage of Fidel's resignation to open talks with Cuba, but no... CNN reports that "Deputy Secretary of State John Negroponte said the U.S. embargo on Cuba will not be lifted in the near term."

Cuba had a socialist revolution in a time of great capitalist corruption, including US-sponsored corruption. Some property was confiscated. Harm was done to both sides. Cuba has some human rights abuses. The US has some human rights abuses - some of them being perpetrated on illegally occupied Cuban soil.

The Cuban revolution was nearly 50 years ago. The Soviet Union ended nearly 20 years ago. Even the Sandinista revolution was nearly 30 years ago (not that I think Cuba was on the wrong side of that one, by any means). It was all a long time ago. Get over it. Stop embargoing this small idealistic island off your southern shores. And give back Guantanamo. The behavior of the US has been shameful and it's time to stop it.

Sure, if only one candidate supports lifting the embargo, then they may lose Florida and that would probably cost them the election. But isn't everyone all about "change" this year? Aren't they all promising to stop with the same old/same old crap and bring some sense to presidential policy? Isn't US persecution of Cuba just about the biggest human rights fiasco that the western hemisphere has endured in the last half century?

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Chilling News on the Economic Front

I reprint this article in today's Globe & Mail, since Globe articles quickly disappear behind the subscription wall.

For my thoughts on all this, see the links below.

Help with U.S. dollar sag, Flaherty tells China
HEATHER SCOFFIELD

October 20, 2007 at 1:12 AM EDT

WASHINGTON — Canada has shouldered more than its fair share of currency appreciation, says Finance Minister Jim Flaherty, and it's up to China to do something about it.

As the Canadian dollar closed well above $1.03, Mr. Flaherty said the currency “has borne the brunt of the U.S. dollar adjustment.”

Officials explained that about one-third of the depreciation of the U.S. currency against a basket of currencies has been absorbed by the Canadian dollar, every year since 2002 – although the figure is likely higher this year.

“A third of the burden has been borne by Canada, and we're only 33 million people in Canada. About a third by Europe,” Mr. Flaherty said after meeting with his counterparts at the bi-annual Group of Seven meeting.

In the past, the Bank of Canada has studiously avoided talk of burden-sharing of currency movements, since it has argued that much of the Canadian dollar's appreciation since 2002 has been warranted by higher commodity prices and strong economic fundamentals.

But Friday, Canada appeared to join Europe in claiming that the appreciation of their currencies was unfair. The euro also traded at an all-time high against the U.S. dollar Friday.

The G7 resisted calls from Europe to bolster the U.S. dollar, and instead wagged their fingers harder than ever at China's exchange-rate regime. They used their toughest language to date in their campaign to persuade China to allow its currency to appreciate.

But the G7 communiqué did not mention the U.S. dollar, the euro or the yuan at all. Markets sent the U.S. dollar lower, interpreting the G7 statement to mean that the only currency solution the seven countries could agree on was that China needs to be more flexible. China was not included in the meeting.

“We welcome China's decision to increase the flexibility of its currency, in view of its rising current-account surplus and domestic inflation, we stress its need to allow an accelerated appreciation of its effective exchange rate,” the G7 officials said in their final communiqué, meant to set the tone of meetings among international finance officials all weekend in Washington.

China has allowed its currency to appreciate incrementally against the U.S. dollar, but has resisted repeated demands for larger moves, with an eye to fallout within its own economy.

Bank of Canada Governor David Dodge acknowledged that China would not react immediately to the G7 plea, but he held out hope for the future.

“We know that this has to be part of the global adjustment,” he said.

The G7 finance ministers and bank governors also warned that the global economy will slow somewhat, after five years of robust growth.

And they congratulated themselves for handling the global credit crunch well, and said focus on central bankers must now turn to controlling inflation.

Market players involved in the financial turmoil, however, now need to shape up and figure out how not to let such problems boil over again, the ministers said.

“We expect markets to learn lessons and address many of the shortcomings that have been exposed by recent events,” Mr. Flaherty said.

“Our securities regulators should also be engaged on financial markets issues.”

Developing countries, however, blamed lax practices in rich countries. In a communiqué of their own, they noted that so far, the credit crunch has not caused much harm in developing countries.

But they warned that unless rich countries improve their oversight of risky market practices, the market turbulence could destabilize their economies as well.

“Ministers underlined that active policy co-ordination is critical to prevent the emergence of a larger crisis,” the Group of 24 developing countries said in a statement Friday.

See also:
* The Unsustainable World Economy
* A Big Mess is Brewing
* Sub-Prime

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The Challenges Facing North America

The creation of the Free Trade Agreement and later NAFTA was a reaction to underlying structural integration that occurred without government involvement. Leading up to free trade, US companies that had once had Canadian branch plants and then Canadian subsidiaries were moving to an integrated US-Canada corporate model. Since the free trade agreement structural integration has continued to grow, notably in supply chains. For example, the power supply in the US and Canada is more integrated even than in Europe; and railroads and other freight haulage now have a north-south orientation, rather than east-west.

NAFTA brought trade laws up to date with business reality, but it failed to create institutions that could provide a vision for our future. We face a bunch of major issues that we are currently unequipped, as a continent, to face. These include:

* security issues
* environmental issues
* energy issues
* transportation issues
* planning infrastructure such as more deep ports to trade with Asia

Another area in which North American trade cooperation is failing miserably is the nuts-and-bolts details of commerce. The Globe & Mail had a front-page article last week about the hurdles facing a maker of jelly beans: for example, the US and Canada have different regulations about the font used for nutritional information, so they have to spend a lot of extra money producing two sets of packaging that is otherwise identical.

The need for institutional infrastructure to deal with our existence as a continent includes the need for a voice for groups other than business and government. Even academics are mostly left out of current free trade talks, much less NGOs and other community groups.

Having wider input will help the mainstream business and government interests as well as make the whole process more productive. It would also avert dangers (such as the poor southern Mexicans who are not being helped by NAFTA and in consequence are becoming more nationalistic).

In terms of business regulations, the US is taking the lead and setting standards on its own. Canada's lagging on the regulatory front is hurting us economically - many corporations (including banks, CN Rail and other service companies) have moved their headquarters to the US to be closer to the effective regulators. Countries in Europe don't have this problem because they don't have one dominant market and they have a say in multilateral discussions via the EU.

In all the areas I mention above, the US will forge ahead on its own if Canada and Mexico don't find a way to more effectively influence the process. A full tripartite effort in all of those areas will benefit the US more than a unilateral approach. For example, the US focuses on its porous southern border, but perhaps more importantly it should be worried about Mexico's porous southern border and what threats might emerge from it.

The recent talks in Montebello were part of an ongoing, inadequate process for dealing with our common economic and security issues (see the Security and Prosperity Partnership). We need to do so much more. I recently heard Stephen Blank argue that mayors should take up the challenge and forge tri-country discussion groups; while mayors don't have a legislative mandate they are very influential. Others have argued that we need an annual forum of all federally elected representatives in the three countries.

I hate to say it (since that ship, apparently, has sailed) but what we need is Bob Rae to run our country and bring his intelligence and vision to forge a new continental relationship. Compare the EU to North American free trade and our inadequacy is especially apparent. There are issues of huge importance to all citizens of North America that we just aren't dealing with.

(Some of this information is from a recent panel discussion at CIGI involving Ginny Dybenko, Daniel Schwanen, Stephen Blank and Duncan Wood.)

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China Bashing

Recently the news has been full of scary articles about recalls of products made in China. From toys for toddlers to dog food, the message is that China is so backward or corrupt that everything made there is suspect.

People who understand the world of cross-border manufacturing know that this news angle is rubbish. Matel, Fisher-Price and the other multinationals are responsible for providing detailed specs to manufacturing plants. The plants don't know the safety rules in the country the goods are shipped to; they might not even know where the goods are destined. The company that hires them is responsible for telling them exactly which paint to use - they can't just leave it up to the Chinese plant manager and hope he doesn't decide to use leaded paint. They can't just accept goods without testing. If they do, then it's their fault.

Maybe this is just another case of the media getting a story wrong. Coincidentally though, the US government seems obsessed with China as the only threat to American world supremacy. China is too strong, too robust economically, and too damn big. Whenever I hear a story that bashes China, I take a long breath and wonder who initiated it.

See also: Climate Wars

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The Fluid Supply of Labor

A year or so ago people were saying that off-shoring had peaked. The argument was that companies were starting to realize that North Americans did a better job. Or that all the best Asian professionals were already hired and so wages were rising there. Or that companies couldn't cope with the problems of time difference and the need to travel half way around the world on a regular basis.

But the decline in hiring off-shore didn't happen. And now even if it did
it wouldn't matter much because Asian countries are developing their own indigenous companies in a broad range of sectors. If North American companies didn't hire Asians, then Asian companies would just under-sell them. The only way to stop the internationalization of labor would be to go back to high tariffs. That's not a winning proposition in any event, but it is unfeasible in the current situation because China, Japan and Korea own so much US debt.

The internationalization of the labor market has happened and it's here to stay. I once thought my job (software technical writer) was immune because the software market is still mostly English and hey - English is my native tongue - but in my company a large part of the writing team is in Singapore. I heard on As It Happens tonight that even journalism jobs are being out-sourced to Asia, and that Reuters has had over a hundred business reporters in Singapore for years - writing about North American business.

All that brings me to the purchase of Chrysler by Cerberus. Some people are arguing that Cerberus is a strip-and-flip specialist, but there's more to it than that. The private equity company makes its money by buying a company that is nearly insolvent, restructuring and making large cuts to the company, and eventually selling it for a profit. Cerberus is dead serious about restructuring companies and it has a lot of management expertise.

Cerberus is not a new investor in Detroit, probably because the US car industry is, in general, completely in the crapper. The Detroit Free Press writes, "In southeast Michigan, Cerberus already has purchased a controlling interest in General Motors Corp.'s finance arm, GMAC, as well as Michigan auto suppliers CTA Acoustics in Madison Heights and GDX Automotive in Farmington Hills. It has offered to invest $3.4 billion in parts giant Delphi Corp., which is in bankruptcy. And earlier this month, a judge gave auto supplier Tower Automotive, also in bankruptcy, preliminary permission to sell nearly all of its assets to Cerberus for $1 billion."

It's like this: The unions and the government have been holding their finger in the US car manufacturing dyke for years, keeping change at bay, maintaining not just high salaries and benefits for workers but also lousy workmanship, lousy design, and second-rate management. Not to mention a steadily eroding workforce as the companies crumbled. The resistance to change also extended to not reforming health care in the US, taking out some of the many profit-takers who contribute to the crippling health costs of unionized companies.

And that's all over now. Cerberus is a private company that doesn't have to disclose its doings to the SEC and doesn't have to answer to shareholders. It isn't going to follow the old car manufacturing paradigms. The future for Chrysler is far different than if Frank Stronach had been successful in his bid.

Change is coming. Not just to US car manufacturers, but to all of us who earn a salary in a rich western country. And isn't that what we always said we wanted? - Better education in developing countries. Equalization of pay scales around the world. An end to the western countries hogging all the world's wealth?

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A Big Mess is Brewing

China and the US have entered an unholy alliance: China finances the US war in Iraq and in compensation the US keeps its markets open to Chinese consumer goods. Marcello De Cecco, an expert in the international monetary system, calls this Bretton Woods Two. Another way of describing it is that the US is forcing foreign central banks to finance the US trade deficit in order to keep their exchange rates from appreciating and their export-based economies from collapsing.

De Cecco, who is a professor at the University of Pisa, advisor to the Italian government, newspaper columnist and author of Money and Empire, gave a lecture this week at Waterloo's Center for International Governance Innovation (CIGI).

De Cecco argues that the current situation has some parallels to the years leading up to the First World War. Then, the pound sterling was the international currency, backed by gold, but the UK was in decline. The two emerging superpowers were the US and Germany, neither of which had ambitions to replace the pound with their own currency. It was France who challenged the pound as world monetary standard, and France that also threw instability into the system, sometimes deliberately (in 1907-14 there were several episodes where France removed money from German markets for political reasons, forcing Germany to hoard gold). The dollar became the world currency after WWII.

Now, it is the US that seems to be in decline. China is the emerging superpower, but again it is not interested in replacing the dollar as the world currency. In fact, China is behaving very responsibly, doing its best to keep the current system working. The euro is the challenger to the dollar. Half of all world assets are held in private hands in Europe, and European investors may dump the dollar if the dollar starts to decline - as may Americans and everyone else, including even China. Of the many sources of instability in the current system (not the least being the behavior of the US government), Russia, a country that is on the decline and bitter about it, may prove to be a problem.

Professor De Cecco called his talk "From the Dollar Standard to a Multiple Currency Standard: Current Developments in the Light of Pre-1914 Experience" and summarized it as: "The world in which we live today is in many ways similar to, and in other ways different from, the one which existed in the two decades before 1914. New world powers are in the making now, as they were then. Power politics seems to have superseded the politics of alliances based on ethics and values. Is the multiple currency world towards which we seem to be going bound to prove as dynamically disastrous as the one which came to an end in 1914?"

De Cecco ended his talk with the ominous statement, "A big mess is brewing."

Related post:
The Unsustainable World Economy

Update: Gwynne Dyer

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The Unsustainable World Economy

We live in precarious times. The US dollar is the official world currency - around the world, over two-thirds of all national reserves are held in US dollars - and yet it is very, very vulnerable. The vulnerabilities of the US dollar include:

* Supply-side financial markets: Enormous amounts of US debt are being held by East Asian countries, notably China, Japan and Korea. These countries are keeping their currencies artificially low (thus propping up the dollar) to fuel their growing export market. If they change their policies, the US dollar could crash.
* Supply side politics: If countries lose faith in the dollar, they could start moving their reserves and transactions to other currencies, causing the US dollar to crash.
* Demand-side US markets: US consumers are fueling the current world financial system by buying enormous amounts of cheap imported goods. (Ninety percent of Wal-Mart's sales are from imports.) If US consumers reduce their demand, say because of a housing market crash or rising interest rates, the whole financial system could topple.

The current system evolved somewhat by accident. There were a series of financial crashes in 1997, notably in Russia, East Asian and Brazil. Countries responded by building reserves of dollars in case of future crises. This caused the US dollar to rise, which fueled exports from those countries. The countries liked that and started to manage their exchange rates to keep their exchange rates low against the US dollar, which caused them to hold more US currency and debt.

Meanwhile, back in the US an ideological president was elected who didn't believe in government intervention. To be fair, currency exchange intervention had been declining in the US before Bush, but Clinton's Treasury Secretary, Robert Rubin, did intervene in the currency market a couple of times. Under Bush, there has been no currency market intervention whatsoever. The US dollar - a key component of economies the world over - has been largely ignored by the US government.

This has had some benefits. The US has enjoyed a ton of cheap goods, and the reliance on cheap imports has helped dampen inflation. East Asia has seen enormous growth. Multinational corporations are making a ton of money off the cheap labor. Stock markets are booming.

But there is a huge downside. While US consumers are getting great prices, this situation is keeping their wages down. East Asian exports are growing, but the wealth isn't flowing to citizens who could in turn create a domestic market for goods. In fact, we're in a bizarre situation where capital is flowing from poor countries to the US.

Furthermore, the whole system is becoming increasingly unsustainable and could result in a huge crisis. If it does, the world economy is very vulnerable. The problems of capital flight which caused the 1997 currency crisis have not been addressed and could happen again, worse. The countries who rely on exports will be devastated if the US dollar collapses. The US currently has a huge deficit and will not be in a good position to help soften the blow for its citizens.

In addition (and this may be meandering into the genre of conspiracy theory), the US could react to such a financial crisis in a very bad way. I'm not just talking about protectionism and nationalism. Is it a coincidence that the Bush administration is trying to position China as a national threat to the US? China holds enormous amounts of US debt and the US seems to be positioning China as an enemy. Who knows what might happen.

I went to a lecture today by Thomas Palley, who argued that the solution is to create a revised Bretton Woods system. He proposes two main mechanisms:

* Managed capital flows: Put in place systems that will avert currency collapse due to capital flight. For example, a "speed bump" law on capital inflows: when someone brings capital into a country, they have to park it for a set period of time with the central bank at a set interest rate. Another example of this sort of safeguard is to require hedging on foreign exchange-denominated borrowing.
* Managed exchange rates: Currency rates should be managed to ensure sustainable trade deficits/surpluses. But the onus must be on the strong currencies to bail out the weak currencies: financial markets are now so strong that they can muster more financial clout than just about any economy, so the weaker currencies can't defend themselves. Also, the stronger currencies are reaping a benefit that they should pay for.

Palley wants these innovations to be put in place before there is a crash, to avert it. However he sees no political will in the US or elsewhere to do so. He suspects there will be a worldwide financial crash, and soon, and hopes that we can put his policies in place at least after the fact.

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The Future of the WTO

The Doha round of trade talks has fallen apart, but the WTO is going strong, especially in the area of trade dispute settlement. There is now an imbalance in the WTO. Politically, it is very weak: member states are unable to reach consensus to make decisions and take action. They have not only been unable to reach consensus on the recent round of trade talks; they have even had trouble doing things like electing a Director-General. At the same time, the dispute-settlement part of the organization is very strong and active. In the eleven years of its existence the WTO has been sent over 350 disputes to settle, which is more jurisprudence than any other international organization.

The institutional imbalance could be a big problem.

Problems will arise if the dispute tribunals start to fill the vacuum left by political inaction by interpreting (and effectively setting) trade law. For example, the WTO agricultural agreements included exceptions that had expiry dates. The exceptions have now expired and negotiations to revise or renew them have been unsuccessful. What will a dispute tribunal do if asked to enforce a part of the law that was previously covered by an exception? Will it honor the exception, thus implicitly making permanent something that was supposed to be temporary; or will it rule that the exception doesn't apply, which will commit some members to something they only accepted with an exception?

In effect, the dispute tribunals could gain a sort of Supreme Court status, creating trade law by interpreting what is agreed to date. This is not what anyone wanted or foresaw when the WTO was created. Current WTO Director-General Pascal Lamy has worried publicly that the WTO dispute settlement system may be too strong, and others agree.

The WTO has released a report on ways to change, called the Sutherland Report. There's a pretty good description of its proposals here. A major part of the proposals aims to improve the organization's structure so that it can reach consensus and get things done.

The WTO is having problems getting things done for a lot of reasons:

- It has 150 member countries, and each has veto power on all decisions. There have even been cases where a WTO ambassador vetoed something without his country's approval, following his own agenda.
- The WTO grew out of GATT, which was an international agreement but not an international organization. The WTO has never developed the structure it needs to perform its functions. It has an insufficient management structure to guide the political process.
- World power is changing. For example, China, India and Brazil have become large players, and others are just behind. Old alliances are fracturing.
- There is disagreement among member countries about the mandate of the WTO. Should its mandate be just to liberalize trade? Or should it do other things such as encourage environmental and labor protection or economic development? Some even argue that it should be used to enforce international environmental and labor agreements.
- Many of the smaller economies, such as developing countries and Canada, and some of the big countries, such as China, have given all the trade liberalization concessions they can for the time being, and are busy implementing them. They simply can't negotiate more.
- Some of the larger economies such as the US and EU are dragging their heals on implementing their obligations, making other countries less confident about the fairness of the process.

Unfortunately, the member states of the WTO don't seem very interested in institutional change. As Debra Steger, a Canadian trade lawyer who helped create the WTO, says, "The Sutherland Report was met with a huge yawn. The delegations aren't interested."

The WTO is also facing very real questions about its legitimacy. It makes decisions that many feel should be made by representative governments, and it does it in secrecy. Other international organizations allow open hearings; the WTO does not, and should.

In Canada, there is no longer even a consultancy program whereby citizens, business, labor and NGOs can provide input to our negotiators. In some cases this has led to failed negotiations because the negotiators didn't know what to do. In all cases it has made people question the legitimacy of the decisions.

Despite its many flaws, the WTO serves a very important role in making trade negotiations open to all. Instead of letting the US, EU and Japan call the shots by making trade negotiations all about regional trade agreements, the WTO brings everyone to the table. Overall, the dispute settlement process has been very effective. The WTO needs to be reformed. Perhaps the collapse of the Doha round will knock some sense into people and energize them to make some changes.

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The Weird Wild World of Debt Relief

For over a decade there has been a powerful international movement to provide debt relief to developing countries. This movement included religious leaders, heads of state, rock stars, a large coalition of US conservative religious organizations, and on and on. They had votes in the US congress. They had money and power and visibility. They had a strong argument: debt repayments from the south to the north are crippling the south. And in many cases very poor countries were being forced to pay back loans that in the US or Canada a court would declare illegitimate - because it was money borrowed by individuals that the IMF or World Bank turned into public debt, or because the debt was acquired by an unelected dictator who no-one should have been loaning money to.

Despite having all this on their side, the debt relief movement didn't get very far. Oh, a little program called Highly Indebted Poor Countries Initiative was started in which the indebted poor countries had to jump through hoops for three to six years in order to get some help on their interest payments, but no serious successes were achieved.

Then the US invaded Iraq.

As the occupiers of Iraq, the US had to deal with Iraqi international debt, which amounted to a staggering $120 billion. Only $4B of this amount was debt held by the US; most of the rest was owed to France, Germany, Russia and some Arab countries. Notice that all of those countries opposed the US invasion of Iraq. The US tried to declare that the debt was, in legal terms, "odious" and so did not need to be repaid, but that ploy failed. The US then tried to get the international community to give debt relief to Iraq, but that too was not accepted. In particular, French President Jacques Chirac spoke out against the US plan and said that if Iraqi debt should be forgiven, then so should the debt of all poor countries. It's not clear at all that Chirac meant what he said, but Bush & Co. called his bluff and said Well okay then: let's have a widespread program of debt relief.

Bush & Co. didn't actually fall on their noggins and start caring about the poor and dying of the world. They wanted to clear the Iraqi debt, and they thought they could manipulate the situation so that they could achieve a dual goal of crippling the IMF and World Bank. So they proposed that the debt of some poor countries should be forgiven, and the entire cost of the operation should be borne by the IMF and World Bank.

They almost won. They got some of the Iraqi debt written off, and the $55 billion cost of the debt relief program is falling almost completely on the IMF (the World Bank escaped relatively unscathed). Eighteen other countries also got some relief, including Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia.

It isn't all champagne corks and car horns though. The countries still have to abide by IMF/World Bank restructuring conditions - reductions in infrastructure spending which have long been an impediment to their development. Also, in some cases the debt relief is matched by a reduction in future loans, which means some countries might not actually get anything out of it. It's possible that Tanzania might even lose funding from having its debt forgiven.

Still, it's an interesting insight into the self-interest that drives humanitarian achievements.