Boxers-Turned-Politicians: Pacquiao vs Klitschko

Fighting Russkies, Striking a Blow for the EU

If this were an actual fight, it would be a grossly unfair one since Manny Pacquiao stands 1.69m tall and weighs 65kg whereas Vitali Klitschko--older brother of fellow heavyweight champion Wladimir of Hayden-Panettiere-is-my-girl fame--is 2.01m tall and weighs 110kg. However, this comparison is grossly unfair in other respects of political consequence. In terms of celebrity, the Filipino boxer is far better known competing in the welterweight division where the glamor, money and attention in prizefighting is now concentrated, whereas the heavyweight division lacks compelling personalities. Yet, Vitali Klitschko makes up for the lack of star power with brain power since, like his brother, he has a PhD. Manny Pacquiao famously dropped high school to start fighting since his family needed the money.

I bring up this comparison because the Klitschko brothers are among the most prominent figures in the current campaign to force Ukranian President Viktor Yanukovych to ink a free trade deal with the European Union. Problematically for the brothers and their prospects for Ukraine politics, both have lived virtually all their professional lives outside their homeland in Hamburg, Germany then La La Land, California. Unlike Congressman Manny Pacquiao, they do not simply go abroad to ply their trade and then return home. Nevertheless, the WSJ op-ed pages recently ran a rather fawning feature on Klitschko the Elder as a champion of freedom and free markets (hey, would you expect anything else given the source?)

Yet Mr. Klitschko stands out among the opposition, and not just because of his breathtaking physical size. He's the one new face in a crowd of familiar political mediocrities. He has a Ph.D. in physical sciences, hence his nickname, Dr. Ironfist. His considerable fortune earned from boxing reassures people about the sincerity of his commitment to fight corruption and resist temptation...

He has broken out in the polls, leading Mr. Yanukovych in a head-to-head match, which may come sooner than the presidential election due in early 2015. The government fears him enough that earlier this fall it fiddled with the residency requirement for the presidency, patently to stop him, since he had trained and lived in Germany for most of the previous decade. Mr. Klitschko says the retroactive legal change won't hold up in court, but in another context notes that the judges are in Mr. Yanukovych's pocket.

"In these hard days, the moral support from friends of democracy is very important," says Mr. Klitschko. While the nationalists in Maidan [Square--protest site] play up Russian meddling, he is always careful to insist that the fight isn't so much about personalities or geopolitics as about values—democracy, human rights, the rule of law. In short, Europe.

It's all very anti-Russian if that's your sort of thing and imagine the Iron Curtain still hangs across Eastern Europe. As the proprietor of the IPE Zone, however, I am more interested in how these two pugilistic politicians regard trade. As I mentioned before, Manny Pacquiao sponsored the passage of trade exemptions for Philippine textile exports to the US that would have likely violated WTO strictures [1, 2]. Meanwhile, Klitschko is championing a preferential trade agreement with the EU. It's not necessarily trade-positive--trade diversion and all that--but the sentiment is there. Who wins in this respect? I'd say Klitschko by a technical knock-out since the Philippine congressman's proposed deal never made it off the ground.

At any rate, we'll probably have more time to learn about both fighters' views on trade since Vitali Klitschko now suggests he will run for the presidency in 2015. Pacquiao meanwhile has long set his sights on the Philippines' highest office.

On education grounds, I prefer the guy with the PhD, but I'm stuck being in the country with the high school dropout.

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WTO Welcomes Its 160th Member, Yemen

Yemen, there's no need to feel down
I said Yemen, pick yourself off the ground...

A little neglected in the hullabaloo surrounding the conclusion of the "Bali package" at WTO negotiations in the eponymous Indonesian resort location has been the organization's acceptance of its 160th member. A stop on the Silk Route of centuries past, to say Yemen has fallen under hard times due to religious extremists and assorted nutcases taking up their various dubious causes is an understatement. However, it now joins the growing ranks of least-developed country members:

Immediately after the heads of delegations’ meeting, members formally accepted Yemen as a new WTO member — its “accession” to the WTO. At a ceremony to celebrate the decision, Mr Azevêdo congratulated the Yemen government for the domestic reforms it is undertaking after 13 years to finally become a WTO member. “We celebrate accessions both because of what it means for the individual country, but also because of what it means for this organization,” he said

The Republic of Yemen will be the 35th least developed country in the WTO. “This group makes up a fifth of the whole WTO membership. It is an important constituency — and, as we have seen in recent days, it is one that is increasingly making its voice heard,” said the Director-General. Yemen’s Industry and Trade Minister Sa’aduddin Bin Taleb expressed his country’s gratitude and excitement at finally becoming a WTO member.

“Sometimes things change for countries and fortunes change. But the very essence of a country and the history and the civilisation remains. Ours has been trading for the last at least five or six hundred years, in fact, since the spice route," he told the assembled ministers from the WTO’s current membership.“We aim to take back that road again and to connect with everybody in the world. ... I hope that after a few months, we will have a new Yemen born." The Yemeni Parliament will have six months, until 2 June 2014, to ratify its accession package. It will then inform the WTO and 30 days later it will officially become a member.

What can I say? Yemen's membership comes just in time to enjoy duty-free, quota-free access by least-developed countries to richer ones as well as preferential rules of origin. Meanwhile, the domestic debate is awfully similar to what countries considering joining the WTO have--we will be inundated with imports, our domestic industries will be wiped out as a consequence, domestic firms are not yet ready, etcIts :

Sana’a University economics professor Salah Al-Maqtari said the move was a bad one for Yemen. “Yemen already has no customs restraints, and international products have invaded its markets, even before accession to the WTO,” he said. Al-Maqtari said Yemen imports 85 percent of its food commodities from abroad and does not produce many goods for export.

“Yemen is on the losing side because its consumption [of imports] is higher than its production [of goods for export],” he said. Car importer Sami Sabiha said the Yemeni government has not made any preparations to help industries or the economy deal with the difficulties they will face as a result of joining the organization. 

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Last Chance Saloon: WTO's Fate & This Week's Bali Meet

I just wanted to share the ICTSD's useful primer on the upcoming WTO meetings in Bali, Indonesia where the organization's fate as a credible negotiating forum hangs in the balance. The full report is available as a PDF file; below is the introduction to this crucial event:

Trade ministers are set to meet in the Indonesian island province of Bali from 3-6 December for the WTO’s Ninth Ministerial Conference, in a meeting that has been touted - for better or worse - as a turning point for the 159-member organisation. Yet on the eve of the conference, what will actually be on the agenda in Bali remains fluid.

Geneva-based negotiators have spent the last several months feverishly negotiating a small package of concessions [see my earlier post on it meager contents] that, if achieved, would mark the first multilateral trade deal since the WTO was formed in 1995. A deal in Bali, officials and observers alike had said throughout the year, would provide a major boost to the organisation’s credibility at what many have deemed to be a critical moment in its history. 

Days before the ministerial, however, WTO Director-General Roberto Azevêdo confirmed that, despite a “tremendous effort” on behalf of the membership and some significant advances, they had not yet agreed on a deal to present to their ministers - leaving the fate of the Bali conference hanging in the balance.

Alike five years ago, India may play the spoiler by sinking the entire deal through kowtowing to its domestic agricultural lobbies:

Chief among those is India’s demand – affirmed at a cabinet meeting in New Delhi on Thursday – for a “peace clause”, intended to give another four years to negotiators to come up with new WTO rules for farm subsidies and the prices paid for staples bought as part of government programmes to supply food to the poor.

Other participants have accused India of backing down from an agreement struck earlier in November over that peace clause and thereby putting at risk a broader deal that would set about removing red tape at borders around the world and, advocates claim, add as must as $1tn to international trade. 

Cautious optimism holds going into next week; no outcome would result in outright despair, while an outcome would result in a welcome development. Still, prospects for a wider Doha deal are remote twelve years after it began.

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After 12 Long Years, a WTO Deal in Bali?

For obvious reasons--nothing much happening in Geneva--I have devoted very little attention to the conclusion of the WTO Doha Round, having given it up for lost. For all intents and purposes, the Doha Development Agenda as it is officially referred to is still on the back burner. But, there was activity stirring a week ago causing its new Brazilian Director-General Roberto Azevedo to remark "We are too close to success to accept failure but it is all or nothing now." Latin brio aside, they have taken some more "salable" items on the negotiating table to hopefully use in demonstrating that WTO negotiations are not yet dead by concluding a smaller multilateral deal during end-of-year gatherings of its members in Bali (3-6 December). 

What exactly is inside this "Bali package," then? Supposedly there are three pillars: (1) trade facilitation to reduce red tape among international customs authorities; (2) development in better operationalizing what kinds of special and differential treatment [SDT] are afforded developing countries; and (3) agriculture permitting developing countries more leeway in doing things such as helping feed their destitute members:

WTO ambassadors resumed consultations on Section II of a draft agreement on trade facilitation. This section provides the basis for special and differential treatment and for technical assistance and capacity building needed for the implementation of the agreement.

In agriculture, members are focusing on proposals about reducing export subsidies and related policies known collectively as “export competition”, reducing the chances that the methods used to share out a particular type of quota among traders become trade barriers in their own right, on how to deal with developing countries’ food stockholding for food security when the purchases could distort trade, on adding a number of environmental and development services to the list of programmes considered not to distort trade and therefore allowed without limit, and on cotton produced by least-developed countries (LDCs).

On development, members have agreed proposals by LDCs on preferential rules of origin and on operationalization of the services waiver for them. Work continues on duty-free, quota free treatment for LDCs. Members are also consulting on a monitoring mechanism for special and differential treatment for developing countries under WTO agreements. 

From my perspective, it's a bunch of giveaways from industrialized for developing countries which do not require substantial concessions from the former that the latter find reasonably attractive. They do not move the game on a whole lot. Still, the hope is that this "Bali package" is useful for demonstration purposes in showing the world that the WTO still matters. Yes, it's akin to shooting fish in a barrel, but the prospects are at least better than Doha. Ladies and gentlemen, a deal is now imminent...

Roberto Azevêdo, the recently appointed head of the WTO, is expected to present a finished draft of the agreement to the body’s highest organ, the general council, in a meeting as soon as Sunday or Monday.

Barring any unforeseen problems – and negotiators gave warning on Thursday that they could still emerge – the agreement would be signed by trade ministers from the WTO’s 159 member countries in Bali next month. “They have crossed over the threshold,” said a senior trade official in Geneva. Sealed, the deal would be a victory for Mr Azevêdo, who warned that the WTO risked irrelevancy if it did not deliver something substantive in Bali when took over in September.

For a guy who just came into office in September, it's certainly an auspicious beginning. And all it took was for a D-G from a developing country to do it?! We could have had something much earlier if so, but I think there's also an air of desperation that crept in which is making this deal more palatable all around. Believe it or not, trade negotiators probably got tired of attending these shindigs just to twiddle their thumbs year in and year out.

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Are the Port of Hong Kong's Glory Days Over?

How the mighty are falling. Here's another one from the Far East shipping files: Hong Kong ranks regularly among the world's top three busiest container ports in terms of twenty-foot equivalent units (TEUs) handled. Yet, its previously unassailable status is coming under attack due to a number of factors. First, rising labor costs in the Pearl River Delta mean it is being less used to handle shipments of manufactured goods from that part of China. Second, "industrial action" hit Hong Kong for the first time in many years earlier in 2013...

Like Shenzhen, Hong Kong’s throughput has been pinched by the decline of South China manufacturing, as high labour costs impel factory owners to shift operations to China’s interior or elsewhere in Asia. Hong Kong narrowly missed losing its third place position against Shenzhen, which marginally increased volumes in 2012 by 1.6%.

The biggest operator in the port, Hutchison International Terminals, was hit by the first major industrial action in Hong Kong in 20 years that began on March 28, 2013. The strike involved 450 port workers, including crane operators and stevedores, and lasted for 40 days. The strike caused a 20% drop in throughput at the Hong Kong operations of HPH Trust — a Singapore-listed Hutchison spin-off that comprises many of Hutchison’s Hong Kong assets.

As a result, many major port operators are divesting themselves of Hong Kong.  Indeed, the years it served as the world's gateway to China are numbered since, well, the former crown colony was reabsorbed by the mainland in 1997 and became a special administrative region (SAR). The handover happened a long time ago, and there is certainly no lack of mainland ports companies can now use--no need to use HK as an intermediary with the Reds in charge here as well:

Dropping volumes in Hong Kong was a factor in divestments by major port operators. In March 2013, HPH Trust bought Asia Container Terminals Holdings for $503m from joint owners Dubai-based DP World and Singapore-based PSA. Simultaneously, DP World sold 75% of its interest in Hong Kong’s Kwai Chung Terminal berth 3 and in ATL Logistics Centre Hong Kong for $463m to Goodman Hong Kong Logistics Fund.

While Hong Kong still retains an edge for operational efficiency, it also faces continuous erosion of demand, as more operators make direct calls to mainland ports. The competitiveness of Shenzhen ports has been boosted by easing of customs requirements for ocean to ocean transhipment.

Hong Kong retains its place as the world's freest economy, but certain parts of its portfolio no longer dominate its unique selling proposition as others have caught up. I hate to say it, but the port business may truly be a "sunset industry" for HK as some have presaged.

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Will Somali Pirates Return if EU Stops Patrolling Soon?

Ahoy mateys, it's back to the Gulf of Aden for us in this post. The collapse of a functioning government in Somalia led to a period when many turned to piracy as a lucrative livelihood in the absence of other viable sources of income. Americans--people who top the global list of ignoramuses about what's going on in the world--even focused some attention on the issue with the kidnap of Captain Richard Phillips of the MV Maersk Alabama. They even made a movie about it (just don't ask them where Maersk is headquartered since the average Yank probably can't find Denmark on the map, let alone Somalia.)

In any event, EU-led efforts to patrol these lawless seas eventually bore fruit, with piracy receding to far less alarming levels in the last year. With EU Navfor's mandate winding up in 2014, however, there is concern that the pirates will come back strong once the cats are away. Back in the UK, Labour's Shadow Foreign Secretary John Spellar has voiced this very concern. (For non-Brits, a "shadow" minister is someone from the opposition whose portfolio is similar to the "real" minister's except s/he is obviously not in power.) From the industry publication Lloyd's List:

A senior UK official has urged the shipping industry to lobby to extend the mandate of EU Navfor’s Operation Atalanta beyond its 2014 mandate deadline.

The shadow foreign and commonwealth office minister John Spellar warned that “EU Navfor’s Operation Atalanta will be renegotiated in 2014 and it is not clear whether it will be maintained”.

Addressing the Security in Complex Environments conference in London, Mr Spellar revealed that politicians had complained that multiple forces patrolling the high-risk area duplicate each others’ efforts rather than complement each other. “There are voices in the back benches that question why we need UK co-operation when there is [North Atlantic Treaty Organisation] involvement,” he said.

Unsurprisingly, most shipping industry interests are lobbying for EU Navfor to stick around:

Mr Speller warned that some government departments are slow to react to changing circumstances and urged the shipping industry to lobby the government as soon as possible to extend Operation Atalanta. “It is important to get [government] engaged at the earliest possible stage,” he said.

A representative from Mitsui OSK Lines based in London said operators needed EU Navfor forces to stay in place. “If we lose that capability the pirates will come back. It’s as simple as that,” he said.

I think the chances are good that EU Navfor will gain an extended mandate in 2014. While the reduction in piracy is also due to a host of other factors alike more commercial vessels having armed guards and designating traffic zones where pirates are less likely to be successful, European patrolling is clearly valued by industry players. Moreover, I am not convinced that playing Britney Spears music [?!] will drive the evildoers away. 

Ops, I hope they don't do it again.

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Colonial Mentality: Chinese Shun Their Own Brands

Given the truckload of goods China makes for the rest of the world, it may seem odd that the Chinese are concerned with their inability to develop homegrown brands: Why should you develop your own brands when Apple/General Electric/Samsung and whoever else have you have done the heavy lifting of brand-building for you as a contract manufacturer? It's certainly not easy, either--none of the world's top 100 brands are mainland Chinese. The answer is as simple as it is clear: actually making consumer goods constitutes an ever-decreasing share of the profits--if any. The higher value-added activities come from branding, marketing and goodwill which emanate from (surprise!) building up a brand name. In other words, the Chinese get the grunt work and the industrial pollution, while Western companies get the cushy high-salaried jobs and clean air.

Just in time, the FT has an article discussing how the Chinese perpetuate this lamentable situation themselves by preferring imported to local brands. In sociology, it would be classified under "colonial mentality" or believing that former colonizers--be they the Japanese or the Europeans--are superior. After all, they managed to colonize you, right?

Chinese consumers want foreign goods. Whether sports shoes or cars, televisions or mobile phones, cosmetics or nappies [diapers to non-Brits], surveys show that foreign brands predominate. Shaun Rein of China Market Research Group says people trust foreign brands not to cut corners and associate them with more of an established heritage than their domestic labels.

This spells trouble for China as its people become more middle-class and spend more on non-essential items. The more that they buy foreign goods, the more that the proceeds of China’s progress will accumulate to shareholders elsewhere. It will also mean fewer profits for Chinese companies to reinvest in innovation and expertise at home in electronics, for example.

Moreover, there is the matter of "sham" trade surpluses (the image above comes from the ADB Institute): trade figures aside, once you adjust for the actual value-added of Chinese exports, the results look rather less impressive:

Its lack of popular brands is already visible to some degree in its trade balances with other countries. China may run a large nominal surplus but when economists adjust those numbers for the value that it adds or gives away in making goods that are consumed at home or abroad, the numbers tell a very different story.

For example, its total trade surplus with the US drops from $189bn to $127bn on a value-added basis, according to calculations by economists at BBVA, the Spanish bank. Most of this reduction is due to value given away in electrical and optical equipment, textiles and clothing.

Consider it as a warning sign. Sometime ago, I wrote a journal article together with a marketing scholar about the pressing need for the likes of China to develop brands of its own. Suffice to say that message has gone unheeded, and things may get worse in terms of prospects for Chinese development going forward if this matter is not addressed:

If China can follow its neighbours and develop its own powerful brands like Samsung of South Korea, or Toyota of Japan, it can sell not only to its own 1.35bn people but to billions of others all over the world.

If it does not build or buy such brands there is a risk that its consistent trade surpluses will become deficits in the decades ahead. That is not what the push to rebalance China’s economy towards consumerism is supposed to do.

Consider these folks warned. After all, if you don't buy your own brands, what confidence will others have in them?

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China's 'Maritime Silk Road' as a Hegemonic Project

 The wrangling over both the US government shutdown and the debt ceiling caused Barack Obama to cancel his attendance at the annual Asia-Pacific Economic Cooperation (APEC) shindig being held this year in Bali, Indonesia. So he stayed at home to deal with a localized insurrection led by an angry, mostly whitebread crowd, "Tea Party" members, they call themselves. Just desserts, I say. His absence triggered yet another round of commentary about the existence of American hegemony in general and its alleged "pivot to Asia" in particular. Some say the absence does not matter; others think it's a culmination of US decline.

At any rate, this notable omission only served to highlight China's latest plan (gimmick?) to curry favor with other nations in the Asia-Pacific. After having its Noughties-era outreach efforts to ink economic agreements alike free trade deals undermined by its strident assertions to territorial disputes in the South China Sea and East China Sea, the PRC seems to attempting to return to a more diplomatic approach. The Silk Road was named after the commercial routes plied by China when it was an empire. At APEC, keynote speaker Xi Jingping's main talking point concerned the "Maritime Silk Road" which once again promises improved relations with neighbors through commercial ties.

On Oct. 3 during his trip in Indonesia, Xi [Jingping] said in a speech that China and the ASEAN will promote maritime cooperation and build a 21st-century maritime Silk Road. This was also brought up by Li [Keqiang] in his seven-point proposal on China-ASEAN cooperation in Brunei on Wednesday. [B]uilding a maritime Silk Road will involve a new consensus, including discussing the signing of a treaty on good neighborliness, friendship and cooperation, strengthening security exchanges, setting up an Asian infrastructure investment bank and prioritizing maritime connectivity development...

In the seven-point proposal, Li [Keqiang] said "the two sides should launch negotiations on upgrading their free trade area and strive to bring bilateral trade to one trillion U.S. dollars by 2020 so as to allow ASEAN countries to benefit more from regional integration and China's economic growth." Zhang Jiuhuan, former Chinese ambassador to Thailand, Singapore and Nepal, said, "Upgrading the free trade area is another significant step for the Chinese government to beef up China-ASEAN cooperation." 

President Xi and Premier Li have been flogging this idea for many months in ASEAN countries, although they have not yet taken it to the Philippines and Vietnam with which it has the most pronounced maritime disputes in Southeast Asia. Still, they allude to the success of the China-ASEAN FTA which they wish to use expand and use as a focal point in strengthening ties:

Starting operation in 2010, the China-ASEAN free trade area is the largest one among developing countries. China is the largest trading partner for ASEAN, and the association is the third largest trading partner for China. According to Zhang, bilateral trade volume between China and the ASEAN grew from 78.2 billion U.S. dollars in 2003 to 400.1 billion U.S. dollars in 2012. Volume reached 210.56 billion U.S. dollars in the first half of this year, up 12.2 percent year on year.

Zhang said "upgrading the free trade area" is needed for both sides. He said the area will help improve the trade of commodities and services and investment cooperation in order to provide convenience and freedom. "All-dimensional cooperation will create more favorable conditions for the maritime Silk Road," said Zhang. "China's economic growth will also bring about more opportunities." 

The idea remains the same in a liberal sense: improved economic ties will smoothen relations--including frayed ones over territorial disputes. However, reception of the Maritime Silk Road idea is mixed among Southeast Asian countries as you would expect: Malaysians are more sanguine, but then again their territorial conflicts with China are not particularly heated. How successful can the Maritime Silk Road project be in calming neighbors? I personally believe that building more economic ties is welcome, but they will be accompanied by more guarded opinions of China's broader intentions. That is, for how long can it afford to give security matters lesser priority while the "security dilemma" the PRC has created makes others feel insecure?

President Xi Jinping and Premier Li have toured ASEAN extensively; it reflects their strategic outlook of developing relationships with neighbouring countries. The new leadership is trying to diffuse tension in the SCS by using various techniques, of which MSR is one. However, a revival of the MSR looks bleak. Also, earlier the route was used for the import of precious stone, wood and spices but today it will used for oil and gas, which is directly connected to the energy security of not one but many countries. There is an emerging security architecture in the region which has led to an increased arms build-up, and the assertiveness of new regional powers has further complicated the regional military balance, which makes the MSR an unlikely prospect.

Moreover, isn't this the same China that disinvited the Philippine president from participating in a trade mission due to the South China Sea imbroglio? More commerce is welcome, but I believe that economic and security matters are becoming less positively correlated in terms of Sino-ASEAN dynamics. That is, stronger economic ties do not necessarily imply improved security ties. Remember, trade has been increasing against a backdrop of worsening conflicts over the South China Sea with the Philippines and Vietnam especially.

Lastly, wasn't the Silk Road at its height when China effectively enforced a tributary system on others in the region? Perhaps the metaphor China has chosen is not a good one since its original iteration had others accepting their subordinate position relative to the Middle Kingdom. The PRC always says it does not seek hegemony (alike white people do), but it has given the rest of us reason to doubt.

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Vaporware 3.0? Shanghai Free Trade Zone

In technology-related industries, the term "vaporware" is used for hardware or software that is all hype and no substance. Either the announced products do not even materialize, or if they do, their features are far less impressive than promised. For our purposes, consider them as "vaporware 1.0" and "vaporware 2.0" respectively.

Today, let us consider yet another overhyped entity that is somewhat larger in scale. Try the largest city in the world's largest country--Shanghai, People's Republic of China--boasting a population of an astonishing 23 million. Just yesterday, a 29 square mile chunk of it formally became the Shanghai Free Trade Zone, but no one is entirely sure what this means. Hong Kong billionaire Li Ka-Shing said it may in time overtake Hong Kong as its economic openness--in banking and other services as well as with a more freely traded yuan--would attract more FDI from elsewhere. Yet, for something so highly touted, how Shanghai will achieve this "world capital" status remain unclear even now after its official launch date:

Well, that’s the plan, at least. The government has so far been clear in its intention to introduce financial reforms in the zone, but not as clear on how they will actually take place. The details on what can and cannot be done there, and when certain reforms will be implemented, remain sketchy. The reforms planned for this Shanghai zone will be much more difficult than those that took place in the trade- and manufacturing-focused zones of yesteryear. Factories, and the shirts, shoes and TV sets they make, are easy to monitor and control; not so financial flows, which could surge in and out of the zone with destabilizing speed. Financial firms could also take advantage of different interest rates and currency values inside and outside the zone to turn a quick buck.

In other words, the Chinese authorities need to ensure that arbitrage opportunities are limited. So the rules are not yet finalized, but there was a grand opening, right? Er, no--it was the softest of soft launches, actually:

Officials at the launch of the zone on Sunday promised a far more open and streamlined environment for foreign firms to do business in China, along with the relaxation of policies for a raft of service sectors, including banking.

However, the absence of senior Beijing leaders at the launch and few specifics on bolder reforms such as a more convertible yuan and liberalised interest rates left some disappointed, while officials stressed the zone remains a work in progress.

Vagueness and a lack of Beijing bigwigs does not make for a promising start. How about promises of greater Internet freedom, then? Well...they turned out to be unsubstantiated rumors after all that you could go tweeting and Facebooking to your heart's content:

The People's Daily, the official mouthpiece of China's ruling Communist Party, denied a recent report in the South China Morning Post saying that people would be allowed to access Facebook, Twitter, the New York Times and other politically sensitive, banned websites within a groundbreaking free trade zone set to launch this month in the country's financial hub, Shanghai. "Today (our) journalists obtained the information from a very powerful channel that these reports are wrong," said the People's Daily.

Let us consider what we have learned so far, then. Unspecified promises for greater economic liberalization at a later date, no bigwig apparatchiks on hand to lend support, and no new freedoms of expression. It doesn't sound so promising to me. However, us gweilo (foreign devils) may be thoroughly mistaken as Chinese themselves are speculating by buying up land there at a fearsome clip:

The property market near the soon-to-be free trade zone is also on a roll. Housing prices have soared 20-30 per cent in one month in the area just outside the Waigaoqiao gates, according to Shanghai Yuexin Real Estate “It seems crazy to me. Nobody knows the exact situation about the zone and they didn’t even take a look at the homes before buying them,” said Xi Xinlei, a Shanghai Yuexin agent.

What is the relevant principle here: A sucker is born every minute, or are some people smarter than you and me? If it's the former, perhaps PC World will in the near future consider the Shanghai Free Trade Zone as the top vaporware product of all time. Stay tuned; some folks have already made fairly large bets that Shanghai is entering a new golden age.

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Reasons to Doubt Trans-Pacific Partnership Expansion

There is an excellent compilation at the Financial Times as to why few expect a "high-quality" agreement to emerge from ongoing TPP negotiations. That is, one with few loopholes and opt-outs for different participants. Given the highly diverse interests of the twelve nations looking to expand this agreement--they range widely in levels of development, size and so on--it is thus unlikely that an agreement that pleases all will be concluded in the next few months. Or, an agreement may be struck, but one which features a bevy of loopholes and opt-outs catering to the special interests of each nation.

At any rate, here are four reasons to be pessimistic: 

1. The TPP seeks much stricter protection of intellectual property than many want. Poorer countries fear that such provisions will make it more difficult for them to use cheaper generic drugs, potentially denying their populations access to life-saving medicines. More generally, strict enforcement of IP is judged to favour advanced countries at the expense of poor ones, which have traditionally absorbed technological advances through copying. To enforce IP rights in too draconian a manner is, say opponents, a victory for protectionism, not for free trade.
2. The agreement seeks to regulate the role of state-owned enterprises, so that they do not enjoy unfair access to licences, contracts or state finance. This is seen as an assault on the sort of state capitalism in countries such as China. It is difficult, however, to see how meaningful rules could be imposed on Vietnam, a TPP member, where SOEs are used by senior Communist party officials as a cash cow for favoured projects and sometimes as personal piggy banks. Even Japan, where the Post Office is in state hands, and the US, which has Fannie Mae and Freddie Mac, may fall foul of some provisions. Temasek, the Singaporean sovereign wealth fund, is believed to be concerned that new rules could affect the performance of some of the companies in which it has invested. Malaysia’s bumiputra policies, which favour ethnic Malays in the awarding of state contracts, may also run counter to the TPP.
3. The TPP calls for a controversial investor-state dispute settlement that would, theoretically, allow companies to sue governments if they believed they were being treated unfairly. Australia has argued that this would weaken sovereign power in favour of multinationals. Anti-fracking activists say such a mechanism would allow oil companies to sue local authorities for imposing strict environmental guidelines. Canada has raised concerns that cigarette companies could use the provisions to take governments to court over anti-tobacco regulations. In Malaysia, Anwar Ibrahim, the opposition leader, has characterised the TPP as an attempt by the US “to impose its brand of economic model” on unwilling countries. 
4. As in every trade negotiation, each country is seeking exceptions for sensitive industries. Japan was allowed to join talks on the basis that it would drop its age-old agricultural protectionism. Yet when Japanese negotiators turned up to talks in Brunei in July, they sought exceptions for “five sacred” agricultural commodities: rice, wheat, beef, dairy products and sugar. Japan is by no means alone. Canada (and the US) want protection for their dairy industry in the face of strong potential competition from New Zealand. Vietnam wants an exception for its textile industry so that it can enjoy tariff-free access to the US while continuing to use yarn made in non-TPP countries, especially China. The sugar lobby is particularly vocal in the US. “There are a lot of areas where the US wants everyone else to change, but doesn’t want to change much itself,” says Jeff Schott at the Peterson Institute.

I've already mentioned agriculture before which I believe will ultimately prove to be the largest stumbling block. However, something unmentioned is the eccentric but enduring American complaint about the US auto industry's lack of access to the Japanese market despite producing unsuitable cars for use there [1, 2].

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Latest US China-Bashing: Hog Farm Protectionism

I am a true connoisseur of all sorts of protectionism: the more obscure and inscrutable the justifications for it, the more I savour the hypocrisy. Free trade? Get outta here! In recent years, the United States has served up some of the more ridiculous examples of what is, at heart, unvarnished racism on the part of American lawmakers. (You don't see them block European foreign investment on a regular basis, do you?) When the purchase of minor American producer Unocal by Chinese SOE CNOOC, "national security" concerns were raised. There was also the matter of 3Leaf, a minor player in the server market, being subject to Committee on Foreign Investment in the US (CFIUS) harassment over interest from Huawei. Nevermind that 3Leaf was a marginal player in the server market in the same way UNOCAL was in energy, but rampant and rather irrational fears of Chinese snooping on US data were in play. After the Snowden incident, Xinhua correctly described the utter hypocrisy behind American data security concerns with the US being "the biggest villain of our age" in cyber-snooping activities.

 More recently, we have had the latest twist on American "national security" concerns regarding the Chinese. It doesn't really matter that the suitor in question isn't an SOE; I guess Yanks believe once you've seen one of them you've seen them all. I am thus wryly amused by this latest form of "hog farm protectionism" as China's Shuanghui International attempts to purchase America's Smithfield International.

A Senate committee on Wednesday criticized a major merger of U.S. and Chinese agricultural interests, saying the combination of two major pork producers could have negative impacts on U.S. food and economic security.

The hearing before the Senate Committee on Agriculture, Nutrition & Forestry was exploring the impact of a proposed merger between Smithfield Foods, the leading pork producer in the U.S., and Shuanghui, China’s largest pork producer.

The $7.1 billion acquisition is the largest purchase of a U.S. company by Chinese business interests. The merger sparked skepticism from committee members who were concerned about Smithfield’s ability to maintain compliance with food-safety standards expected in the U.S.

Read more here: http://www.mcclatchydc.com/2013/07/10/196351/senate-committee-wary-of-us-china.html#.UeFeNKxjuSo#storylink=cpy

A former US trade official, Robert Herztein, added fuel to the fire by tortuously describing this "hog farm protectionism" in terms of the Chinese unleashing tainted food products on an unaware American public:

It could, of course, be a stretch to conclude that Chinese ownership of Smithfield, the world’s largest pork producer, might impair U.S. national security...Reports of egregious food adulteration in China suggest a culture where companies have little concern for safety and health standards.

While there has been an episode of a supplier providing tainted meat to Shuanghui, it has since increased its monitoring of its supply chain. (I invite Shuanghui's critics to find the smoking gun that indicates Shuanghui promoted the use of chemicals hazardous to human health instead of implying this to be the case. Moreover, Herzstein conveniently ignores that Smithfield has been scaling back use of the controversial drug ractopamine in order to meet Chinese demands to be free of this feed additive. In the last year, Smithfield has lessened ractopamine usage in half--presumably in expectation of a China deal: 

This March, China began requiring third-party verification that U.S. pork products were ractopamine-free. Russia, the sixth-largest buyer of U.S. pork, had blocked imports of U.S. meat using ractopamine weeks before...The measures highlighted a sharp contrast with the U.S. Food and Drug Administration, which approved ractopamine for use in commercially-raised swine in 1999 and stands by that decision, saying its safety has been corroborated four times. It is used in more than half of the U.S. hog herd, analysts estimate.

By early May [2013], Smithfield already had moved two of its plants - including Tar Heel, North Carolina, the world's largest pork-processing facility - off ractopamine. When the third plant converts on June 1, "over 50 percent of our operations will have no ractopamine as part of their feed rations," CEO Pope said.

Shuanghui also has its own rather self-serving FAQ, but nevermind: I am honestly at a loss as to why Americans always ascribe the worst to the Chinese. Given such intense scrutiny, how likely would it be that they would (a) divert fuel supplies meant for the US to China, (b) build routers to deliberately spy on American communications or (c) risk a mass poisoning of American pork consumers? It makes no sense. Not only would they lock out other Chinese firms from investing in the US for years and years, but the ferocious backlash would ensure that their days of doing business Stateside are numbered. Forced divestiture or a massive public boycott; the result would be the same.

As a more pragmatic, less ideological sort, here's my suggestion to the Yanks: Why don't you let the Chinese invest and see what happens instead of pigging out on racist protectionism all the time? I truly doubt that egregious violations of public safety on a massive scale would occur, Snowden-style. For aforementioned reasons, getting rid of "national security" transgressors would be so very easy and set an example besides.

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Is the 2013 US Farm Bill "WTO Legal"? Nope

Ho hum--another US Farm Bill, another round of fat agricultural subsidies for American producers that hurt farmers in the developing world. Just as Brazil successfully sued the US for its cotton subsidies a couple of years back [DS 267], the 2013 Farm Bill under consideration does not do away with actionable subsidies in the form of price supports if crop prices drop significantly. Senator Pat Roberts (R-Kansas) recognizes this, although it should be pointed out that his state is not a major producer of the most-contested crops--rice and peanuts:

I also have longstanding WTO concerns. The United States lost the cotton WTO case to Brazil in part because of the decoupled target price program. It simply isn’t right to force that same risk onto other commodities when we already know the potential pitfalls. The WTO stove is hot. We should not reach out to touch it again.

The domestic debate over the inclusion of food stamps aside that is still holding up the Farm Bill, the bone of contention with America's international critics remains. Sure they may have renamed the price supports, but in this case it truly is a case of old wine in new bottles:

Both bills retain a counter-cyclical price program that makes a farm payment when prices for covered crops decline below certain levels.It is renamed Adverse Market Payments or AMP in S. 954 and Price Loss Coverage or PLC in H.R. 1947. To better protect producers in a market downturn, the price guarantees (called “reference prices” in both bills) that determine payment levels are set in statute and increased relative to current parameters (called “target prices”). 

To be fair, there was some effort made last year in the Senate to remove such subsidies on all but the most sensitive agricultural products, but it all came to naught and either Senate of House versions will now retain them:

The [stillborn] 2012 Senate-passed farm bill (S. 3240) did not provide for a counter-cyclical price program, and an amendment to eliminate AMP for crops other than rice and peanuts failed during committee mark-up of S. 954. S. 954 continues current policy by making payments on 85% of historical plantings (or “base acres”), a provision designed to minimize the program’s effect on planting decisions. In contrast, the House bill pays on 85% of planted acreage to better align payments with producer risk.

All in all, the US is still living dangerously with regard to WTO-actionable subsidies. It remains a case of putting a large "KICK ME IN THE WTO" sign on yourself and hoping you avoid a swift one in the hiney.

Given how the US further disadvantages already disadvantaged farmers in the developing world while claiming it's "free trade," somebody should really make a WTO case against it soon. 

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With (Spying) Friends Like US, Who Needs US-EU FTA?

It seems the Yanks have gotten themselves into yet another fine mess with their Internet Unfreedom spying activities. [Hello NSA lackeys, I hope you're enjoying yourselves reading this post in between surfing porn sites.] Over the weekend, Der Spiegel added fuel to the fire over the US National Security Agency spying on Internet communications of American friends and foes alike. (Do the Yanks treat them all that differently?) Alike most everyone else, the Germans have come under massive surveillance:

The documents prove that Germany played a central role in the NSA's global surveillance network -- and how the Germans have also become targets of US attacks. Each month, the US intelligence service saves data from around half a billion communications connections from Germany.

However, linguistic ties being paramount, there is a set of favoured Anglophone nations who are exempt from a thorough covert investigation from the American spooks:

No one is safe from this mass spying -- at least almost no one. Only one handpicked group of nations is excluded -- countries that the NSA has defined as close friends, or "2nd party," as one internal document indicates. They include the UK, Australia, Canada and New Zealand. A document classified as "top secret" states that, "The NSA does NOT target its 2nd party partners, nor request that 2nd parties do anything that is inherently illegal for NSA to do."

The allegations right before US-EU FTA are scheduled to start. European responses thus differ based on the amount of spying each nation is purportedly subject to. The French are obviously up in arms over the idea that they should ink a free trade agreement with those stealing sensitive information from Europeans:

The spying allegations come just days before trade negotiations between the U.S. and the EU are scheduled to start on July 8. But [French President Francois] Hollande raised doubts about the talks, saying there should be no negotiations with the U.S. on any matter until it guarantees that it is not spying on its European allies. "We cannot have any negotiations or deals in any domain unless we've gotten these guarantees for France, and that goes for the EU as well," Mr. Hollande said.

However, the Brits who have not been targeted as much are more relaxed about the issue, saying the trade talks should continue anyway according to a UK spokesperson. Still, particularly alarming to the Europeans are claims that spying on the European Council building is widespread and unabated in their own lands:

The EU security experts managed to pinpoint the [spying] line's exact location -- a building complex separated from the rest of the headquarters. From the street, it looks like a flat-roofed building with a brick facade and a large antenna on top. The structure is separated from the street by a high fence and a privacy shield, with security cameras placed all around. NATO telecommunications experts -- and a whole troop of NSA agents -- work inside. Within the intelligence community, this place is known as a sort of European headquarters for the NSA.

A review of calls made to the remote servicing line showed that it was reached several times from exactly this NATO complex -- with potentially serious consequences. Every EU member state has rooms at the Justus Lipsius building for use by ministers, complete with telephone and Internet connections.

Ultimately, if serious objections are raised to the US-EU FTA over American espionage, they will likely come from the European Parliament instead of the European Council despite the latter coming under more direct American data attacks. Post-Lisbon Agenda, the European Parliament has expanded powers to turn down free trade deals--especially over human rights violations such as violating the privacy of Europeans. While the Americans can probably gain the acquiescence of European leaders through the time-tested way of buying them off in any number of ways, such a trick is harder to do with the more heterogeneous and newly assertive European Parliament given its increased discretion.

The EU Parliament used to be pretty lame, but it has since gained authority in certain respects. Unfortunately for the Yanks, these include again basing FTAs on human rights criteria. Martin Schulz, the current [German Social Democrat] president of that body, is certainly annoyed by the spying:

The head of the European Parliament has demanded that the United States provide full clarification over a report disclosed by American whistleblower Edward Snowden alleging that Washington spied on EU offices. Martin Schulz said on Saturday that the revelation would have severe impacts on the ties between the EU and the US if proven true.  

“On behalf of the European Parliament, I demand full clarification and require further information speedily from the US authorities with regard to these allegations,” Schulz stated.

At the very least, expect greater European Parliament scrutiny of these so-called "friends" of theirs in trade negotiations. After all, with lying and spying friends like the US, who needs enemies? 

UPDATE: France is suggesting that the US be given a "time out" by delaying US-EU FTA negotiations by two weeks. However, the European Commission does not agree. As I said earlier, the most likely source of disapproval will come from the European Parliament. That will happen later on assuming that the US and EU come up with something they believe domestic audiences shall sign up to.

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Will France's "Culture" Concerns Delay US-EU FTA?

I have already dubbed the proposed " Transatlantic Trade and Investment Partnership" AKA the US-EU FTA a non-event on the grounds that (a) the counterparties are slow-growing economies (b) which already have few barriers on each other's products [around 2% tariff rates on average]. Also, (c) they face several obstacles to further liberalization on products with tariff peaks that will at best result in a watered-down agreement --especially in agriculture. While this FTA bores me already, I have nonetheless found France's intransigence somewhat intriguing given the run-ins they've had with the United States over various issues. Remember those "freedom fries"? I surely do.

A few weeks ago I discussed how the French were likely to raise a stink about "cultural imperialism" insofar as their "superior" culture was to be overwhelmed by Hollywood's brand of lowbrow tinselled trash. Call it the cultural special safeguard mechanism. While agreeing that much US video entertainment is garbage, it is not my place or that of anyone else's to question the questionable taste of French consumers. That is, if they prefer Hollywood fare to France's own productions, well, tough. Obstinate French officials are pressing this point, though. They will surely ask for exceptions in agriculture--just you wait since they will come just as night follows day--but possibly delaying the start of FTA negotiations over exceptions to entertainment is exceptional:

France is "extremely determined" to keep movies and digital media out of free trade talks between the EU and the United States, a government minister said on Wednesday, a stance that could block the start of negotiations. Two days before EU countries are supposed to give the go-ahead for negotiations, the EU is struggling to find a compromise that satisfies France's "cultural" concerns without exempting the audiovisual sector from the wide-reaching talks.

"France defends and will defend the cultural exception to the end - that's a red line," French Culture Minister Aurelie Filippetti told Reuters TV, referring to current EU rules that allow governments to preserve "cultural diversity" by setting subsidies and quotas that might otherwise be considered contrary to free trade. Asked if Paris would go as far as blocking the opening of talks on what would be the world's largest free-trade agreement, she replied: "France is extremely determined."

The first round of talks has been tentatively scheduled for July, but both sides must first agree the scope of the negotiations, something EU trade ministers should finalize at talks on Friday.

Later today the eurocrats will discuss the coverage of FTA negotiations. Expect more drama from the French. Mas oui!

UPDATE 1: The French will not block the start of the negotiations after winning an exemption on media products after hours and hours of negotiations (albeit with some qualifiers):

Paris had refused to join the 26 other EU governments unless television, movies and developing online media were left out.

The final mandate given to EU trade chief Karel De Gucht, who will lead negotiations, does not include the audiovisual sector. However, it does give the Commission the right to ask member states for a broader mandate at a later stage. "I can live with this," De Gucht told a news conference.

French Trade Minister Nicole Bricq said it was "written clearly in black and white" that culture was excluded.

UPDATE 2: A number of top European directors are elated about "victory" in a culture trade war.  

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Money Printing Plus: Japan's Other Growth Strategies

Everyone knows of Japanese PM Shinzo Abe's money-printing strategies for combating Japan's seemingly unconquerable deflation. However, it is but one tactic in a multi-pronged strategy to get the world's third largest economy growing again in a noticeable fashion. Tomorrow Abe unveils a raft of other initiatives for doing so. Reuters has a list of expected steps in the so-called "Third Arrow of Abenomics" compiled from various news sources (don't ask me why it's called that).

Of particular interest to me are those concerning free trade agreements and migration. First, let's begin with FTAs. Belatedly keen on not losing its competitive advantage alongside those FTA-crazy South Koreans, it too is supposedly going to embark on an FTA frenzy:

Hit a target of 70 percent of exports covered by free trade deals by 2018, compared with around 19 percent, by pushing the U.S.-led Trans-Pacific Economic Partnership (TPP) and other trade deals with the European Union, China and South Korea, and aim to create an Asia-Pacific free trade area. 

Insofar as Japan has virtually zero multilateral FTAs at present (only partially implemented Japan-ASEAN FTA aside) but a whole host of bilatereal FTAs, let's say it has a lot of work to do if it truly intends to compete with Korea in this respect. With Japan's strong agricultural lobby complicating matters, expect tense negotiations when these products are discussed. That said, it's interesting how Japan is not playing geopolitics if this were truly the case in being willing to join any sort of FTA negotiation whether it be led by the US (TPP), China or whomever.

Another point of interest is opening up Japan to migration. Its population is shrinking, yet it remains easier for a camel to enter the eye of a needle than to be an economic migrant to Japan. Or is that assertion about to be shattered?

Shorten the duration of stay in Japan required for approval of permanent residency to three years from five years to encourage high-skilled foreigners to keep working in the country.

Let's just say that Japan's come up with all sorts of plans to generate growth since 1990 that have since been shelved or have borne little fruit. 

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EU-US FTA & the Lameness of 'Cultural Exception'

There is already a certain desperation to the idea that trade can significantly be boosted between the US and EU FTA when they already have exceptionally low tariff levels. What more substantial trade barriers can be removed? Are these dynamic and growing markets? The answers, of course, are "few" and "no." Despite there being a number of obstacles to even this smallest of possible achievements--especially agriculture--one of the more interesting ones concerns trade in "audiovisual industries."

Today, I came across two interesting articles on US entertainment. The first concerns American firm director Michael Bay "apologizing" for his movie Armageddon. Alike the vast majority of US-based productions, Bay's films have next to no artistic merit despite having commercial appeal. So it's schlock, but it's schlock that finds a ready audience of gullible folks worldwide of the lowest common denominator variety [explosions! special FX! naked people! cussing!] I myself prefer watching documentaries, but that's beside the point.

Another article deals with the latest resurrected and utterly ridiculous trade grievance of the Europeans. It may seem to you that I usually side with the Europeans in trade disputes with Americans, but that's not always the case--especially over the non-issues of GM food, hormone-fed cattle, and so on. Here we have another blatant form of European protectionism waiting in the wings over the supposed cultural erosion that will occur if American films are allowed unfettered access to European markets:

The cultural exception has its roots in 1993 when a furor erupted as Hollywood, notably led by late MPAA chief Jack Valenti, wanted to include the audiovisual industries in the GATT (General Agreement on Tariffs and Trade) negotiations. Europe, led by France, balked. Member states claimed that including the arts would threaten their quota and subsidy systems and put them in danger of total Hollywood hegemony. Hours from the deadline, a deal was struck and Europe got its way.

In their current petition, Euro filmmakers say 20 years ago, “the cultural exception burst onto the international scene, leading to the recognition of a specific status for audiovisual works as they are not just goods like any others and must therefore be excluded from trade negotiations.” The group calls the proposed negotiations mandate “a renunciation,” “a capitulation” and “a breaking-point” which would “reduce culture to nothing more than a commodity.” The group further argues that the trade negotiations appear “strikingly like a conscious desire to bring European culture to its knees.”

The most vociferous opponents of this so-called cultural invasion are (surprise!) the French:

But that wasn’t quite good enough for France’s external commerce minister Nicole Bricq and culture minister Aurélie Filippetti, who said, “France has placed a sine qua non condition on its accord for trade negotiations with the United States: The full respsect of the cultural exception and in particular the pure and simple exclusion of audiovisual. The draft mandate must therefore be modified” to erase De Grucht’s “ambiguity.” They added, “France will not compromise. The exclusion of audiovisual services is not negotiable. A policy statement is not enough.”

This argument is quite frankly moronic in exactly the same way that French authorities acting as "guardians" of French language is: In a free market, no thought police are supposed to disapprove of your (exceedingly poor) taste in (lowbrow) American fare for as long as your (deplorable) viewing habits harm no one else. If people want to watch garbagey American films and don't hurt anyone in the process, then they ought to be free to do as they damn well please.

So here's a (backhanded) salute to Michael Bay and other directors of proto-garbage American entertainment from the IPE Zone. I certainly wouldn't want to watch their brand of Ameritrash, but I will strongly support the right of others to watch it. Heck, I'll even encourage you to play the archetypal American entertainer Whitney Houston's rendition of the Star Spangled Banner while you're at it ;-)

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Loser's Lament: Delta Air Sues US Ex-Im Bank

The hapless and pathetic US carrier Delta Airlines seems less interested nowadays in running a viable business than in taking on quixotic wild goose chases. A few months ago it made the headlines by buying an oil refinery to help bring its costs under control. Nevermind that it's the cost of crude oil that's particularly high and not that of refining it, but hey, it made for a pretty good 5-minute publicity stunt if it did not neccessarily improve Delta's bottom line.

Now we have another act of desperation with virtually no chance of paying off: Delta has filed a case against the American Export-Import Bank for allegedly providing "subsidies" to foreign carriers it is in competition with by offering export finance to Boeing when it sells jetliners abroad. Aside from the sheer chutzpah of believing that the US government would prioritize the interests of a constant drag on its purse alike the airline industry at the expense of a viable export industry alike commercial jet exports, the term "subsidy" is arguably being abused here.

How does export finance effectively reduce the purchase price of aircraft to foreign carriers? That is the question Delta will have to build a case on. Export finance is exceedingly common especially in countries with sizeable exports. And, of course, the WTO would not entertain a case in which a domestic firm sued its own government--it's always a government taking a case against another country or countries on behalf of a firm domiciled in its boundaries. At any rate, here's to Delta for the comic relief in an otherwise bleak Stateside airline industry:

Delta Air Lines Inc has sued the Export-Import Bank of the United States over loan guarantees given to support purchases of Boeing Co's widebody planes by certain foreign airlines, according to a court filing. Delta said that Ex-Im bank's subsidies to foreign airlines, including Emirates Airlines, Etihad Airways and Korean Air Co Ltd, to help them buy Boeing planes would cause adverse economic effects on airlines and their employees.

Delta said in the filing that the bank did not properly analyze the adverse economic impact and has requested the district court in Washington D.C. block any loan guarantees...In a complaint filed in federal court in Washington D.C. late on Wednesday, Delta said one of the types of exports that Ex-Im Bank subsidizes is the export of aircraft by U.S. manufacturers, especially ones made by Boeing.

"In 2012, the bank's total exposure to outstanding financial commitments was $106.6 billion. About 46 percent of this amount was for air transportation loans and loan guarantees, more than the three next largest industrial sectors combined," Delta said in the filing.

Delta said the Ex-Im Bank loan guarantees help lower the cost of capital for foreign airline companies. "These foreign airlines will recoup their investment in their new aircraft faster or reduce ticket prices on competing routes without adversely impacting their relative rate of return on those investments," Delta said in the filing. Delta argued that unsubsidized U.S. airlines will be forced to respond by "reducing their prices and reducing or altogether eliminating their capacity to serve those routes where they compete with bank-subsidized foreign airlines."

The whole point of trade finance is to make goods alike American-made jetliners available for purchase in LDCs where commercial finance is not sophisticated enough. To brand this kind of activity "illegal" would hurt any number of American exporting industries by precedent.

Why would the US sacrifice substantial exports to satisfy the (protectionist) interests of an utterly substandard airline like Delta? Even in present-day America, rewarding mediocrity has its limits.

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Obama's Anti-China Free Trade Area of Free People [sic]

Question: What do you get when you cross the EU-US FTA with the Trans-Pacific Partnership?
Answer: The Free Trade Area of Free People (FTAFP)[sic]

During the Cold War, older readers will remember that the United States began funding pro-democracy propaganda via Radio Free Europe, Radio Free Asia, and so forth. Now that the Cold War is over, we are, er...supposedly returning to that same sort of mentality from the Yanks. Or, at least news sources are telling as alike the Financial Times. Maybe it was a slow day at the world's premier financial newspaper, but it too has succumbed to this temptation of portraying US FTA initiatives as those meant to "bandwagon against" China in the economic realm.

I am honestly wary of this characterization since it, first of all, brings us back to the framing of trade as inherently conflictual when it's supposed to be mutually beneficial as per the theory of comparative advantage. Moreover, hasn't China pursued FTAs of its own especially in Asia that pointedly exclude the US and other Western nations? At any rate, an argument being marshaled is of China's exclusion helping to appease trade-phobic American lawmakers:

But much of the substance of the EU talks and of TPP points to China. The agenda includes state subsidies for business and protecting intellectual property – precisely the sorts of issues that are becoming huge bones of contention with Beijing. If the US can get enough important countries to sign up, it hopes to establish global trading standards that China would feel obliged to respect. On Capitol Hill, where free trade is not an easy sell in an era of unemployment of more than 7.5 per cent, the China angle is being used to rally support. “This is very much part of our China strategy,” an aide to a leading Republican senator puts it, talking of the discussions with the EU. 

And speaking of my admittedly, ah, tortured title, there is supposedly an emergent coalition of the WTO-plus trade willing to paraphrase a former American leader:

TPP and the US-EU trade talks represent an alternative strategy, an attempt to forge fresh rules by appealing to smaller groups of like-minded nations, in this case working around China rather than with Beijing. Supporters say this is not an abandonment of global institutions such as the World Trade Organisation but simply a realistic assessment of how to get things done.

You're either with us or against us in trade. Where have we heard something similar before? That said, I am doubtful whether joining up the TPP and US-EU FTA really is an American goal to isolate China in trade. After all, both American-led initiatives are hardly done deals and both face formidable obstacles to completion, so we cannot even begin to speculate about their merger.

That said, you must admit that Free Trade Area of Free People [sic] has a nice ring to it.

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A Bit Less Lame Than US-EU FTA: Japan in TPP

After the "who cares" of the US-EU FTA, here's something marginally more significant. There is no doubt that Japanese PM Shinzo Abe is seeking American favour in a very big way. The postwar US-Japan relationship has been characterized by lopsided deals to the former's advantage. Think of limiting Japanese exports to the US--consumer electronics, automobiles, you name it--when American producers could not compete. It was probably only a matter of time then that the LDP would lead Japan down this same road in US-led negotiations to enlarge the  Trans-Pacific Partnership (TPP).

We now receive word that PM Abe will make an announcement concerning Japan's TPP plans next week. It appears it's the same old, same old as far as the US goes in fearing Japanese auto exports in the event they are able to be exported tariff-free to the US. And just like then olden days when Japan was willing to strike unfair economic bargains since the US effectively left it with limited means of protecting itself militarily, the latest is that Japan will voluntarily accept the retention of tariffs on automobiles. It's the 80s all over again (I can hear Steve Perry over the radio right about now):

Japan will let the United States continue imposing tariffs on Japanese vehicles for now, a decision expected to help Prime Minister Shinzo Abe announce Japan's participation in talks for the Trans-Pacific Partnership free trade arrangement. The United States currently imposes a 2.5-percent tariff on imported passenger vehicles and a 25-percent tariff on trucks. Although a major premise of the TPP is to eliminate all tariffs in principle, Tokyo and Washington are maneuvering to allow exemptions of certain products that are politically sensitive at home.

Actually, there is a quid pro quo in play of Japan not lowering its towering agricultural supports--which begs the question of why you would even bother to join a free trade deal when it is riddled with escape clauses and opt-outs...

One reason Japan is compromising on the U.S. tariff is because Tokyo wants to maintain tariffs on various agricultural products. But if the U.S. tariffs are kept in place for very long, the merits to Japan of joining the TPP would weaken. For that reason, Japanese government officials want reassurances from Washington that the auto tariffs will eventually be eliminated.

Keep in mind that the economically moribund but politically influential US auto industry still fears Japan after all these years, while Japan's agricultural lobby remains fearsome and continues to be a key constituency for the LDP:

Yet amid the push from the top, resistance is expected from lobby groups in a potential stumbling block to a quick agreement. The “Big Three” U.S. carmakers of Chrysler, Ford and General Motors have reportedly opposed Japan’s entry into the TPP, arguing that the Japanese auto market continues to “lock out” U.S. vehicles.

Ahead of Japan’s summer upper house elections, Abe faces pressures from not only rice and other farmers, but also medical and consumer groups worried about the effects on the nation’s universal health care system as well as food safety. Defending the TPP, Abe told lawmakers on Wednesday that the universal insurance system was “a building block of Japan’s health care system and will never be shaken up....Relaxing individual food safety standards has not been negotiated either,” he added.

Consumer protection advocates have urged the Japanese government not to ease standards on food imports, including U.S. beef, labeling requirements on pesticides and genetically modified foods. Japanese farmers are also reportedly anxious to win exemptions from the TPP’s “zero-tariff” principle. According to agricultural cooperative JA Group, the elimination of tariffs would threaten Japan’s $48 billion in agricultural produce, making nearly all Japanese wheat, sugar and beef uncompetitive and wiping out a quarter of all rice production. The long-cherished national aim of “food security” would also be threatened, with the farm ministry estimating that reliance on imported food would increase to 90 percent from the current 60 percent.

Even if American and Japanese bigwigs do announce that Japan will now participate in TPP negotiations, I hardly think it's a done deal. Not only do they need to sort matters out bilaterally with contentious issues alike automobiles and agriculture, but the overall negotiations are also proceeding rather cautiously.

Ultimately, I think the official Chinese press reads things right: the main purpose as far as Japan is concerned is not trade creation but reinvigorating security ties with the US at a time of heightened security tensions with China over territorial disputes. Those North Koreans are looking pretty crazy too, so the perceived need by Japanese leaders to suck up to Uncle Sam via his pet project is understandable even if it has little to do with trade creation.

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Redefining 'Lame': Proposed EU-US Trade Deal

If you're wondering about scant coverage of the proposed EU-US FTA in what purports to be the IPE Zone, nobody said that I had to cover rather pointless trade deals. While I am not entirely indisposed to doing so, the ones I do mention at least have some entertainment value alike the (rather unlikely) EU-MERCOSUR deal which has been decades in the pipeline. Unfortunately, an EU-US FTA ranks right up there with a New Kids on the Block reunion on my radar screen. Who the £$%^ cares? The overall premise is overwhelmingly underwhelming. Let us count the ways:

(1) Exporting stuff nobody buys at home because folks are hard up doesn't assure sales abroad when your trade partner is equally hard up. The underlying premise of this FTA, trade creation, is highly dubious. We owe a debt of gratitude to none other than Karl Marx in the stupefaction sweepstakes evident here: We know that both the EU and the US are terminally stuck in reverse gear. Both economies are shrinking. Household incomes in both have been stagnant-to-declining for well over a decade. Hence, lowering trade barriers doesn't really matter when there's not enough money to go around despite unprecedented easy money policies on both sides of the Atlantic. Why are we to believe that ridding EU-US trade of the negligible 3% average tariffs remaining will result in much of anything when trillions in stimulus-- far greater inducements to consume--have failed to get these economies out of their respective ruts? Peugeot cars selling well in America--dreaming is free, no?

You'd think that countries go abroad in search of more promising markets than those at home once they reach saturation alike what Marx said, but here you have two equally saturated markets wishfully thinking that salvation lies in each other. You keep dreaming.

(2) Stated potential gains from this FTA are likely overstated. People clowning with DGSE models is usually the source of wildly overestimated gains from lowering trade barriers. It has been some sort of pastime estimating gains (if any) from this FTA.  I am thus astounded that the claimed gains for both sides exceed some that I've seen made for the completion of the (global) Doha Round. It's easy enough to get a hold of the software, set optimistic parameters and wind up with trade creation figures in the tens of billions and I suspect that's what's going on here.

(3) Tariff lines won't be negotiated where they are highest--in agriculture. European agricultural subsidies are, in a number of ways, even worse than already-high American ones. The assumption going in is that both parties will want opt-outs for their respective agricultural lobbies. End result? No progress where substantial reductions in tariffs actually are possible.

(4) Most of the expected gains lie from reducing non-tariff barriers alike through standards harmonization. The EU admits as much:

Given the low average tariffs (under 3%), the key to unlocking this potential lies in the tackling of non-tariff barriers. These consist mainly of customs procedures and behind the border regulatory restrictions. The non-tariff barriers come from diverging regulatory systems (standards definitions notably), but also other non-tariff measures, such as those related to certain aspects of security or consumer protection.

Once again, think of agriculture. Famously, the US has had no luck gaining access for its genetically modified foodstuffs and meat products using beef hormones in European markets. I doubt whether the Europeans are willing to make significant concessions over these issues now when they have not been willing to do so before. Moreover, why are we to believe that, say, harmonizing automobile crash safety testing is going to unlock the sales of Peugeots Stateside multiplied across dozens of other industries?

(5) Canada has been negotiating an FTA with the EU for four years now with limited progress over issues that will almost certainly reappear when Europe negotiates with the 10x larger United States. Chances are that discussions will be even more contentious given the money at stake. The EU-Canada deal isn't exactly a promising precedent. From Reuters:

EU Trade Commissioner Karel De Gucht had hoped to wrap up talks for a free-trade agreement with Canada in Ottawa in early February, when he met his Canadian counterpart Ed Fast. But negotiations are held up over contentious issues including agricultural exports, intellectual property and the ability being to bid for government contracts on both sides of the Atlantic. "What was on the table was simply not feasible," De Gucht told the European Parliament's trade committee, when asked by one lawmaker to explain why a deal had not been reached. "On a number of issues they will have to make additional exceptions," he said, referring to the Canadians.

Also consider that negotiating this deal would terminally wound the Doha Development Agenda and you must wonder how desperate the brokeback Yanks and their European counterparts have become. Make no mistake that they would not have even proposed going down this road if things weren't so bad that they are now trying to make lemonade out of the lemons they've been dealt with.

Here is my fearless prediction: There will be heated negotiations--and perhaps even a done deal sometime around when Obama (mercifully) exits. Even so, it will all have been for not much of anything in the end.

If this is the rescue plan for both America and Europe, they are as delusional as they come.

(6) 2/23 UPDATE:  To throw another monkey wrench into the proceedings concerning (surprise!) agricultural products, the EU has now applied blanket tariffs against US bioethanol exports over "dumping":

The EU will place a duty on all U.S. bioethanol imports to the 27-nation bloc from Saturday, in a move that has prompted Washington to express "serious concerns" and that comes as both sides prepare to launch negotiations on a free-trade deal. The European Union will levy a 9.5 percent tariff on all bioethanol coming from the United States, the bloc's Official Journal said on Friday, concluding a 15-month investigation that argued U.S. bioethanol was being dumped, or sold below cost.

Since most bioethanol is a component in blended fuel, the ruling sets a fixed charge of 62.30 euros ($82.38) per net tonne of bioethanol present in fuel. Brussels says that U.S. incentives to produce clean fuels constitute an illegal subsidy under world trade rules, and have allowed U.S. producers to sell cheap fuel to Europe, an accusation rejected by U.S. producers. 

The US will likely appeal as FTA negotiations get underway. It's not such a good omen after so many unresolved squabbles over agricultual products, don't you think?

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