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Saturday, December 02, 2006 5:02 PM

World Trade Progress

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Reuters is reporting Brown, Paulson call for WTO progress.

I must note that Mish has been calling for world peace for years but no reportable progress has been sighted. Is this a chicken/egg which comes first kind of thing (no free trade without world peace/no world peace without free trade)? While pondering that question here are the article highlights lowlights.

Ahead of their meeting in London on Tuesday, Paulson and Brown said in a joint article that urgent action was needed to restart global trade talks, in a sign that the United States may be preparing to cede some ground in order to reach a deal.

"With the fate of Doha in the balance and multilateral trade rules a possible casualty, we urgently need people on both sides of the Atlantic who are prepared to make the case for trade and commit to policies that make it work," the two finance ministers wrote.

"North America and Europe are the two largest free-trade areas in the world. We are also the two largest economies. Further trade liberalisation led by our continents could encourage others to follow."

World Trade Organisation chief Pascal Lamy suspended the so-called Doha round of talks in July after trade ministers failed to break a long-standing impasse over farm subsidies and tariffs.The round has been billed as a once-in-a-generation chance to inject up to $300 billion (155 billion pounds) a year into the world economy and lift millions out of poverty."

Current talks are focussed on the agriculture sector, a vital part of economies across the globe. We should recognise, though, that expanding trade in manufacturing and services is also critical to economic progress everywhere," the two men wrote.
The reason I said "lowlights" is because all anyone does is talk. There is never any action. Time after time there is an agreement to agree without ever doing a thing. I see that current talks are focused on agriculture, which is where they were focused last year, two years ago, three years ago, 5 years ago, and (I am guessing at this) 10 years ago.

Let's look at a few previous links on trade.
The US and EU are the two single biggest block to free trade in the entire world, largely due to insistence on agricultural tariffs so it was ironic if not outright Orwellian to see Paulson claim "North America and Europe are the two largest free-trade areas in the world. We are also the two largest economies. Further trade liberalisation led by our continents could encourage others to follow."

The first major country that has the intestinal fortitude to really PRACTICE free trade, regardless of what any other country does or says will be an enormous winner. Instead the EU is putting tariffs on shoes, underwear, and other goods, and both the US and EU have massive subsidies on agricultural goods.

Height of Ridiculousness

The height of ridiculousness has to be trade agreements that force Japan to import rice even though its protectionist measures enable Japan to grow all the rice it needs. I talked about the absurdity of mandatory Japanese rice imports in How NOT to fix the Global Economy.
Mandatory rice imports pile up in Japan, raising storage costs.
Tuesday, October 10, 2006 at 13:20 EDT
TOKYO — The inventory of rice Japan has imported to fulfill a requirement under an international trade accord reached 1.8 million tons by the end of this August, entailing storage costs of 17 billion yen in fiscal 2005, agriculture minister Toshikatsu Matsuoka said Tuesday.

"How to draw down the inventory and reduce the storage cost is a major challenge for us so we hope to come up with some measures to whet demand for foreign rice," the minister of agriculture, forestry and fisheries told a news conference. The government has been encouraging use of imported rice in processed food so as not to dampen demand for domestically grown rice people eat as their staple food.
Storage costs are 17 billion YEN for rice in Japan, rice they will not even eat!

Paulson Warns on Protectionism

Echoing a headline opinion I 100% endorse, Paulson warns on trade protectionism.
U.S. Treasury Secretary Henry Paulson said on Tuesday trade protectionism was on the rise despite strong global prosperity and warned it was a potentially dangerous trend.

"We cannot allow protectionist elements to stifle our growth, limit our opportunities, and dictate the terms of our engagement with the world," Paulson said in prepared remarks for delivery to the Confederation of British Industry's annual conference.

"Giving in to protectionist sentiment would send a terrible signal," Paulson said during a joint appearance with British Chancellor of the Exchequer Gordon Brown.

Paulson said while reducing agricultural subsidies was important, it was just as vital to find ways to boost trade in manufacturing and services. Paulson said countries that opened their borders to trade almost invariably achieved increased prosperity.

"Despite the known benefits of trade, the protectionist sentiment that is rising in our two nations and elsewhere around the world is predicated on a false assumption that trade harms our economies," Paulson said.
If countries that open their borders to free trade "invariably achieve increased prosperity" then why don't we do it? In other words why don't we practice what we preach?

Here is the key hypocrisy "Paulson said while reducing agricultural subsidies was important, it was just as vital to find ways to boost trade in manufacturing and services." No, it is NOT just as important, at least not to third world countries. The US still has a manufacturing base (even if it is shrinking) and huge agricultural output as well. Many emerging markets only have an agricultural base. The US and EU both want something for nothing. That is, the US and EU want "free trade" when it comes to airplanes but not corn. The US claims to be willing to give up agricultural subsidies, but only if the EU does. Waiting for the EU to give in on that concept is like waiting for Godot.


In yet another irony I see that Europe Surpasses U.S., Japan in Gains From Trade.
Nov. 27 (Bloomberg) -- Europe, where worker anger over globalization sparks street protests, is surpassing the U.S. and Japan in the race to reap benefits from the explosion in world trade and investment.

The continent is claiming a bigger share than the U.S. of the increased trade with fast-emerging markets such as Brazil, Russia, India and China, say economists at Goldman Sachs Group Inc. Companies such as French retailer Carrefour SA and German software maker SAP AG are winning customers in emerging markets at the expense of rivals based in other regions.

"It raises eyebrows when people hear it, but Europe is doing well from globalization and greater trade," says Erik Nielsen, chief European economist with Goldman Sachs in London. "It stands to benefit much more in the future."

"Some politicians in Europe have been using the threat of globalization as a way of saying we have to protect ourselves, so it's become part of the political agenda," says [Martin] Baily, who was chairman of the White House Council of Economic Advisers under President Bill Clinton.

A European Commission poll of 24,750 residents this year found 47 percent regard globalization as a threat. Just 37 percent view globalization as a "good opportunity," compared with 56 percent three years ago. Opposition ran as high as 72 percent in France, where discontent played a part in the rejection of a new European treaty and the defeat of revamped labor market laws. France will elect a new president next year and globalization is the hottest issue in the campaigning.

"You can be scared of globalization, but only openness and the dismantling of trade barriers will create prosperity," German Chancellor Angela Merkel said in a speech in Frankfurt on Nov. 17.

French Interior Minister Nicolas Sarkozy, a likely 2007 presidential candidate, this month lauded the "unprecedented possibilities" of globalization. "The question is not whether globalization is good or bad," Sarkozy said Nov. 9. "It is whether we are prepared for it."
It is ironic that the EU is gaining on account of small pockets of free trade but workers are angered over it. Even though French Interior Minister Nicolas Sarkozy and German Chancellor Angela Merkel are strong proponents of free trade, only 37% of EU respondents think it is a good opportunity. Will French voters support Nicolas Sarkozy or will there be a backlash of protectionism?

One way of looking at free trade is "That Giant Sucking Sound". Another way of looking at free trade is cheaper underwear at Sears and cheaper goods in general at Wal-Mart. The third way of looking at things is that Australia, Canada, New Zealand, Brazil, India, China and other countries are forging economic alliances and the US and EU are increasingly on the sidelines over agricultural subsidies.

This is yet another short term pain, long term gain thing but few countries are willing to suffer through the short term pain. With every passing day the US and EU are less relevant. It may be a long long time before "less relevant" becomes "irrelevant" but we are clearly headed that direction. Like it or not, Asia is embracing free trade and the US and EU better hop on board or they will be left behind. "The question is not whether globalization is good or bad. It is whether we are prepared for it." Clearly the US and EU are not prepared for it.

Fair Trade

I know the counter arguments already. "It's not free trade we want. It's fair trade we want". Of course the US and EU want to decide exactly what "fair" means. Fair Trade is really a euphemism for protectionism (typically fostered by some group demanding protection). What people don't realize is that even if a country removes all barriers to trade UNILATERALLY (meaning, the trade situation will be "unfair") it will garner more prosperity than its protectionist competition. It works every time and Hong Kong is a good example. Free trade encourages competition, lowers prices and spurs innovation. In spite of those benefits, protectionist sentiment seems to be rising.

Living Wages

The second argument is "We need a living wage". As plausible as that argument may sound, the problem just may rest with reckless spending (such as the war in Iraq), stupid government policies promoting housing (GSEs and the Ownership Society), other horrid governmental waste most notably in Medicaid/Medicare policy, a negative savings rate, and prices that are simply too high, as opposed to wages that are too low. If prices are too high it is because of government intervention, government policies, and excessive monetary printing. The solution is not more government intervention, more government policies, and it certainly is not more misguided stimulus in the belief it will create more jobs.

Currency Controls

The Telegraph has an interesting article out called Airbus could trigger 'nuclear option' of currency controls.
If you have funds across the Channel, or a ferme in Acquitaine, be vigilant. Keep a close eye on Europe's press, because you might one day find your money is nailed more immovably to its Continental home than you had thought.

Four years ago, a small "cellule" inside the European Commission was ordered to draft a report, instigated by Paris, examining the legal basis under EU treaty law for 1970s-style exchange controls. It concluded that Brussels may lawfully freeze capital flows in and out of the EU, and within it, and that this could be done by a "qualified majority" of EU finance ministers, leaving Britain with no veto.

One of its authors told me this was not an abstract exercise. It was to enable Europe to stem the rise of the euro if the dollar goes into free fall, the underlying argument being that Washington should not be allowed export the consequences of its own reckless spending policies through a "beggar-thy-neighbour" devaluation.

The idea was to stop money coming in, though it could equally be used to stop money leaving.

I thought of this study when French premier Dominique de Villepin lashed out this month at the over-mighty euro. "We can't let the European Central Bank act alone on the exchange rate," he said. Ségolène Royal, the new Socialist leader, upped the ante a week later, accusing the ECB of "shattering growth".

My hunch is that Airbus will bring matters to a head. I was told by an Airbus official last year that if the euro exchange rate went above $1.30 for long, the company was "cooked". He said the chances of this happening were almost nil.

Well, "nil" may be here. While Airbus has an order backlog of 2,177 aircraft worth $220.3bn, these delivery contracts are in dollars while costs are in euros. "This is the nub of the problem," said Louis Gallois, the Airbus chief.

In 2004, the group was shielded by currency hedges at an average rate of $0.98. This year the rate is $1.12, and the hedges are expiring fast. Soon Airbus will face the full violence of the spot market. The aerospace champion is so deeply tied up with Europe's sense of industrial self-worth that it will not be sacrificed lightly on the altar of free currency flows. When the French premier vowed to do whatever it takes to save Airbus, I believed him.
It is important to note that currency manipulation is just another way of protecting home grown industries. There is not a country around it seems that wants a strong currency. Everyone wants to debase their currency to provide export jobs to the US, apparently in the mistaken belief that the US consumer is a bottomless pit of consumption. Those destructive policies are about ready to backfire.

Given that trade disputes are hallmarks of deflationary times, do not look for much world trade progress with the US/EU (and the rest of the world), and do not look for world peace either.

Mike Shedlock / Mish

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