Africa’s economic prospects have always been a topic of great consternations for local governments and international analysts and commentators.  A continent rich in commodities (oil, diamonds, minerals), with a favorable demographic trends, and the potential for economic growth, has historically been ‘stuck in the muck’.  Yet, things are turning around, and the past decade has seen consistent economic growth (faster than East Asia’s), a 200% increase in trade with the rest of the world, a decline in foreign debt (by a quarter) and budget deficits (by two thirds), and inflation in the single digits (8%).

Although there still a lot to be done throughout the continent, a recent article by The Economist (Africa’s hopeful economies: The sun shines bright) was talking about the emergence of Africa’s “Lion Economies.”  However, the global financial crisis which, has crippled the U.S. and EU economies and is threatening global trade and commodity prices, could also derail Africa’s economic prospects and its significant progress to sustainable growth.

With this in mind, in January 2012, the African Union Heads of State and Government will hold their annual summit and focus on the theme of “Boosting Intra-Africa Trade”.  The choice of the theme is both appropriate and timely, given the challenges facing the continents ability to continue to rely on global trade and high commodity prices for growth, and the need to come up with strategies to improve the situation.

On average over the past decade, only about 10 – 13% of African trade is with African nations, whilst 40% of North American trade is with other North American countries, and 63% of trade by countries in Western Europe is with other Western European nations.

To this end, African countries have established the African Union, and created various Regional Economic Communities (RECs) to improve growth through trade.  In this context, the RECs are pursuing integration through free trade, and developing customs unions and a common market.  Eventually, these efforts are expected to converge to an African Common Market (ACM) and an African Economic Community (AEC), whereby economic, fiscal, social and sectoral policies will be continentally uniform.

Pooling economies and markets together through regional integration provides a sufficiently wide economic and market space to make economies of scale possible.  Trade enables countries to specialize and export goods that they can produce cheaply, in exchange for what others can provide at a lower cost.  Trade also provides the material means in terms of capital goods, machinery and raw and semi-finished goods that are critical for growth.

More importantly, through such an economic marketplace, Africa can strengthen its economic independence and empowerment with respect to the rest of the world.  A united Africa can better negotiate for access to markets (foreign and domestic), commodity prices, foreign investment and technology transfers with its trading partners in the U.S. and the EU.

Even more importantly, is the ability to negotiate better terms of trade with the BRIC countries, which operate more nationalistically in the global market then the U.S.-EU market economies (negotiating with governments vs. negotiating with corporations).  A generation ago, Brazil, Russia, India and China accounted for just 1% of African trade.  Today they make up 20%, and by 2030 the rate is expected to be 50%.  Therefore, as the BRIC economies go, so will Africa’s economic prosperity – thus enhancing the negotiating needs of the continent vis-à-vis the BRIC countries.

A New Continental FTA –

Therefore, if trade is a vehicle to growth and development, then removing the barriers that inhibit it can only help increase its impact.  In order to address this trend, African leaders are making new commitments to boosting intra-African trade.

First was the landmark decision by COMESA, EAC (East Africa Community – Burundi, Kenya, Rwanda, Tanzania, and Uganda) and SADC to establish a single Free Trade Area.  The launch of this tripartite FTA initiative covering 26 African countries (more than half of AU membership) with a combined population of 530 million (57% of Africa’s population) and a total GDP of $630 billion (53% of Africa’s total GDP) has galvanized interest towards a much broader Continental FTA.

It will enlarge markets for goods and services, eliminate the problem of multiple and overlapping memberships, enhance customs cooperation and broader trade facilitation, promote harmonization and coordination of trade instruments and nomenclature, and broader relaxation of restrictions on movement of goods, persons and services.

The collaboration and cooperation of RECs through the Continental FTA should further improve regional infrastructure and consolidate regional markets through improved interconnectivity in all forms of transport and communication as well as promote energy pooling to enhance the regions’ competitiveness.

Export-led Growth Alternatives –

The one lesson from South-East Asia that all developing countries and regions must never forget is that export-led growth will always produce desirable economic benefits.  Focusing on existing areas where the continent has a comparative advantage (fuels, minerals, and even food products) will continue to generate valuable returns to be invested in those areas that need additional financing.

Food production in particular (along with beverages, tobacco, and other agricultural products) could be a boondoggle for African countries.  Although the continent as a whole is a food importer (see chart from a recent Issue Paper prepared by the AU Commission for the 2012 AU Summit), Africa has 60% of the world’s uncultivated arable land.  With rising populations in Asia, food is becoming more and more valuable, and global food prices and constantly rising.  Africa more than Europe is in need of ‘Common Agricultural Policy’ which puts real focus and energy (meaning financing) behind this potentially very profitable segment of the economy.

However, as the Commissions Issue Paper points out, the continents infrastructure and logistic shortcomings make all efforts to increase trade (export or intra-African) very expensive and uncompetitive.  In particular, because of infrastructure bottleneck (roads, ports, telecommunications, and storage) transport costs are 63% higher in African countries compared with the average in developed countries (and constitute 14% of the value exported in African countries, against 8.6% in developed countries).

Furthermore, delays at African customs are, on average, longer than in the rest of the world: 12 days in Sub-Saharan countries compared with 7 days in Latin America, less than 6 days in Central and East Asia, and slightly more than 4 days in Central and East Europe.  These delays add a tremendous cost to importers and exporters, and they increase the transaction costs of trading among African countries.  Each transport day lost due to customs and related problems are equivalent to additional tax.  In addition, delays and complicated procedures related to insuring goods and customs guarantee requirements raise the cost of exporting from Africa and compromise the continent’s competitiveness.  For food and agricultural (perishable) goods, such delays can be devastating – leading to the complete loss of entire shipments.

The Road Ahead –

For Africa, it often seems that the obstacles outweigh the potential for sustainable poverty alleviation and continuing economic growth.  The current situation is hanging in the balance, especially after the global financial crisis and the recent political upheaval in the north (see Arab Spring).

But, incrementally, it appears that the leaders of the African Union are fully aware of the way forward; a Continental FTA that focuses on Intra-African trade.  The road (for regional integration) is long and hard, but if the AU can ‘build it’ then goods will come and go, and trade could do for Africa what it has done for South and East Asia.

As the Arab Spring is turning to its second (and harder) phase of conducting elections and forming legitimate transitional government, the need for an economic strategy is becoming painfully apparent.  The people, who marched on the streets demanding political freedom, were also demonstrating for economic freedom and the general improvement of their future economic prospects.  Rising food prices, inflation, unemployment, all played a significant role in motivating people to demand democratic and accountable governments.

Much has been made about the comparisons of the fall of communism in Eastern Europe and the Arab Spring.  Although similar in origin and motivation, most analysts are quick to point out the glaring difference: Eastern Europeans had a vision of what they wanted – EU and NATO membership.  Eastern European countries in constitutional transition during the 1990’s, had something to look towards – something to emulate.  The people of the Arab Spring don’t have that.

Now more than ever, the Arab people need a vision of what life after dictators could look.  Because of the instability, the Arab people need reassurance and certainty for the political and economic future that awaits them.  In essence, they are in need of targets and in need of benchmarks; for something to aspire, both politically and economically.

They need to organize and form a regional integration group, modeled after the EU.  They need a new regional integration strategy that includes as many elements of the Eastern European accession treaties as possible, in a way that is of course particular to the needs and idiosyncrasies of the region.

This will not be easy, considering that intra-regional trade is currently very low: between 4% and 7%.  On the other hand, exports to the EU make-up 40% of total exports.  However, this economic trade relationship with the EU has created a foundation on which convergence could be achieved.

A League of Nations in Transition –

At a time when all the people of the Arab world are going through this political and sociological transformation it might feel inappropriate to embark on any regional integration effort.  However, now is the time to think big and find inspiration from each-other.  The people are following developments around the region and are connected (in solidarity) in a way that should make regional integration feasible.

This ‘League of Nations in Transition’ could start with the countries that have overthrown their dictators: Tunisia, Egypt, and Libya.  After that comes Jordan and Morocco, both of which have embarked on some (meaningful or not remains to be seen) important democratic reforms, and continue with Lebanon, the Palestinian Territory, Yemen, Syria, and eventually Algeria (if/when they continue with their political reforms).  [Eventually, including a democratic Israel willing to conclude negotiations on the Palestinian issue, will be the ultimate sign of braking with the past.]

Members should adopt a set of principles – similar to democratic values (respect for the party system and elections – freedom of the press to report on candidates and elections – independent judiciary – rule of law).  Democratic standards and criteria should be used for membership, and members-nations should use each-other for peer-review and monitoring, to ensure the successful transition to democracy.

Although the countries of the region face high budget deficits and are in need of immediate financial assistance, the long-term challenge remains the absence of a vibrant private sector that can create jobs domestically and export/compete internationally.  For oil-importing countries like the majority of the Arab Spring nations in constitutional transition, who cannot rely on oil production to attract foreign investments and create jobs, trade agreements with the west (and each-other) could increase foreign direct investment and encourage domestic reforms that improve the domestic business climate.

The key to economic growth and long term prosperity for the whole region is Regional Integration like the EU.  Start with a common energy policy, then common custom/tariff regulations/levels, then common investment/banking regulations.  Eventually, what would be very important for the region is labor mobility, especially considering the labor needs of the oil-exporting nations of the Gulf and the labor surplus of the non oil producing nations of North Africa.

Of course, integration of regional trade will require: 1) customs facilitation, 2) transportation/infrastructure improvements, 3) transparency of trade regulations, 4) harmonization of regulatory requirements, and eventually 5) political integration.

What if the foundation for all that was already there because of 30 years of legal and regulatory harmonization with the EU?

Backdoor Integration through Trade with the EU –

Regional integration through trade is not something new for North Africa and the Middle East.  The countries of North Africa in particular have in the past joined trade agreements with the EU and among themselves, with devastatingly unsatisfactory results.  Of course, there are other regional integration efforts currently in place (like the Arab Maghreb), but they are seriously tainted by their origin and affiliation to past dictators and autocrats.

However, democratization, or at least the possibility of removing dictatorial control of the people and the markets, changes the existing paradigm and hopefully the counter-productive conditions on the ground.  The lesson from Eastern Europe is that well-structured trade agreements can help create the conditions which encourage countries in transition to undertake appropriate reforms.

Starting in the 1960s, the European Community began concluding first-generation Cooperation Agreements (CAs) with Mediterranean countries.  By the beginning of the 1990s, the EU had signed a series of CAs with most Arab states in the eastern and southern Mediterranean, which mainly covered aid and trade liberalization.  Though commerce in general rose between Europe and the region, the region’s balance of trade with the EU worsened under the CAs.

Because these CAs were clearly not enough, negotiations started on Association Agreements (AAs) between the EU and the eastern and southern Mediterranean countries to replace the existing CAs.  Provisions of these AAs have many economic aspects in common, including establishing WTO-compatible free trade over a transitional period of up to twelve years; provisions related to intellectual property rights, services, public procurement, competition rules, state aid, and monopolies; and economic cooperation in numerous sectors.  With time, more areas of cooperation have been included, thus further bringing the regulatory and legal regimes on the ground in sink.

In essence, the EU has established a network of AAs with most countries of the region, with the only exception of Syria, though currently the coverage of these Agreements is essentially limited to trade in goods.  To that end, the EU has developed a system of pan-European rules of origin. This allows diagonal cumulation among regional members in order to export to Europe as long as they adhere, among themselves, to the same rules of origin introduced in Europe.

These ‘mandates’ as they are called (to be completed by the end of 2011 and then submitted for ratification by EU member states) are with Morocco, Tunisia, Egypt, Jordan (and Libya) for ‘second generation’ FTA’s (that go beyond goods and also cover services, investment, competition, government procurement, etc.).  In particular, negotiations are currently in progress on the liberalization of trade in services and establishment, on further liberalization for agricultural, processed agricultural and fisheries products, a Dispute Settlement Mechanism, and on an Agreements on Conformity Assessment and Acceptance of Industrial Products (ACAA).

The AAs also cover political dialogue, respect for human rights and democracy, cooperation related to social affairs and migration (including the readmission of illegal immigrants), and cultural cooperation. After they are signed, AAs must undergo a lengthy ratification process by EU member national parliaments.

Therefore, these EU AAs with North African countries have the potential of harmonizing regulations across the region.  By participating in FTA’s with the EU, regional countries could end up (and are certainly in the process of) with the same rules and regulations for a number of critical sectors responsible for economic growth, foreign direct investment, and trade.  Country specific accession to FTA’s with the EU and compliance with EU regulations for market access and trade, could lead to a ‘backdoor’ regional integration.

The Agadir Agreement –

The Agadir Agreement is a free trade agreement between four Arab countries: Egypt, Jordan, Morocco and Tunisia (covering 115 million people) – all countries that have been going through some serious constitutional transition due to the Arab Spring.  It was launched in May 2001, signed in February 2004 and came into force in March 2007.  The Agadir Agreement is open to further membership by all Arab countries that are member of the Arab League and the Greater Arab Free Trade Area, and linked to the EU through an Association Agreement or an FTA.

Its purpose is to facilitate integration between Arab states and the EU under the broader EU-Mediterranean process, by enhancing investments in the Agadir partner countries and eliminating barriers to trade; the overall objective being to boost economic activity, to support employment, and to improve living standards.  The rationale behind Agadir is that integration would be easier to achieve with a core of countries, and that others could join later when they were ready.

Trade among the Agadir signatories is limited, both in absolute size and compared with exports to other destinations.  The exports of the four countries to each other were $1.06 billion in 2006, or 2.1% of the region’s exports.  In contrast, more than 51% of all exports from the four Agadir signatory countries went to the EU.  However, since the agreement’s inception, intra-Agadir trade exchange has registered a 45% increase.  In Jordan, exchange with Agadir signatories jumped by 70% between 2007 and 2009.  During the same period, Egypt saw a 160% increase in trade with member states, while Morocco witnessed a 30% rise.

Many technical issues are to be tackled by the four signatory countries with the EU’s financial and technical support.  The European Commission has contributed 8 million euro since the beginning of the process, investing in a Technical Unit that works on practical aspects: legislative approximation, custom regulations, rules of origin, etc.  Three sectors were identified to kick start inter-Arab trade exchange: textile, leather and automotive technology.  One important feature of the Agadir Agreement is that it uses the EU’s rules of origin.  The EU allows its Mediterranean FTA partners to cumulate value-added. This means that it turns a blind eye to where value was added, for the purpose of preferential tariffs, as long as it was in an FTA partner country.

In Conclusion –

Regional integration for the region would be hard under normal circumstances, let alone under the current Arab Spring.  Any meaningful effort for regional integration will require external help and assistance in building and facilitating infrastructure (roads – railways – air and seaports) at a regional level.

However, the Agadir Agreement offers the perfect vehicle on which to build and grow a ‘League of Nations in Transition.’  The ongoing harmonization of rules and regulations with the EU is leading to substantial conversion of rules and regulations among the four countries.  Adding Libya and building on the existing progress could significantly improve regional trade and real economic growth for the people of the Arab Spring.

Other Sources:

The Star (Amman, Jordan) – ‘Made in Agadir Zone’: An ambitious vision of the future’.

European Commission – Overview of FTA and other Trade Negotiations.

Carnegie Papers – EU and the U.S. Free Trade Agreements in the Middle East and North Africa.

The Washington Quarterly – American and European Response to the Arab Spring: What’s the big Idea?

A huge topic in academia at the moment is the changing global economic and political landscape. The “Reshaping Power, Shifting Boundaries” theme of the 2012 International Political Science Association conference being held in Madrid in July is a testament of this. Academics from around the world will gather to discuss how power is being reconfigured and how it is creating opportunities for change.

One of the political and economic power players emerging on the world stage are the BRICS countries or Brazil, Russia, India, China and South Africa. In line with that thought, Jim O’Neill the Chairman of Goldman Sachs Asset Management who coined the term BRIC is set to release his new book next week entitled The Growth Map: Economic Opportunity in the BRICs and Beyond.

Of the excerpts that have already been released, O’Neill highlights some startling statistics. Between 2001 and 2010, the BRIC economies’ GDP rose much more sharply than thought possible even in the most optimistic scenario. “Moreover, their citizens’ wealth showed equally remarkable increases, bringing hundreds of millions of people out of poverty. Their GDP per capita, the best indication of individual wealth, collectively trebled.”

One of the biggest surprises, according to O’Neill, was Brazil. The South American powerhouse has overtaken Italy to become the seventh largest economy in the world, with a GDP of $2.1 trillion (£1.3 trillion). “I never imagined Brazil could grow so big so fast. “Our [analysis] did not suggest that it would reach that stage until after 2020.”

Although O’Neill discusses the BRICS rapid export growth, the commodity boom and unsustainable American demand, he also highlights the significance of the BRICS consumer. For example, personal Chinese consumption rose by $1.5 trillion between 2001 and 2011, the equivalent of creating another UK.

China’s growth continues to amaze with O’Neill’s research suggesting “China’s economic output – its gross domestic product – could match that of the US as early as 2027, and perhaps even sooner,” he writes. “Since 2001, China’s GDP has risen fourfold, from $1.5 trillion to $6 trillion [£949bn to £3.7trillion] Economically speaking, China has created three new Chinas in the past decade.”

As O’Neill’s economic statistics rightfully point out, BRICS, who represent around one-fifth of the world’s economy, have emerged as a powerful new voice in the world, especially in the economic realm. And the leaders of BRICS countries realize this.

Government officials from the ‘big five’ have stated that they should have a bigger say in institutions such as the IMF.

Brazil’s foreign Minister Antonio Patriota recently told Reuters that the financial crisis battering Europe showed that the emerging world’s time was now.

“I think we are experiencing truly tectonic changes when it comes to the configuration of power internationally. These changes were accelerated by the 2008 economic crisis, and now a second wave with the European crisis and its impact on the world economy,” he said.

O’Neill’s full analysis of BRICS will be released next week. It will undoubtedly be a text that will help the public better understand the current global economic changes.

As developments unfolded in the Middle East and North Africa (MENA) during the past 8 months, one thing has become abundantly clear: the political transformation will not survive without an economic transformation.  As many analyst have pointed out, an overwhelming motivation of the people who took to the streets with the ‘Arab Spring’ was the dismal economic and employment condition on the ground; high unemployment among the young, crony capitalism, inefficient welfare state, and even food shortages.

What has been less adequately reported, is that Tunisia and Egypt (along with Morocco and Jordan) has experience an intense economic transformation during the past couple of decades, away from “Arab Socialism” of the 60’s and 70’s, and towards western style capitalism in the 80’s and 90’s.  Through the guidance and assistance of the IMF and the World Bank, Tunisia and Egypt have pursued neoliberal economic policies (entrepreneurial freedom, strong property rights, free markets, and free trade), which have led to great income inequalities and a concentration of wealth among the political elite.  Walter Armbrust’s article, ‘A revolution against neoliberalism?’, make’s it abundantly clear that corruption in Tunisia, Egypt, and other MENA nations now in turmoil, was the result of conflation of politics and business under the pretext of privatization – that the revolving door between government and business, and the participation in private business of political leaders, bureaucratic officials (technocrats) and even military personnel and their enrichment from such preferential business deals was less a violation of the system and more ‘business as usual.’

The combination of authoritarian regimes (to suppress populist religious movements) and reliance on oil and gas exports for economic growth has produced weak and isolated economies conditioned on patronage and welfare and cut off from the global market.  Non-the-less, the new regimes emerging from the Arab Spring will have to tackle the many economic problems that are plaguing the region.  How do you promote economic growth in politically transitioning nations, like the ones of the Arab Spring?  Which economic model (good old-fashion ‘national’ socialism, western neoliberalism, or some hybrid – see authoritarian capitalism under China?) should be implemented in pursuit of economic growth, higher employment, and equal opportunities for all (a major demand of the people in the streets).

Three levels of economic activity, where trade plays a role –

Any strategy for instituting political reform in MENA will have to include a strong consideration for economic reform, and in particular integrating the region into the global economy.  With the exception of natural resources (and Al Jazeera), most countries in the region have been net importers – relying heavily on foreign imports to cover even basic food needs.  The Arab world stands alone and excluded from the benefits of global trade and economic integration.  The nations emerging from the Arab Spring need to reenergize entrepreneurial activities at the local level, strengthen the regulation of national market, and facilitating exports through regional trade integration.

At the local level, commerce always existed, especially in the Arab world with its strong cultural affinity for exchange and bargaining.  What small and medium size local merchants need to grow and flourish is the freedom from government regulation/intervention, AND the existence of an infrastructure system that only the government can create and maintain.

In order to jump-start local markets and promote economic activity at the lowest lever, the central government will have to transfer the administration and regulation of local markets to local authorities.  This will allow for the more efficient operation of these local markets, and free the central government to tackle bigger issues.  Therefore, the collection of taxes and promulgation of licenses and local regulations will have to be performed at the local level, with respect to these local markets and small/medium size companies.

On the other hand, the central government should concentrate its efforts in providing the necessary infrastructure (roads and transportation systems, power grids, telephone, internet), and venues/methods for adjudication and dispute resolution (courts and other legal services) – all very necessary for the proper functioning of a local economy.  It is imperative that small entrepreneurs have the necessary access to adequate transportation, consistent energy and upgraded for the 21^st century communication systems – something only the central government can guarantee.

At the national level, according to neoliberal economy theory, what applies for small companies and local markets should also apply nationally.  However, it will be very challenging for a young democracy to both regulate and control large companies.  After all, corruption at the top and exploitation of the public trust by the regimes of Tunisia and Egypt was in part what broke the proverbial camels back and send the people to the streets.  In order for neoliberalism to succeed, it will have to apply to the large national companies and the national market as well, subjecting them to the same free market economics that the middle class had to leave by during the past 20 years.

Therefore it is imperative that any liberalization at the national level or any privatization of national companies be done slowly, methodically and very-very carefully.  Shock therapy like the one used in post-soviet Eastern Europe, and WB/IMF ‘one size fits all’ economic policies which advocate for complete and unconditional liberalization of the market, will lead to the perpetuation of cronyism and the further enrichment of the current elite.  For example, the government should scrutinize not only the selling/privatization of large and inefficient government companies, but also operation/management of large companies transitioning from national monopolies to market economies.

At the international level, there are two trade-related strategies for growth; first, regional integration that focuses on movement of workers, goods, and capital; and second, preferential access to western markets through financial assistance from the WB and the IMF.

Free movement of workers is imperative for a region that has a lot of jobs to offer in the oil and gas industry, but relies heavily on migrant workers from sub-Saharan Africa and Asia.  The region needs a common regulatory system that allows for preferential working permits of Arab citizens wishing to move from non-oil producing countries (like Egypt, Syria, Tunisia, Morocco, Yemen, Jordan) to oil-producing countries, but does not extend citizenship rights.  Such movement of workers could alleviate unemployment in some countries, grow production in others, and foster better understanding and cooperation among the otherwise culturally and religiously similar people of the MENA.

Although many analyst hope that the Arab Spring will usher a new era of peace and democratic values for the region, Leon Hadar doubts that and argues that the Middle East should follow the ASEAN model of regional integration. (see: The Middle East Needs an ASEAN)  Mr. Hadar argues that ASEAN is a mosaic of various political systems and old and new civilizations in various stages of economic development, which were brought together not by a common ideology, religion, or culture, but rather by their mutual economic and political interests.  A free-trade zone for the MENA region, based on the large and educated middle class of the region, could provide many opportunities to local companies for growth.

A role for the West –

On the other hand, the best thing the west can do for the MENA people right now is help them integrate into the global market… quickly but sustainably!  Western nations should link democratic development with access to western markets, and promise to deliver the benefits of preferential trade access to the people of those nations that embrace democratic values and democratic forms of governance.  The promotion and facilitation of a regional trade agreement should be at the forefront of any western economic initiative about the ‘Arab Spring.’  After the revolutions sort themselves out, the U.S. and the EU must incentivize the growth of existing regional trade agreements, or the creation of new ones.

In particular, President Obama announced in his recent Mideast speech, that “it’s important to focus on trade, not just aid; on investment, not just assistance.”  President Obama outlined the U.S. goal of promoting a development model based on economic openness and competition, trade and integration to global markets, and financial stability that enables more employment opportunities for young people.  Of all the ideas proposed by President Obama (see previous post) the most ambitious (and least defined) was the one about launching a comprehensive Trade and Investment Partnership Initiative in the Middle East and North Africa.”  President Obama promised to “work with the EU to facilitate more trade within the region, build on existing agreements to promote integration with U.S. and European markets, and open the door for those countries who adopt high standards of reform and trade liberalization to construct a regional trade arrangement.”

The question of how can the Bretton Woods institutions (WTO, IMF, WB) help the ‘Arab Spring’ is hard to answer, considering that it was WB and IMF policies in the first place that led to imbalanced liberalization of the Tunisian and Egyptian economies, and the inevitable crony capitalism that has followed the application of neoliberalism in the Middle East and throughout the world.  On the other hand, during the most recent G-8 summit (this past May), the G-8 countries pledged $20 billion of their own money to go along with $20 billion offered by the IMF and the WB, to support the Arab Spring.  However, it is unclear whether that represents new money, or the re-branding of existing aid commitments.  Debt forgiveness or renegotiation of past debts by the post ‘Arab Spring’ governments should also be part of any IMF/WB strategy to help the region.

Authoritarian Capitalism, China Style –

Finally, one model that could work for the transitioning economies of MENA is China.  Although politically authoritarian, during the past 30 years China has pursued an economic policy of liberalization at the local level with centralized control and supervision of strategic industries at the national level.  Government control and direction of most of the biggest companies has led to cronyism, the enrichment of the political elite, and income inequalities.  On the other hand, small and medium size companies have been allowed to operate and thrive at the local level, lifting millions of people from poverty and creating a sizable middle class.  They were able to do that even under heavy capital control regulations by the central government, and the lack of access to financing and the major banks.  (See: Entrepreneurship in China.)

Granted, China is a large country with many opportunities… but China was as economically depressed and underdeveloped as many on the MENA countries are today.  What China had was a culture of opportunity (in Chinese, crisis and opportunity translate the same) and a belief that anyone could become successful!  These are assets that the people behind the ‘Arab Spring’ also posses.  Let a million ‘Arab’ flowers bloom – through trade and commerce!

Last month Secretary of State Hillary Clinton proclaimed, in an article for the Foreign Policy Magazine, ‘America’s Pacific Century’! This week, President Obama will be laying the foundation through a series of multilateral meetings involving Pacific Rim countries. He will start with the Asia-Pacific Economic Cooperation (APEC) meeting in Hawaii (Nov 12th-13th), and continue at the Association of South-East Asian Nations (ASEAN) summit in Bali, Indonesia (Nov 17th-19th).

At the margins of both these world leader gatherings, President Obama will be pushing hard for the Trans-Pacific Partnership (TPP), a little-known but fairly liberal trade grouping which could put real pressure on China to finally change its mercantilist trade policies and undervalued currency.

Currently, the TPP includes only 4 small economies: Brunei, Chile, New Zealand and Singapore. During the past couple of years, Australia, Malaysia, Peru, Vietnam, and the U.S. have been negotiating entry into the group. Now Japan has also announced that it will participate in the negotiations to form what, at least in theory, has come to be perceived as the “gold standard” for trade agreements that would go further than any existing arrangement.

All these Asian summits officially present an excellent opportunity for President Obama to take his effort for economic growth and job creation internationally. Two-way trade between the U.S. and the 8 TPP nations totaled $171 billion in 2010, compared with $457 billion with China, $181 billion with Japan and $88 billion with South Korea, according to the U.S. Commerce Department. Overall, the APEC economies account for half of global output, and represent the main target of the president’s efforts to double U.S. exports in the near future.

Unofficially however, U.S. efforts within APEC and more specifically the nature and composition of the TPP are designed to confront China on its mercantilist trade policies – especially the manipulation of its currency.

MCT 2011. [Papua New Guinea Current account balance is in millions of $US].

What Is So Special About The TPP

According to Iwan Azis, head of the Asian Development Bank’s regional integration office (quoted in an interview by the FT), the agreement is intended to deal with what he calls “behind the border” issues. These include areas of what could be deemed domestic policy which go beyond the normal scope of trade agreements.

Currently, almost everything other then labor mobility is up for liberalization through the TPP, making it one of the most comprehensive free-trade treaties yet conceived. Beyond the ambitious goal of eliminate all tariffs over 10 years, the most significant areas that are currently negotiated include: government procurement, rules governing the conduct of state-owned enterprises, and intellectual property standards.

The TPP promises something truly groundbreaking: persuading Asian governments to accept new rules on the role of state-owned enterprises, the cornerstone of Asian-style capitalism. State-owned enterprises often benefit from cheap financing or government protection. China, in particular, is often criticized for seeking to ensure the success of national champions to the detriment of free trade and honest competition.

According to Bloomberg, Asian governments operate in many markets through state-owned companies with large bundles of cash reserves at their disposal. They exist both to make a profit and to build state power. Ten years ago, emerging countries added $100 billion a year combined to their reserves. In 2009, they took in $1.6 trillion. Sovereign wealth funds now control 12% of investment worldwide, according to the U.S. State Department. Sometimes, state-owned enterprises work in secrecy and without accountability to shareholders, independent boards and regulators. The lack of transparency puts U.S. companies at a disadvantage.

On the other hand, China undervalues its currency, by pegging the renminbi (RMB) to the dollar at an artificially low level. This, along with other subsidies and mercantilist trade policies, keeps Chinese exports cheap, and thus more attractive to consumers in the U.S. and Europe. Because China is the manufacturing hub for South-East Asia, where most assembling and export happens, China’s artificially undervalued currency is also impacting trade throughout the region.

As a result, other regional countries have pegged their currency to the RMB (Singapore, Taiwan, Malaysia, and of course Hong Kong) in order to compete with Chinese exports, but also to align their production pricing with China. More recently, Japan has been forced to intervene in the foreign currency markets 4 times during the past 14 months, in order to lower the value of the yen and thus facilitate greater exports for its manufacturing sector.

This is where the TPP can provide leverage for the U.S. The U.S. has not been able to convince China to change its trade and currency policies. Now it must try to put pressure on the other Pacific Rim countries to embrace the U.S. agenda. The timing could not be more opportune.

The U.S. Strategy So Far

Over the years, high on the list of U.S. international trade priorities has been getting commitments from China to enact more flexible currency rate standards to help balance trade; respect intellectual property rights; and limit the role of state-owned enterprises in the market. The TPP reads like the U.S. trade agenda with respect to China, now being formalized with some of the most important economies of the region.

So far, China has not been very responsive to U.S. demands for currency appreciation and more domestic (Chinese) consumption. In last year’s APEC meeting, President Obama directly pressed China over its massive exports aided by a cheap RMB, and urged countries with large trade surpluses (like China, Japan, and S. Korea) to shift away from their unhealthy dependence on exports and take steps to boost domestic demand. President Obama’s pleas fell on deaf ears (both then and now) as the Chinese leader insisted (as always) that China will make reforms at its own pace.

Unfortunately, singling out China as the worst offender (in mercantilist trade policies) has not worked so far as a strategy. On the other hand, the U.S. has greater leverage and a much different/better relationship with most of the other Asian member of APEC. Therefore, the U.S. should push the partnership to curb currency manipulation, Internet censorship, forced intellectual-property sharing and coerced joint ventures with state-owned companies. If the rest of Asia moves closer to the U.S. model, that could pressure China to do the same. Experts hope that creating a free-trade block of sufficient mass will put pressure on China to join and thus open and liberalize more of its economy. The idea is for the TPP to be a structure on to which other nations, including possibly South Korea, and eventually even China, could be eventually integrated.

Furthermore, China’s efforts to internationalize the RMB make it all that more pressing to confront them on their undervalued currency. (see, China’s Efforts to Internationalize its Currency) Although it is the most appropriate forum, doing this through APEC will not be easy. China has gotten very good at manipulating international organizations and getting what it wants out of them.

Although active at the technical level, China has not been helpful at the leader’s level with APEC’s efforts to achieve anything even remotely approaching regional free trade. While not wanting to be seen as obstructionist, China can nevertheless be expected to effectively exploit APEC’s inherent inability to act decisively in order to help ensure that the organization never fully achieves any meaningful trade reform. APEC will need strong leadership from the U.S. and President Obama to both address the trade distorting nature of China’s currency policy and strengthen regional free trade.

The ‘Elephant’ in Room – China

David Gordon of the Eurasia Group recently argued that China has overplayed its hand in Asia, and its rapid growth and aggressive posturing (both economic and military) “is inadvertently driving Asian states to build closer economic and strategic ties with the U.S. and each other.” Over the past 18 months China has taken a very an aggressive tone towards territorial disputes in the South China Sea and elsewhere. Mr. Gordon further argues that Beijing has miscalculated its ability to cater to nationalist feelings domestically without alarming its neighbors, and is now (inadvertently) driving Asian nations to build closer economic and strategic ties with the U.S. and each other.

And you know that the Chinese leadership is concerned when commentary in the Chinese press often casts the TPP as an aggressive U.S.-led ploy to squeeze China out of SE Asia. Of course this is exactly what China did back in 2005, with the China-ASEAN Free Trade Area. Covering more than 1.8 billion people, this FTA is the world’s largest in terms of population; and amounting to a combined $6 trillion in GDP, the third largest after the EU and NAFTA. The obvious advantage was that such an approach removed the US – and its oftentimes confrontational agenda – from the equation and it undermined U.S. economic linkages in the region. Now the U.S. is poised to formally accede to East Asia Summit (the ASEAN+3) next week, a move that the other SE Asian nations welcome, as they hope that the U.S. could provide a counterweight to China in the region.

Conclusion

Undersecretary of State Robert Hormats was recently quoted as saying: “There’s competition between the American economic model and the more state-centered economic model of China and other countries.” Many have been arguing for a serious debate on the damaging role of state capitalism on the global economy, and the ideological differences between the U.S./EU rule based global economy and SE Asia’s mercantilist trade practices.

Although there is a deeply pragmatic driving force behind the TPP, undoubtedly, it also has an element of seeking to wrest back global trade for nations perceived to play by the rules. The Obama administration might have finally found a trade strategy to deal with China’s undervalued currency and mercantilist economic policies.

Some Sources –

Trans-Pacific Trade Deal Could Revolutionize Commerce: View by the Editors of Bloomberg BuisnessWeek. (http://www.businessweek.com/news/2011-11-11/trans-pacific-trade-deal-could-revolutionize-commerce-view.html)

Trans-Pacific Partnership: Far-reaching agreement could form powerful new trade bloc, By David Pilling. (http://www.ft.com/intl/cms/s/0/47dd4d14-06cc-11e1-90de-00144feabdc0.html#axzz1dKBjz1mp)

America’s Pacific Century, By Hillary Clinton. (http://www.foreignpolicy.com/articles/2011/10/11/americas_pacific_century)

Obama heads to Asia focused on China’s power, by David Nakamura and William Wan. (http://www.washingtonpost.com/world/obama-heads-to-asia-with-sharp-focus-on-chinas-growing-power/2011/11/10/gIQAOsQkBN_story.html)

A trade opportunity Washington shouldn’t pass up, by David Gordon. (http://www.washingtonpost.com/opinions/a-trade-opportunity-washington-shouldnt-pass-up/2011/11/10/gIQA1K3t9M_story.html)

Global economic developments this year, along with the impact of safe-haven investment flows have led to the appreciation of the dollar in global markets, contributed to the high level of unemployment in the U.S. and increased the chances for a double-dip recession in America.  All these developments have further highlighted the international tensions over exchange rates, with the value of the Chinese renminbi (RMB) and U.S.-China bilateral trade taking center stage this fall.

In the U.S., the unfortunate economic development of the past decade has been the explosion of the trade deficit.  Returning the U.S. economy to economic health would be much easier if the country was not spending $500 billion more (then exports) each year on imported goods and services.  To bring the U.S. trade deficit down, American products need to become more competitive internationally, which in practice means that the value of the dollar must fall in terms of other currencies.  This notion that a weaker currency leads to a stronger economy is of course a strategy employed by many other governments, most notably China.

Fall Developments by the Administration –

This fall we saw a number of moves by both the U.S. executive and the legislative branch to pressure China to change its mercantilist trade policy and artificially undervalued currency.

On September 20, the U.S. Trade Representative Ron Kirk announced that the U.S. has filed a case against China before the World Trade Organization (WTO) to protect up to 300,000 American agricultural jobs that are being threatened by China’s imposition of duties on imports of American chicken products.

On October 6, Ambassador Kirk announced that the U.S. was submitting information to the WTO, identifying nearly 200 subsidy programs that China has failed to notify as required (and 50 subsidy programs by India) under WTO rules.  Through this action at the WTO, the U.S. is seeking the prompt provision of detailed information and data from China, in order to ascertain whether Beijing is violating its WTO obligations.  China is required to provide information on domestic subsidies programs every year, something that it has done only once since joining the WTO ten years ago.

On October 19, Ambassador Kirk announced that the U.S. is seeking detailed information (under WTO consultation provisions) on the trade impact of Chinese policies that may block U.S. companies’ websites in China, creating commercial barriers that especially hurt America’s small business.  What is of concern to the U.S. government is that businesses based outside of China face challenges when offering services to Chinese consumers when their websites are blocked by China’s national firewall.

Next month (end of November) signatories of the Government Procurement Agreement (GPA) are hoping to finally receive China’s long-awaited revised offer for accession to the GPA.  This would address a major demand by the U.S. and other GPA parties, who had criticized China’s initial offer in 2007 and a revised one in July 2010 for being not only incomplete (only covering central government procurement, and not also including sub-central entities such as provincial and local authorities), but also being grossly overdue (China promised to join the GPA as part of its WTO accession – some 10 years ago).

The Senate Currency Bill –

Meanwhile, the U.S. Senate approved S. 1619 on October 11 by a bipartisan 63-35 margin.  This currency legislation will make it harder for the U.S. executive branch to avoid taking action to counteract the trade effects of undervalued currencies such as the Chinese RMB.  In particular, the Senate bill will remove the question of ‘intent’ from Treasury’s bi-annual analysis of the exchange rate policies of major trading partners, and trigger retaliatory tariffs if the Treasury finds any country’s currency to be ‘misaligned.’

The legislation also instructs the Commerce Department that it cannot dismiss allegations that undervalued currency serves as an export subsidy in trade remedy cases simply because the benefits of currency undervaluation don’t extend only to exporters.  Currently, the Commerce Department considers countervailing duties when a country targets a specific industry or product, such as steel or shrimp or bedroom furniture.  The bill will require the Commerce Department to use estimates of currency undervaluation when calculating ‘countervailing duties,’ imposed against imports deemed to be state-subsidized (effectively treating the undervalued RMB as a subsidy offered by the Chinese government).

Therefore, the Senate bill will make it more difficult for the Commerce and Treasury departments to ignore currency manipulations and sidestep retaliatory measures against countries like China.

The Devil of the Details –

This is clearly a significant push by both branches of the U.S. government to force China to be more accountable with its trade policy.  Unfortunately, the acts are rather symbolic and the impact will be fairly small!

First, WTO cases take forever (at least 3 years), and China has learned how to ‘litigate’ at the WTO.  Although the Obama Administration has been much more active in the WTO then the Bush Administration, the precedent in which China drags its feet and even brings counter-cases (see China’s request for the establishment of WTO panel on the use of zeroing in U.S. trade remedy cases) has been set.

Second, the currency bill will only be significant on subsidies cases, and considering that trade remedies cases cover less than 4% of all U.S. imports it’s hard to see how it will have a major impact on Chinese exports (see past article by this author).  Also, many trade policy experts believe that the currency bill is vulnerable to a WTO challenge, because a benefit offered by the government to all domestic producers (like an undervalued currency) is not quite a subsidy under the WTO Subsidies Agreement.  Finally, the Senate bill will have to be approved by the House and signed by the President as well, both of which right now are looking very uncertain.

Third, according to many analysts, the appreciation of the RMB will not change the current U.S.-China trade imbalance.  This is because many items made in China are usually just assembled in China.  Although China exports a number of indigenous low value-added products, the majority of high-tech goods coming out of China are usually designed and developed in Japan, South Korea and Taiwan, and are only assembled in China.  Also, if Chinese exports become less competitive, jobs are more likely to move to other low-wage countries of south-east Asia and less likely to move to the U.S.

However, the U.S. is not alone in its frustration with China.  According to Steven Mufson of the Washington Post, Brazil has taken a variety of measures to combat imports from China.  Brazil changed government procurement rules to favor locally made products.  It boosted by 30% a tax on imported cars, which have been gaining market share.  It revived an old law restricting the amount of farmland that foreigners can purchase.  And, Brazil recently suggested that WTO laws be changed to permit tariffs to be imposed against imports from countries with undervalued exchange rates.

Changes in China’s Domestic Economy –

China’s currency has been rising in value, and along with inflation in China it is putting an extra burden on Chinese manufactures and the Chinese economy.  Growing wages and a demand for more cheap labor mean that China is no longer the world’s top cheap producers.  Inflation is a real problem within the Chinese economy, rising to at least 6.5% this year.  Along with 7% appreciation of the RMB since June of 2010, doing business in China is almost 14% more expensive than a year ago, and consequently so are exports to the rest of the world.

Therefore, according to an article by Keith Richburg of the Washington Post, China’s trade surplus is now less than 3% of the country’s gross domestic product, down from 11% in 2007.  China has actually cut its trade surplus relative to the size of its economy, although this could be due to the global recession.

Finally, according to the Peterson Institute for International Economics, it is currently costing the Chinese central bank about $240 billion per year to hold down the value of the Chinese currency relative to other currencies, and this cost is growing rapidly.  To put this cost in perspective, $240 billion is considerably larger than China’s trade surplus of $183 billion in 2010.  Based on calculations by the Peterson Institute, the cost is about 4% of China’s GDP in 2010.  Moreover, this cost does not include the implicit tax on the banking system associated with China’s reserve holdings which are passed on to Chinese households in the form of depressed rates of interest on savings deposits.

The Bigger Picture –

Robert Samuelson of the Washington Post reported recently that what’s at stake is not just the U.S. trade balance with China but the nature of the global trading system, according to a recent book by economist Arvind Subramanian of the Peterson Institute (“Eclipse: Living in the Shadow of China’s Economic Dominance”).  Since World War II, the United States has presided over an open, non-discriminatory global trading system, which has been a big success.  However, that has only served the needs of the U.S., with its comparative advantage over the rest of the world in capital, technological innovation, and the largest protected domestic market.

According to Mr. Subramanian, China might supplant this system with one focused on its needs.  It might pursue preferential access to needed raw materials (oil, grains, minerals); it might discriminate in favor of its friends and against adversaries; it might subsidize its exports and seek protected markets for them.  It already does all these things — and as its power grows, it may do more.  Just as the U.S. enjoyed the economic benefits that come with having the world’s reserve currency, now China is using its undervalued currency to shape the world economic system to serve its needs.  (see also: China’s Efforts to Internationalize its Currency)

In Conclusion –

The two ways out of the current U.S.-China trade/currency war could not be more divergent.  On the one hand, many experts (including this author) have proposed an across the board 25% to 40% tariff on all imports from China.  This indiscriminate measure could put real pressure on China to dramatically change its currency policy, and shift its economic growth model from export led growth to domestic consumption.  On the other hand, Yao Yang of the Center for Economic Research at Peking University advocates for a Free Trade Agreement between the U.S. and China, arguing that it could be better for both sides than currency revaluation.  Chinese tariffs for imports of consumer goods are fairly high (thus making up only 3% of China’s $1.4 billion imports last year), and an FTA between the U.S. and China could only benefit U.S. exports of consumer goods to China.

Unfortunately, once again, incrementalism trumped substance… Currency issues (from manipulation, to exchange, to sustainability) are vitally important to the global market and economic growth around the world.  They should be the main focus of America’s trade policy, to be considered in a grand debate of how to fix the global economy.  Instead, America’s politicians are stuck in the mock, deliberating on minutia that promises ‘revenge’ but fails to address the bigger issues!

China and the U.S.: Who’s winning?

The IMF is much publicized as saying earlier this year that China will have a larger economy than the US in 2016.  That statement is true depending on two factors — how you value a country’s output or GDP and what your forecasts for GDP growth are.  If China’s economy is valued at today’s market exchange rates and at the costs and prices currently prevailing in the different economies, its economy is much smaller than America’s and will not surpass it for many years to come.

In 2010, US GDP was about $14.7 trillion and China’s was about $5.9 trillion.  BUT, valued at what economists call Purchasing Power Parity, that is a dollar buys the same basket of goods in the US and in China (which would mean we would have to increase China’s undervalued currency, kept low to increase exports, and correct for some price and cost differences), then China’s GDP suddenly becomes over $9 trillion while US GDP remains roughly the same.

The second factor is what is your growth forecast for these economies.  Well, China has been growing at 8-11% per year for many years now and the US economy cranks along at about 2-3% growth, not bad but not stellar for a developed economy.  So, many economists straight-line out that growth record for the years to come and, say, okay, China’s economy will be larger than the ever fearsome US economy in 2016.  It may well be, but history has shown us that economic success stories turn sour and sluggish economic dogs transform into race-winning greyhounds.  Witness, poorly growing Brazil’s and Peru’s transformation into fairly robustly growing economies and “peripheral” Europe’s turn to bust in recent years.

And, watch out for China’s potential property price bubble, its huge, opaque and state-directed financial system, and considerable political risk in the Middle Kingdom.  As for the US, it has proven “declinists” wrong before — remember Paul Kennedy’s book in the 1980s about the decline of the US?  He didn’t foresee the tech boom of the late 1990s when America grew by nearly 5% per year.  Likewise, those predicting the decline of the US economy today — with its labor market flexibility, dynamism, highly developed financial markets, relatively nimble political system (that’s right, compare it to Japan’s) and technological prowess — may be proven wrong again.

And what about power?  Political scientists discuss power in relative rather than absolute terms.  That is, even if the US economy grows nicely, emerging market economies are likely to grow more rapidly.  Thus, the US economy will decline in relative terms.  It must.  It can’t maintain its wealth gap forever as long as EM economies continue to appropriate technology and know-how from the developed world.  So, since a nation’s economy is the underpinning of its power — in political and military terms, US power will decline relatively.

Power has other dimensions too, including alliances, and it seems implausible that a hostile power could erect in the near term an alternative coalition to really challenge US-led alliances worldwide.  Finally, it all depends on whether you are a foreign policy realist, believing we live in a dog-eat-dog world, or a foreign policy liberal, believing we have erected effective multilateral institutions with broad participation, including nations that could be possible adversaries, such as China, India and Russia.  If you believe in the latter, then the relative decline of US power may not yield the insecurity and threats realists would have you worry about. China, India and Russia (and others) would have too much to lose.

What should the US do about all this, policy wonks?  For starters, cut the fiscal deficit and develop a medium-term plan to reduce entitlement spending and get government debt to GDP down to a moderate level.  That said, the government should invest in infrastructure and education and perhaps in basic research, maybe by freeing up funds through closing tax loopholes and cutting subsidies to farmers and others.  And, once the economy rebounds, let’s put the Tea Party back in the Lipton Tea box, so that we can raise America’s comparatively low tax burden and fix these roads and bridges and educate these kids.

On the defense front, the US should begin to wield military power more effectively, like Les Gelb recommended in a Foreign Affairs article last year, by avoiding costly land wars and instead leveraging alliances and employing more “surgical” tactics.  President Obama’s happily successful (and lucky?) foray into the Libyan conflict, whereby the US played a leading role, but left much of the dirty work to France and Britain, may be a case study.

This week the members of the G8 will hold their annual meeting in Deauville France, to discuss issues ranging from non-proliferation and counter-terrorism to the internet and transatlantic cocaine trafficking. Although these are all very important issues, the only agenda topic that matters is the ‘Arab Spring’ and how some of the eight wealthier nations in the world can help the people of North Africa and the Middle East.

The Arab world stands alone and excluded from the benefits of global trade and economic integration. The combination of authoritarian regimes (to suppress populist religious movements) and reliance on oil and gas exports for economic growth has produced weak and isolated economies conditioned on patronage and welfare and cut off from the global market. In hindsight, it was not that surprising that the ‘Arab Spring’ was sparked by persistent unemployment and the rise in global food prices.

Besides military and humanitarian assistance (which is hard to come by after fighting two wars in the past decade), the best thing the wealthy north can do for the Arab people right now is help them integrate into the global market… fast and sustainably! Now is the time for the G8 to link democratic developments with access to western markets, and promise and deliver the benefits of preferential trade to the people of those nations that embrace democratic values and democratic forms of governance.

As President Obama announced in his recent Mideast speech, “it’s important to focus on trade, not just aid; on investment, not just assistance.” President Obama outlined the U.S. goal of promoting a development model based on economic openness and competition, trade and integration to global markets, and financial stability that enables more employment opportunities for young people. Starting with Egypt, President Obama outlined a number of specific policies to facilitate these goals:

First, “relieve a democratic Egypt of up to $1 billion in debt, and work with our Egyptian partners to invest these resources to foster growth and entrepreneurship.” The U.S. intents to help Egypt regain access to global markets by guaranteeing $1 billion in borrowing that is needed to finance infrastructure and job creation.

Second, “create Enterprise Funds to invest in Tunisia and Egypt” modeled after funds that supported the transitions in Eastern Europe after the fall of the Berlin Wall. According to President Obama, OPIC will soon launch a $2 billion facility to support private investment across the region.

Third, “launch a comprehensive Trade and Investment Partnership Initiative in the Middle East and North Africa.” President Obama promised to “work with the EU to facilitate more trade within the region, build on existing agreements to promote integration with U.S. and European markets, and open the door for those countries who adopt high standards of reform and trade liberalization to construct a regional trade arrangement.”

The promotion and facilitation of a regional trade agreement should be at the forefront of any G8 initiative about the ‘Arab Spring.’ Let the revolutions sort themselves out, provide military and humanitarian assistance when possible, and then incentivize the growth of existing regional trade agreements, or the creation of new ones.

President Obama made the start by announcing some modest measures for helping transitioning economies of the ‘Arab Spring.’ Now all the G8 members must agree, jointly or independently, to provide economic benefits like debt forgiveness, investment facilitation, and most importantly market access and trade integration to any and all North African or Middle Eastern nations which take the necessary steps towards democracy.

The World Trade Organization announced the Appellate Body’s ruling on Friday, which essentially bars counties from imposing the “double dipping” duties in retaliation for dumping. The Appellate Body also affirmed that when a state had majority ownership of an enterprise this made it necessarily a “pubic body.”

Long story short, While the US is not happy, both rulings seem to be reasonable. On the second issue this is only logical. When the government owns a private business it is not really private.

The first issue however, is a little more interesting. The US was making the case that when imposing retaliatory tariffs against a country (in this case China) they should be able to impose tariffs based on both the Antidumping Agreement and the Agreement on Subsides. The US was essentially punishing China twice for the same crime. The US wasn’t even claiming that they weren’t doing this but that they should be allowed to. From what I understand this would be like charging a traffic violator twice for the same incident. At the risk of (shutter) siding with China – this seems to be patently unfair and the WTO has now affirmed that this is explicitly disallowed.

While USTR Ron Kirk is “deeply troubled” by the ruling  and has gone on to say “it appears to be a clear case of overreaching by the Appellate Body. We are reviewing the findings closely in order to understand fully their implications,” it seems to be that the AB got it just right.

Further Reading:

WSJ: Trade Body Rules in Beijing’s Favor

 Now that the President has signed the FTA in still needs to be ratified by congress. This is going to present a whole new set of challenges for the White House. Below we will examine the position of different groups and their view of free trade.

 From the Left

 Thos on the left tend to take the position that trade is bad because it costs U.S. jobs. They maintain that lowering tariffs make foreign made goods cheaper which will encourage U.S. manufactures to move their production (and their jobs) overseas. There may be some truth to this but it is far too short sighted of a viewpoint. This viewpoint ignores the benefits brought by FTAs notably better and cheaper goods for all consumers. This creates a net benefit outweighing the loss of jobs for a few. Furthermore, the production of other goods will move to the U.S. as certain comparative advantages are realized.

 Mr. Obama himself took this anti-trade stance before becoming President. While on the campaign trail he emphasized the negative aspects of free trade and questioned the viability of NAFTA. Since taking office his stance has changed as he works towards his goal of doubling U.S. exports.

 From the Right

 Those on the right generally have a more positive view of trade but from time to time invent a whole host of evils associated with it. The tea party in particular seems to be taking on a decidedly mercantilist worldview. Furthermore Republican elected officials are not immune to the pressures of their constituents in agricultural or manufacturing areas pressuring them to vote against FTAs.

 Those on this side also tend to have a knee jerk “USA is best” attitude which results in the converse belief that “foreign stuff is bad.” This causes some on the far right to spin FTAs as anti-American.

 Perhaps most disappointingly, it seems to be the automation reaction of many conservatives to be automatically against anything the White House is in favor of.

 From the Center

 Those in the center from both parties tend to recognize the net benefits of global trade and support free trade agreements. The question now becomes are there enough of these rational centrists to get this FTA passed?

 President Obama mentioned the South Korea FTA in his state of the union address yesterday, stating “this agreement has unprecedented support from business and labor; Democrats and Republicans and I ask this Congress to pass it as soon as possible.” This is an issue that has a real possibility of bi-partisan support which may just help break the bitter deadlock we have seen in Washington over the last several years. Let’s hope our elected officials take this chance to so something good for the country.

Further Reading:

Washington Post: U.S., South Korea complete free-trade deal

Sorry for the long delay in posting. I promise to report on the following developments in international trade soon:

The singing of the US South Korea FTA and it prospects in making in through congress.

China and Russia agreeing to abandoned the dollar and begin trading with their own currencies.  Should the US be worried? (answer: no!)

Recent WTO rulings

Last June President Obama stood on the world stage and said he would have the U.S.-South Korea Free Trade Agreement sign on this trip to Asia. Last week, he against stood on the world stage on said trip to Asia and was forced to admit failure on this issue. The global trade world was hopeful that this agreement, first negotiated and signed by President Bush in 2007, would finally be brought to congress for ratification. The U.S. Chamber of Congress and other groups are making a good case that the U.S. is falling behind as others nations, like Australia, Canada and even China, have signing FTAs with South Korea.

Though the President says the deal is still just “a few weeks” away from being signed, this seems highly unlikely. If the negotiators couldn’t get it done with the pressure of the President’s visits as a highly visible deadline, what is the likelihood that they will get it done now? Furthermore, the two Presidents reportedly negotiated it themselves for nearly an hour and couldn’t find common ground. If negotiations have failed on the highest of levels I don’t see it going through on lower ones.

The main problem is with U.S. auto and beef imports into South Korea. While the agreement does call for reduced tariffs on actual auto imports, it does not do enough to eliminate non-tariff barriers. South Korea imposes very strict regulations on autos with regard to safety and emissions. These are designed mainly to promote their domestic car market. In fact it is very rare to see a non-Korea car in Korea. Much like the 1970’s in the United States individuals driving a foreign car face ridicule from their friends and neighbors. In the Asian culture based on shame (as opposed to the Western guilt driven society) this type of pressure means very few foreign cars are sold in Korea. These types of non-tariff barriers are very difficult to overcome and I don’t see negotiators being able to reach a reasonable consensus without major compromise on the American part. Whether or not the other benefits outweigh these negative is up for debate (ok – not really – the benefits absolutely outweigh these negatives).

As for beef imports, the South Koreans have long been under the rather bizarre belief that American beef is plaque with mad cow disease. Several years ago there were massive protests on the street when the former Korean President removed a temporary ban on U.S. beef imports. This is no small point as South Koreans are some of the largest consumers of Been per capita in the world. The current leadership in Korea is well aware of how the public reacted last time U.S. beef tariffs were messed with and now see this as a major lighting rod there are wisely unwilling to touch.

The sad reality is that this whole charade is irrelevant. The chance of a free trade agreement passing through Congress, even, if not opposed by the auto and been industries, is hard to imagine. The new congress, made up more than ever by extremists on both sides, seem to agree on only one thing: free trade is bad. The irony is free trade is the one area where the President and Republicans could actually work together. Had President Obama managed to stick to his own deadline and get this deal signed while in Korea, he may have had a chance of bring something home that he could get through a lame duck congress. At this point the USSKFTA is all but dead.

Further Reading:

Foreign Policy Magazine: The KORUSA Catastrophe by Phil Levy

NY Times: U.S. and South Korea Fail to Agree on Trade by Sheryl Gay Stolberg and Sewell Chan

NY Times: Stalled South Korea Trade Deal is Setback for Obama by Sheryl Gay Stolberg

Financial Times: US-South Korea Fail to Agree on Trade Deal by Alan Beattie