P is for...

Protectionism. And Poland and Poznan, where I call home these days. While waiting for the tram the other day I noticed an ad for a popular magazine in these parts, Wprost, kind of a Polish version of Time if you will. My rudimentary Polish allowed me to decipher the gist of the cover story, which basically boiled down to "Buy Polish". A subtle sign, but, in case you missed it, protectionism is back and ready to reek havoc on the globalization dream of the neo-liberal economic movement. P is also for patriotism, a bullet proof cloak that protectionists love to drape around themselves, especially in times of crisis. It may sound strange for me to admit it, but one thing the neolibs have right in theory is that the free flow of goods and services around the globe can benefit the world. Without open markets each country wastes resources producing goods in which it has a comparative disadvantage, and consumes too little of imported goods. Of course we've never actually got to the point of true free trade, all trade is managed, but the pendulum is about to start swinging toward protectionism again.

When the Group of 20 countries met in mid-November, everyone agreed to "refrain from raising new barriers" to trade or investment over the following 12 months. Showing how much the agreement meant, India increased tariffs on steel, iron and soybeans a few days later. The APEC leaders made a similar pledge that same month. However, promises quickly lose their authority when the world seems to be collapsing and workers are being thrown out of work en masse. Recent economic downturns have had global trade as a major engine of growth to help pull the world's economies out of recession, Japan in the 80's, China after 9/11, however, this time is different. The similarities to 1931 keep popping up, this time it's trade barriers.

While it's a stretch to compare the current US stimulus package with the Smoot-Hawley Tariff Act of 1930, which raised tariffs on over 20,000 imported goods, there is a clause that raises alarm bells. The stimulus package contains a "Buy American" rider, the American Steel First Act, which would ensure that only US-made steel will be used in $64 billion of federally funded infrastructure projects. The as-yet-unpassed senate bill is even worse as it stipulates that all stimulus-funded projects use only American-made equipment and goods. Trade war anyone? Combine this with the anti-NAFTA rhetoric thrown around during the election campaign and we've got a recipe for disaster. There's already rumblings up north about the clause as Canadians feel they're being unfairly left out of the bidding extravaganza. Along with the rest of the world, they see the move as another example of the US trying to force the world to follow one set of rules while creating another rulebook for themselves. The tipping point will come and the resulting domino effect of retaliatory trade barriers will prove disastrous for world trade and the global economy.

Back in December the World Bank released a forecast that world trade would fall for the first time since 1982, 2.1%, compared to growth of almost 10% in 2006 and the estimated 6.2% for 2008. Smoot-Harley wreaked havoc on trade, with US imports from Europe declining from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934. Need an effect to match with the cause? US unemployment in 1930, before the passage of the bill was at 7.8% in 1930, jumped to 16.3% in 1931, 24.9% in 1932, and 25.1% in 1933. The latest US unemployment number, 7.2%. Add to that the importance of international trade to the economy today compared to then. In 1930 global trade as a percentage of GDP was in the single digits, it hit $16 trillion in 2007, equal to 31 percent of world GDP. Another factor was brought up in Davos on Satuday by British PM Gordon Brown. The Institute of International Finance predicted capital flows to emerging markets would slow to $165 billion in 2009 from a record $929 billion two years ago. “What you’re seeing is a form of financial protectionism where banks retreat to their home base,” Brown said. French finance minister Christine Lagarde said at a Jan. 31 press conference in Davos that bank bailouts and fiscal stimulus plans are “implicit protectionism.” Additionally, the binge of new borrowing by the US and other central governments will surely put a squeeze on on other borrowers, in terms of a shortage of available financing and higher long term interest rates.

Much of the world is focusing their attention on China as countries look for ways to boost national economies. With America and the world already pointing fingers at what is perceived to be currency manipulation to maintain an exporting edge, Chinese officials announced a series of measures to boost domestic production last month. State banks are being directed to lend more to exporters, government research funds are being set up and a measure to provide $12 billion worth of letters of credit to Hong Kong exporters. This comes at a time when American quotas on many Chinese garments have just expired on the heels of a WTO challenge in which the US accuses China of providing illegal subsidies. Meanwhile Indonesia has imposed a series of measures that will make it harder to import Chinese goods. Train producers are crying foul, claiming the Chinese market is closed to importers while at the same time Chinese manufacturers are using technology acquired from western companies on the condition it not be used in production meant for export for just that purpose.

There are many other signs sprouting up of the growing tide of protectionist policies. Ecuador announced it was lifting tariffs across the board, with the levy on imported meat jumping from 25% to 85.5%. India raised steel tariffs and Russia has boosted levies on imported cars. France has pledged $7.6 billion to shield home industry from "foreign predators". "British jobs for British workers", a slip of the tongue by British PM Gordon Brown a couple of years back is coming back to haunt him as strikes rage across Britain, with much of the fury aimed at foreigners. France was paralyzed on Thursday by a nationwide strike, Greece has seen mass riots along with a few other EU members. You may be asking yourself where is the WTO in all this? I thought we had agreements in place to stop just such a thing from happening. Nope. The rules have too many loopholes such as not requiring government stimulus plans to be open to all bidders.

The next meeting of the so-called Group of 20 comes in April. By then the world should have erected enough barriers of trade to make the Great Wall look like child's play. True free trade with an even playing field creates certain economic advantages. Unfortunately, what has been created over the past 60 years courtesy of GATT through the WTO, along with the World Bank and the IMF, is a playing field so tilted that it finally fell over. Sadly, instead of ending a system where an EU cow receives more in government subsidies than half of the world's population earns in daily wages, about $2, the focus will continue to be on throwing money at the banking system. Of course the WTO is trying to maintain calm, releasing a 14-page report last week claiming "there has been only limited evidence so far of increases in tariffs or non-tariff barriers, or increased resort to trade remedy actions"; the EU and China are pretending to play nice, while doing exactly what the WTO claims isn't happening, placing new duties and lodging anti-dumping complaints, the Doha dream suddenly seems beyond reach.

Some idea of the vicious circle of these protectionist measures can be illustrated by the increase in tariffs being imposed by the EU on Chinese fasteners. Duties will rise from 63% to 87% on 200 different kinds of screws and bolts. So not only could China consider retaliatory measures, but the cost of producing everything using those fasteners in Europe will go up, from cars to DIY projects. This increases the price to the ultimate consumer, leaving them poorer than they would have been without the duties, thus reducing their spending on other goods. While the Obama administration is seen by the world as a breath of fresh air, there is a waft of the musty, protectionist policies of the past. Anti-NAFTA talk, and Chinese currency manipulation were themes of his campaign while Treasury Secretary-designate Timothy Geithner is an outspoken critic of China's yuan policy. Aid to US auto-makers and now the stimulus package with it's "buy American" clause, a flag waving, trade war instigating, global economy killer. Could it be that the Democrats really don't know how economics works? Well, I suppose that would make them just like the rest of us.

As passed by the House, Section 1110 of the American Recovery and Reinvestment Act of 2009 says, "None of the funds appropriated or otherwise made available by this act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron and steel used in the project is produced in the United States."

Crisis! Oh, you mean that crisis

“Failure is simply the opportunity to begin again, this time more intelligently”

-Henry Ford

It must have felt pretty cool being one of the selected few to be among the delegates representing 44 different countries at the Bretton Woods conference in the summer of 1944. Everything about it was planned to ensure that the talks would result in a world economic order that would foster cooperation and prosperity for future generations. The rural location, New Hampshire’s plush Mount Washington Hotel, was chosen so that the delegates would have no distractions, and no pressure from lobbyists or other politicians. While the focus was to establish a stable system of exchange rates, and how to pay for rebuilding the war-damaged economies of Europe, the meetings also led to the creation of the IMF, World Bank and to a lesser extent, the United Nations, the Marshall plan and the International Trade Organization (later GATT and the WTO). A lot has changed since those days when John Maynard Keynes, representing the UK, along with the other delegates hammered out the foundations for the American financial order.

Fast forward to the dying days of 2008 and the world is again in crisis. This time instead of worrying how to rebuild a world in the aftermath of a World War, we’re faced with the aftermath that 65 years of greed has wrought on the world’s economy and the planet. The stock market crash of 1929 and the decade of protectionism that followed was one of the main causes of WWII and the financial aftermath; this time it’s the devastation that has been brought about by the oil based economic model. If only Keynes had got his way back in ‘44 and a world central bank (to be known as bancor) would have been created to reflate the world’s money supply. Instead, it was left to America, who by the mid-70’s gave up the gold standard and switched 100% to the oil standard.

Last week and next, representatives from 190 nations are meeting in my adopted hometown of Poznan, Poland to try to map out a plan to Copenhagen next year, where it is hoped that a new emission protocol to replace Kyoto will be reached. Unfortunately, instead of being a headline event, it’s playing 2nd fiddle to the financial crisis. In the perfect world, the two would be sharing top billing, hand in hand giving policy makers the opportunity to kill two birds with one stone. This won’t be the case though as special interests ensure that no compromise will be reached. As one government after another announces trillions of dollars in shock therapies for national economies, the only market that matters, the planet, will be left out in the cold.

Imagine, if you will, a world where greedy bankers actually pay for their lending mistakes. Or car makers are forced to be competitive. Yeah, I know that’s how it’s supposed to work, but it no longer does. I can hear the cries of “the banks need to survive to provide financing for investment”, but who can make rational investment decisions when governments are handing money out for failure? Imagine what could be done with the money if it was spent with the view of improving the world. Instead of delivering a better world, our desperate battle for growth at all costs has put us on a crash course with ecological disaster. The average person works more hours and has less to show for it than 30 years ago. Add to that the crumbling safety nets, such as pension plans and health care coverage and it makes one wonder why we’d want to fix the system at all. Let it crash, we have to start fresh.

What I can’t wrap my head around is the typical response that people have to the proposal of carbon taxes or the likes to try to reduce CO2 emissions. “Don’t spend MY tax dollars on something that might not even exist!” Yet they don’t seem to have any problems with having their tax dollars go to banks, or worse yet, car companies. Whether or not the theory that human activity is causing climate change is eventually proven or disproven should be irrelevant. Dependence on fossil fuels is ridiculous and all our efforts should be focused on lessening this reliance. It’s not a coincidence that oil prices have fallen drastically over the past few months. The world is hostage to the oil supplying nations, yet even those nations know that there is a line that when crossed, will force us to actually change the way the world works and end the reign of oil. Yes, I do realize that forecasts for demand have fallen due to the failing world economy, thus pushing down the price, but it’s more than that as anyone without fossil fuel blinders can see.

There’s a few reasons why the Poznan conference or the meeting to be held next year in Copenhagen won’t come up with an agreement to save the planet. The price of oil dropping to $20 a barrel is the easiest scapegoat, but it’s the public’s perception of the climate change debate that is the most troubling. One of my student’s referral to “that conference, or whatever you call it” causing traffic difficulties is the perfect illustration of how many people have been misinformed and feel there are more important issues to deal with. The developed world won’t tell Asia and Africa to choose poverty, disease, hunger and illiteracy over electricity. Kyoto was a failure, I don’t know of a single region or country that will reach their targets. Dubya made sure the people knew what he thought of it, and while he is Dubya, there are people whose opinions are formed by their president. These CC deniers will fight tooth and nail to defend their right to pay foreign nations huge amounts of money to import fuel in support of big oil companies.

The biggest problem though lies in the complexity of the issue and the way the media has presented it to the people. While the evidence pointing to human activity as the cause for climate change has been slowly solidifying, the media has been bombarding us with other discordant findings. In effect, the media is to blame for obfuscating the issue, creating a breeding ground for apathy. The arctic ice sheets melting, the Brazilian tree frogs disappearance and the hurricane season all might have something to do with climate change, but by hitting the people with these stories in rapid succession and linking them to CC, it’s easy to see why there are still so many skeptics out there. Another brilliant example comes from a Republican presidential debate in Iowa in which the candidates were asked, “How many of you believe global climate change is a serious threat and caused by human activity?”. Here, the mistake of conflating two distinct questions into one only serves to confuse the issue: whether climate change is a ’serious threat’ and whether humans contribute to it. Furthermore, by wording the question in this way, the candidates were given the chance give general responses, without dealing with the issue, such as “I believe that global climate change is serious” (Rudy Giuliani), and “I think that climate change is real” (John McCain).

Poznan ain’t gonna be Bretton Woods. I wonder if the UN was trying to say something by choosing ths city to host the event. Poland burns so much coal that the air is often thick and yellowish while at the same time the government is doing all it can to stymie the implementation of an EU emission standard. The word homogeneous was invented for Poland, where 95% of the population is white and catholic. Real debate is impossible in an environment such as this, where just having a car is considered to be a status symbol. It seems natural to want to live in a cleaner world, so instead of scaring people, we need to focus on showing the benefits that a new way of thinking can achieve. Until the people can be convinced that we’re faced with an opportunity rather than a threat, events such as the Poznan conference will be nothing more than a blip on the media radar.

Lies - Part 3

Push play and read...


Farmers protest in Argentina, truckers block the roads of Spain, South Koreans flood the streets of Seoul, riots break out in more than 15 countries. What are they so angry about? While the reasons may vary from taxes to fuel costs to imported US beef or simply the cost of rice, they all have their roots in globalization. No, globalization itself isn't a bad thing. It makes perfect sense that lower trade barriers help make the flow of goods move smoother and thereby reduces costs for the benefit of people. What is a bad thing is the system that is in place today, ruled over by the financial powers through the World Bank, International Monetary Fund (IMF) and the World Trade Organization (WTO), formerly GATT (General Agreement on Trade and Tariffs). However, the past few months have seen some dramatic events in the world markets that may point to the end of the imperialist system that the rich need us all to believe in so badly.

As Jose Louis Jamarillo, the former Columbian Ambassador to GATT and President of the Group of 77, declared after the birth of the WTO, what we have created is "an institutional trinity which will dominate all economic relations across the world in the interests of the strongest". The World Bank lends money to poor nations to develop their resources, the IMF ensures they budget correctly to pay back the loans, and the WTO ensures they keep their markets open to imports. The rule of the market, cutting public expenditure for social services, deregulation, privatization are the mantras of neo-liberalism. Structural adjustment demanded by the IMF can best be summed up with the idea of earn more and spend less, thus ensuring that debtor nations will scramble to sell what resources they can, driving down the price, while paying workers the minimum, in wages and benefits. This combination of low wages, low commodity prices and debt is the perfect system to guarantee the world's resources flow to the rich nations.

Meanwhile, the wealthy world prescribes exactly the opposite medicine for their own economies. The European community agreed that West Germany had to put $1.5-trillion into the former East Germany to simultaneously build industry, social infrastructure, and buying power. When Greece, Portugal, and Spain, relatively poorer than the rest of Europe, wanted to join the Common Market, massive transfers of direct aid flowed into these "poorer" nations to accelerate development, raise wages, regularize safety and environmental standards and improve living conditions. All wealthy nations provide enormous subsidies to their industries and agriculture, they all placed, and some still place, high tariffs on manufactured imports and low or no tariffs on raw material imports. They all provided, and still provide, subsidies to exports. There are also land donations, tax breaks, and below cost services in bidding wars to gain or retain industry as well as wage subsidies, and outright cash incentives. Between 1995 and 2005, $165bn of American taxpayers' money was used to support US agricultural commodities. Soya, corn, rice, wheat and cotton accounted for 90% of that money. Sugar was also heavily subsidised. The real beneficiaries of this system of government support have not been US farmers, who have gone out of business in their thousands, but the mainly US-based trading giants. For subsidies have allowed them to export grains at less than the cost of production, making it impossible for other countries to compete, while bringing the money from added-value markets back home. In this they mirror the patterns of trade established between previous empires and their colonies. The European Union gives out about $41 billion a year in agricultural subsidies, about $8.2 billion to France alone.

If people don't have enough food to put in their mouths, what's the use of an economic boom in exports. Countries are scrambling to come to terms with the new economics of food. India scrapped all import duties on cooking oils and banned exports of non-basmati rice. Japan is importing genetically modified grains for the first time. China has tried to calm its people by announcing reserve grain holdings, once a state secret. Meanwhile, the truly poor, the billion living on less than a dollar a day are trying to survive by cutting out bread and switching to different grains such as sorghum, eliminating meals and drinking tea for lunch. What can you do when wheat prices have leapt 80% from 2005 to early 2008? Much of the root of this problem can be linked to "free trade" and agricultural subsidies. Annual subsidies paid to farmers in "rich" countries total about $280 billion while total annual development assistance to the "poor" nations totals about $60 billion. The aforementioned agricultural subsidies flow mainly to a few commodity crops, wheat, cotton, corn, soybeans and rice (about 90% of US subsidies). This not only makes it more difficult for farmers in the "poor" nations to compete, but also makes other fresh fruit and veggies relatively more expensive. A Japanese cow gets a $3000 subsidy, one in the EU $1000 while the average income in sub-Saharan Africa is $500. So, what happens to the farmers in poor nations? They stop farming as they can't compete with the cheaper imports. World food prices spike and now you have a crisis of unimaginable proportions.

An interesting case in point is the effect that the price bubbles in oil and food are having on the have and have-not nations of the Middle East. While Egypt has banned exports and raised taxes to pay for the 88% in food subsidies it has been forced to give it's people following rioting, Saudi Arabia simply lowers tariffs and the UAE buys farms abroad. The rich and the poor, within and among nations behave in different ways towards crisis. The end result of neo-liberalism, or globalization has been an ever intensifying concentration of wealth. The rich get richer and the poor get poorer, a global game of winners and losers. Perhaps if the winners weren't faceless corporations or greedy money managers the looming food crisis wouldn't now be upon us. The ease with which capital flows has contributed to the recent price surge. As investors fleeing Wall Street's mortgage strife noticed the price spike early last summer as reports of weak wheat harvest in the US and Europe along with a prolonged drought in Australia, they poured money into grain futures. Of course their actions can't be seen in isolation, as many other factors such as government subsidized biofuel programs and national governments reactions from the barring of exports in producing nations, to increased purchasing by importing nations such as China also came into play. Food became the new gold for hedge fund investors last year and they're looking for the next disaster play. “every debt crisis in history since Solon of Athens has ended in inflation, bankruptcy or war” - George, Fate Worse Than Debt, p. 196

So, what happens when someone doesn't want to play by the rules set by the world's elite? That's easy, embargo, destabilization, attack or an engineered change of government. Most of the world's resources are found in the developing world, this is why we see the race for free trade agreements and feel the ever growing threats implied towards other nations who don't toe the line. If these less developed nations were to form alliances and barter for a better deal for their natural resources, they would be able to develop. Unfortunately, what we have is a true vicious circle: the world economy is dependent on growth in the U.S. economy but the U.S. domestic economy is [now] skewed more towards consumption than production and investment, and this consumption is in turn sustained by borrowing—at home and abroad.... The deal with surplus countries essentially has been as follows: you can run a big trade surplus with us provided that you put the money back into our capital markets. One of the major points free traders point to for the reason that poor nations are poor is corruption. While it's hard to argue against the fact that corruption is a huge drain on wealth, how can the World Bank and IMF criticise recipient governments for their lack of transparency, widespread corruption and undemocratic regimes, insisting on the reform of these aspects as a pre-condition to granting loans and debt relief? These same issues haunt the World Bank and IMF which are widely regarded as not transparent, undemocratic and unaccountable. Corruption within these organisations is rife, and millions of dollars unaccounted. Remember Paul Wolfowitz?

Finally, labour from two angles, one lie for the poor, another for the rich. If the "rich" nations of the world want free trade with free movement of capital and resources, the third component in the wealth creation equation should also be able to move freely; labour and people should be allowed to move across borders as easily as goods, services and money. In today's Guardian, Evo Morales, president of Bolivia, wrote an open letter to the leaders of the EU in which he pleas for them not to punish illegal immigrants too harshly. The US fights with it's own immigration policies, while millions around the world seek to escape poverty and war only to find the door closed. Meanwhile, in developed countries, labour faces it's own challenges. Corporations are able to combine labour and equipment from anywhere in the world, making it easier for them to use lower priced labour overseas. Businesses can use the threat of relocating as a lever to get what they want in the form of tax policy, regulations and subsidies, with the costs being borne by labour itself. South Korea will be losing jobs to cheap labor in Thailand and even China may someday lose factories to Bangladesh. Industries can be built quickly. But the markets of an efficiently functioning economic infrastructure (roads, schools, universities, businesses, homes, postal system, trucking companies, and airlines) can be built only slowly.

Over my last three posts I've tried to point out some of the most common lies that the public are fed daily. I understand that it is part of a politician's job to portray a state of calm in the face of growing turbulence. It may seem a little paradoxical to claim in a blog that part of the problem lies in the narrow range of views the public is fed daily. You might be reading this, we all may have access to different sources of information, but the fact is that the majority of people get their news from one of six sources: GE, Time Warner, Walt Disney, News Corp, CBS or Viacom. Forget the WTO or even the G8, the power of who gets traded with in in fact in the hands of only 4, the Quadrilateral Group of trade ministers. While there's no denying that the global economy has grown, the real questions are who benefits and what are the costs. The growth model that everything is built on seems inherently flawed, especially of late with the surge in oil prices. And what of the effects on the environment, a subject not even touched upon here.

If you like the film at the beginning, you can download it in it's entirety and legally, here.