Sticky Situation: Export Trade Certificates of Review and Their Relation to the “North American Community” and a Look at Farm Bill Provisions and Market Distortion

Institute for Trade Standards and Sustainable Development

As an economic community of sorts, NAFTA has emerged as one of the premier models of economic integration through tariff liberalization; however, its critics contend that it has not achieved full integration of sorts, with policymakers still timid and somewhat cautious. In assessing the progress that NAFTA has wrought in its decade and a half tenure, it has provided for the increased economic growth of Mexico and the formalization of economic relations between its 3 constituent members. Fans of the European Union model of integration bemoan the snag it has apparently hit with the disintegration of the Lisbon Treaty in light of Irish opposition to reducing farm subsidies, a move that certainly was looked upon negatively by many EU citizenries aiming to agitate the supranational to protect them from the buffeting nature of global trade. What this harbors for the big picture is a litmus test of sorts, and indication of the reticence that the EU has assumed of late. Attributed to either the individual issue (reduction of farm subsidies to reinvigorate the stalled Doha Rounds), or the larger more dynamic paradigm that is emerging (paranoia in light of global economic downturn, topped by a historical dip in the DJIA and the S&P 500) [1] , is a muddy issue, with some arguing on the behalf of either. Nicolas Sarkozy, in summing up the sentiments of those seeking to renege on economic liberalization in light of its apparent ineptitudes, attacked Peter Mandelson (EU Trade Commissioner) for not being in synch with the demands of the European people, or in other words, for greater protection. [2] Facing similar questions, although without the pomp and drama characterized by the Europeans, North America has largely left such issues untouched, more willing to allow the status quo (epitomized by NAFTA) to run its course. Such reluctance and complacency, argues Robert Pastor, is a large contributing factor in preventing US policymakers or politicians from reconsidering their own situation, namely that of the supposed North American Community.

“Sadly, the United States' leaders are looking backward at NAFTA rather than forward by articulating a new vision of shared continental interests. NAFTA has become a diversion, a piñata for pandering pundits and politicians -- even though it succeeded in what it was designed to do. It dismantled trade and investment barriers, and as a result, U.S. trade in goods and services with Canada and Mexico tripled -- from $341 billion in 1993 to more than $1 trillion in 2007 -- and inward foreign direct investment quintupled among the three countries and increased tenfold in Mexico between 1990 and 2005. North America, not Europe, is now the largest free-trade area in the world in terms of gross product.” [3]

Prescribing that the incoming President take up the mantle of greater cooperation between the US, Canada, and Mexico, Pastor laments the backwards approach to NAFTA, that of deconstructing it and reforming it for the “benefit” of the US (a sentiment promoted by Obama). Such hostility, bereft of any mention of the inherent benefits accrued by NAFTA such as the increased trade between the three nations and the development of a pro-business inclination within Mexico, aims to undermine a regional organization that could serve to place North America at the forefront of economic cooperation and development. Although hamstrung by a slew of mainly political considerations (immigration control, export credit issuance, etc.), NAFTA remains one of the most underrated policy opportunities that the US could capitalize on if it was capable of overcoming the largely populist hurdles that hold its progress back. One small example of such a hurdle, although not purely political in nature, is the issue of ETC’s, or Export Trade Certificates of Review, a small known privilege that can be doled out at the blessing of the Department of Commerce and the Department of Justice to export oriented companies seeking to shield themselves from anti-trust litigation within the States. In applying for an ETC, ASEC (American Sugar Export Company) set the terms that it wishes to enter into, terms that fundamentally undermine the further liberalization of trade that NAFTA broke through just recently. Although the agreement and its outlying effects face danger in many other ways, the greatest threat to NAFTA comes in the form of a fundamental misunderstanding of its effect on the integration of the US’s, Canada’s, and Mexico’s economy.

Misunderstandings: How ASEC’s Application for an ETC Undermines the Spirit of NAFTA

On June 12, 2008, ASEC (American Sugar Export Company of America LLC) applied for an Export Trade Certificate of Review, a small known provision defined in the Export Trade Company act of 1982 intended to shield conglomerations of companies aiming to even the playing field with foreign markets from antitrust litigation within the US (very much in the same spirit of commodity/export credits and other trade related promoters). [4] In applying for their ETC, ASEC and its constituent members [5] sought numerous privileges that promote unfair and blatantly anti-competitive behavior. On top of this disturbing trend is the shear strength represented by the listed companies in terms of market share and percentage of total sales over overall economic activity within the sector alone. Constituent members of ASEC possess a total sales allotment of 4.1683 Million USD, while total economic activity within the sector clocks in at 10 Billion USD. As such, total applicant market share exceeds 40%, representing a very real threat to other sugar companies within the US. [6] This, coupled with terms that promote anti-competitive behavior makes for a disastrous effect on NAFTA’s recent breakthrough.

• Implementation of Export Trade Certificate pursuant to section entitled “Export Trade Activities and Methods of Operation” section 1b(i-iii) would allow for applicant companies to:

1. Establish the prices at which Products will be sold.
2. Establish standard terms of sale of Products.
3. Establish standard quality grades for Products. [7]

Although neither approved nor denied, a quick analysis of US-Mexico sweetener and sugar trade reveals how ASEC’s application for an ETC explicitly undermines the progress that NAFTA has reached. Effective January 1, 2008, complete liberalization of the sugar trade between the US and Mexico was implemented, thereby fulfilling the original mandate of NAFTA, or in other words, the reduction of the barriers to trade between its 3 constituent members (although Non-Tariff Barriers and other technical issues persist). [8] Given such headway, ASEC’s attempt to redress this vital progress underrates the current paradigm of sugar trade between the US and Mexico. Integration of the US-Mexico sugar markets pursuant to the mutual reduction of tariffs and other barriers to trade may not have taken full effect yet; however, attempts at blocking this vital development endanger NAFTA’s potential ability to advance the so-called “North American Community”. With consistently lower prices, Mexico’s sugar production has proven highly competitive for existent sugar cooperatives in the US, an indication that US sugar companies may seek to distort the current free market with legislative smokescreens and the like. [9]

Despite this apparent reality, US sugar companies have taken concerted efforts to ensure that a managed trade paradigm exist within the US market, enabling them greater profits at the expense of the US consumer. The unforeseen consequence of an issuance of an ETC on the behalf of major sugar cooperatives within the US could lead to a serious strain on US-Mexico economic relations. In order to compete effectively within the Mexican market, US sugar companies would have to seek the only tangible competitive strategy available for a homogenous good that is looked upon largely as a commodity. In this particular case, price differentiation would be the only means by which American sugar companies could effectively breach the Mexican market and oust competition. However, in complying with the first rule of ETC issuance, (result in neither a substantial lessening of competition or restraint of trade within the United States) [10] US sugar companies would have to maintain domestic prices higher than those of foreign markets (in this case Mexico). Catching wind of such a discrepancy, Mexican companies would raise the allegation of dumping, although to little avail due to other existent legislation within the US that still distorts the sugar markets effectively enough to keep domestic prices high. Expressing dismay over such strategic moves in the self-interest of sugar cooperatives and dominance of the local markets, US Secretary of Agriculture and USTR Susan Schwab commented on reopening NAFTA to further negotiations as upsetting the tenuous balance that had been achieved up to that point. [11] However, what may serve to undermine NAFTA and other developments in free trade between the US and Mexico are provisions provided under HR 6124, or the newly framed farm bill. Although rife with trade distorting mechanisms (such as subsidies and export credits), the farm bill provides for certain market controlling schemes that could endanger the US’s position as a bulwark of free trade.

HR 6124 and Marketing Allotments, “Reinterpretation” of the First Sale Rule and Other Threats to Free Trade

The existence of so-called marketing allotments under HR 6124 provide for the reservation of a certain percentage of the market for local suppliers, undercutting the fundamentals of free markets and, additionally, transferring the burden of such inefficiencies onto the US consumer. [12] By promising an 85% share in the local market for domestic sugar producers, prices will be driven substantially higher than that of international prices, which overall are lower than that of US prices. [13] Without legitimate access to US markets, international suppliers will be discouraged from targeting the US market, possibly taking their business elsewhere. Other reports have found damning evidence with regards to the current US sugar program and the one that is sought under the auspice of HR 6124. A GAO report released in 2000 analyzed the costs incurred on consumers as a result of price supports currently in effect, concluding that such controls definitively harm the consumer and are extremely inefficient in the long run. [14] Under threat of the same sort of trend, HR 6124 allows for marketing allotments to protect farmers here in the US for absolutely no other reason than political clout, and as such, the approval of an ETC in favor of US sugar companies within the US would artificially maintain high prices within the US while enabling exporters to undersell abroad, a means by which domestic sugar companies could circumvent accusations of dumping and the imposition of countervailing duties. In an attempt to circumvent the legislative process altogether, US sugar companies attempted to insert a provision defining a “managed trade” paradigm that, if implemented, would mean the reinitiating of a rudimentary form of TRQ’s (Tariff Rate Quotas). Initially proposed as an add on to the conference report of the original farm bill (HR 2419), the managed trade proposal sought to define HFCS (High Fructose Corn Syrup) as a displacing factor for sugar in Mexico, due in part to the fact that local beverage producers sought to replace conventional sugar with HFCS, thereby creating a surplus of sugar existent in the Mexican market. Consequently, such surplus would be most likely sold to the US under the new NAFTA rules; however, such excess (remember the existence of market allotments and their quota like effect on trade) would be purchased by the USDA and used in the separate ethanol production program, effectively supporting higher prices within the US. As a tangible threat to NAFTA and a clearly mismanaged policy, the proposal was struck down and taken out of the conference report.

First Sale Rule: A Bad Thing or the Right Thing?

A current reinterpretation of a fundamental rule with regards to international trade comes in the form of a change in the so-called first sale rule. As is common practice, the valuation of a good was determined by the first sale that it underwent (i.e. from an international supplier to the first middleman). This rule is under revision due in part to Customs and Border Protections acquiescence to a construing of the GATT parameters that define the sale of a good as the “price actually paid or payable” as that of the last sale as opposed to the first made.

“Specifically, CBP is proposing that in a series of sales situation, the price actually paid or payable for the imported goods when sold for exportation to the United States is the price paid in the last sale occurring prior to the introduction of the goods into the United States, instead of the first (or earlier) sale. The result will be that transaction value is normally determined on the basis of the price paid by the buyer in the United States.” [15]

This interpretation, intended to capture the valuation of a good that exchanges multiple hands, could prove to increase the duties charged to individual goods by an immense amount. Although many argue that such an interpretation is more closely attuned with the price of actual goods (given the fact that charges incurred by middlemen are also included). However, in the end, producers of such goods that are going to see increases in duties charged may simply pass on such costs to consumers instead of shouldering the burden. A Sense of Congress insertion into HR 6124 effectively has tied the hands of CBP in not moving forward on the new interpretation of the first sale rule, leaving many lawmakers frustrated that an allegedly common sense ruling such as this should be deliberated on sooner rather than later. As to if such a distinction is an ethical matter or not, it boils down to an economic consideration more-so than anything else. As an attempt to increase duty revenues being collected from international suppliers, the reinterpretation of the first sale rule would most likely force international suppliers to undo the influence of middlemen, most likely putting them out of business and contributing to the vertical integration of international shipping. In terms of economic efficiency, firms will most likely opt to bring such middlemen activity under their fold rather than shouldering the burden of extra duties. Welfare, in government terms, will mostly not change as such expected duties would be deferred due to integration.

The Future of NAFTA and the North American Community

Pastor’s vision for an ambitious North American Community, at least on the political front, faces significant threats from both candidates; however, it faces its largest threat from the vested interests of the farming community within the US. Supporting, with unconditional avarice, the operations of large farming cooperatives that artificially inflate prices domestically only serves the interests of a few while ostracizing the largest (and most important) contributing factor to the emergence of the North American Community, the consumers. Unwary of the consequences that such legislation has on the collective conscious of the US’s trade policy, the promotion of such legislation as HR 6124 fundamentally undermines the goals sought under NAFTA and greater multilateral trade liberalization. Pastor’s North American Community, although a veritable goal overall, most likely will just have to wait a while.

[1] Financial Times. IMF says economy is set to stagnate. Sat/Sun June 21/22 2008.

[2] Financial Times. Sarkozy turns on Mandelson over No vote. Sat/Sun June 21/22, 2008

[3] Foreign Affairs. The Future of North America: Replacing a Bad Neighbor Policy. Robert Pastor. July/August 2008.

[4] For more information on relevant legislation: United States Congress (97 Congress). Export Trading Company Act of 1982: Sec 303(a)(1). Export Trading Company Affairs.

[5] For a list of companies seeking issuance of an ETC refer to: ASEC Federal Register: June 12, 2008 (Volume 73, Number 114) Application No. 08-0008.

[6] Total Sales (4.1683 Million USD) was calculated given Hoovers Inc. individual data on each company listed on the Federal Register. Total Market capitalization of 10 Billion USD derived from International Sugar Journal 2004: The US Sugar Industry: Large, Efficient, and Challenged (Jack Roney). Figure 5 on Page 4 (US Refined Sugar Sellers) also illustrates the dominancy of companies listed under ASEC’s request.

[7] Federal Register: June 12, 2008 (Volume 73, Number 114) Application No. 08-0008.

[8] For more information on this development, please refer to: US International Trade Commission: Journal of International Commerce and Economics. US Corn Sweeteners and Mexican Sugar: Agreement at Last! December 2006. Page 9.

[9] For more information on the dynamics of the US-Mexico Sugar Trade refer to: US Department of Agriculture: Sugar and Sweeteners Outlook. Economic Research Services.

[10] United States Congress (97 Congress). Export Trading Company Act of 1982: Sec 303(a)(1). Export Trading Company Affairs.

[11] See USDA Statement. STATEMENT BY AGRICULTURE SECRETARY ED SCHAFER AND US TRADE REPRESENTATIVE SUSAN C. SCHWAB REGARDING THE BUSH ADMINISTRATION’S POSITION ON RECENTLY PROPOSED FARM BILL AMENDMENTS. February 8, 2008.

[12] For more information on marketing allotments, see: Promar. Farm Bill Sugar Provisions Bad for Everyone, Study Says. February 22, 2008.

[13] Refer to footnote 9

[14] Refer to: GAO. Sugar Program: Supporting Sugar Prices Has Increased Users’ Cost While Benefiting Producers. June 2000.

[15] Department of Homeland Security: Customs and Border Protection. Federal Register: Vol 73, No. 16. Thursday January 24, 2008.

A Morphing Debate: Climate Change, The Law of the Sea, International Uranium Trade, and the New (or Revived?) Dialogue

Institute for Trade Standards and Sustainable Development

By: Osman Aziz

The mounting tension between the competing forces of so-called national sovereignty and international law pose to redefine the debate between neo-mercantilism (in its modern manifestation: protectionism) and the increasing reality of international economic and financial integration. However, the notion of the nation state stands to lose much footing and grounding if it buys into such a concept, whether beneficial or harmful. Underlying this amorphous debate is the central theme of cooperation and the often misleading notion of liberalism. As such, much can be lost when analyzing the current macroeconomic trends as well as the international legal regimes that many nations are member to. For example, are such developments predicated on the assumption that everyone stands to benefit from international law, or are nations and other multinational actors essentially resetting the rules of the oft played game? History serves to provide an enumeration of examples that support the latter. Globalization, if it is defined as the liberalization of trade and the inducement of greater connection between peoples, began around 1870 and was abruptly murdered at or around 1914. [1] This commonly utilized argument views globalization not as a technology driven frenzy, but as a leveling of the playing field in terms of global economics, or in other words, allowing economies to achieve efficiency and not be burdened by the imposition of tariffs or other barriers to trade. Under this same logic, however, it can be argued that what is being witnessed today, with the line between public and private being ever blurred by the emergence of a new financial paradigm, is simply an extension of what occurred over a century ago, but just at a faster rate due in part to advanced technologies that expedite the process. This argument also serves to analyze that the relationship between developed and developing nations is not one of convergence but a wholly different perspective of development and growth. [2]

What serves to illustrate this contention mist vividly are up and coming trends in the global economy that either advances the assertion that the world is finally realizing the potential benefits that can be had by streamlining not only trade relations, but also legal regimes and political beliefs. In context, for example, the environment and the ongoing debate as to the role of international legislation and trendsetting serves to exemplify a debate that, according to some, may be the early manifestations of international fascism and the death of liberty. On the other end, some highlight the commonality of environment as a point of unity rather than dissension and seek to bring the world under the fold of reason and sense. Secondly is the domain of international law. Although a murky and relatively obscure field of relations, the showdown between nations looking to tap arctic reserves of oil has shined the spotlight on a little known piece of international legislation known as the Law of the Sea Treaty [3] and the implications it has for a non-signatory, the United States. Another contentious issue regards the establishment of an international market for uranium, and effectively transforming a once divisive and explosive issue into a point of unity that will further the convergence of nation-states. The introduction of a so-called “123 Agreement” (referred to as such due to section 123 of the Atomic Energy Act of 1954) would formalize nuclear relations between two former rivals, the US and Russia. All these issues relate to each other in terms of the underlying premise that unites them, however, the outcome of each and the developments that surround them may set the tone for the future of global relations.

Klaus and the new Fascism of Environmentalism

According to many experts, scientists, and politicians, the looming horizon of an apocalypse is not that farfetched an assertion. The growing mentality of the Green Revolution and its sister, the Green Market Revolution, is not only a financial and economic trend, but also may have stake in cultural affairs and the notion of liberty as, in reality, destructive and detrimental to the common good of the environment. However much worth the scientific and empirical evidence may possess, a new debate has emerged questioning the sort of effect that supranational and government policy will have on the traditional notions of governance and political economy. Delegating the duty of addressing the global crisis regarding the environment has taken on many complexions however. Czech President Vaclav Klaus believes that personal liberty is at stake in the larger more macrocosmic dialogue surrounding the environment. As an economist himself and having published works relating to the empirical analysis of the effect of climate change on public policy, Klaus contends that a disproportionate amount of weight is being levied in analyzing current trends in global warming without realizing the effect that past pollution has had on the situation. In a detailed correspondence between Lawrence A. Kogan (CEO of the Institute for Trade Standards and Sustainable Development) and President Vaclav Klaus, the President expresses his perception of climate change as a force that threatens individual liberty. [4] Realizing that change fundamentally will come from either the individual (in altering his or her personal tastes and inclinations towards products that may be deemed detrimental to the environment, essentially rewriting the book on utility), or from some sort of collective agreement, Klaus views the latter (international delegation and law) as threatening to individual liberty and to the right of free association.

“According to Klaus, the ideology of environmentalism started modestly and with good intentions. However, over time, honest attempts to protect nature have been replaced by more ambitious goals to regulate human societies. As a result, environmentalism has become a menacing alternative to ideologies that value human freedom. This new ideology no longer has anything to do with natural sciences or, what's worse, with social sciences. It is, in essence, a metaphysical doctrine, one that refuses to see nature or humanity ‘the way they are.’” [5]

From the view held by such critics of enabling international pressure to dictate the whims of the individual, trends in globalization don’t seem to conform to the notion that some sort of international body will trump the rights of individuals. The continuing downward pressure of devolution, or in other words, the development of technologies and services that enable the individual power commensurate with that of states and non governmental actors, has revived the often cited debate between collective identity and the individual. Klaus’ perception of the fallout of individual liberty in light of the increasing tide of environmental populism that characterizes the current European movement is a scathing criticism of a trend that many, on the other end of the argument, say is the natural development of international law pursuant to the overlying trends of globalization. The current case regarding environmental sustainability and the prospects of handling it reveals the inadequacies of generalizing the trend of globalization as an integrating force, but rather, as a force that doesn’t necessarily unite governments, but the individuals that constitute it. As such, the buck stops with the personal inclinations and desires of the greater global populace, not with the governing institutions that increasingly warrant cultural paradigm shifts and dictate policy that may curtail the liberties that form the basis of civil society. However, research conducted into the level of alarm elicited by individuals who witness the possible cataclysms that are portended due to environmental instability shows that apathy may trump the hand of consumer wisdom and activism.

“After interviewing more than 1,000 Americans on their environmental attitudes, researchers found that people who are more informed about the risks and causes of global warming are not only less alarmed than those with less knowledge of the topic, but they also feel less responsibility to do anything about it. The lack of concern may stem from people’s confidence in the scientific community’s ability to devise solutions. ‘People [with greater knowledge of global warming] trust scientists more,’ says Paul Kellstedt, a coauthor of the study. They ‘trust scientists will develop emission-less vehicles and things that are going to reduce the carbon footprint of humanity.’ The lack of responsibility, Kellstedt says, might simply be ‘evidence of the tragedy of the commons.’” [6]

For the evidence aforementioned, many policymakers and pundits have taken up the mantle of a top-down approach to climate change and addressing environmental concerns. However, the increasing influence of market solutions, manifested in green marketing, may place a check on such a trend, enabling individuals, as opposed to governments and supranational organizations, the ability to decide for themselves how climate change will be effected, if at all. In fact, much empirical research in the form of polling has not been able to clearly say that consumers have responded actively enough to the imperilments of climate change. [7] Klaus’ response to such criticisms would undoubtedly ring somewhat along the lines of allowing the invisible hand to work its way into addressing the issue, however, many still remain skeptical over the prospect of such becoming a reality. Invariably, the debate between these two diametrically opposed sides will continue to rage on, with the prospect of reconciliation or abridgement far off, much like the issue that both views possess contention over.

LOST at Sea? How the Law of the Sea Treaty Effects Orthodox Notions of National Sovereignty

Proven arctic oil reserves at the north pole has prompted the revival and dusting off of a little known international treaty that was signed into force in 1994 known as the United Nations Convention on the Law of the Sea. Known by its critics as LOST, the Law of Sea enables nations to lay claim 200 nautical miles off of its coast. A slew of other provisions dictate the exploration and subsequent exploitation of the seabed and waters, however, certain provisions within the treaty carry exogenous effects for the US economy and for policymakers. Signed, but not ratified by the US Senate, many arguments abound as to the effectiveness of the treaty in truly resolving disputes at sea and in altering the presence of international law in light of sovereign arbitration. Some of the contestations leveled at the treaty include the need to pay for taxes and fees for the establishment of the International Seabed Authority, effectively subjecting the American people to a tax with which they have no say whatsoever in subsuming. Additionally, concerns over further encumbering businesses and corporations that do business on the high seas already by levying fees and licenses would carry serious economic side effects such as the transition of tax burden to consumers to offset losses, is also a legitimate concern to be voiced by businesses. However, fundamentally, the contentions regarding the convention echo the same sentiments of either sacrificing personal liberties for a supposed “common good” or maintaining personal liberty, regardless of if such preservation is contradictory to the trend of greater international integration. Criticisms of this international legislation may hinge on outdated sentiments of national sovereignty as the vast majority of nations in the world have adopted the legislation (155 in all). Furthermore, many proponents of the legislation see UNCLOS as expeditious rather than cumbersome; however, such notions could simply ring of populism in light of independent consideration.

“Recognizing the importance of the Law of the Sea (LOS) Convention to the energy sector, the National Petroleum Council, an advisory body to the US Secretary of Energy, in 1973 published an assessment of industry needs in an effort to influence the negotiations. Entitled Law of the Sea: Particular aspects affecting the petroleum industry, it contained conclusions and recommendations in five key areas including freedom of navigation, stable investment conditions, protection of the marine environment, accommodation of multiple uses, and dispute settlement. The views reflected in this study had a substantial impact on the negotiations, and most of its recommendations found their way into the Convention in one form or another.” [8]

The inclusion of so-called exclusive economic zones (EEZ’s) have some critics at arms regarding potential land grabs that would benefit only a select few nations in obtaining the proven reserves of oil located on the arctic seabed. To some, this treaty serves to embody nothing more than a paradigm led by a select few nations that have contrived, through malfeasance, a treaty that plays to the benefit of not all, but some. Nonetheless, the undeniable fact that the US has not signed onto this treaty has left its claims to possible oil exploitation exposed, a prospect that could undermine its national security initiatives in maintaining oil reserves in light of gloomier forecasts in the commodity markets. However, while other nations begin talks aimed at averting a potential clash regarding the reserves located on the seabed, the US is ironing out politically motivated delays to the ratification of the treaty. [9] Lame duck status in lieu, many in the US see the possibility of ratification or even debate not likely until the current regime is supplanted, a delay that may cost the US much in international influence and prestige. However, on the other end of the argument is a burgeoning initiative, although bilateral in nature that aims to spearhead an international market for a rare commodity.

Commoditizing uranium: How Russia 123 Aims at Developing a New World Market and the Legislation that Aims to Take it Down

Signed by the US and Russia on May 6, 2008, the Russia 123 Agreement is a commercial agreement pursuant to the 1954 Atomic Energy Act that requires the US to sign such agreements when considering commercial nuclear activity with a foreign nation. Included in the agreement are numerous provisions that strengthen cooperation on nuclear technology, know-how, regulations, among other issues. The US currently has “123 agreements” with many nations, including Argentina, Australia, Bangladesh, Brazil, Canada, China, Colombia, Egypt, European Atomic Energy Community (Euratom), Indonesia, International Atomic Energy Agency (IAEA), Japan, Kazakhstan, Republic of Korea, Morocco, Norway, South Africa, Switzerland, Taiwan, and Thailand. Commercial Nuclear Transactions currently take place under the framework of the Megatons to Megawatts program that downgrades HEU (Highly Enriched Uranium) into LEU (Low Enriched Uranium) which is then processed by USEC (United States Enrichment Corporation) and sold to plants across the US. The aforementioned aspects of the Russia 123 agreement does not wholly serve to contextualize the heated debate that is emerging regarding the establishment of a global market in uranium as a commodity. Concerns over non-proliferation, a legitimate issue, has hamstrung the agreement although little attention has been invested into the actual protections that the 123 agreement provides for in the field of nuclear non-proliferation. Many of the provisions, although economical in nature, outline an ambitious plan to wean away the Russian Federation from nuclear cooperation with Iran by establishing an international market for uranium and by intensifying and formalizing nuclear cooperation in the field of peaceful civil use. However, current legislation, including the Cox-Markey Amendment and the Iran Counter Proliferation Act [10] threaten the implementation of the agreement as it stands, additionally politicizing an agreement that could viably create a powerful international market for uranium and, more importantly in some respects, an international market for safe civil nuclear energy. Given the language of the Cox-Markey Amendment (which exists within the corpus of the Energy and Policy Act of 2005), the buck stops with the President’s determination regarding the potential proliferation of nuclear materials to countries that are state sponsors of terrorism.

“The President may waive the application of paragraph (1) to a country if the President

determines and certifies to Congress that the waiver will not result in any increased risk that the country receiving the waiver will acquire nuclear weapons, nuclear reactors, or any materials or components of nuclear weapons and—

‘‘(A) the government of such country has not within the

preceding 12-month period willfully aided or abetted the international

proliferation of nuclear explosive devices to individuals

or groups or willfully aided and abetted an individual or groups

in acquiring unsafeguarded nuclear materials;

‘‘(B) in the judgment of the President, the government

of such country has provided adequate, verifiable assurances

that it will cease its support for acts of international terrorism;

‘‘(C) the waiver of that paragraph is in the vital national

security interest of the United States; or

‘‘(D) such a waiver is essential to prevent or respond to

a serious radiological hazard in the country receiving the waiver

that may or does threaten public health and safety.’’. [11]

In relation to paragraph 1, subsection 3 of the amendment enables the President the authority to determine if entering into greater cooperation with Russia would directly or indirectly support the nuclear ambitions of Iran. Given the lame duck status of the administration, chances are likely that the executive will agitate for the implementation of the agreement by waiving Russia, thereby sending the message that international diplomacy trumps the hand of misplaced fears regarding nuclear proliferation. HR 1400, a piece of legislation that although supports the notion of diplomatic efforts to counter Iran’s nuclear ambitions, still is being cited as legislation that opposes the Russia 123 agreement. In a letter sent to the President, the House Committee on Energy and Commerce attacked the prospect of a 123 agreement by invoking sec. 405 of HR 1400 that states that no agreement shall “enter into force or be introduced to Congress” that relates to a country that supports the hostile nuclear ambitions of Iran. However, the President retains the right to waive such consideration provided that he invokes certain language that may jeopardize his current stance on foreign policy towards Iran. [12] Surmounting all of these considerations is the fact that HR 1400 is not actually law as it yet has to pass both houses and the President. However, its existence and its 397-16 vote of approval may carry clout, but most likely not enough to detain the Russia 123 agreement.

The New or Revived Dialogue

Realizing the potential encroachments of international law into the realm of domestic policy, successive generations will have to undoubtedly debate the circumstances of current global affairs and their far reaching consequences. It is not enough to be cognizant of the increasing influence of international political, economic, and social regimes; however, it serves as a start. The three aforementioned examples, which serve to contextualize an increasingly de-contextualized and abstract debate about globalization and international integration, only covers a sparse area of a dialogue that is ever expanding. Much like the issues of sustainable development, climate change, and others, the ever existent contention between international integration and the preservation of the traditional notion of the nation state is a debate that will extend into future generations, asking of subsequent eras the same or more that is being asked of at present. Nonetheless, the debate surrounding the contention between these two choices are vital to moving forward in a world that is increasingly skeptical about opening up and subsuming the “risk” associated with greater integration. Another form of allegorical representation of this debate is the notion of an integrated North American Community as posited by its most outspoken proponent, Robert A. Pastor. Representing the largest economic zone in the world, the constituent nations of NAFTA represent a rejoinder to the European model of economic integration and surely represent a region, which if united under a customs union or something of that nature, would constitute an extremely powerful regional association on par or even past that of the EU. However, Pastor expressed dismay at the inability of the US to initiate talks or efforts to draw Canada and Mexico, its largest trading partners, closer together into an association. [13] Given the rhetoric expressed by Barack Obama in attempting to rewrite NAFTA on allegedly “better” terms for the US, the vital relationship between the member nations of NAFTA could be undermined fundamentally, thus rendering a golden opportunity null. On the other end, McCain’s complacency regarding the ineffectiveness of the current paradigm under NAFTA could retain the status quo, neither advancing nor perturbing the current regime. Regardless, the ball is in our court, and the decision ultimately lies on the shoulders of the present to enable the future a greater opportunity.

[1] Sinking Globalization. By: Ferguson, Niall, Foreign Affairs, 00157120, Mar/Apr2005, Vol. 84, Issue 2

[2] For more information on the dispelling of the myth of convergence, see How Local Companies Keep Multinationals AT BAY. By: Bhattacharya, Arindam K., Michael, David C., Harvard Business Review, 00178012, Mar2008, Vol. 86, Issue 3

[3] ITSSD Journal on the Law of Sea Treaty. Also see Oceans and Law of the Sea: Division for Ocean Affairs and the Law of the Sea.

[4] For more on Vaclav Klaus’ perceptions on climate change, refer to: Klaus, Vaclav. Notes for the speech of the President of the Czech Republic at the UN Climate Change Conference. September 24^th, 2007.

[5] Jiri Pehe. Czech on the Environment. Foreign Policy. Washington: May/Jun 2008. , Iss. 166; pg. 78, 3 pgs

[6] Foreign Policy. Global Warming? No Sweat. Washington: May/Jun 2008. , Iss. 166; pg. 23, 1 pgs

[7] For more information on the conclusions and accompanying polls, refer to Deflating a Myth. By: Dolliver, Mark, Adweek, 01992864, 5/12/2008, Vol. 49, Issue 16

[8] The Convention on the Law of the Sea: Why the critics are wrong. By: Kelly, Paul, World Oil, 00438790, Apr2008, Vol. 229, Issue 4

[9] For more on international initiative to address the Law of the Sea, see Talks Aim to Avert Arctic Oil Rush. Financial Times. May 28, 2008.

[10] For more information on the Iran Counter-Proliferation Act see: HR 1400 Sec. 405. Iran Counter Proliferation Act of 2007.

[11] For more information on the Cox-Markey Amendment see: Section 632 of the Energy Policy Act of 2005. August 8, 2005.

[12] These determinations and reports are located in HR 1400, Paragraph 2, Subparagraph A,B,i,ii. Iran Counter-Proliferation Act of 2007.

[13] For more on this issue, refer to Toward a North American Community: Lessons from the Old World to the New. Robert A. Pastor.

Market Wisdom: How Sovereign Wealth Funds can take a page out of Hedge Fund Regulatory Standards

Institute for Trade Standards and Sustainable Development

By: Osman Aziz

A hot topic that has recently garnered a considerable amount of attention from regulators and economists alike has been the ascendancy of Sovereign Wealth Funds in recent history. The recent upturn in global commodity prices has stoked the debate over the relative power that such state owned funds possess and their potential role in greater economic and financial globalization/integration. Although such funds have been looked upon as a blessing in times of tight credit and a general lack of available capital and credit, many have dispensed the usual regulatory criticisms that are the hallmark of government scrutiny. A legitimate concern has arisen over the available capital that such funds command and the sort of influence they can present to economic integrity. But what if these funds took a page out of private regulatory standards, such as the standards that hedge fund managers currently need to comply with? Drawing parallels between hedge funds and sovereign wealth funds may seem a bit disingenuous especially since the two participate with differing intentions and differing strategies in mind. Hedge funds, which are financial investment arms that “hedge” risk by typically purchasing commodities sold as futures (oil, wheat, gold, etc.) at a set rate as insurance against the rise or fall in the prices of such goods, are not the same as SWF’s (participation in other markets such as real estate also characterize hedge funds as well as certain national wealth funds). However, certain similarities can be drawn between the two such as the amount of capital that they both command. Investing largely in overseas companies and acquiring significant stakes typically in private financial institutions, SWF’s don’t typically subsume risk when exerting its weight but look to turn a long turn profit from existing capital reserves. Recently, investment banks, suffering from the downturn in the US markets and a subsequent credit squeeze, have turned their focus to SWF’s as a potential source of capital. Examples abound, however, new developing trends in these funds’ behavior have shown that they could possibly act much like private equity funds and hedge funds. Private investment banks have turned much attention to SWF’s as a frontier investment that could possible play a major role in financial markets in the near future. [1] An Abu Dhabi Investment vehicle, for example, has sought to receive a rating, a move often associated with private investment firms and strategy that could place SWF’s more in line with the private practice.

“Waleed al-Mokarrab alMuhairi, chief operating officer at Mubadala, which has stakes in Ferrari and Carlyle Group, as well as a burgeoning portfolio of investments in sectors ranging from energy to property and telecoms, told the Financial Times that the company was eight weeks into the ratings process and working with more than one agency. Mr Muhairi also signalled an eagerness to broaden the investment focus, buying debt from troubled institutions and putting money into Asia. Mubadala would be the first state-owned investment entity in the Middle East to receive a rating. The move requires disclosure and would help improve Mubadala's transparency at a time when state investment arms in the region are under increasing scrutiny.” [2]

Although hedge funds do not control as much capital commensurate with that of SWF’s, questions regarding their influence on commodity prices and the nature of securities trade, especially recently, have come up and have prompted greater regulatory oversight. Correspondingly, certain actions by SWF’s in recent history have caused a general furor over their potential breach of the “economic sovereignty” of other nations, a concern that clearly broaches the notion of economic freedom and if it is being duly preserved by restraining such giant funds. The IMF’s take on SWF’s to date has been not to compare them in the same light as hedge funds due to the relative difference in the amount of capital they control, and most importantly, the constituency that they represent. For the most part, SWF’s mostly possess the responsibility of reallocating surplus revenue for local infrastructure and as a hedge against commodity price fluctuations (in the case of nations that are resource abundant). However, today’s economic environment has caused major alterations in the strategies that many SWF’s are pursuing. In light of increased inflationary pressure around the world, many SWF’s have stepped back from using such funds as capital infusions for their respective nations. The concern: injection of capital into a nation may stoke inflationary pressures at a time where enough fuel is driving the prices of goods upwards and may also strengthen respective currencies, thus weakening the competitive advantage of exports. [3] As such, many of these funds have looked to pursue the long term through acquisitions of foreign companies, but to little avail. As state funds, these bodies typically draw the ire of politicians and “national security” hawks. In order to mitigate such rancor, the IMF has prepared work on a code of best practices that may serve to lighten the political baggage that inherently follows from them. However, the IMF warns that drawing comparisons between hedge funds and SWF’s may be misleading for a slew of reasons.

“ Their growth reflects high oil and non-oil commodity prices and general reserve accumulation in other countries. Estimates of foreign assets held by sovereigns include about US$7 trillion in international reserves (including gold) and an additional US$2 to 3 trillion in SWFs (Table 1). SWFs exceed the size of hedge funds (US$1.7 trillion), but the latter tend to be heavily leveraged, so that the comparison is somewhat misleading. While SWFs may still be relatively small in comparison with total global financial assets, estimated at US$190 trillion (Table 2), and even smaller relative to total global financial and real assets, they are significant relative to both mature market stock market capitalization and emerging market economies’ debt and capital markets.” [4]

Although the IMF may not want to draw these distinct parallels for falling into the trap of attaching the same lexicon to two different instruments of finance, the reality may be a different one altogether. The fears stoked by upward inflationary pressures due to increased foreign capital (from surpluses) flowing back into a country (in the case of Russia and its National Wealth Fund) prompted many developing nations to look elsewhere to spend their capital. [5] This fear, although it may seem disingenuous to the nation itself since the governments of these respective nations should be endowing their wealth back into the nation for infrastructural development, the exogenous consequences may be overlooked. History has provided for lessons that support the sentiments of many of these developing nations, especially of that of Russia which seeks foreign prospects more-so than local. The 1997 East Asian Financial Crisis, although spurred by the floating of the Bhat (causing massive devaluation in a short interval of time) which caused significant capital flight was only the side effect of a Real Estate bubble that burst within the nation. Retrospective analysis has provided for a more in depth look into the paradigms of developing nations, especially those that are member to the East Asian model of development of powerful export regiments. The case with Thailand was that of a typical bubble that contributed to the collapse of the housing sector and subsequent capital flight, a possibility that many other nations that possess surpluses wish to avoid, even though Thailand was able to bootstrap itself out of that particular situation.

“Bursting real estate bubbles and economic recessions are not uncommon and the financial crisis in South-East Asia did not come completely unexpected. What makes this financial crisis important is that it took place in a developing region and emerging market which is a true part of the globalising economy. In the globalising economy, as Castella (1996, p. 436) points out, entire economies, and particularly those of developing countries, depend on the movements of capital largely determined by subjective perceptions and speculative turbulence. Using international capital, Thailand developed a strong housing industry which was studied and envied in the region and beyond. The withdrawal of capital from Thailand led to the total collapse of the real estate sector and the banking sector.” [6]

Even though this anecdotal evidence may not be enough to explain the strategies being pursued by many developing nations, it conforms to the logic asserted by Russia when explaining its interest in overseas prospects. Additionally, motions by Chinese state owned companies and funds that reflect the need to acquire a certain modicum of commodities and resources to sate local demand is highly similar to the objective of speculative maneuvering that many hedge funds exhibit when betting for or against a certain market. The only tangible difference that exists between the two is the intentions. One is to satisfy economic profit for a firm, the other is to serve as insurance against fluctuating commodity prices. China’s move to purchase a stake in BHP Billiton as a wedge preventing the hostile takeover of Rio Tinto by the British mining company serves as an illustration of the sort of demand that growing developing nations’ middle classes and ambitions can have in their corporate dealings. [7] Although it may be one example of similar financial maneuvering, the prospect that SWF’s may be used to achieve the same ends is not a farfetched assumption. In fact, many market analysts see money originating from SWF’s in the hands of hedge fund managers, creating a serious conflict of interest that will undoubtedly be addressed by the IMF once their standards are published. [8] This growing relationship, whether detrimental or a match made in heaven stands to muddle the interactions that dictate public/private policy. On the one hand, such investment may be a blessing insofar as it reduces the level of political baggage that is subsumed from SWF’s. However, on the other hand is the increasing influence that “public” policy may have on financial firms’ efforts to realize economic profit and possibly endangering private interests for the supposed greater good of political policy. Regardless, international cooperation to handle such funds is a necessity in light of the considerable amount of weight that international financial integration has played in recent time. To marshal support for unilateral actions under the banner of national security interests would undermine not only the US’s reputation, but would also prompt other nations to follow suit and be another considerable blow to multilateral cooperation on an issue that truly needs it. However, negative sentiments directed towards such funds, save for the obvious issues surrounding transparency, look to derail a multilateral process as many legislators have already looked to undercut multilateralism with the introduction of unilateral legislation that severely restricts foreign capital flow. Although the US has maintained a relatively liberal regime when it comes to FDI, it may reconsider such in light of the political motivations of some SWF’s, but endangering funds that may be looking to help the US with capital infusions is a casualty that isn’t fair at all. [9]

“My contention that SWF-specific legislation is not needed at this juncture comes not just from my hope that over time many SWFs will become more transparent of their own accord. Rather the imposition of unilateral rules on US investment for SWFs may harm the competitive position of our economy. After all the United States is only one of many markets in which SWFs can choose to invest. As former Secretary of State Colin Powell noted, “capital is a coward,” and unilateral rules in the US that are not matched by similar regulations in other potential host states may adversely impact our ability to attract FDI and consequently may diminish our competitiveness. It is worth remembering that the majority of SWF money that has been invested into the US is actually recycled US dollars resulting from our oil dependence (for the Middle Eastern funds) and mass current account deficit (for the East Asian funds). It seems far better to have this money recycled here, than to be moved elsewhere.” [10]

Eizenstat’s point regarding the current account deficit and the dependence on oil states of the Persian Gulf raises a possible advantage to be had regarding the nature of SWF’s monies, insofar that they are mostly constituted by US money in the first place. By allowing further cooperation between Hedge Funds and SWF’s, the possible stigma of political consideration could be dispelled and the need to draw up a regulatory regime may not be as needed as current opinion seems to make it. The publishing of the IMF code of best practices will come at great scrutiny; however, it will spur debate that has been largely left untouched as many nations have looked to turn to unilateral actions as opposed to facing the matter with international cooperation. The lessons provided by the 1997 East Asian Financial Crisis and the current economic downturn should be evidence enough that international economic and financial integration has taken on a different paradigm that cannot be addressed by unilateral action and left to the whims of public policymakers who do not possess the necessary knowledge to address an issue of global scale. Regardless, the comparison between SWF’s and Hedge Funds, in light of their increased cooperation and aims, does not seem like such a farfetched assessment. Needless to say, their growth within the next decade or so will begin to add significant emphasis on global finance and economics. The only hope is to utilize foresight to assess their impact before it is fully realized in nominal terms.

[1] The Investment Dealers’ Digest. SWF’s: Investment Banks’ New BFF’s? Bulge Brackets Ramp Up Outreach to Sovereign Wealth Funds. May 5^th, 2008.

[2] Financial Times. Abu Dhabi Investment Group Seeks Rating. May 5^th, 2008.

[3] This was the case in Russia when it was considering creating a National Wealth Fund. Refer to Wall Street Journal. Russian Wealth Fund Rattles the West. May 7^th, 2008.

[4] International Monetary Fund. Sovereign Wealth Funds: A Work Agenda. May 8^th, 2008.

[5] As an issue of liquidity, SWF’s can sometimes enable asset bubbles. See OECD. Sovereign Wealth and Pension Fund Issues. January 2008.

[6] Housing Studies. Once Only the Sky was the Limit: Bangkok’s Housing Boom and the Financial Crisis in Thailand. 11/27/2000.

[7] Wall Street Journal. BHP’s Chief Thinks China May Throw a Wrench in Rio Deal. May 8^th, 2008.

[8] For more on the effect that SWF investment in Hedge Funds may have, refer to the Peterson Institute. Edwin Truman: Testimony before the Committee on Banking, Housing, and Urban Affairs, United States Senate. November 14, 2007

[9] For a closer look at the US’s attitude towards FDI, refer to OECD. Foreign Direct Investment Restrictions in OECD Countries. 2005

[10] Joint Economic Committee of the United States Congress. “Do Sovereign Wealth Funds Make the US Economy Stronger or Pose a National Security Risk?” Testimony by Stuart E. Eizenstat: Partner and Chair of the International Practice Group

For the Sake of Free Trade: Why Passing the KORUS FTA is Commercially Significant and Vital to a Stable Trade Regime

The Institute for Trade Standards and Sustainable Development

By: Osman Aziz

Amid the rancor of debasing and undermining bilateral free trade agreements as inherently one sided and intended to accrue political benefits more-so than for the sake of economic efficiency, the US-South Korea FTA (KORUS) stands as an example of a counterpoint and a negation of the oft heard rhetoric regarding FTA’s. As an agreement intended to strengthen economic integration with its 7^th largest trading partner, KORUS could stand to be one of the most important FTA’s for the US in over 15 years. On South Korea’s end, the lucrative nature of this FTA couldn’t be more pronounced. The US, South Korea’s second largest trading partner, represents a very significant market that the Republic could breach further if the agreement is signed into effect. This, coupled with the fact that the export sector of South Korea is forecasted to grow by 40,000 (in Millions of USD) in the years extending from 2007-2009, makes the US a more attractive market for exports. [1] As opposed to the US-Colombia FTA, which has been derided by Democrats as tacitly encouraging the undermining of labor rights in Colombia, KORUS is not set to attract as much political resentment because of its commercial and economic relevance and due to positive signals originating from the Bak administration in the mutual elimination the long held ban on beef imports into South Korea. Regardless of the fact that this lift will benefit local beef suppliers, with some analysts placing market size at 1 Billion USD annually, Democrats still remain skeptical about the agreement. [2]

Although negotiated and signed in June 2007, KORUS remains to be accepted by either legislative body, and as such, the Bush administration is facing a significant hurdle due to Democrats’ inclinations towards not allowing legislation of this sort to pass without affecting it in some way. With fast tracking authority expired, proposal of the FTA would be subject to either approval on an up or down basis, or to a delay by Congress and a subsequent consideration of each amendment within the FTA. This literal hamstringing would expose the FTA to undue pressure, most likely stalling its passing and rendering it to further politicization. Opposition to the trade agreement has largely been centered on what many Democratic lawmakers are stating is the lack of necessary market access for US autos in South Korea. However, a general demeanor has seemed to grip the world in light of the evolving financial crisis. In a sign of greater protectionism, nations are seeking to remedy their individual macroeconomic problems through a more introversive perspective, a prospect that threatens to undermine the notion of multilateralism. A most recent and relevant example are the export bans being imposed on numerous commodities such as wheat and rice that are putting upward pressure on global commodities, which, in a almost vicious cycle of sorts, continues to place undue pressure on inflation. [3] What this general environment threatens to undermine is the need for a reassessment of economic integration, not a return to the sentiments of “Smoot-Hawley” that characterized the breakdown of the international trade regime following World War I. Nonetheless, the downturn in the general acceptance of multilateralism, or free trade for that case, threatens to undermine a sensible and rational bilateral agreement such as that envisaged by the KORUS FTA. Regardless of the current environment regarding sustainability of the global financial markets and the general attitude towards free trade, condemning the KORUS FTA would represent the most significant setback to an active free trade agenda ever since the meltdown of the Doha rounds.

In relation domestic opposition to the agreement, issues regarding access to South Korea’s automobile market may be unfounded in light of the greater degree of liberalization in the autos market, which is markedly past the current protectionism that is the hallmark of South Korea’s trade policy with the US. Although acquiescing to the 1998 Global Technical Regulations for Wheeled Vehicles (GTRWV), the USITC determined that South Korea maintained a regime in technical standards that impeded with US exports to the nation in the form of automobiles. [4] In 2006 alone, such standards were reflected in trade statistics between the nations, with South Korea importing a meager 4,344 US made automobiles, while the US imported more than 695,000 South Korean made automobiles. [5] With the KORUS FTA, such technical barriers to trade have come to the fore, forcing the Republic of Korea to confront such regulations or risk losing access to a slew of other markets in the United States. The current makeup of the KORUS FTA does address such barriers, and pursuant to the agreement, creates an Autos Working Group that will address future regulatory issues that may arise.

“The U.S.-Korea FTA contains an unprecedented package of provisions designed to ensure that U.S. automobiles can compete in Korea on a level playing field. Part of that package is an immediate elimination of Korean tariffs on most U.S. priority passenger vehicles and trucks. Korea has also agreed to overhaul its system for taxing cars based on “engine displacement”, including the Special Consumption Tax, the Annual Vehicle Tax, and the Subway/Regional Development Bond.” [6]

The provision of such stipulations, hopefully, will address Democratic skepticism regarding the deal, but House speaker Nancy Pelosi has already threatened to impose the same indefinite delay on the KORUS FTA that the US-Colombia FTA was subjected to. Ascending to the position that Hillary Clinton has assumed regarding free trade, Pelosi and other Democrats have adopted a likeminded stance that would place a “time-out” on all pending free trade agreements the Bush administration has proposed, a notion, that although politically and nominally attractive, is lethal and highly damaging to the US bilateral free trade agenda (all the more important in a world devoid of a multilateral stance on nearly anything). Renegotiation of the KORUS FTA, according to the USTR Susan Schwab is a superfluous and frankly political move in light of the already established arrangement the agreement harbors. Both Obama and Clinton have pointed to the automobile sector as their primary concerns, although neither candidate has mentioned the 1998 GTRWV or the current remedies provided for by the agreement as it stands, making their positions more a matter of posturing than understanding.

“They [Clinton/Obama] say it fails to adequately address South Korean regulatory barriers to U.S. auto exports, while opening the U.S. market to more South Korean cars. Schwab sharply disagreed, saying the elimination of a 2.5 percent U.S. tariff on auto imports from South Korea ‘is not going to have an appreciable impact on U.S. auto trade.’ In contrast, South Korea will have to eliminate an 8 percent tariff on U.S. auto exports and reduce other barriers that have long kept out American cars, she said.” [7]

Although much rancor and consideration has been exerted addressing the current disparities between the US auto-markets and South Korea’s, not much has come up regarding IPR (Intellectual Property Rights) as an issue. As a matter of much contention, current Democratic skepticism has been lacking in a sector that affects nearly every business and is a major matter when it comes to a firm’s decision to either license or franchise in a foreign nation. South Korea, although attempting to update its stance on IPR with the adoption of numerous international treaties relating to IP, was elevated from the Special 301 Watch List to the Priority Watch list by the USTR in 2004 due to egregious violations relating to software piracy. [8] Currently, South Korea still maintains a regime that is at best lackluster when concerning IPR. Current losses sustained as a result of inadequate protection of intellectual property is estimated at 440 million USD, and levels of software piracy are at a high of 45%. [9] Although adopting several international treaties on IP and also aligning its current legal paradigm with that of WTO standards, reports still indicate that much deadweight loss is incurred as a result of a weak enforcement regime.

“In 2007, South Korea, a country of more than 49 million people, spent nearly $16.6 billion on information technology (IT) – computers, peripherals, network equipment, packaged software and IT services. That spending accounted for 1.8% of gross domestic product (GDP), supported more than 30,000 IT companies with nearly 547,000 IT industry employees, and helped generate $25.4 billion in IT-related taxes.

Yet the IT sector’s contribution to the South Korean economy could be even bigger if South Korea’s PC software piracy rate were to be lowered 10 percentage points over the next four years, creating an additional 7,600 jobs, $1.3 billion in local industry revenues and $736 million in additional tax revenues for federal, regional, and local governments. [10]

Democratic contentions over the automotive sector centers primarily on technical barriers to trade but also is heavily related to labor protections (due to cheaper labor in South Korea, they harbor a competitive edge over US automaker firms). However, the KORUS FTA, although addressing current IPR discrepancies, has not received attention in the affirmative for doing just that. Instead, lawmakers have harped on the agreements alleged inability to address the inequities in the automotive sector. Such politicization raises veritable questions as to the double standard that Democrats have pursued when attacking the KORUS FTA for its shortcomings.

Revival of Protectionism Threatens Global Growth Prospects and Bilateral/Multilateral Frameworks: Also a word on LIBOR and Global Liquidity

Crucial misunderstanding of current negotiations and the terms that have been established as a result of past agreements, although the result of political pandering, carries significant consequences for trade relations, especially in a time where the cause of free trade can be best described as failing. This concern, coupled with the fact that bilaterals are often not met with much acceptance in the free trading community, has placed the KORUS FTA in grave danger of being log-jammed by Democratic opposition along with the environment that happens to be coming to fruition in light of the current financial crisis. However, on the bright side, if there ever existed one, current domestic demand is set to grow substantially in lieu of certain macroeconomic trends that seem to place emphasis on local growth and investment in infrastructure as opposed to the typical East Asian model of economic development centered on export strength and vitality. Forecasted projections of local demand are set at a 3.3% increase, year on year, with regards to total domestic demand, an indication that South Korean consumers are looking to purchase more than in the past. [11] This, along with the fact that forecasts also place imports of services and goods (as a percentage of growth) past that of exports for the years 2007 and 2008 is an added indication of the more introversive perspective the Korean economy could be looking at. [12] Although at first glance it may not seem as though East Asian economies are looking to shift gears in macroeconomic trends, the increased importance of import regimes and local demand may mark the downturn in the traditional model of East Asian development. As to if this is necessarily a bad thing for the South Korea is an issue that needs to still play out, however, the prospect that it could alter its current course is not as clear. On the American side, worries over a potential recession have stoked fears regarding the role free trade has played in the advent of a recession. Although highly politicized and overplayed, the US current account deficit (especially with China) has been emphasized as the source of the current bout of throes, although little consideration has been given to current levels of FDI entering the US from abroad and the role a weakened dollar could play. Nonetheless, given the fact that consumer confidence has been adversely affected, mostly as a result of the drop off in home prices, a favorable outlook towards free trade may be a pipe dream. [13] However, the rise in global commodity prices has still posed the most significant threat to free trade and the prospect of bilateral agreements such as the KORUS FTA due to its widespread effect. However, to de-contextualize the current financial crisis would underrate the role protectionism has played in contributing to upward pressure on commodities such as grain and oil.

“Policy plays a role, too. The global trade in agricultural commodities is riven with inefficiencies created by subsidies and tariffs. The high price of oil has spurred governments to encourage the production of biofuels ethanol from corn in the United States, sugar cane in Brazil. Last year, one fifth of the U.S. corn crop was diverted to ethanol refineries. The policy response to rising food prices has aggravated the situation. China, India, Vietnam and Thailand have effectively banned rice exports. The moves, intended to build up domestic stockpiles, have further pushed world prices up. The result: higher prices (basmati rice from India in the past year has risen from $850 per ton to $2,000) and hoarding. Chains like Costco and Sam's Club are limiting the number of 20-pound bags of imported rice varieties that customers can buy.” [14]

An environment as terse as the one currently being witnessed it reminiscent, in some detached ways, of the sort of demeanor that gripped nations following the fallout of World War I, a scenario which led to the onset of the Great Depression. Speculation as to a possible global recession seem a bit too removed, however, what lay at risk in the current downturn is a crucial relationship that has emerged between the US and East Asian economies that maintain robust export sector led development. This downturn, which has seen many protectionist sentiments brought back from the dead, is another setback with regards to multilateralism and to even the unpopular bilateral framework. In Japan, a nation known for being a bulwark against foreign acquisitions, the revival of restrictions on foreign enterprise ownership of shares in Japanese companies have caused many developed nations to raise red flags. Although opening up to foreign ownership in the early 90’s, Japan is looking to constrict the level of foreign ownership over fears regarding financial stability and a longstanding commitment to a welfare state. Such sentiments threaten to create a trend for other East Asian economies to follow; one where economic integration is shunned and the policing of economic efficiencies are doled out by political agendas.

“In a speech earlier this year, Takao Kitabata, a vice minister of Economy, Trade and Industry, posed the question, "Are corporations the property of stockholders?" Shareholders are "stupid, greedy, adulterous, irresponsible and threatening," he said. "They are the type of people who just sell the stock if they get mad. Japan isn't alone in its protectionist tendencies: Governments including the U.S., Germany and Australia have lately proposed or erected barriers to foreign investors. And Japan's shift isn't universal. Many top officials continue to argue for openness to outside investors. Some companies are lowering their guard: Mail-order company Nissen Holdings Co. and contact-lens retailer Nihon Optical Co. have let their poison-pill protections elapse. "Adopting takeover defenses doesn't give us the right image in the market," says a Nihon Optical spokeswoman.” [15]

For the sake of free trade and the more important notion of beginning to address the aforementioned issues on a global scale, the reactions by numerous nations including the United States have only prompted a further isolation in a time where collaborative action may seem relevant. Global commodity prices and financial inadequacies, although legitimate concerns for individual nations to address, harbor global repercussions for the actors involved, which happens to be everybody. The recent move by the Federal Reserve to cut interest rates by another quarter percentage point could move to further encumber the global economy and stands as an example of the global reach that a macroeconomic policy can harbor. Although intended to be a move to spur spending and move entrepreneurship forward, a weaker US dollar could be detrimental to currencies pegged to the US dollar (which happen to be many nations that are “coupled” to the US through trade). Although announcing a halt on further cuts, the Federal Reserve has still played a dangerous game by instituting further federal funds rate cuts, especially since bank to bank lending rates on an international scale remain higher than that of the Feds. The British Bankers Association London Interbank Offer Rate (LIBOR) is used as a benchmark rate for banks all over the world. Although individual rates vary, the LIBOR rate is often what guides interest rates on over ten trillion dollars worth of individual mortgages, corporate debt, among other debt instruments. As such, it is equivalent, in a way, to the Federal Funds rate and is often at odds with macroeconomic policy instituted by the US. Although cutting the Federal Funds Rate by a quarter of a percentage point, the LIBOR rate remains higher, suggesting that many international banks plan to hold dollar denominated assets and to simply hold assets as long as possible. [16] This trend, which runs counter to the Feds stated objective of injecting liquidity into the markets, is once again an example of how domestic decisions may not carry as cleanly over to the international stage. The slew of issues that the world faces today range from not only bilateral trade agreements (even though they technically concern only two nations), but also financial stability and the all important environmental challenge, but the reaction by the global community has been sparse and reserved at best.

[1] Economist Intelligence Unit. Country Report: South Korea. April 2008

[2] The Wall Street Journal. South Korea Agrees to Lift Ban on US Beef Exports. April 19^th, 2008.

[3] Financial Times. Fresh Export Bans Deepen Food Crisis. April 16^th, 2008

[4] US International Trade Commission. US Korea FTA: The Economic Impact of Establishing a Free Trade Agreement (FTA) Between the United States and the Republic of Korea. September 2001.

[5] The Wall Street Journal. Trading Without America. August 7^th, 2007.

[6] Office of the US Trade Representative. Trade Facts: US-South Korea FTA. June 2007.

[7] The Washington Post. No Need to Renegotiate US-Korea Trade Pact: USTR. April 28^th, 2008.

[8] Office of the United States Trade Representative. Special 301 Priority Watch List. 05/03/2004.

[9] Economist Intelligence Unit. Commerce Report: South Korea. July 2007.

[10] Business Software Alliance (Report by IDC). The Economic Benefits of Reducing PC Software Piracy: South Korea. January 2008.

[11] Economist Intelligence Unit. Country Report: South Korea. April 2008.

[12] Ibid. Pg. 86.

[13] The New York Times. Consumer Confidence Slips as Home Prices Drop. April 29^th, 2008.

[14] Newsweek. Now it’s the $6 Loaf of Bread; As prices soar, food has replaced oil as the big threat to the long-running global economic expansion. April 29, 2008.

[15] The Wall Street Journal. Japan’s Companies Gird for Attack; Fearing Takeovers, They Rebuild Walls; Rise of Poison Pills. April 30, 2008.

[16] The Wall Street Journal. Fed Cuts Key Rate, Signals a Pause. May 1, 2008.

Most politicians don't understand economics. At least their speeches and policies present the sort of boiled down, uselessly simplified version of economics that "the people" can understand. Despite countless sound bytes about free markets and efficiency and deregulation and competition, most of the ideas are assumed, not understood. Sometimes they make for poor economic policy. Still, these planks of economic "free-market" ideology are deeply embedded in the Republican platform. Ignoring them will only piss off hard-lined Neo-cons and the Cult of Reagan.

Which is why McCain can't properly address Healthcare problems. Unlike most economic markets, healthcare plays by weird economic rules, governed by a sort of black hole physics of economics. Its imperfections are vast, varied, and unavoidable. Anyone will pay anything for an ambulance. Simple mistakes happen, and when they lead to a patient's death, it inflicts the sort of emotional trauma that can only be soothed by grossly unfair malpractice suits aimed at bleeding the doctor of all his wealth. Conflicts of interests exist between doctors and patients, hospitals and doctors, health insurers and the insured. Healthcare is a smorgasbord of freak characteristics and unfixable oddities. It's no wonder that a free market healthcare system is a far cry from the well-oiled machine Republicans assume it would be.

In reality, the Democratic candidates' Healthcare policies better address these strange problems and apply mechanisms to try and fix them. McCain's recent move towards a "centrist" healthcare policy seems to acknowledge this. Ideally, he could go further towards the "center", beyond the "center", into the liberal hue of the spectrum, where government involvement in the economy is acceptable. It'd work better. He should do it. He can't do it. It's just not big-C Conservative enough, and already he's looking too Liberal for many Republicans.

But then, how much does that matter. Like politicians, most people don't fully grasp the ebb and flow of economics. Some of them hold beliefs in free market or social welfare. For the most part though, people don't get that worked up about economic policy. If there's a recession or inflation - (or in today's economy, both) – maybe Everyday Joe just wants the problem fixed and doesn’t care how. And if nothing's wrong, then don't fix what isn't broken.

However, healthcare is one of those wedge issues that divides Republicans from Democrats. In the past that has meant an unwavering approach that showcased the differences in each party's economic ideology. It’s the battle royal between Democratic social welfare liberalism and Republican free market functionality. Today the problems with healthcare are getting serious. So the question remains, will both sides move towards the "center" or “left” or “right” or whatever direction is needed? Will they find a way to ignore partisanship and solve the problems? Or are the candidates, like McCain, weighed down by their party's ideology?