Institute for Trade Standards and Sustainable Development
Obvious questions abound regarding the current meltdown of Fannie Mae and Freddie Mac. Were unethical practices sought? Did both Government Supported Enterprises bite off more than they could chew, or in other words, did they take on more debt than they were capable of financing? Additionally, did they do this knowing full well that the Federal Reserve and Treasury would come to their rescue unconditionally under the pretense that the stability of these two enterprises translated into the very sustenance of the US housing market? [1] Studies conducted analyzing the role of moral hazard in financial markets is extensive, however, it seems that with the collapse of Bear Stearns and the rampant run on IndyMac Bank that has left it in the protection of the federal government, it looks as though history has been forgotten. The general downturn and collapse of trust that has been marked by the credit squeeze and the subsequent unwillingness by larger banks to fuel the crippled housing market in the US echoes historical trends.
Although many are looking to chalk this up to another overly speculative bubble, the consequences of the collapse of the US housing market could harbor international repercussions due to the fact that many of these mortgages have been packaged into securities and sold overseas, in many cases to China (not to suggest this is a bad thing, given the fact that their reserves were looking to finance something). Efforts to attract Chinese capital to lubricate the US housing market was a effort at the forefront of the US Department of Urban Housing Development (HUD) when it made solicitous overtones to the Chinese government to buy government backed mortgage bonds. [2] The nature of these MBS (Mortgage Backed Securities) is that they aren’t faithful to trade in a free market environment. Being dominated largely by both Fannie Mae and Freddie Mac (GSE’s), the market for MBS’s was a hard one to penetrate (the fact that the assumption of so much debt in the form of subprime backed MBS’s led to the collapse of Bear Stearns reveals a deeper dynamic of not only the risky nature of such debt, but also of the market that it is traded in). Although the subprime sector has become popular in skeptical parlance, the region has existed for quite some time and has rarely produced trouble commensurate with what the US economy faces today. Regardless the ascendancy of MBS’s of the subprime nature is a trend that is relatively new, and given the market they exist in, most likely require greater oversight. However, what do policymakers specifically need to pinpoint, and couldn’t severing Fannie Mae and Freddie Mac’s status as GSE’s do the job? The Fed seems to think other problems persist.
“The credit rating agencies play an important role in resolving or at least mitigating several of these frictions. Our view is that the rating of securities secured by subprime mortgage loans by credit rating agencies has been flawed. There is no question that there will be some painful consequences, but we think that the rating process can be fixed along the lines suggested in the text above. However, it is important to understand that repairing the securitization process does not end with the rating agencies. The incentives of investors and investment managers need to be aligned.” [3]
This sort of rhetoric seems awfully similar to policy prescriptions suggested following the fallout of S&L Institutions in late 80’s and early 90’s. Having come to be known as one of the most disastrous collapses of financial stability, the S&L debacle cannot be effectively deconstructed to fit the contours of the modern fallout, but enough similarities abound to make comparisons. These commonalities include a lack of net worth to effectively subsume existent debt on these thrifts’ books (the situation seen today), the development of new financial instruments that were more liquid in nature (many say that MBS’s and CDO [Collateralized Debt Obligations] are examples of new instruments traded today), and many others. [4] However, the most striking similarity lies in the creation of regulatory oversight bodies that police these financial institutions following their subsequent “bailout” or “fallout” (depending on what philosophy you happen to conform to). Following the collapse of 747 S&L Institutions, the federal government responded with the creation of OTS (Office of Thrift Supervision) under the Financial Institutions Reform, Recovery and Enforcement Act of 1989. The need for greater government oversight was necessitated by an overly warm relationship that developed between these institutions and the Federal Home Loan Bank System, according to some experts, while other disagree and see corporate greed as the prime motivator instead of government ineptitudes. [5] The same sort of trends seems to be emerging from the current debacle with many saying that the close relationship between Fannie Mae and Freddie Mac and the government (other than the obvious relation as GSE’s) motivated the sort of risky behavior that is the hallmark of moral hazard and government guarantees. Analysts of the situation seem to agree that GSE’s fundamentally undermine market forces in important ways, so much so that privatization may be in call for.
“First, the existence of the agencies was held to create "moral hazard" - the mere presence of such a guarantee, it was held, would create an incentive for excessive risks. As it was obvious the government could not allow the agencies to go bust, capitalism's normal controls against risk-taking would not work.
Second, academics complained that the agencies would create "crowding out". With the government effectively competing against the private sector, the argument was that the private sector would be crowded out of anywhere that Fannie and Freddie were competing.” [6]
Perspectives on GSE’s have come quite far from initial assumptions that government oversight would be enough to keep these ventures under control. However, to be fair, the current economic downturn could help explain why Fannie Mae and Freddie Mac found themselves in tough spots; given the fact that little to no one foresaw the downturn in the housing markets as dramatically as it panned out. But critics still insist that some fraudulent behavior persisted, especially given the fact that a scandalous relationship emerged between government oversight bodies and the companies they were tasked with reining in if they were found to be abusing their status as GSE’s. However, some analysts point to a different trend that may have been responsible for misleading loans and the subsequent defaults that left Fannie and Freddie scrambling for capitalization. This is of rating agencies tasked with approving certain rankings for loans on the basis of their performance. [7] If colluding on ranking takes place (and many assert that it has) it produces a highly distorted environment where ratings agencies can grant their blessing for loans that are known to not be that well performing, thereby betraying customers of mortgage backed securities and the underlying trust that must exist between rating agencies/financial institutions and the customer. Chastising the ratings agency community, Chris Cox (Chairman of the SEC) offered a report that, according to many, did not go nearly far enough in exposing such unfair practices.
“The report offered small correctives but stopped short of prescribing strong medicine for a system fundamentally flawed because the users pay for their ratings. Imagine a shipwright working for months patching the hull of an old cedar-strip boat, only to watch the vessel sink because he ignored the drain plug. The SEC is that shipwright… The SEC's report says the conflicts become especially apparent in the CDO and RMBS markets, where deals are designed for ratings and where arrangers have "substantial influence" over the choice of rating agency. What happens in these markets just highlights the flaw that runs through the whole rating process, according to Sean Egan, co-founder of Egan-Jones Ratings.” [8]
The fact that such a relationship developed between oversight organizations and their subjects today and in the past is a fascinating trend, one that will surely find itself occurring again if government regulators and policymakers don’t consider this lesson in full. Research into the collapse of S&L’s in the late 80’s reveals that greater government oversight was necessary to keep them in check. [9] The sort of effect, on an international scale, that the collapse of IndyMac Bank and the rescue of Fannie and Freddie, is an increasingly growing sense of mistrust in international financiers’ minds due to the volatility of the US economy. This is coupled by a larger mistrust of free trade and deregulation; with many governments pursuing the road of protectionism in trade policy due to unfounded fears that trade liberalization has caused this instability. With many financial institutions looking overseas for capitalization, this could have adverse consequences on financial firms within the US looking to finance much of its debt and could be a subsequent setback to international financial integration (a necessary precondition for the integration of global markets).
“Some of the world's largest sovereign wealth funds are seeking to reduce their exposure to the US dollar in a sign of global concern about the currency. One big sovereign fund in the Gulf has cut its dollar-denominated holdings from more than 80 per cent a year ago to less than 60 per cent, while China's State Administration of Foreign Exchange (SAFE) has been looking to strike deals with private equity firms in Europe as a part of a strategy to reduce its dollar holdings. Sovereign wealth funds have played a leading role in helping to recapitalize faltering US banks, but have lost money so far on such investments. Continuing market turbulence has further shaken their faith in US policy and policymakers.” [10]
This sort of underlying mistrust could endanger the progress of international financial integration to the point that was seen during the Great Depression, a situation that is very much similar to what is being faced today with widespread panic among depositors weary that their respective financial institutions aren’t adequately capitalized. However, some scholarly interpretation disagrees on some points, stating that the reasons for why the Great Depression came along are not monolithic, but varying. Some historians point to premature regulatory initiatives imposed by the government of financial intermediation that led to the tightening of the monetary environment, a problem compounded by the international downturn of the economy. [11] In 1983, a little known scholar of the issue, Ben S. Bernanke wrote that one of the prime motivators for the economic downturn that subsequently caused many people during the Great Depression to make a run on the banks was due to the increasing cost of credit intermediation, or more simply put, the cost associated with getting money from competent investors to competent borrowers. This sort of task, which is the very fundamental definition of finance, Bernanke argues, was made convoluted and inefficient by increasing government regulations and depository requirements. In a way, Bernanke is outlining a prototype form of the current credit crunch/squeeze that we are currently experiencing by speaking of the increasing economic cost associated with the issuance of credit. However, as to how this makes the current situation comparable with that of the Great Depression will require a more intricate look into the effect that the development of international economies of scale has affected the global dynamic of economic and political relations. However, the first signs of this comparison may be coming to light with the meltdown of IndyMac bank, the third largest bank failure in the history of the US in terms of volume of assets. The response that Bernanke observed in the Great Depression with the creation of more government oversight bodies and the subsequent increase in prices associated with financial intermediation is also being echoed today with calls for more oversight into unethical practices by financial institutions (a veritable goal, however, somewhat naïve and oversimplified a solution). [12] If the same thing is happening today, what sort of implications does it have on further growth of the US economy, and are we staring at a very similar situation with the failure of financial institutions due to the fact that they are no longer capable of raising adequate capital to even borrow due to financiers’ fear of instability. Although comparisons between the current economic downturn and the Great Depression are still far off for adequate analysis, the actions that policymakers can take in addressing these issue aren’t, in fact, they are quite self-evident. However, with little foresight to mention, and certainly less wisdom to boot, the federal government will almost surely guarantee the existence of Fannie/Freddie as a “too big to fail” situation and will invariably turn up regulation for thrifts such as IndyMac and other financial institutions. Apparently, lessons haven’t been learned, and maybe the adage “too big to fail” will become a permanent fixture of American economic policy parla[1] For commentary on Fannie Mae’s status as a bane to the US housing market see: A Decent Burial for Fannie Mae; The US Should End and Anomaly in the US Housing Market. Anonymous. Financial Times. London (UK): Jul 15, 2008. p. 14
[2] For a look into this effort last year, refer to: Bloomberg. US Urges China to Buy Mortgage-Backed Securities. July 13th, 2007.
[3] A more in-depth analysis of the MBS market and the implications that moral hazard has on it can be found at: Understanding the Securitization of Subprime Mortgage Credit. Federal Reserve Bank of New York Staff Reports. March 2008.
[4] For a complete list of the reasons why the S&L Crisis unfolded the way it did see: Norman Strunk, Fred Case (1988). Where deregulation went wrong: A look at the causes behind savings and loan failures in the 1980s . Chicago: United States League of Savings Institutions, 15-16.
[5] For more information on the former argument of government ineptitudes translating into moral hazard see: The Saving and Loans Crisis and It’s Relationship to Banking. FDIC.
[6] Commentary on the existence GSE’s and betrayals of market risk-taking methods: Moral Hazard on the Road to Increasing Profits. J ohn Authers, Stephanie Kirchsgaessner. Financial Times. London (UK): Jul 15, 2008. p. 2
[7] See footnote 3
[8] For more information on this relationship see: SEC Report on Rating Agencies Fall Short. Jack Willoughby. Barron's. New York, N.Y.: Jul 14, 2008. Vol. 88, Iss. 28; p. 35 (1 page)
[9] For analysis of the S&L crisis see: Were S&L Financial Statements Misleading? Some Evidence and Policy Prescriptions. Cahan, Steven F, Johnson, Eric N. Journal of Applied Business Research. Laramie: Winter 1992-1993.
[10] For a look at shaken confidence in US markets and financial integrity, see: Sovereign Funds Cut Exposure to Weaker Dollar. Geoff Dyer, Henny Sender. Financial Times. London (UK): Jul 17, 2008. p. 1
[11] For a regulatory perspective on the Great Depression see: Regulation, market structure, and the bank failures of the Great Depression. By: Wheelock, David C., Review (00149187), 00149187, Mar/Apr95, Vol. 77, Issue 2
[12] For Bernanke’s historical analysis of the Great Depression and its causes and consequences, see: Nonmonetary Effects of Financial Crisis in the Propagation of the Great Depression. B ernanke, Ben S. The American Economic Review . Nashville: Jun 1983 . Vol. 73, Iss. 3; pg. 257, 20 pgs
]]>Institute for Trade Standards and Sustainable Development
A rhetorical and theoretical debate abounds regarding the relevancy of the term “development” in the modern context. As a concept that has come into use simply due to its common usage, the term itself conjures images of what is commonly held to be the “modern” way of life (mortgage, car, house, the typical American Dream). Sometimes also referred to as the middle class paradigm, the increasing pressure that a growing middle class globally is having on commodity prices and inflationary pressures have some viewing the world through a neo-Malthusian lens. This sort of sentiment seeks to undermine the current trajectory of development, labeling it (quite derogatorily) as a western model of development. More often than not, however, such assumptions tend to belie reality. As a movement largely fueled by individual endeavor, the increasing integration of the global economy in terms of supply chains, financial integration (liquidity of capital), and cultural exchange has created a sort of free market of ideas wherein citizens of countries can choose to either buy into or deflect the traditional neo-classical notions of economic development, and given the current swell in commodity prices (especially in agriculture), it seems as though the world’s middle class is buying largely into the trend, however with some necessary qualifications.
“While this is, of course, good news, it also means humanity will have to adjust to unprecedented pressures. The rise of a new global middle class is already having repercussions… The food-price index compiled by The Economist since 1845 is now at an all-time high; it increased 30 percent in 2007 alone. Milk prices were up more than 29 percent last year, while wheat and soybeans increased by almost 80 and 90 percent, respectively. Many other grains, like rice and maize, reached record highs. Prices are soaring not because there is less food (in 2007, the world produced more grains than ever before), but because some grains are now being used as fuel and because more people can afford to eat more.”[1]
Although the rise of a global middle class is having tangible effects on upward inflationary pressures on food items, it also is beginning to manifest itself in higher energy prices due in part to increased demand for more sophisticated technologies and, of course, a particular standard of living consistent with “development”. Within this context is also an emerging cultural question regarding the effect development has on traditional societies that cling (whether right or not) to particular values that clash with increased privatization of industries and the establishment of strict paradigms of private property (considered by Hernando De Soto to be the primer for economic development and poverty alleviation)[2]. This sort of clash has occurred in the past on many occasions (memories of communism have become misconstrued in the modern context in many ways, applied somewhat inaccurately to the radicalization of Islam), but scholars have argued that these movements had their origination as fringe movements that snowballed due to populist sentiments.
The Soviet brand of Communism that
rode in on a wave of discontent stoked by the failures of czarist
In the days of lore, colonialism, imperialism and the sort where pretenses for espousing beliefs that fit neatly into a doctrine or creed, however, today, the debate is no longer dictated by policy, but by a sort of free market of opinions and voices. However, this is not to suggest that traditional mechanisms of power have been dispensed with altogether, but, the tide does seem to be turning with the advent of technologies that circumvent the lines that divide and make communication easier and more effective. Considerations such as commonality of ideas and beliefs may forge a consensus of sorts, however, the specter of populism still remains a rejoinder of sorts on the somewhat anarchical nature that global communication/dialogue has assumed. Regardless, as with all developments of such nature (economic integration and the increasing transparency/liquidity of financial instruments also brought up similar issues regarding the role of the state), the question comes down to the role the state plays in either policing or nurturing such devolutions of power/influence and if they hold the reins or not.
The Theoretical
Approach to Economic Development: Should the State Play a Role, or is it
Laissez-Faire: Resistance to Change a Bad Thing? Also a Look at the Environment
From a theoretical standpoint, the consideration as to if development is beneficial or not must come at the use of some sort of standard/modicum to weigh it against. Given the trend of the development of larger middle classes in countries such as India, China, and Brazil, it is safe to assume that the neo-classical doctrine of economic development is still predominant (if it wasn’t, trends in consumption such as increased demand for automobiles, housing, and other middle class amenities would not have been apparent to corporations doing business in those countries)[5]. One of the leading scholars on development from the perspective of not only nation states, but of those of individuals is John Kenneth Galbraith. Often derided as an economist that sought to strike the impossible balance between Keynesian economics and free market ideals, Galbraith’s approach to economic development brings into serious question the role of relativism in diagnosing cases either country to county or by region to region. As such, Galbraith’s approach to economic development leaves open to consideration that a consensus may not be possible at all, which ironically chides with the notion of commonality and unity in economic integration and subsequently advancement.
“Galbraith was acutely aware that there could be no single
formula or solution to induce economic development that would apply to all
nations at all times. There was little point, Galbraith argued, in applying the
same remedies to
Although Galbraith was not actively involved in analyzing economic development in the context of international relevancy (insofar as integration has forced some to consider consensus or uniformity in definition), he did comment on resistance by some groups to actively change their perspective on development as a result of entrenched stratifications of society by an elite group (typically of an agricultural elite).[7]
However, what may best serve to
ground this sort of dialogue is to contextualize the debate and analyze current
situations where such forms of resistance have flared up to defy the norms of
development. The case of the autonomous region of
“Perversely, the disproportionately large government spending on the
construction of big state projects, and on the expansion of the government and
party administration, has widened social divisions within Tibetan society. A
tiny share of the local population, including Tibetan cadres, administrators
and other government workers, has become affluent at the expense of the
overwhelming majority of Tibetans who remain poor, rural and illiterate. Unlike
in other provinces where expenditures have been adjusted to boost education and
reduce bureaucratic fat, security concerns have dictated the opposite in
Although
many trumpet the Chinese form of development as being highly effective (the
recent rancor over China’s ascendancy has garnered considerable limelight, at
times a bit too much), questions abound as to the necessary cultural and ethnic
considerations that may find themselves bulldozed as a result of the grander
objective of “economic development”. This also brings up questions as to the
role of the state in dictating development and if subsidization and state
regulation can force development onto a people, irrespective of their
inclination towards it.[10]
In the case of
Scholarship and analysis of the relevancy in the governments role in stoking development has largely concluded that public policy in the form of government intervention is absolutely necessary in ensuring that development takes place. However, what seems to be a point of major contention is what governments should actually do. Openness in trade policy and the development of necessary legal frameworks that protect private property are starting points, however, as has been seen (and most likely will be continued to be seen) the specter of relativity may check these alleged “universal” qualities that all nations and peoples share.
“The key challenge for most developing countries is to create the basic legal and institutional infrastructures that protect property rights, enforce private contracts and allow individuals to freely take advantage of market opportunities. In principle there are many more things that governments could and should do: provide public goods, correct market failures, reduce inequalities in income and opportunities, stabilize excessive economic fluctuations. But these other government activities are not what make the difference between success and failure in economic development. The real difference is made by the basic institutional and legal infrastructures that protect property rights, enforce the rule of law and prevent abuse by governments.”[12]
What this brings the dialogue ultimately back to is a question regarding the utility and sustainability of encouraging economic development through such methods.
Utilizing
environmental concerns (Carbon Dioxide emissions, energy consumption, among
others) as a backdrop by which to weigh the significance of development, the
outlook is quite bleak. Developing nations are projected to increase their
share of emissions at a rate faster than those of developing nations. This
coupled with the fact that growing middle classes also place significant
pressure on emissions and consumption may also revive some neo-Malthusian fears
that have been agitating to make their way back to center stage.[13]
However, in the midst of this relatively gloomy economic outlook, continued
economic development may come under fire as a negative trend in the court of
public opinion; much like free trade has been labeled as a paramount evil that
has ruined the global economy, although highly untrue. The problem posed by
using environmental degradation as a weight is its biased outlook towards
developing nations. Many of these nations (BRICS specifically) don’t possess
the necessary technology to make sea changes that can reduce the use of carbon
emitting fuels. Addressing this issue at the G8 Summit in Hokkaido Japan, the
leaders from the leading industrial nations of the world gathered to address climate
change. However, President Hu Jintao of
“‘
This sort of perspective, which is shared by many developing nations, poses a serious threat to the overarching notion that economic development and the growing role of middle classes from these burgeoning economies is adding strain on the environment. However, much like opposition to the Kyoto Protocol and its one sided proposition that developed nations cut emissions while developing nations bear little to no responsibility is much the same as what developing nations are arguing at present. At the root of this whole dialogue is a concerted need to either redefine development or allow it to run its course in the hopes that it can produce a sustainable world and not contribute to the degradation of the environment. In the end, critics of the term “development” may find more use in simply invoking “relativity” in checking the universal values of development and denying that any real consensus exists at all.
[1] Naím, Moisés. Can the World Afford a Middle Class? Foreign Policy, Mar/Apr2008 Issue 165, p95-96, 2p.
[2] For more information about the paramount
nature of property rights in
[3] For historical perspective on Stalin’s particular brand of populism and implementing it for the “People’s Will” see: Recent Soviet Historiography of Russian Revolutionary Populism. Slavic Review, Vol. 29, No. 4 (Dec., 1970), pp. 599-612
[4] For a look at some of the reasons as to why fundamentalism and other movements occur within religions, irrespective of their nature, see: The New Religious Politics: Where, When, and Why do “Fundamentalisms” Appear? Comparative Studies in Society and History, Vol. 40, No. 4 (Oct., 1998), pp. 696-723
[5] For a corporate take on
the increased amount of disposable income for both Malaysian and Indian middle
class families (just as a small example) and purchasing habits see:
[6] For commentary on
Galbraith’s take on economic development and how to implement it, see: Galbraith
and the Problem of Uneven Development. Jim Peach.
Journal of Economic Issues.
[7] Ibid. Pg. 6.
[8] For more figures on housing development in
the rural areas of
[9] For more information on
the illusory nature of development in
· This can also be an example of what Galbraith alludes to as one of the three forms of development, in this case Symbolic Modernization, or the providing of the modern trappings of development (buildings, public works, etc.).
[10] Nearly 75% of
[11] For more information on
Miles’ take on the
[12] For more information on the role of the state in economic development, see: The Role of the State in Economic Development. Tabellini, Guido. Kyklos, May2005, Vol. 58 Issue 2, p283-303, 21p.
[13] For more information on the effect that individual, regional, and income level economies are having on emissions and consumption see: 2008 Little Green Databook. The World Bank. 4/22/08.
[14] For more on the standoff that persists between developing and developed nations on the issue of reducing carbon emissions see: Biggest polluters back deep cuts to emissions. Financial Times. July 9th, 2008.
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.
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.
]]>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 24th, 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.
]]>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 5th, 2008.
[2] Financial Times. Abu Dhabi Investment Group Seeks Rating. May 5th, 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 7th, 2008.
[4] International Monetary Fund. Sovereign Wealth Funds: A Work Agenda. May 8th, 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 8th, 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
]]>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 7th 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 e