Globalisation in BusinessWeek

BusinessWeek has two bloody interesting pieces up on various aspects of globalisation, one American and one Chinese.

First, NAFTA!

… the regional fears Nafta inspired in 1992 have gone global in 2008. In addition to Mexico, most of the world’s dynamic emerging markets, including China, India, and Brazil, have become strong players in the global economic arena. Americans worry about competition from overseas companies and workers from other lands emigrating to the U.S., especially with the economy faltering amid falling home prices, tottering financial markets, and shaky consumer confidence.

The case for freer trade and open markets is overwhelming. Economic evidence and economic history alike support the view that freer trade over time invigorates economic growth by encouraging the spread of new commercial ideas, new technologies, and new ways of organizing everyday life. Consumers enjoy lower prices and greater choice. Competition from overseas rivals encourages corporate efficiency and innovation.

Which is say (in one’s best Mitch Hedberg voice) they’re for it. Diminishing the power of the article somewhat are things like, “give Joe Sixpack credit”. I’m sorry – what?

I imagine, however that, as we move farther into this lunatic’s game called the election, we’re to see a lot more of this. From pols, from pundits, from media generally, from academics. You name it. Expect heat, though – not light.

The Chinese-centred article is similarly bound up in the new world of globalisation.

… many of China’s manufacturers — including Shan Hsing — are undergoing the kind of restructuring that tore through America’s heartland a generation ago. The U.S. housing market, which generated demand for everything from Chinese-made bedroom sets to bathroom fixtures, has plummeted. A new Chinese labor law that took effect on Jan. 1 has significantly raised costs in an already tight labor market. Soaring commodity and energy prices, as well as Beijing’s cancellation of preferential policies for exporters, have hammered manufacturers. The appreciation of the Chinese currency has shrunk already razor-thin margins, pushed thousands of manufacturers to the edge of bankruptcy, and threatened China’s role as the preeminent exporter of low-priced goods.

So new labour laws in China are driving up costs, sending owners to India and God knows where else – this isn’t new. When was Naomi Klein’s No Logo first published? She detailed the Baby-Huey-like migration of multinationals from one Export Processing Zone to the next. Sonia Gandhi was on about this in India 2 years ago.

Chinese policymakers so far profess little concern. The closures are mainly hitting lower-value, labor-intensive exporters that pollute heavily and use energy inefficiently. Beijing now wants cleaner industries that produce higher-quality items for the local market, from cars and planes to biotech products and software.

That emphasis not only helps boost domestic consumption — a key national goal — but also reduces frictions internationally from the ever-swelling trade surplus. “We are not abandoning the [exporters],” said Guangdong Governor Huang Huahua on Mar. 8. “[But] selling domestically is good for the country, good for the collective, and good for the people.”

From an international-macro perspective, this is good news. Slower production/manufacturing means more unemployment in China, which means more pressure from the bottom to do something about government from the top. Who knows? Perhaps China will move even faster to democracy, devolution – all the things we like to think we have. One can only hope.

Export restrictions the way of the future, question mark

The known exacerbator of Peak Oil is the decline in exports (i.e. not only is less oil being pumped out of the ground, but even less of that is being let out of the country, after domestic use). E.g. the Export Land Model (pic is from the Oil Drum)

So to the Financial Times. They put up an interesting article today concerning much the same thing about, in this instance, rice:

Rice prices jumped 30 per cent to an all-time high on Thursday, raising fears of fresh outbreaks of social unrest across Asia where the grain is a staple food for more than 2.5bn people.

The increase came after Egypt, a leading exporter, imposed a formal ban on selling rice abroad to keep local prices down, and the Philippines announced plans for a major purchase of the grain in the international market to boost supplies. Global rice stocks are at their lowest since 1976.

…

The Egyptian export ban formalises a previously poorly enforced curb and follows similar restrictions imposed by Vietnam and India, the world’s second- and third-largest exporters. Cambodia, a small seller, also on Thursday announced an export ban.

These foreign sales restrictions have removed about a third of the rice traded in the international market.

The immediate price effects of course are about as “no” as brainers get. This is an interesting phenomenon to watch, though going forward. Will it expand into other sectors of the agriculture economy? It ought to scatter no end of eggshells beneath international relations.

If the days of tit-for-tat diplomacy (referring to tariffs) were to return, we really ought to ask ourselves, country by country: what can we threaten to withhold in retaliation? Some countries, currently wealthy and powerful, may not much like their answer.

Free trade: I heard ’em say it was all about the Benjamins

I have a wobbly relationship with Cafe Hayek. Specifically, I’m a screaming leftie tit, and they’re a mite too free trade for my tastes. I’m Austrian only to the extent that governments should be no bigger than they must be to get things done – but we part company on the matter of exactly how much a government should be doing.

That out of the way. They have been discussing the protectionist rhetoric of Presidential candidate-candidates (that seems right) so far. We talked about this in class, back when we looked at comparative advantage and international trade. Having run through the basics of tariffs, quotas, etc., and how protectionism is about restoring Producer Surplus, we consider how much Consumer Surplus is lost in the process. The question is, what price a job saved? Our textbook has a few figures:

Is it worth the loss in Consumer Surplus of this scale? Bear in mind that the cost is spread across the many consumers, but one is hard-pressed to defend USD50-odd million per job in the rice industry.

In class we discussed “dog whistle” politics – the use of coded language that is meaningless to most of us, but appeals directly to a specific sub-set of the electorate. Going to Michigan and talking about bringing back jobs is an example. “We” hear that, laughingly, while poor bastards in Detroit hear it and, not caring at all the cost to the economy as a whole, like what they hear. And so ad infinitum.

Edwards and Kerry caught my attention in 2004, in this regard, as do Obama and Clinton, now – basically all NAFTA-hassling is dog-whistle protectionism: the only way to come good on the rhetoric is to restrict trade; not for the benefit of all (or for the benefit of under-represented workers in our partner-countries in trade), but for the benefit of a few. Remember the quirk of globalisation/outsourcing/etc.: the benefits are spread very broadly, but the costs are felt very acutely. We respond only to the costs at our peril.

Ultimately I do not like Boudreaux’s “letters” – meaning his responses to the issue. I do think they’re worth reading, though: it’s a dialogue not seen elsewhere. Add Cafe Hayek to your bookmarks for the duration of the election campaign.

How to keep an AUD30bn surplus

The short version: you can’t. Not (politically) tenably, at any rate.

The Federal Government could deliver a record budget surplus of between $26 billion and $30 billion under its new fiscal policy tactic for putting downward pressure on inflation.

As the Government faced calls yesterday from a business group to freeze spending, it is emerging that the surplus for next financial year is set to be much larger than the $18 billion flagged.

This would allow the Government to use the budget to sell its message that it is tightening fiscal policy enough to contain inflationary pressures despite keeping its promised $31 billion in tax cuts.

The Treasurer, Wayne Swan, said yesterday the Government would apply a “new era of fiscal discipline” for years to get inflation under control.

Mr Swan said a Business Council of Australia submission calling for no real spending increases correctly identified challenges in areas like improving workforce skills and infrastructure.

I don’t know how the government plans to pull that off. Our economy is under very serious inflationary pressure – as was well-presented only over the weekend by Ross Gittins:

When our real resources reach the point of being fully employed, the economy (gross domestic product; aggregate demand) simply can’t grow faster than aggregate supply is growing – which these days the econocrats estimate to be 3.5 per cent a year at most, and probably nearer 3 per cent.

When we attempt to grow faster than that we don’t succeed, we just generate imports and inflation.

If, for instance, the state governments decide it’s time to start making inroads into the infrastructure backlog, their extra spending is more likely to bid up wages in the construction sector than cause more roads and schools to be built.

…

So how do we reduce the likelihood of such an unhappy event? By reducing the need for the Reserve Bank to rely as heavily on the blunt instrument of further interest-rate rises by making more use of the budget’s braking power.

And that means Kevin Rudd not being so stupid as to keep his ill-considered promise to cut taxes in July.

Needless to say, now that they are in opposition, the liberal party has a different view:

the Opposition Leader, Brendan Nelson, defended the Coalition’s approach. “As a Liberal Party we take the view that those taxes [are] money taken out of the pockets of hard-working, everyday Australians,” Dr Nelson said.

“Once we’ve delivered on our commitments in defence and health, education and roads and all of the things that we need to do to look after pensioners, then that money wherever possible ought to be returned to the people who actually paid it.”

Actually, as a liberal party, you should not have set those tax revenues up in the first place, while allowing a now-probably-non-solvable export bottleneck to hold productivity back.

Budding Austrian economists! This is why (big G) Government isn’t supposed to take away more than the minimum required to do the things for which it was created. It always ends in tears, eventually. I don’t much look forward to another recession we will have to have had (I’m the Picasso of tenses, it’s true).

Given, as Gittins explains, that we are at (and, probably beyond) the non-accelerating inflation rate of unemployment, giving Australian households AUD31bn in negative taxation is not going to help much – irrespective of how much money the government isn’t giving back.

If today’s IHT is correct, the commodities boom could, soon, be boosting Australia’s income still further, as Latin America faces its own problems:

Argentina and Brazil are facing the possibility of short-term energy crises from a lack of natural gas, which is needed to fuel industries and generate electricity for residents. Bolivia is sitting in the middle, with the region’s largest gas reserves.

I’m with Gittins: the government should really consider holding onto that money for awhile. Pour it into the migration of labour within the economy, from low to high-productive areas/industries, if necessary.

This returns us to the notion of complexity, though. If you’d promised AUD31bn in tax cuts, and then I came along and explained the macroeconomic risks of delivering on that promise – the promise of tax cuts – what would you do? Unfortunately, the government is also in politics.

The Gulf Common Market

Question: what is it we don’t like about the EU? The Common Agricultural Policy. Suppose, then, that a common market formed, and in that common market the key commodity was not agricultural production but, say, oil.

Six Gulf Arab states, including Saudi Arabia and the United Arab Emirates, will form a common market from the beginning of next year, said Abdul Rahman al-Attiyah, head of the Gulf Cooperation Council.

…

“The common market aims at creating a unified market in which GCC citizens can benefit from valuable economic opportunities in the Gulf,” al-Attiyah said. “The agreement will open the way for intra-Gulf and foreign investment in the region and increase the usage of available resources in the Gulf countries.”

A Common Oil Policy, then? Bear in mind that, among the key problems associated with peak oil, the fact that oil exports are declining even more quickly than oil production is prevalent, and a big contributor to the so-called ‘crunch’ that the rest of us face. A common market in the Middle East is more likely than not to exacerbate that, given that Market members will be top of the list to get the exports of bigger, superfielded Other Members.

There’s also the matter of the common currency, apparently still slated for 2010 (probably later). For the likes of the US, these are developments probably worth watching: even OPEC itself is “only” some 40-odd percent of oil production in the world, but (still, I suspect – although that Brazilian find will bump this around) two-thirds of oil reserves – hardly the entire market, but more than enough to make a serious difference if, say, oil stopped trading in dollars, and/or Arab states stopped pegging their currencies (or, by then, currency) to the dollar. Add that to the US’s loss of favouritism in getting sweetheart deals for oil, and the US has a pretty big problem.

Australia’s deficit of investment in trade infrastructure

Time for Prime Minister Rudd (wee!) to get to work,

Australia has ratified the Kyoto Protocol. Prime Minister Kevin Rudd signed the instrument of ratification of the Kyoto Protocol in his first act after being sworn in this morning.

…

He said the Federal Government would do everything in its power to help Australia meet its Kyoto obligations, including setting a target to reduce emissions by 60 per cent on 2000 levels by 2050.

It also would establish a national emissions trading scheme by 2010 and set a 20 per cent target for renewable energy by 2020.

No no, not the feelgood-but-ultimately-incomplete Kyoto accords (although it is nice to leave the US to its pariah status, alone); the trading scheme is a better move, though.

No, I meant all that stuff we dig out of the ground, on which we’re struggling to make money because we can’t get it out of the bloody country in time.

Australia recorded its largest ever monthly trade deficit in October as supply bottlenecks choked off mining exports, while strong domestic demand sucked in imports.

…

Exports fell 3.4 percent compared to September, with metal ores and minerals down 20 percent, metals off 22 percent and coal falling 11 percent.

In contrast, imports climbed 2.3 percent with higher oil prices causing the biggest dent in the trade balance.

While the boom in commodity prices of recent years has greatly boosted Australia’s earnings from its resource exports, the country has struggled to boost output, in part due to rail and port bottlenecks.

A lingering drought has cut into farming shipments while a rising Australian dollar has hurt by making exports more expensive to foreign buyers, as many commodity goods are priced in a falling U.S. dollar.

That in turn was pressuring profit margins. A separate report from the government on Monday showed company profits fell 2.1 percent after tax in the third quarter, a surprise to analysts who had looked for a 2.0 percent increase.

Mining was again the main culprit with gross profits falling a steep 11.6 percent in the quarter, while manufacturing suffered a 4.5 percent drop.

Eco 1 students, pay attention:

Firms also added to inventories at a faster pace than expected, with a 1.3 percent increase to $113 billion. That was likely to add around 0.3 percentage point to gross domestic product (GDP) in the quarter, when most analysts had looked for a neutral impact. The GDP numbers are due on Wednesday.

“The strong growth in inventories will obviously push up GDP in the quarter,” said Rob Henderson, chief economist markets at nabCapital. “It looks like it has added to the view that we’re going to see strong GDP in the quarter.”

See how GDP can increase, based on things nobody has bought (yet)?

This is not the first time we’ve seen this problem hurt our balance of payments, either. Being prejudiced against the former (yay!) Prime Minister and his ultimately, proven, cowardly Treasurer, however, I can be optimistic that, perhaps, something can be done about this before the commodities boom is over. It would be no end of frustrating if, with hundreds of ships lined up outside our ports, we missed our boat.

So. Time for our more/actually aware and adaptive new Prime Minister (hooray!) to focus the attention of his government on Australia’s flagging productivity.

“…you’d have to manufacture war after war to keep the economy alive.”

Fascinating!

Since the 1970s, this impoverished and remote remnant of the British Empire has positioned itself as a discount-soldier surplus store. Its best customer has been the United Nations’ peacekeeping operations. Today, on the post-Sept. 11 battlefield, Fiji is marketing for hire its 3,500 active soldiers, 15,000 reservists and more than 20,000 unemployed former troops.

…

Fiji, which has undergone four coups in the past 19 years, has the biggest military force among Pacific island nations and sends officers to study at war colleges abroad, including China, Malaysia and South Korea.

“We made a conscious decision to create an army bigger than we need to generate foreign currency,” said Lieutenant Colonel Mosese Tikoitoga, 46, senior officer and private army sales liaison in the junta led by Commodore Voreqe Bainimarama, a former UN peacekeeper.

“Our economy has no choice but to build armies, and it’s a good business. There are few other foreign investments. If we didn’t do this, our people would be in the street creating havoc.”

This story also contributes to our sensese of humour, with the likes of

Doug Brooks, president of the Washington-based International Peace Operations Association, a lobbying group for security companies that employ mercenaries, said, “Fiji is a vital part of the industry” – which he prefers to brand as “the peace and stability operations industry.”

War is, of course, a peace and stability operation (so, I might add, is genocide. Ratko Mladic was in the peace and stability operations industry). Also:

Sitiveni Ratuva, a sociologist at the University of the South Pacific in Suva, is waiting for Fiji’s lock-and-load economy to backfire.

“It’s unsustainable,” Ratuva said. “Their training is geared for engagement on the battlefield. Normal economies don’t facilitate jobs that require mercenaries. Otherwise you’d have to manufacture war after war to keep the economy alive.”

I’d like to have explained to me how Fiji is any different from some other countries. Jimmy Carter was the first president not to have/go to a war – and look what happened to his second term.

There is some bizarre, wonderful common sense to what Fiji has done. Other islands/countries have done similar things. Nauru, for example, ruinously rented itself out for financial shenanigans, and now houses an Australian detention centre (not for Australians, of course – we’d never do that to ourselves. Brown-skinned asylum-seekers, hell yes). Is prostitution better than being a mercenary?

If this isn’t an industry already, explain this one to me:

Raivoce, a 58-year-old decorated veteran of numerous UN peacekeeping campaigns, is no snake-oil hustler. He can ship a special forces-trained Fijian soldier to a private army like Blackwater USA in Moyock, North Carolina, or the London-based Global Strategies Group for a salary of about $1,700 a month. That’s about 3 percent of the $50,000 a month those same companies will pay for a retired and similarly seasoned U.S. or British combat trooper.

As U.S. lawmakers continue to investigate the Sept. 16 shooting incident in Iraq involving the State Department security contractor Blackwater that left at least 11 people dead, Raivoce says he doesn’t turn out “cowboys.”

“My boys know when to shoot and who to shoot,” he said of the men available to security consulting companies like as Killology Research Group in Jonesboro, Arkansas, and Instinctive Shooting International in Israel.

The UN’s Department of Peacekeeping Operations, the multinational force with an annual budget of $5.5 billion and about 100,000 personnel serving in 18 security actions globally, has 243 Fijian troops deployed in the Middle East, Africa and Southeast Asia. It sees Fijian soldiers as a cut-rate blessing. Eight Fijians have been killed in Iraq.

“Peacekeepers cost $1,030 per head per month,” said a UN spokesman, Nick Birnback. “That’s cheaper than fielding a NATO soldier.”

Fiji has observed that they need only other, greater, economies to manufacture wars (to keep their economies alive?), and they can do quite well. Particularly in this modern era of, with apologies to Gary Larson, inviting wars to which nobody wants to come. The simple fact is (Eco 1 students, this relates to labour as a factor of production) that wages, like prices, are determined at the margins in their own markets. One’s value as a Fijian is higher in the war-fighting market than in, say, the sugar-cane growing market. To some extent it relates to skills, but not so much. A Cuban man is not automatically worth more in baseball than on his village’s farm – but one who can hit home-runs certainly will be.

I can see the objection that some of us have, but it is, ultimately, only a sadness at the cynicism of a country attending to an industry such as war – but Fiji didn’t start that industry. It doesn’t start those wars. We should save our hand-wringing for our own countries, as they do start the wars, while raising poor people to face the military as their only source of health care or college educations. We could just as easily spend that trillion-odd dollars building and re-building shit all over the world, stabilising economies – and we could hire Fijian workers for that, too.

Alternatively, write an article about why people willingly work in factories that build weapons – goods, manufactured on an industrial scale, whose only possible use it to kill and maim. Or about why so many such factories are even in existence.

To “save” the domestic auto industry, the union may end up killing itself

Columnist for the Nation Max Fraser made this his principle assessment of that last, mad rush to close the Summer and the Summer’s negotiations, for the United Auto Workers.

The historic concessions made by the United Auto Workers, billed as necessary measures to keep the reeling Big Three from bankruptcy, in fact represent something far more ominous. To “save” the domestic auto industry, the union may end up killing itself.

This is a fair assessment (allowing for the trouble the union is having with ratification for the Chrysler deal. The GM deal was ratified – just). The union has protected – more or less – its current members, but has done so at the cost of getting many more. Having established two tiers of auto workers – the new hires, the “non-core” hires, will cost around a third less (depending upon the estimates I see), so the odds of them giving any of what’s left to the union that created that tier is small. Even allowing for the argument that, without that concession, the jobs wouldn’t exist, on any tier (Communication Workers Union, if you’re reading…).

Fraser looks, with some clarity (and some subjectivity, but that’s cool, too) to the future:

… the proliferation of Toyota, Honda and other foreign-owned plants has accounted for virtually all recent growth in domestic auto manufacturing. After decades of watching plants close down and jobs move overseas, the UAW finds itself beset by a process of globalization-in-reverse, as foreign automakers increasingly “insource” production with cheap nonunion labor in right-to-work and Rust Belt states. The global South has arrived in Detroit’s backyard.

…

If the UAW is to have a future, it must figure out a way into these foreign-owned factories.

More easily said than done. Amongst other things, we’re talking about foreign firms building factories in the US. They aren’t stupid: in the Age of Waltons and Monopsony Employers, they know exactly how to keep both unions, and out-of-work-union-labour-from-out-of-state (read: Detroit) from buggering up their game – while also having learned exactly how Big Firms Appeal to State Legislatures. The UAW probably only had employed, unionised workers for them, and they just mortgaged off most of their future of that resource.

Ultimately, the debate is larger than this, entirely, including such questions as, should the US even make its own cars anymore? Can it compete in the world for the production of elaborately-transformed manufactures? At some point even the protectionist resource allocators may need to decide that there just isn’t a margin in pursuing that final value-added step in production.

Eco 1 students: this is comparative advantage, specialisation and gains from trade. Come the day, we may well look back on the death of Big Union with gratitude, for allowing unimpeded pursuit of points of consumption well outside our production possibilities frontiers. We may also deeply regret it – that’s half the fun of economics (we’re never the ones being squeezed out of our mortgages, you see).

Russia’s economy booms, and cargo traffic piles up at Finnish border

Speaking of Australia’s problems getting our produce (or minerals and ores) out of our own ports,

Russia’s economy booms, and cargo traffic piles up at Finnish border

Russia’s economy is booming, and its hunger for new cars, televisions and machinery means that the transit routes through Finland, Latvia, Lithuania and Estonia are clogged with trucks.

Because of this heavy trans-border traffic, Finland is now as large a trading partner for Russia as is the United States, but customs posts on the border are struggling to cope.

…

While the vehicles are stuck at the border, retailers in Russia and the transport firms are losing money and local people are scared to drive on the roads with one lane blocked by trucks.

The Finns blame the Russians for the queues, which are also a problem in Estonia, Latvia and Lithuania.

I think my favourite part was this line:

Russians prefer to import goods through Finland to minimize theft – and because Russian harbors near St. Petersburg do not have enough unloading equipment or warehouses.

The amount of goods imported through Finland has doubled since 2002 to about three million tons in 2006, and Russia’s Transport Ministry admits that its officials cannot handle the growing number of vehicles.

Partly because it’s just plain amusing, but also because it leads me to wonder: at which border are the trucks with the – presumably – millions of tonnes of waste? Does Russia burn packaging? Recycle? Send it to Siberia? Are they using it to reclaim enough land to take the North Pole’s oil?

I wonder if Jim Kunstler has seen this story. And to think, we argue that America needs to invest in heavy rail…

From the islands of Fiji

Rushing for the bus back out (turtle moved successfully, although a potential adopter has come along), I grabbed a bottle of Fiji water – not something I’ve gotten, previously. For purchasing bottled water I have a preference for Evian (Volvic is also good, but not an American-found water). My wife and I (more my wife – she drinks more water, but is also better at this) tend to re-use bottles to death.

Reading its label, as I sought to determine why it was so popular with the types of people sufficient to make it sound like Water for Wankers, I discovered the following, mind-blowing attempt at marketing (a similar passage can be found at their website):

The purest water comes from the purest clouds. Our rainfall is purified by trade winds as it travels thousands of miles across the Pacific Ocean to the islands of Fiji. A continent away from acid rain and other pollutants, FIJI Water is preserved and protected by one of the last virgin ecosystems on Earth.

Then we went into that last virgin ecosystem! And took its water! And put it in bottles we had made in China and flown to us (bottles that use 6.74 times more water to construct and transport than you just drank – but it was only water Chinese people would have drunk from a tap, or something. Morons), then flew it back across thousands of miles of Pacific Ocean! Enjoy.

So. I believe I hate Fiji water, and the people who bottle the stuff. It does taste nice, though.