The most important trade deal you’ve never heard of
With Europe at the fore, it seems hard to justify paying attention to a congressional hearing about a trade deal nobody’s ever heard of. But the most important trade agreement in a generation—the Trans-Pacific Partnership (TPP), the subject of a House Ways and Means Committee hearing yesterday—is quietly advancing. The pact, a free-trade deal including the US and several other Pacific Rim nations, will profoundly affect economic and security relations between the US and Asia. And it may ultimately reshape global economics.
Negotiations are only starting, and with Japan just joining the talks they could go on for years. The true significance of TPP lies in what it promises: a new type of broad alliance for a world where trade and investment issues are no longer separate, and together underpin a new geopolitical reality. It’s the first of what could be many “coalitions of the willing” to unlock economic and financial efficiency. And if works, it will act as a magnet to pull many more countries into its fold.
TPP’s emergence follows nearly a decade of disappointment in trade talks. The World Trade Organization’s (WTO) Doha Development Round of talks first collapsed in 2003 and effectively died with the financial crisis. Doha’s moribund state is a direct result of the massive changes in the international economic system that the crisis brought to the fore. Now there is a new approach for trade and investment negotiations.
The WTO and global trade talks under its auspices are built on a divide between developed and developing economies. With developing countries’ increasing economic clout, this divide no longer makes sense. China, the world’s second-largest economy, is a developing country. So are Brazil (seventh), India (ninth), Mexico (fourteenth), Turkey (seventeenth), and Indonesia (eighteenth)—and these and their developing peers’ share of global economic activity is growing dramatically. The breakdown of the dichotomy between developed and developing economies—with developed countries loath to grant powerful developing economies their traditional advantages, and developing countries equally loath to relinquish them—torpedoed Doha.
No less fatal to Doha were the changes in global finance. In yesterday’s world, developed countries were assumed to be mature and less risky, dispensing aid to emerging markets and shepherding developing countries into the international economic regime in exchange for major concessions. That seems almost quaint today, when French President Nicolas Sarkozy goes to China with his hat in hand to ask for help rescuing the Eurozone, IMF intervention in Europe requires Brazilian funding, and the preferential treatment of companies and investments by developing economies is a core global issue.
The death of Doha and the rise of TPP mark an inflection point for global economic negotiations. For the first time since the modern trading regime took shape in 1947, a negotiating round collapsed. Continuing shifts of power in the world economy and the increasing convergence of trade and finance make another WTO-wide round impossible to conclude, even if no one is willing to declare failure.
As power struggles stymied Doha, countries turned to bilateral deals. In Asia alone, 51 FTAs were inked from 2000 to 2009, with another 78 under negotiation. Yet complex webs of small deals are extremely inefficient over the long term. With each FTA establishing different standards, businesses and governments lose the economies of scale that ambitious trade pacts bring.
The G20 summit should commit to growth
By Gordon Brown The views expressed are his own.
The build-up to the G20 summit has been dominated by the euro’s failings. With Europe now the epicenter of the global crisis, its continued weakness will dominate the G20 discussions. Even now, uncertainties about Greece’s future — and about the real strength of Europe’s commitment to its new stability fund — has left little opportunity for a focus on the global economy as a whole.
But even if the state of the world economy has featured less than the euro in the preparatory work for the summit, the decisions world leaders will make on the global economy will dictate the mood of the coming two years. President Sarkozy has major global initiatives he will unveil to improve global food security, and may even force his plan for a global financial levy on the agenda. But there is a big choice the G20 must make. Either the world will come together and agree on a coordinated growth plan — or we will retreat into a new, more acrimonious protectionism.
Already the head of the World Trade Organization is warning of a return to protectionism, and every day we find yet another new country following Brazil, Switzerland, Indian, Korea, and Japan in introducing either new tariffs, currency controls, or capital controls. In response, the draft G20 communiqué assumes a free trade world where each continent steps up what it is doing in order to achieve sustained growth.
But a G20 that was really working would take countries far beyond the current draft communiqué — which is a set of bland statements about what each country is doing on its own to foster growth. Instead it would focus on coordinated measures under which countries would agree to support and complement each other’s contribution. If , under an agreed growth pact, China increased consumer spending and Asia opened its markets, and if this was balanced by America and Europe investing more in infrastructure, then over a three year period — as the IMF has suggested — there could be 5 percent more growth and 25-50 million more jobs, with 100 million people taken out of poverty.
A ccordinated approach is desirable because under current policies every country wants to export its way to growth and no one wants to import. But cooperation is not just an option; it is, in my view, a necessity because the world is precariously balanced between a west that consumes the most, and the rest of the world which now produces the most. For 150 years until now, Europe and America monopolized the world’s output, exports, manufacturing, investment and consumption. But in 2010 for the first time America and Europe were out-produced, out-exported, out-manufactured and out-invested by the rest of the world. Today they account for just 41 percent of output, 43 percent of manufactured goods, 47 percent of trade, and 40 percent of investment. But they account for 55 percent of consumption and, if we added other advanced economies, the figure would be 70 percent.
A better understanding between the consumer countries and the producer countries would make for more balanced and more sustainable growth. Indeed, if China was confident its export market could be sustained then it might be more willing to increase domestic consumption, and if America was confident its export markets could flourish then we would have a more confident American consumer and more private investment at home. This was what was envisaged by the April 2009 summit of the G2O and then in the detail of the growth pact agreed to at the Pittsburgh summit in autumn 2009. Unfortunately in 2010 the growth pact has descended into a dispute over currencies, with the American senate now calling China a currency manipulator. A brave attempt by Korea to break from the currency dispute and accelerate growth by putting ceilings on surpluses and deficits failed.
Checksbalances
For the UK economy to serve the interests of the UK population then Government control as you set it out would only work if we had impartial politicians(to the banks/finacial sectors, fuel cartels, Brussels and the like) and these politicians would have to operate in accordance with their election manifestos. I do not see a lot of evidence for this now or indeed over the last 30 years. The UK political system has intrinsic problems of corrupted values and a total lack of honesty when addressing peoples concerns. They are only interested in one thing, their own ambitions. People need some protection against rampant capitalism, for this to be so, we must then constrain market capitalism within limits that give a sufficient level of protection.
The constant attack on pensions, salaries and working conditions driving down of the ordinary persons ambitions can only lead to strife.
Moving Doha forward: The U.S. view
By Ron Kirk, U.S. Trade Representative Ron Kirk. The opinions expressed are his own.
Right now in Geneva, Switzerland, a test is underway. It is a test of the willingness of World Trade Organization (WTO) members to move the decade-long Doha Development Round negotiations into the “end game” – as President Obama and other G20 Leaders have directed negotiators to do this year. The window of opportunity for the talks to avoid decline into futility is a narrow one. The United States will leave no stone unturned in its quest for an ambitious and balanced outcome. But key negotiating partners must share this motivation.
The world has changed since the Doha negotiations began in 2001. To succeed today, WTO trade talks must address the world as it is and as it will be in the coming decades. The remarkable growth of emerging economies like China, India, and Brazil must be reflected in a final Doha outcome.
The United States has been frank about the importance of increased access to these emerging markets for U.S. exporters. But such access is also vital for the poorest countries that have been a particular focus of the Doha negotiations –especially since these countries already have largely open access to major developed economies like the United States. In a negotiation in which the United States is being asked to significantly cut 100 percent of import duties on both industrial and agricultural goods, we are asking emerging economies to accept responsibility commensurate with their expanded roles in the global economy.
No country is more important to a successful Doha outcome than China. By any estimate, China will be an enormous winner from a Doha agreement. China’s exports have boomed since joining the WTO, but it continues to maintain high tariffs, many of which still would not be cut under the current parameters of the Doha Round.
Despite its position as an economic and trade powerhouse, today’s WTO rules allow China to have open access to major markets without giving appropriately reciprocal access. In Doha, we are asking China to commit to a significant opening of its market in industrial sectors – like chemicals, electronics, and industrial machinery – where China’s global competitiveness is unquestioned. That’s reasonable.
Similarly, Brazil is one of the world’s ten largest economies and a growing export power. Yet Brazil’s market remains restricted in the technology sector, among others. Since 1996, 73 countries comprising over 97 percent of the global trade in information technology products have opened their markets to competition in this sector by signing the WTO Information Technology Agreement (ITA). Signatories include developing countries such as Egypt, El Salvador, Costa Rica, and Vietnam. In Doha, one of our “asks” of Brazil is to join the ITA. That’s reasonable.
Not interesting.. It looks like you got a cushy position for being a friend to the current administration.. As a dallas native i’m not impressed and honestly either should you
from Summit Notebook:
Does Germany need Europe?
Jim O'Neill, the new Goldman Sachs Asset Management chairman who is famous for coining the term BRICs for the world's new emerging economic giants, reckons he knows why Germany might not be rushing to bail out all the euro zone debt that is under pressure. Europe is not as important to Berlin as it was.
Speaking at the Reuters 2011 Investment Outlook Summit being held in London and New York, O'Neill pointed out that in the not very distant future Germany will have more trade with China than it does with France.
"It's a different global environment. That's why maybe Germany (ties) itself to a rules-based game with the rest of Europe because economically it doesn't mean so much to them now. What goes on in China is more important than what goes on in France and that's puts a different economic (spin) on the situation for the Germans."
O' Neill also drew parallels between the current situation which sees Germany being asked to stump up for ill-disciplined southern euro zone economies and the problems faced in 1990 when West Germany had to do something similar for East Germany.
"Fast forward 20 years and this time (they are saying) it's not even our own people. I think the Germans will stay pro-European , but it's a different set of circumstances."
The idea that Germany and others will eventually sort out the euro zone debt problem because of a desire for political unity underlies much of the long-term expectations for euro zone survival. But it is a new world, in many ways.
from Commentaries:
Why Russia needs America
In the wake of President Obama's decision to scrap the U.S. missile defence shield in eastern Europe, many are pondering Russia's response. The relationship will remain in the spotlight this week, when President Medvedev heads to the U.S. for the G20 summit. Although the precise nature of Russia's reaction remains to be seen, it has a big incentive to improve relations. It badly needs American investment and co-operation to help solve serious economic problems at home.
Critics of Obama's decision worry that it will "embolden" Russia, causing more aggressive behaviour abroad. Yet they forget that the Bush administration's antagonistic policies failed to provide security to Russia's neighbours. These policies didn't prevent Russia's war with Georgia, the repeated gas disputes with Ukraine, and a serious cooling of relations with countries such as Poland. Far from being restrained, Russia's confrontational attitude had a lot to do with its perception that the U.S. was busy encircling the country with missile bases and alliances.
The critics also imply that Russia is preoccupied with external expansion, but that hardly seems appropriate today. Russia's GDP is set to plummet by 8 percent this year. Russian analysts estimate that the country needs up to $2 trillion to renovate its dangerously clapped-out infrastructure. In major industrial cities, Russia's dilapidated factories are mulling huge job losses. For the foreseeable future, Russia's leaders are likely to be preoccupied with thorny domestic problems. Faced with such daunting challenges, it's entirely logical that both Medvedev and Putin say they are keen to kick-start American trade and investment. Responding to Obama's decision -- which he described as "brave and correct" -- Putin immediately linked it to economic issues. He called for the U.S. to back Russia's entry into the World Trade Organisation (WTO), and scrap Soviet-era trade restrictions against Russian companies, especially those that regulate technology transfer to Russia.
On the same day, at an investment summit in Sochi, Putin held well-publicized meetings with the CEOs of General Electric, Morgan Stanley and Texas Pacific Group -- all major U.S. companies. When it comes to the economic sectors that Russia says it is most eager to develop, American investment will be especially crucial. The crisis has underscored the need for Russia to wean itself off dependence on natural resources, and develop new high-technology sectors, such as IT and nanotechnology, where U.S. companies are at the cutting edge.
This means that the U.S. still has plenty of bargaining chips left as it seeks to gain Russia's cooperation on global issues. The bigger problem could be persuading U.S. investors to come. No matter how much Russia's leaders appear to welcome foreign investment, there remain huge obstacles, including corruption and bureaucracy, which they seem largely powerless to deal with.
Nor does the tentative thaw mean an end to diplomatic tensions. Russia's relations with its immediate neighbours may well remain stormy, potentially causing renewed strains with Washington. Still, it's hard to argue that by extending his olive branch to Russia, Obama increases the likelihood of such upsets. The evidence of the last few years implies just the opposite. The frostier Russia's relations have been with the U.S., the more determined Russia has been to resist U.S. encroachment in nearby countries, increasing regional tensions.
Now, Obama's gesture has opened up the possibility of a fresh start, creating prospects for mutually beneficial economic cooperation. The Russians would be foolish not to jump at that opportunity.
Let’s remember…..Russia invaded Poland with the Nazi’s. Let’s remember that and if we ignored the Soviet Union…it may have been from these “compulsions:”. And just as a side note…how many of his own people did Stalin kill?
For Chinese exporters, grass is greener abroad
- Wei Gu is a Reuters columnist. The opinions expressed are her own. -
The U.S.-China tire dispute threatens to spill into other sectors and squeeze Chinese exporters’ already razor-thin margins further. It might seem mind-boggling to many that Chinese manufacturers are still hanging on to weak overseas markets even though the domestic economy looks much healthier and surely offers more potential.
But there are structural reasons why the grass is greener outside China. The risk of not getting paid, or getting paid late, is significantly lower when dealing with foreign buyers. The cost of international shipping has dropped so much that it can be cheaper to send goods over the Pacific Ocean than across the country.
In addition, selling to large buyers such as Wal-Mart creates volumes large enough to compensate for weak margins. Moreover, Chinese exporters get all sorts of export rebates and local government incentives which help to lower their costs.
But as the tire spat has illustrated, Washington can slap punitive duties on Chinese imports simply by pointing to a significant increase in imports from China. By imposing penalties in this case, President Obama has opened the door for a slew of similar complaints against Chinese goods. It will only be a matter of time before other countries, worried about where those displaced Chinese exports might end up, start to follow suit.
That’s why Chinese policy makers need to get more serious about stimulating domestic spending. It is time for Beijing to revamp a system built over the past three decades that explicitly and implicitly favours exports and to encourage manufacturers to prioritise selling to the domestic market.
A good first step would be to reduce some of the export incentives China offers to certain industries. These effectively subsidise foreign consumers at the expense of domestic customers. For example, Chinese tyre-makers get a tax rebate of about 9 percent on the value of the products they sell abroad. That’s why tyre makers can afford to price exported tyres more cheaply than ones sold at home, according to Xu Qiyuan, a researcher at China’s Social Science Academy.
That would be good, if you can’t afford to go on holiday, stay at home and landscape you own garden.
Africa at the threshold
– John Simon was recently U.S. Ambassador to the African Union and former Executive Vice President of the Overseas Private Investment Corporation. He is currently a Visiting Fellow at the Center for Global Development in Washington DC. The views expressed are his own. —
President Obama’s trip to Ghana highlights one of Africa’s leading success stories – a country that has held five consecutive democratic elections, recently transferring power peacefully to the opposition after it won a razor thin victory.
Ghana is not alone. Sub-Saharan countries made tremendous progress in the past decade. Freedom House ranks seven out of ten of Sub-Saharan countries as free or partly free. Through 2007, Africa experienced 10 years of uninterrupted economic growth, the last five at rates above 5 percent. Foreign capital inflows increased from only $7 billion in 2002 to $53 billion in 2007.
Yet continued progress is not inevitable. If Africa is to realize its potential, the hard work Africans have exerted over the past decade to improve the continent’s governance and economic policies must continue, and despite the myriad of pressing issues elsewhere, engagement by the international community in general, and the United States in particular, cannot flag.
Supporting Africa’s progress is not just about providing additional aid. Aid is an important element for financing Africa’s development, but aid flows to Sub-Saharan Africa have nearly tripled since 2000 and will quadruple by 2010 if donor commitments made at the Gleneagles G-8 Summit are met. More important now are efforts to help Africa increase its trade, solidify democratic norms through its own institutions, and resolve its remaining conflicts.
The United States can lead the world to provide an immediate benefit to Africa through trade. The stalling of the Doha Development Round of trade talks is a missed opportunity that would have been worth billions of dollars for Africa. Yet all is not lost – the United States could agree to implement those aspects of the Doha package that will benefit Africa now without waiting for a final deal with all WTO members.
This means eliminating domestic agricultural subsidies. The U.S. has held out on conceding these economically unjustifiable programs for a comprehensive deal, which would offer our farmers greater access to emerging markets like China and India. But with deficits exceeding $1 trillion, we can no longer afford these $20 billion programs that mostly benefit fewer than 200,000 large farms at the expense of millions of poor farmers across the globe. Acting now will counter the impact on Africa of the global financial crisis, which threatens to stop Africa’s economic progress in its tracks, and give us standing to insist the EU follow by opening up its massive market to African agricultural products.
Did this guy catch malaria or dengi fever over there? We cannot even put our own house in order. We need to immediately stop all subsidies to foreign governments, our own corporations (esp. big agribusiness), and radically downsize our military expenditures until we can balance the national check book, pay down our national debt to a respectable percent of GDP, afford to keep our citizens healthy, fix our sewers, roads, bridges, electrical grid, dams and levees. Otherwise in 20 years it will be the USA with emissaries running around the globe with a hat in hand.
Starting a trade war with “Buy America”
–- Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. –-
When Congress inserted “Buy America” protectionist provisions that required some goods (such as steel, cement, and textiles) financed by the stimulus bill to be made in America, our government invited a trade war with important economic partners. Now China and Canada are imposing their own protectionist regulations, potentially destroying well-paid American jobs in the export sector. Other countries may follow suit.
This week China reported that the government now requires stimulus projects to use domestic suppliers when possible, even though in February it promised to treat foreign companies equally. The Chinese $585 billion stimulus package has resulted in a World Bank growth forecast of 7.2% for China this year, far above other industrialized countries.
And on June 6 the delegates at the Federation of Canadian Municipalities passed a resolution calling on “local infrastructure projects, including environmental projects such as water and wastewater treatment projects, [to] procure goods and materials required for the projects only from companies whose countries of origin do not impose trade restrictions against goods and materials manufactured in Canada.”
The tragic losers of “Buy America” are free trade agreements and potential job growth in the American economy. Seductively, “Buy America” promises workers they can have it all — cheap goods from China, oil from Canada, as well as protection from global competition. But real life just doesn’t work that way. In reality, “Buy America” is shorthand for fewer jobs as other countries retaliate.
Many markets no longer have national boundaries but global reaches. America sits at the center of global markets for technology, equipment manufacturing, finance, banking, fashion, and advertising — to name but a few. When international markets expand, America grows. When barriers are erected to trade, jobs — and also wages —shrink.
You want to protect a small number of jobs that pay more than $100,000/year. It’s a reflection of who you are and your view of America.
In short, you’re clueless. The last time America was a good place to work was during the Johnson administration. Many factory workers had vacation homes. Jobs were plentiful, NOTHING made in mainland China was for sale in the United States, we made T-shirts here in America.
Sadly, you won’t lose your job protecting a small number of wealthy people’s income, but if you don’t get a clue, you won’t succeed in doing it.
What Asia needs from the G20 meeting
Jaspal Bindra is Chief Executive, Asia, for Standard Chartered Bank. The views expressed are his own.
Asia has come of age. When leaders from the Group of 20 nations converge in London, Asia’s rising powers – China, India, Korea and Indonesia – will be sitting at the global high table to decide on ways to reshape the world’s financial and economic order.
There are expectations that the meeting will include concrete steps to revive economic growth, a boost in funding for the International Monetary Fund, and an understanding on the new financial architecture to restore trust in the financial system.
Asian policy makers are looking for two other critical assurances from the meeting: one, that the developed countries will keep their markets open; and two, that global capital flows needed to finance trade and investment will remain unchecked.
No one doubts the difficulty of reaching consensus. But the stakes have never been higher.
Amidst the frenetic attempts by individual governments to tackle the biggest economic crisis since the Great Depression, it is easy to forget that the progressive dismantling of barriers against international trade and investment contributed to the biggest economic boom the world has seen.
More than 200 million jobs were created worldwide between 2000 and 2007, according to the Institute of International Finance, and millions of people in the developing world were lifted out of poverty, as a result of free flow of capital, goods and services.
the G20 in reality should be addressing the reshaping of eco-systemic approaches to global governance with far greater urgency than the reshaping of economic governance of the global markets.
within contemporary economic modelling a value is placed on a mature tree or a school of tuna in isolation of its relationship to the entire ecosystem. however the ability of the whole far exceeds the sum of its parts.
all the myriad of parts are necessary for the overall performance of the entire system, a system which we humans are intrinsically a part, not separate from.
removing parts of the system by overhunting or excessive felling of rainforest disturbs the whole system, irreversibly.
humans are not existing in isolation from these systems. therefore much greater care should be exercised when disturbing the equilibrium of ecosystems. they are all sensitive and absolutely essential for our continued survival.
we should be continually relaxing and refining the resources extracted from the natural environment so as to minimise impacts on the balance of the systems. benchmarks have to be reappraised with an objective view on a commitment to future generations of humans that will be just as determined to survive as we are, hopefully within the context of dynamic ecosystems.
healthy, flourishing ecosystems make good sense if we have the least concern at all for the rights of future generations. do we have a right in 2009 to make a determination on the sustainability of life in the year 3009.
our contemporary viewpoints on economic governance have brought mankind to a perilous juncture, where the environment is finding new equilibrium;no one can ‘peer through the mists of the future’ to discern what new forces will be invoked as the earth rebalances.
now is the time to turn our attention and synergy back to the nourishment, care and nurturing of our immediate environments & get that right, first. then other aspirations can be fulfilled.
mankinds entire approach to the earth has to be
re-engineered, keyed to establishing dynamic harmony with natural environment, not continually attacking it.
from Africa News blog:
Time to stop aid for Africa? An argument against
Earlier this month, Zambian economist Dambisa Moyo argued that Africa needs Western countries to cut long term aid that has brought dependency, distorted economies and fuelled bureaucracy and corruption. The comments on the blog posting suggested that many readers agreed. In a response, Savio Carvalho, Uganda country director for aid agency Oxfam GB, says that aid can help the continent escape poverty - if done in the right way:
In early January, I travelled to war-ravaged northern Uganda to a dusty village in Pobura and Kal parish in Kitgum District. We were there to see the completion of a 16km dirt road constructed by the community with support from Oxfam under an EU-funded programme.
The road is bringing benefits in the form of access to markets, education and health care. Some parents say their daughters feel safer walking to school on the road instead of through the bushes. Many families have used the wages earned from construction work to pay for school fees and medical treatment. This is the impact of aid.
Having lived and worked in east Africa, I have witnessed the positive effects of aid. But done badly, it can be very limiting and even has the potential to create more harm. To avoid this, it must be provided within an enabling environment in which it is used as a catalyst for change and not as an end in itself. Governments must show leadership through an accountable system.
For individuals, access to resources – including aid - is like an investment. Aid can build up poor people’s assets, support good governance and enhance skills and capacities to bring about transformation. But it can become a bane when it makes communities dependent, lazy and hopeless. Governments, aid agencies and the United Nations need to ensure the delivery of aid is well planned and coordinated, leading to higher self-reliance among poor communities.
Aid is also beneficial when trade is fair. There are several examples in Africa, like the case of coffee farmers in Uganda, where aid has been used effectively to improve the overall quality of the coffee seeds, thereby giving farmers better prices for their produce. When they have access to markets at home and abroad, they generate income which is ploughed back into increased output, better access to health and education, and overall improvement in the quality of their lives. To make this happen, developed countries need to stop procrastinating and put in place fair trade practices.
Aid works well if governments are accountable – in other words, when they are responsible and encourage active citizenship. On this continent, civil society is still weak and needs to be nourished. But stopping aid will not resolve frustrations about poor governance, which is partly a result of weak public scrutiny. Aid should be used to help fight corruption and promote accountability through active input from ordinary people.
Strangely enough, even though I am in favour of foreign aid, I found Ms Moyo’s perspective a little more convincing.
Ghandian philosophies don’t always quite mirror the situation on the ground and while I agree that Aid has its in benefits, in the long-term it would be nice to see African countries becoming self-sufficient. Or to be even more optimistic for Africa’s wealthier nations to become the largest donors to their neighbours.
We definitely do need aid, at least for the time being, but the culture of dependence and of expectations from our former colonial masters needs to be curbed~
The TPP has very little to do with goods trade. It has everything to do with propagating American dominance in the post-industrial 21st Century. When you look at why REMOVAL OF CAPITAL CONTROLS would be included in a trade pact, the answer is clear as day.
America, with bipartisan support, chose ultra highly leveraged FINANCIAL ENGINEERING as a post-industrial era “industrial policy”, and in the last 15 years has staked the policy with the full faith and credit of the nation, and the best minds the country can offer. Bloomberg reported the size of the derivatives casino reaching US$700 TRILLION (50 times the American GDP) by June 2011. When you consider that the American banking sector has only $16 Trillion in total balance sheet assets, gambling at this level of $700 Trillion (about 44 TIMES assets) is RECKLESS. And yet Washington acts as if the irresponsibility is a good thing. This festering financial cancer is affecting not only America, but the entire world.
The world’s economic malady since 2008 was basically caused by an American decision about 15 years ago, to enable massive OTC derivatives trading, as the nation’s industrial policy in a post industrial world. The policy is imposed on the rest of the world through FREE TRADE, which eventually led to the 2008 debacle.
Today, American banking is synonymous with “trading”, mostly in unregulated OTC derivatives. I believe it was reported that B of A made 90% of its profits in 2010 on trading; the number of SBA loans made also dropped by about 90% from previous levels. American banks don’t bank (lend) anymore, they trade. They are not really banks anymore, but malignant forms of their former selves.
On its face, as a grand national strategy, derivatives look brilliant: not constrained by natural resources, not limited by labor, “new products” galore come forth from the “ingenuity” of the new-fangled breed of financial engineers, and growth looks unlimited, basically constrained only by the salesmen’s ability to sell.
The “minor detail” is that unlike most other business endeavors, derivatives do not produce anything. $700 Trillion in derivatives did not produce a shirt, a tire, or even a single hamburger. It is purely redistributive – one side wins, and the other loses, with the croupier (banker) taking a cut as intermediary. Derivatives, in other words, is PURE GAMBLING. Or is it rigged gambling? The “contracts” are typically crafted by the best Wall Street prospectus writers, and not even the salesmen can really explain them. The suspicion is unavoidable that if they are truthfully explained, nobody would buy them. The products are typiclaly sold on the age old “confidence” basis – “Hey, this is a sophisticated business instrument coming from one of the world’s largest financial institutions, what can possibly go wrong? Just trust me.” It is also a VERY profitable export. Foreign central bankers and major insurance houses, sick and tired of 2.5% returns on Treasuries, are prime customers (victims).
There is no sign of abatement, even after the 2008 debacle. With the American mutual funds industry now (year end 2011) pushing for massive adoption of derivatives, and the Commodities Commission promulgating regulations to allow the small guys to join the fun, the derivatives casino is going to be US$1.5 QUADRILLION in no time. That would be 100 times the size of the American GDP, and more than the entire world’s total GDP!! That is sheer MADNESS. What is scary is that many in Washington believe that there is method (and good) in that madness.
2008 complicated things a bit. The world witnessed how even 100 year old financial houses can go belly up overnight. Lehman Bros. had $60 Billion of derivatives on its books, lost 3% or $2 Billion, which wiped out its equity. WHAT is the significance of that? 3% of $700 Trillion is $21 Trillion, which is more than the TOTAL equity of ALL American financial companies. AND you would never know when it would hit, or even which bank it might hit. MF Global is just the latest example – total wipeout with very little prior warning.
You think that would stabilize the world economy?
2008 complicated things, as I said. Both Germany and China ordered their banks to stop massive gambling in derivatives. Both of their economies recovered. America bet the farm, and counted on EXPANDING the scope of the casino, betting heavily that (a) in the name of FREE TRADE or other trade arrangements (such as TPP), other countries will be forced to open their markets to this contagion, and (b) the American banks would always win HUGE against foreigners, as they did in the decade before.
The $7.77 TRILLION in subsidies (in the form of no cost or very low cost loans) to the American banking industry also complicated things (Bloomberg reported the practice after 2 years of FOIA requests). Now the foreigners are going to point to that as an violation of WTO rules, and refuse to allow the American banks to come in and maraud.
As an aside, against that backdrop, disputes over merchandise trade (a billion here, a few hundred millions there) are rather irrelevant. The real economic “battleground” in this 21st century is going to be over industrial policies in a post industrial world – mostly over the financial industry. It is absolutely necessary to discuss and compare risks in various nations’ banking and financial systems, to identify systemic risks and frauds that could infect the whole world.
It is clear that TPP goes way beyond balancing merchandise trade, as it seeks to take away sovereignty as protection for nations’ industries, be they financial or manufacturing or farming, and substitute them with rules written to benefit special interests. It is not in America’s national interest to see multiple Asia Pacific nations impoverished. But if the American banksters have their way, and successfully destroy national financial defenses in the name of trade negotiations, Asia Pacifics and the world would be the poorer.