Harry Potter and Hollywood Gone AWOL in Indonesia

This being on my purported beat of Southeast Asia, here's some interesting news. One of the more practical applications for those studying political science / international relations is the area of "political risk analysis." In particular, there is concern by foreign investors of how shifting political winds affect the climate for their businesses, the ultimate Bad Thing being uncompensated expropriation. But there are many other irritants that may yet cause foreign firms to throw their hands up in frustration. Frustrating enough to keep the final instalment of Harry Potter from the world's fourth most populous country.

For your consideration, today we have Harry Potter and Hollywood Gone AWOL in Indonesia. No, JK Rowling has not quite reneged on having written the last novel about Harry Potter. Besides, I doubt whether she would have penned something with such a mouthful title for Year 8. Rather, this story is Based on Real Life and is occurring right now in Indonesia.

There are two opposing versions here. Both concern the largest motion picture chain in Indonesia, the Cineplex 21 Group, and regulations supposedly introduced at the start of the year on taxes and royalties due to the government from those showing Hollywood blockbusters. The Motion Picture Association (MPA) representing the largest US firms have worked with Cineplex 21 for the longest time, and it is the latter which has come under fire the most from Indonesian government officials. While Cineplex 21 claims it was not aware of the new regulations coming into effect (which obviously require larger payments being made to the government), the authorities point out that Cineplex 21 has been recalcitrant in paying up.

So, with the largest Indonesian movie chain not being able to show first-run Hollywood movies over alleged arrears--the very same one which has an exclusive deal to show such movies in the country--they've been screening nearly everything else to the annoyance of local filim buffs. As with other American commercial interests facing fettered access, this has become a full-blown trade issue:

Debates over the absence of Hollywood movies at local cinemas have gone bilateral, with Indonesia asking the US to find other importers to end the five-month Hollywood movie drought amid the summer blockbuster season. Local importers, which have the exclusive rights to import Hollywood blockbusters, have suspended import activities since January as they settle tax cases in court involving Rp 300 billion (US$35.09 million) in royalty fees and penalties in arrears. The importers said they were never aware of such obligations.

Ever since, Indonesians enjoying the luxury of movie theaters in 65 cities across the country have been screening lower-quality flicks such as Beastly and What Women Want, while much-awaited blockbuster films such as Black Swan and Kung Fu Panda 2 are nowhere to be seen. “In the [bilateral] meeting, which was also attended by the US ambassador, we said there were many importers willing to work with them,” Finance Minister Agus Martowardojo said over the weekend.

Indonesia’s cinema industry has long been dominated by the Cineplex 21 Group, which acts as both importer and distributor and also owns the largest theater chain. Of 600 total theaters in the country, about 500 are owned by the 21 Cineplex Group, 50 by Blitz Megaplex and the remaining by various other businesses. Ananda Siregar, CEO of the second-largest theater chain, Blitz Megaplex, has tried to contact the Motion Picture Association (MPA) to take over import activities, but failed as Hollywood distributors have agreements with the Cineplex 21 Group. MPA represents major Hollywood studios such as Twentieth Centry Fox, Paramount, Sony Pictures Entertainment, Walt Disney Studios and Warner Bros.

Finance Ministry Director General of Taxation Agung Kuswandono said last week that there have been importation requests from new firms to ship foreign movies. “But I don’t know if they are [affiliated] with the existing players or not.” If they are affiliated with existing players, Agung added, they might not be allowed to import. “We are not only banning the company, but also the directors. So, we need to look at it first, to see if these [new importers] are only an effort to shift position from being banned to being allowed [to import].”

In the meeting conducted on Tuesday, both the Indonesian and the United States governments have also called the “Hollywood boycott” bogus, Agus said. “The American representatives clearly understood that Indonesia has no problem with American film exporters, producers or government. but there is a problem that needs to be solved by [local] importers that have been acting as American film importers for the MPA.”

From the fiscal front, the government has pushed efforts to ease importation of foreign movies by simplifying import procedures for foreign movie importers. The Finance Ministry stopped the royalty fee requirement, but instead imposed a new duties system that requires importers to pay import duties of Rp 21,000 to Rp 22,000 per minute for each copy of a film they brought into the country.

There was an earlier hope that instead of being taxed a fixed proportion of gate receipts which MPA rejected as being too prohibitive, a tax on film length in minutes would solve the impasse. However, as the article above suggests, the Indonesian government appears keener on ending the "Hollywood boycott" not by making terms more favourable to 21 Cineplex but by giving the franchise of distributing Hollywood films to other importers. Like many things in Southeast Asia, I suspect these rule changes have more to do with certain interests wanting something done with 21 Cineplex as opposed to regulatory opaqueness.

PRC Rare Earth Metal Hoarding: Fake Trade Issue?

Given several new developments, today's a mighty fine time to update our coverage [1, 2] of worldwide rare earth metal availability provided its importance to modern industrial production. Beginning a year and a half ago, the US, EU and Mexico filed related WTO cases [DS 394, 395 and 398 respectively] challenging the PRC's use of quotas, export duties and licence requirements to limit exports of rare earth metals required in many high-technology products. With 95-97% of these metals emanating from the PRC at the present time, it is not a trivial problem for various manufacturing concerns abroad that rely on their supply. Although the PRC has claimed that environmental protection and conservation were the grounds for limiting exports, such claims have been undermined by largely unfettered access by local firms to these rare earth metals. The NY Times cheat sheet above graphically illustrates China's dominant position in sourcing these valuable materials.

To make a long story short, China has just been found in violation of trade rules via a ruling from the WTO's dispute settlement mechanism. Bloomberg offers a summary. The naturally pleased US Trade Representative claims victory while offering this version of what has just transpired:

U.S. Trade Representative Ron Kirk announced today that a World Trade Organization (WTO) dispute settlement panel has agreed with the United States, finding that export restraints imposed by China on several important industrial raw materials are inconsistent with China’s WTO obligations. China’s actions were not justified as conservation measures, environmental protection measures, or short supply measures. The raw materials at issue include various forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus, and zinc, and are used in a multitude of downstream applications in the steel, aluminum and chemicals industries...

The export restraints challenged in this dispute include export quotas and export duties, as well as related minimum export price, export licensing, and export quota administration requirements. These types of export restraints can skew the playing field against the United States and other countries in the production and export of numerous processed steel, aluminum and chemical products and a wide range of further processed products. The export restraints can artificially increase world prices for these raw material inputs while artificially lowering prices for Chinese producers. This enables China’s domestic downstream producers to produce lower-priced products from the raw materials and thereby creates significant advantages for China’s producers when competing against U.S. and other producers both in China’s market and other countries’ markets. The export restraints can also create substantial pressure on foreign downstream producers to move their operations and, as a result, their technologies to China.

The USTR's claims on "market distortion" grounds are straightforward: the Chinese are responsible for rare earth metal shortages worldwide that disadvantage foreign firms by limiting their availability while raising their prices. However, local producers do not face similar limitations. What's more, perhaps consistent with China's wish to be on the technological leading edge via knowledge transfer, such limitations encourage foreign manufacturers to bypass such restrictions by locating in the Middle Kingdom.

But is that all there is to this story? While the US, EU and Mexico chose the route of litigation to free up more supplies from China, Japan appears to have found a (potentially) superior solution: get these materials from non-PRC sources. And so we have another tale hot off the presses touting Japan's newfound sources that both cut out China and make these metals appear less rare than at first glance. Instead of being in Inner Mongolia, these finds are under the sea:

Vast deposits of rare earth minerals, crucial in making high-tech electronics products, have been found on the floor of the Pacific Ocean and can be readily extracted, Japanese scientists said on Monday. "The deposits have a heavy concentration of rare earths. Just one square kilometer (0.4 square mile) of deposits will be able to provide one-fifth of the current global annual consumption," said Yasuhiro Kato, an associate professor of earth science at the University of Tokyo.

The discovery was made by a team led by Kato and including researchers from the Japan Agency for Marine-Earth Science and Technology. They found the minerals in sea mud extracted from depths of 3,500 to 6,000 meters (11,500-20,000 ft) below the ocean surface at 78 locations. One-third of the sites yielded rich contents of rare earths and the metal yttrium, Kato said in a telephone interview.

The deposits are in international waters in an area stretching east and west of Hawaii, as well as east of Tahiti in French Polynesia, he said. [Kato] estimated rare earths contained in the deposits amounted to 80 to 100 billion tonnes, compared to global reserves currently confirmed by the U.S. Geological Survey of just 110 million tonnes that have been found mainly in China, Russia and other former Soviet countries, and the United States.

We then return to the geopolitics of it all:

A chronic shortage of rare earths, vital for making a range of high-technology electronics, magnets and batteries, has encouraged mining projects for them in recent years. China, which accounts for 97 percent of global rare earth supplies, has been tightening trade in the strategic metals, sparking an explosion in prices. Japan, which accounts for a third of global demand, has been stung badly, and has been looking to diversify its supply sources, particularly of heavy rare earths such as dysprosium used in magnets.

Kato said the sea mud was especially rich in heavier rare earths such as gadolinium, lutetium, terbium and dysprosium. "These are used to manufacture flat-screen TVs, LED (light-emitting diode) valves, and hybrid cars," he said.

As you would expect, there are qualifiers. First, Japan is not free and clear to mine them unlike if they were in its exclusive economic zone, i.e. its territorial waters. If it wishes to abide by international law which I presume it does, then it will have to consult with UNCLOS authorities--and likely with other countries which have manufacturing interests such as the litigants mentioned above. The Economist offers this take on potential complications:

Seafloor mining beyond countries’ territorial waters is regulated by the International Seabed Authority, set up under the United Nations Convention on the Law of the Sea. So far it has issued only eight licences, all for exploration, not production, all for nodules, not massive-sulphide deposits, and all to governmental or quasi-governmental agencies (of China, France, Germany, India, Japan, Russia, South Korea and an east European consortium). No wonder. Commercial miners want both a clear title to their holding and exclusive rights to exploit it. They also have to answer to shareholders.

Second, there are likely more technical obstacles to deep sea mining and, third, its environmental sustainability than the Japanese let on. From Nature News:

Current on-land mines, and sites picked out for future mines, have rare-earth concentrations of about 3–10%, he points out [whereas those found by the Japan researchers are in the 0.1-0.2% range]. The much lower concentrations at the Chinese clay mine mentioned by Kato and his colleagues are only economically viable because the material is much easier to access than it would be in hard rock. That's not true for mud located below 4 or 5 kilometres of water, which would require expensive ship time and equipment to pull up. "There are better options," he says.

Craig Smith, an oceanographer at the University of Hawaii at Manoa, notes that companies are exploring the idea of mining manganese nodules from the sea floor to exploit their commercially-valuable contents, including copper and nickel as well as rare earths. Commercial mining of nodules is "probably a decade away", says Smith. Ocean mud could prove another possible source of the increasingly valuable elements.

Smith and others have raised concerns about the environmental consequences of deep-sea mining, particularly around hydrothermal vents, which host unique worms, clams and other life. Kato points out that gathering the metals from mud won't involve disturbing the vents; he found the highest concentrations of rare-earth elements thousands of kilometres away from vents. Closer than that, the rare earths were diluted by other deposits. But Smith notes that sea-floor life away from vents could also be fragile. Ecosystems on the cold ocean floor regenerate very slowly, he says, so any damage done by mining could take decades or centuries to heal.

Qualifiers and all, it's a potentially significant discovery. Whether Japan itself stands to benefit from this find is a matter of interpretation concerning the law of the sea and the state of deep sea mining technology. (If you're further interested, io9 has a map depicting where these deposits lie as per the Nature Geoscience article.)

Returning to the main story, China also has the opportunity to appeal the WTO ruling, though I firmly believe that the PRC's claims are covers for protectionism plain and simple. Perhaps other countries ramping up the capacity to mine rare earth metals on land will be more viable than either the route of litigation or deep sea mining. That said, China being alone in continuing large-scale mining of such resources remains a testament to its foresight and long-term planning. In a way, it's being punished for being resourceful, dubious PRC claims at the WTO notwithstanding.

India Needs Jets: Sweden's Saab, US Overstretch

[NOTE: This still is the IPE Zone, not Jane's Defence Weekly. Still, you may want to pull the bomber jacket out of the closet and groove to Steve Stevens for old time's sake.] Here's an interesting IPE angle on the machinations of defence procurement that I came upon totally at random alike much of the most interesting blog fodder. It's funny how time flies when Top Gun is 25 years of age this year. Back then the Cold War was still very much in full swing with Maverick and Goose encountering the (fictional) MIG-28. As late as 1986, India was still more sympathetic to the Soviet Union than the United States in the belief in central planning and a mistrust of unfettered markets. This was before Manmohan Singh started loosening the reins of the infamous "Licence Raj" that kept India on the infamous Hindu rate of growth.

So it will be of no surprise to anyone that aside from the custom of writing five-year plans, the Indians also purchased a lot of their military hardware from the Russians. They Still do--but even that may change. Manmohan Singh, now prime minister, famously signed a nuclear technology sharing agreement with the Yankees in 2006, causing his then-Communist allies great consternation. In the commercial realm with India becoming perhaps the offshoring destination of choice for Western firms, the globalization game was well and truly on.

Now resurgent India is flush with cash as its aging fleet of MIG-21s reaches the end of the red brick road. To be sure, the nation has a fair need for military hardware. India's main security concern remains nuclear-armed Pakistan--the suspicion is mutual--while its border dispute with China remains a point of contention. In geopolitical terms, it is troubled by both US-Pakistan and China-Pakistan military cooperation. Internationally, there is now a massive race to see who can get India's signature for a multibillion dollar deal that is arguably the most eagerly anticipated one in the international arms bazaar. Aside from the Soviets and the Americans, the French and the Swedes are also vying for this lucrative contract.

For comprehensive information on India's Medium Multi-Role Combat Aircraft(MMRCA) competition, let us turn to Defense Industry Daily for the first time ever:

“It’s the biggest fighter aircraft deal since the early 1990s,” said Boeing’s Mark Kronenberg, who runs the company’s Asia/Pacific business. India’s planned multi-billion dollar, 126+ plane jet fighter buy became a contest between Dassault, Saab, MiG, American competitors and EADS’ Eurofighter...

The original intent of India’s fighter purchase was to replace hundreds of non-upgraded MiG-21s that India will be forced to retire, with a complementary force of 126 aircraft that would fit between India’s high end Su-30MKIs and its low-end Tejas LCA lightweight fighter. While plans to develop a “fifth generation fighter” in conjunction with Russia have received a lot of press, they are uncertain at best, address a different requirement, and offer no solution to the immediate problem of shrinking squadron numbers as existing aircraft are forced into retirement.

Let us now segue into Saab's story. Unlike ill-fated Saab Automobile AB which was bought by GM in 1990, Saab Aerospace--maker of sleek fighters and other defence gear--has remained in Swedish hands. The Swedes are a go-it-alone sort, preferring not to join the Eurozone while keeping the krona, for instance. So it has been in defence: its jets are not Eurofighters but homegrown designs. Through persistence and individuality, Saab is now in the frame with the world's top defence concerns in a race to replace India's MIG-21s even if its name recognition handicaps it somewhat:

The biggest contract that everyone is fighting for at the moment is an anticipated $11bn (£6.7bn) Indian order for 126 fighter jets, set to become one of the biggest export orders in the history of the defence industry. Saab was recently told it had not been shortlisted for the Indian contract, due to be awarded in March 2012, but remains hopeful nevertheless...

Saab is convinced its lightweight single-engine multirole fighter aircraft is both as capable as and much cheaper to buy and operate than larger, twin-engined jets such as the Eurofighter Typhoon, Dassault's Rafale and Boeing's Super Hornet - not to mention Lockheed Martin's F-35 Joint Strike Fighter, which has suffered from cost overruns running into billions of dollars. By contrast, [Saab's] Mr Sindahl observes: "We made the Gripen demonstrator at 40% of the original budget because we introduced new ways of working.

At any rate, there are other customers for the Swedes even if India doesn't sign on:

Saab's gain is a commercial product that is marketable across the world, according to Lennart Sindahl, head of Saab Aeronautics, the largest of the group's five divisions. The Saab JAS 39 Gripen has so far been bought not only by Sweden, but also by the Czech Republic, Hungary, South Africa and Thailand, and the UK is using it as its advanced fast jet platform for test pilots worldwide...

Saab is convinced it can extend its list of customer countries considerably over the next decade or so, as some 5,000 of the 13,000 fighter jets currently in operation are scheduled for retirement, and as emerging nations prepare to gear up their air forces. "For the Gripen, there are new markets and market possibilities coming along all the time," Mr Sindahl tells BBC News in an interview.

Those crafty Swedes have used the oldest trick in the book, industrial policy, of keeping its defence industries competitive:

The Gripen project has emerged from Sweden's desire not to rely on foreign companies for its defence capabilities. The programme has been further strengthened by the country's supportive industrial policy.

Sweden has realised that targeted investment in hi-tech sectors, such as the military aircraft industry, can be hugely beneficial for the nation as a whole, according to Gunnar Eliasson of Sweden's Royal Institute of Technology and the Ratio Institute, a free-market think tank. "Long-term competitive sustainability of an industry requires the local presence of one or more technology-leading firms for the rest of industry to learn from," he says in a book on advanced public procurement as industrial policy. Investment in the Gripen project "has generated an additional social return to society on the order of magnitude of at least 2.6 times the original development investment", according to Mr Eliasson.

Now let us turn to the Yanks. Lockheed's F-35 Joint Strike Fighter (JSF) programme has famously been beset by delays and cost overruns. Like America itself, US defence contractors are seldom on time or on budget. That figures. While it is certainly one of the more advanced and highly rated designs in the race to replace the ageing MIGs, it is beset by--you probably guessed it--industrial policy, this time on both sides. On one hand, while the Indian economy has certainly liberalized compared to the pre-Manmohan Singh days, it seems they are still keen on not just being paying customers by availing of technology transfer and accompanying "offsets" that benefit local industry:

The vendor who finally wins will be required to undertake 50% offset obligations in India. That’s a boost from the usual 30%, which is required for Indian defense purchases over $70 million. The additional 20% was added because India is looking for a large boost to its aerospace and defense electronics industries, and understands that the size of their purchase gives them additional leverage. The Indian MoD’s RFP release adds that “Foreign vendors would be provided great flexibility in effecting tie up with Indian partners for this purpose.”

On the other hand, you also have American defence firms alike Lockheed being obliged to keep proprietary knowledge in-house that are not keen on sharing this knowledge--even at a price:

India has been invited to F-35 events. With potential US [domestic] order numbers dropping, India might even be accepted into the program if they pushed for it. The F-35’s killer weakness was timing that coudn’t deliver the fighters in India’s timeframe, and India’s pursuit of its FGFA program with Russia offers it a semi-indigenous alternative. Even if India changed its mind, the F-35’s advanced systems, established industrial partnership structure and program procurement policies could also make it nearly impossible to meet India’s technology transfer and industrial offset rules.

Just as international trade policy largely fashioned on American preferences as exemplified by the WTO discourages subsidies, so does US foreign military sales (FMS) procurement policy discourage "offsets":

The general policy of the Department of Defense with regard to offsets is that they are market distorting and inefficient. In accordance with an April 16th, 1990, Presidential Policy statement, the decision whether to engage in offsets, and the responsibility for negotiating and implementing offset agreements, resides with the companies involved. The Presidential Policy mandates that "no agency of the U.S. Government shall encourage, enter directly into, or commit U.S. firms to any offset arrangement in connection with the sale of defense goods or services for foreign governments."

Let's be honest here: Americans have BS artists from here to eternity, and the defence industry certainly isn't free from them. Even when the US military cannot afford jets due to overstretch--broke America probably has more pressing priorities--it still turns up its nose to countries that can actually pay for these killing machines.

Security matters often receive less IPE attention, but we have an interesting triple comparative political economy here depicting countries on different trajectories. India is definitely shining with many keen on sharing design know-how with it. Sweden is maintaining its reputation for engineering through well-applied industrial policy. And the US is, industrially speaking, a beggar being a chooser that is flushing itself down the toilet of history through overstretch. That's about par for the course as far as the global pecking order is concerned.

Modern American defence policy isn't up there with the best of the best, to put it mildly. It's funny what a difference a quarter of a century makes.

Georgia, Still Russia's Roadblock to Joining WTO

I just wanted to add this update to my ever-growing collection of posts pertaining to Russia joining the WTO [1, 2, 3, 4, 5, 6, 7, 8, 9, 10]. The gist of it is that Georgia remains the main obstacle to Russia joining the international trade body. Given Georgia's outright conflict and continuing troubles with Russia over access to its erstwhile breakaway republics of Abkhazia and South Ossetia, the final blocking party was obvious. Imagine having another country controlling access to what you rightfully can claim as your own territory. It's not fun stuff. When we last had dispatches from this front, Switzerland had offered to mediate WTO entry among the quarrelling factions. Many months later, perhaps Swiss efforts haven't been enough. From Bloomberg:

Georgia and Russia haven’t made any “substantial” progress in three months of talks on Russia’s bid to join the World Trade Organization, Prime Minister Nika Gilauri said. “We don’t see any substantial progress yet even though there are some steps,” Gilauri said today in an interview with Bloomberg News at the World Economic Forum on Europe and Central Asia in Vienna. “So far the talks are going very much in the same mode.”

Switzerland in March started mediating negotiations between Russia and Georgia, which fought a five-day war in 2008 over the breakaway Georgian region of South Ossetia. Georgia has cited disputes over customs checkpoints in South Ossetia and another breakaway region, Abkhazia, as reasons to withhold its approval for Russian WTO membership.

Russia, the largest economy outside the WTO, has been seeking to join the Geneva-based trade arbiter since June 1993. The U.S. announced last year it had resolved most issues necessary for Russia’s accession. “The only request from Georgia’s side is for transparency on border crossings, on customs checkpoints,” said Gilauri. “If there is no transparency on checkpoints, how can Russia become a member of the WTO?”

Russia rejects “politicization” of WTO accession talks by Georgia, the Russian Foreign Ministry said in March. The “political window of opportunity” for Russia to enter may “start to close down” at the end of the year as the U.S. and Russia enter election years, Russian Deputy Prime Minister Sergei Ivanov said in an interview with Bloomberg in Miami in April, adding that he is hopeful an agreement will be reached before then.

Like me, do you find it odd that the US election cycle would put off the Russian bid for WTO membership? Despite the usual paeans to equal membership status, some may be just that bit more equal than others--alike the country that was instrumental in creating it. Some things never change, but you have to wonder if US presidential elections really matter that much in an ostensibly multilateral organization.

Meanwhile, As Clausewitz said, war is the continuation of politics by other means--a perfect explanation of the aforementioned conflict. What better way for Georgia to contest Russian checkpoints located in its breakaway republics but to create roadblocks to Russia joining the WTO? Strictly speaking it's not a trade issue being debated, but how does the "free movement of goods and services" sit alongside your neighbour fencing you out from your own territory? Strange but true.

US Free Trade Lies, PRC / Pentagon Bids Edition

Patriotism is the last refuge of a scoundrel - Samuel Johnson

Is it just me or is the United States fast becoming a nation of scoundrels? I've long pointed out the hypocrisy of bankrupt America continually posing as the world's free trade champion when, in reality, it has been distinctly protectionist when it comes to its funders wishing to purchase assets that yield better returns than lousy Treasuries. The case of the Chinese firm Huawei is very well-known as it has been discouraged from buying the tangential defence contractor 3Com. Ditto for 3Leaf. It has also been discouraged from bidding on US government contracts with "security" related concerns. Before that you had CNOOC being similarly discouraged from purchasing Unocal over even more dubious grounds. And these examples are just the tip of the iceberg.

So, it continues to boggle me what lengths Americans will go to in order to prevent the Chinese from taking their due. After all, if you continually run up such a monstrous tab, you would expect those footing your bill to have some input in governance matters, right? Well no. In yet another affront to the idea of free trade, American lawmakers have just decided to effectively freeze out Chinese firms with Communist Party affiliations from bidding on US defence contracts. Given the increasing sophistication of PRC hardware, this restriction comes as quite a blow:

The US House of Representatives has broadened the type of Chinese entities barred from receiving Pentagon contracts amid growing unease in Washington over China's expanding military might. Under the amendment, passed by voice vote Wednesday, all entities owned by or affiliated with the Chinese government are prohibited from providing defense articles to the United States and the US secretary of defense must report to Congress 15 days before any planned waiver of the ban.

"With China making significant progress in the defense and aerospace industries it is critical that we ensure US national security is protected and that the highly skilled jobs and associated technologies in these industries are not outsourced overseas," Representative Rosa DeLauro said in a statement. The Connecticut Democrat said the measure "will help guard American interests, not only for our national security, but also the innovation, job creation and long-term economic growth in Connecticut and across the country that will allow the United States to remain competitive globally."

Yes, protectionism it is, red in tooth and claw. There's also this tendency to conflate increasing Chinese technological prowess with goals of militarily dominating other countries--like its prospective customers. As I've pointed out before, this crude realism so favoured by certain Americans doesn't really follow Chinese history since even at the height of their technological advantage over the West, China did not go around the world colonizing and enslaving other people--unlike certain Westerners. But here they go again:

Chinese state-controlled firm China Aviation Industry Corp, or AVIC, is said to be weighing a bid for the contract to produce the next US presidential helicopter, prompting concerns in Washington about the possibility that Beijing may obtain US military secrets.

DeLauro's measure, also sponsored by Republican Representative Frank Wolf, was among dozens of proposed amendments to a $690 billion defense budget bill the House passed on Thursday. The amendment allows the defense secretary to waive the procurement restrictions if a good or service is both critical to the Defense Department and not otherwise available.

Companies affected by the amendment include any commercial firm "owned or controlled by, directed by or from, operating with delegated authority from, or affiliated with, the People's Liberation Army or the government of the People's Republic of China or that is owned or controlled by an entity affiliated with the defense industrial base of the People's Republic of China."

"Over the last several years, so-called 'commercial' Chinese companies have sought to compete for DoD contracts. In fact, these Chinese 'companies' are very much arms of Beijing and the People's Liberation Army," said Wolf. "That is why we believe Congress must act quickly to make clear that it will not support any contract that involves a Chinese state-controlled company for the highly sensitive presidential helicopter program or any other defense system."

As mentioned above, an immediate precursor of this move was Chinese firm AVIC considering a bid to replace ageing US presidential helicopters with a more advanced design despite utilizing American (Pratt & Whitney) engines. Worse, AVIC is also being frozen out from bidding on replacing America's ageing jet trainers in a far larger contract. From an earlier article:

Could the US president's helicopter be made in China in the future? It's a possibility, as China Aviation Industry Corp (AVIC) is aiming to win US aviation contracts. The Wall Street Journal has reported that AVIC, the maker of China's new J-20 stealth fighter, has teamed up with a tiny California company, US Aerospace Inc (USAE), to try to launch bids for US defense contracts, possibly including one to supply Chinese helicopters to replace the aging Marine One fleet used by the president, people involved in the partnership were quoted as saying. Two AVIC officials previously confirmed that the company signed a strategic cooperation agreement with US Aerospace in September last year,

The AVIC's AC-313 [helicopter], which demonstrated its first flight last year, is powered by three engines made by Pratt & Whitney and can seat up to 27 passengers and two crew members. The model is capable of replacing the aging Marine One. Insiders expect the contract to be awarded in the next two to three years.

AVIC and US Aerospace have also held talks over the suitability of AVIC's new L-15 trainer jet [see picture above] as a candidate to replace the US Air Force's fleet of Northrop T-38s which have been in use for 50 years and on which American fighter pilots learn skills such as flying at supersonic speeds. That contract is expected to be one of the most lucrative [American] military aviation contracts this decade. The United States is likely to buy about 400 aircraft and other allied countries about 600 more as the jet will become the standard model for training pilots to fly the US F-22 and F-35 stealth fighters.

Like a lot of Yankee blather, I think it's utter rubbish to single out Chinese defence contractors thusly. First, it would not be difficult for the US to discern if the Chinese are deliberately providing substandard equipment not living up to specifications. That would be grounds for contract termination, period. Second, why are we to assume that the Chinese would riddle their equipment with spying software and hardware--bugs, cameras, the works? It would again be very easy to spot these devices and, in the process, terminally hurt China's prospects of exporting similar wares to other countries.

Truly, patriotism is the last refuge of a scoundrel--and a rather dumb one at that. Free trade means selling off chunks of American equity, not just debt. It also means opening up bidding processes to all comers. But when you instead treat others so shabbily, is it any wonder why paeans to "free trade" fall upon deaf ears?

American Badass: Kraft Gordon Gekko'd Cadbury

[NOTE: The candyman is often portrayed in popular culture as a sweet-talking but devious character. Here's one named...Kraft. I almost forgot about it until I witnessed the sickly sweet made-for-TV Obama visit to the UK. Unlike fawning by the uninformed over an insubstantial political figure, here's unsweetened commentary on a distinctly souring transatlantic trade relationship.

This post is a follow-up to the post I made earlier regarding the Kraft takeover of the UK's largest confectioner, Cadbury. If you will recall, I was opposed to this move on degustatory and economic grounds. Others were even more adamant--see the image to the right. While there are fine American chocolates alike San Francisco's famous See's Candies, let's just say American mass-market chocolates are not up to snuff. (To those who care, Cadbury represents affordable but good quality chocolates.) Others too had concerns about Kraft adopting typical American corporate raider-style asset stripping of Cadbury assets and laying off of staff. To assuage such fears, Kraft's then-leadership made promises to maintain both,

On the positive side of this acquisition, the famous Cadbury brand has spearheaded Kraft's efforts at opening up consumer markets in the world's fastest emerging developing countries--think especially of India:

With the acquisition of Cadbury, Krafts portfolio has expanded beyond 40 confectionery brands, each with annual sales of more than $100 million. Kraft has now become the biggest player in the global chocolate industry with popular [Cadbury] brands like Dairy Milk, Creme Egg, Flake, and Green & Black’s. Kraft’s global market share in chocolates and candies currently stands at 12.5% by our estimates.

In addition to owning some of the more popular confectionery brands, Cadbury has also helped Kraft expand its global reach, mainly in the European Union and the Asia-Pacific region. For example, in India, Cadbury is almost synonymous with chocolate, given that the company has been present for more than 60 years in the country selling popular brands like Dairy Milk, 5-Star and Perk. Cadbury also expanded Kraft’s presence in Europe’s chocolate markets of Poland, Russia, and France.

Kraft has indicated that its profits in the Asia-Pacific region have recorded double-digit growth since 2008. Kraft is looking to penetrate the lucrative Indian market by leveraging the Cadbury brand to sell its own flagship Oreo cookies and powdered beverage Tang. India has become the fastest growing market in Asia-Pacific for Kraft with around 40% growth during Q1 2011, double the 20% growth for China and Indonesia.

On the negative side here we are so many months later and, to no one's real surprise, the Yanks do not appear to be keeping their end of the bargain. Indeed, their CEO doesn't even bother to come to the UK when called to explain Kraft's nefarious activities before parliament. Call it choco-patriotism, but it's been classified as an act of high treason akin perhaps to extrajudicially executing Cadbury's British heart and soul. Let's just say all is not well in terms of plant closures, staffing, and integration. And with each UK Kraft gaffe, lawmakers become keener on tightening acquisition laws to repeat this miserable experience:

Ramifications from the bitter battle spread far be­yond Bourn­ville, Cadbury’s historic home in the English Midlands. Irene Rosenfeld, Kraft chief executive, continues to ruffle feathers by snubbing UK lawmakers – a parliamentary report on the acquisition, issued on Monday, refers to her failure to respond to their summons as a “sorry episode”. Take-over rules are being redrawn – in a way that bankers warn will hamper the purchase of British companies – after Kraft reversed pledges to keep open a Cadbury plant in Somerdale, west England. (Inspection of the plant, asserts one banker, entailed little more than “a quick Google Earth”.)

There is friction in executive suites, too. Welding together two organisations with disparate cultures has resulted in an exodus of senior former Cadbury executives as the nexus of power migrated from the UK to Kraft’s European headquarters in Zurich. The tension reaches all levels of former Cadbury staff, from the commercial division to the factory floor.

Ah yes, the missing American overseer:

All this has left Ms Rosenfeld unfazed. The representatives she sent to appear before a parliamentary select committee were best placed to handle questions about the British market, she says. Speaking to the Financial Times before Monday’s statement from the committee, she said: “We have clearly shown ourselves to be good stewards of the brands, and yet the continued assault has been somewhat surprising. “I think we’ve done everything possible to address concerns, to respond to issues, and the focus remains on making sure that this integration is successful.”

Defectors from Cadbury and politicians beg to differ. They say the speed of the integration, allied to the fact that the hostile nature of the bid precluded due diligence, has made the process more fraught. Ms Rosenfeld’s perceived disdain, for workers as well as parliament, has added to the rancour.

And here's something on the legal changes in the works:

This week, in one of the biggest shake-ups of UK dealmaking rules in decades, a round of consultation by the Takeover Panel on proposed changes to rules governing mergers and acquisitions comes to a conclusion. In October, the panel unveiled proposals aimed at redressing the balance of power between bidders and target companies, and improving disclosure for the benefit of employees and shareholders. They are expected to come into effect this year.

The proposed rule changes are the result of a feeling among some senior politicians that UK companies like Cadbury were being acquired for short-term gain at the expense of the best interests of their investors and staff.

Already bankers and lawyers are preparing themselves for the impact of the proposed changes. One is a tightening of the so-called “put up or shut up” period, requiring a publicly named bidder to declare formal intentions within 28 days of an approach. At present, the clock starts ticking at the request of the target company. The aim is to reduce the time a company can be “in play”, after several recent potential takeovers – including Kraft’s – dragged on for months.

More on the new measures here. So it's definitely a mixed bag--not all treats with a lot of Yankee tricks mixed in leaving a regrettable aftertaste. I certainly am wary of the Americans screwing over this great brand built over decades for short-term gain as is the habit of a lot of their kind.

Rumour Mill: Lord Mandelson, Next WTO Chief?

I would advise you to take this latest report with a grain of salt. For, in the last few hours, Gordon Brown's statements championing a greater role for less-developed countries at the IMF which had been interpreted as his bid to become its next managing director have been pooh-poohed--by Brown himself.

That said, we have yet another New Labour stalwart waiting in the wings to fill posts in prominent international economic organizations. While British Prime Minister David Cameron scoffed at the idea of recommending Brown to become the next IMF chief, this new Guardian article suggests Cameron is keener on Peter Mandelson. Unlike Gordon Brown, Lord Mandelson remains remarkably unscathed by the financial crisis insofar as he was brought back by Labour from his role as EU trade commissioner to perform damage control instead of, let's be honest here, inflicting damage. And so the rumour mill churns again with the idea that the more amiable Mandelson has the ear of Cameron when it comes to replacing outgoing WTO Director-General Pascal Lamy who wraps up his second and last term in 2013:

In a sign of the prime minister's high regard for Labour's last business secretary, government sources indicated that Mandelson was seen in Downing Street as a strong candidate to succeed Pascal Lamy, who is to stand down as the WTO director general next year [actually, in September 2013 since his second four-year term began in 2009--but candidates' names must be put forward next year already].

"Peter Mandelson is a strong candidate for an international job," one government source said of Britain's former European trade commissioner. "The director general of the WTO, which will become available next year, is an obvious position. We are sure that Peter Mandelson would have a lot to offer."

The interest in Mandelson may be seen in Labour circles as troublemaking by the coalition, which is rubbishing Gordon Brown's unofficial campaign to fill the vacant position of managing director of the International Monetary Fund after the resignation of Dominique Strauss-Kahn. The former prime minister made a speech in South Africa calling on rich western countries to meet their pledges to fund education for the world's poor.

Mandelson has been ruled out by Britain as a possible IMF head because he is does not have the necessary qualifications as a former finance minister or a former central bank governor. "Peter Mandelson does not have enough credibility for the IMF," the government source said. But the government does believe he would be well placed to succeed Lamy, Mandelson's French predecessor as EU trade commissioner. Lamy is a highly respected figure, though Cameron has been highly critical of the WTO's failure to complete the Doha trade round.

The reporter's angle on the coalition further undermining Gordon Brown is a doubtful one insofar as Brown's chances of political rehabilitation are remote. Neither is he inflicting much damage to the coalition nowadays as he mostly remains silent in parliament.

OTOH, while I remain a Peter Mandelson fan, I doubt whether he fancies the job and if he's really the man for it. After all, he was most enthusiastic about returning from abroad (Brussels, to be exact) when Gordon Brown came a-calling. If he so liked British politics that he would rather have been the de facto PM of a doomed government than stick around in Brussels, why would he want to venture there again? Next, alike at the IMF, I remain keen on an LDC candidate for the post. Just as I was wary of Lamy gaining a second chance at not completing Doha, so should I express caution about another industrialized country head at the WTO. Given the current difficulties over international trade negotiations, LDC voices need someone who feels our pain. Honestly, I am not sure if another ostensibly left-leaning politician with a penchant for the good life is what the WTO needs.

Nevertheless, don't forget the Pascal Lamy was himself a European trade commissioner prior to assuming his current post, so there is precedent there.

GOP & Dems Agree: Whack Agricultural Subsidies

I will soon have more on the shameful budgetary shenanigans being waged Stateside, but something international trade followers can probably cheer is this: both parties' much-ballyhooed fiscal plans involve major rollbacks to American agricultural subsidies. As you would expect, states with large agricultural interests are looking warily on. Indeed, the Republicans are split given that the plan forwarded by Paul Ryan (R-Wisc) is calling for bigger cuts than those just outlined by the so far impotent Fiscal Commission. From the Fergus Falls Journal [!]:

The Republican head of the House Budget Committee, Rep. Paul Ryan, R-Wis., may find opposition from his own party regarding the cutback of agriculture subsidies by $30 billion over the next 10 years. He’s also meeting opposition from fellow House members such as Seventh District U.S. Rep. Collin Peterson, a DFLer [Democratic-Farmer-Labor Party] from Detroit Lakes.

Rep. Frank Lucas, R-Okla., chairman of the House Agriculture Committee, said, “Members of the House Agriculture Committee and I will write the next farm bill.”

Peterson said Monday that President Barack Obama’s deficit commission called for $10 billion in savings from farm programs over 10 years. “That’s something people can live with,” said Peterson. “However, there’s no justification for a $30 billion cut. Overall, we’re talking about a 25 percent cut for ag, and we’re not seeing 25 percent cuts to other parts of the budget bill.”

Ryan has proposed cutting $30 billion over 10 years by spending less on a crop subsidy program called direct payments and giving smaller subsidies to crop insurance. Direct payments were already expected to be a major target in the 2012 farm bill. That farm bill will cover the years from 2013 to 2018.

Reining in agricultural interests will be a challenge insofar as the House Agricultural Committee obviously authors the Farm Bill. Whatever budget is ultimately passed, keeping the lawmakers who decide on subsidies in line is obviously required.

'WTO a Success...Advancing Rich Nation Interests'

And now for a characteristically pessimistic assessment of the WTO from trade commentator Rorden Wilkinson of Manchester University. As with many other international organizations, the WTO was undoubtedly structured to advance the interests of its creators. Read: the United States when Americans used to dream about the future (does anyone remember that bygone era?) Seen in this light, Professor Wilkinson says that the WTO has, actually, been quite a success in facilitating the interests of wealthy countries instead of the usual metrics of advancement such as completing trade rounds and so forth. What he now writes is that, historically speaking, successive WTO rounds demonstrate how the deck has been stacked--including some things in negotiations (manufactures in which developed countries have a comparative advantage) but not others (agriculture in which developing countries do), while strong-arming LDCs with quotas and suchlike if it suited (textiles). At the current time, you can certainly think of American unwillingness to even put temporary migration provisions of GATS into effect. Some fair trade regime; same old, same old.

What follows are the abstract and some policy implications on how this lopsided situation can begin to be remedied, while the rest can be read at the link provided. Given that rich country cheerleaders for trade liberalization aren't getting their way, perhaps it's time to look at wider-ranging changes to WTO governance to make a more decisive break with the past:

Abstract

This article offers an alternative account of the performance of the World Trade Organization (WTO) – an institution whose performance is usually assessed in terms of its capacity to function as a forum for the exchange of mutually beneficial trade concessions, its ability to act as an arena in which trade rules can be negotiated and its capacity to serve as a forum for settling trade disputes. The article argues that when understood in these ways, the performance of the WTO inevitably appears lacklustre. However, the fact that member states remain committed suggests that the criteria on which an assessment of the institution’s performance ought to be based are different and the way in which we conceive of the institution is flawed. The article argues that if WTO performance is measured as the institution’s capacity to act as a strategic device to maintain and exacerbate the advantages of a group of industrial states over their less powerful and developing counterparts (an aim that is much closer to the institution’s intended purpose), then it has actually been quite successful, albeit undesirably so.

Policy Implications

• An alternative assessment of the performance of the WTO suggests that it has been far from lacklustre, as is commonly held to be the case, and has actually been quite successful in satisfying the interests of the leading industrial states.
• However, such an assessment also shows how developing countries as a group have consistently been net losers in the multilateral trading system.
• This situation is no longer tenable. There is a pressing need to reform the institution fundamentally to rebalance the economic opportunities afforded to developing countries, especially the poorest and most vulnerable, as well as to think seriously and differently about the design of the institution and the interests it serves.
• Meaningful reform of the WTO cannot, however, come from minor adjustments to its operating procedures. What is needed instead is a much more wide-ranging discussion about its purpose, form and function, as well as the value of trade liberalisation (currently constructed or otherwise) as a vehicle for development and poverty reduction.

Georgia On Russia's Mind On Latter Joining WTO

Alike the completion of the Doha Round, another WTO-related possibility that I've covered for as long as this blog has been around--four years already, mind you--is Russia joining the WTO. Actually, Russian efforts to enter the WTO far predate this blog--and even the World Wide Web going mainstream, for that matter. In 1993, during the leadership of the late Boris Yeltsin, Russia began a working party exploring its accession into world trade fora. Despite several twists and turns [1, 2, 3, 4, 5, 6, 7, 8, 9], let's just say this story isn't quite over yet.

Many of the more recent Russia/WTO posts have concerned the understandable wariness of neighbouring Georgia to allow Russian entry. All existing members must agree to Russia joining the WTO and Georgia beat Russia to the WTO in 2000. Since then, Russia and Georgia have contested the latter turning more towards the West, especially after the so-called Rose Revolution. I suppose Georgia's grievances with Russia are obvious and relevant: First, Russia continues to encourage the breakaway republics of Abkhazia and South Ossetia with their populations predominantly of Russian heritage.

As you may have predicted, Georgia is the sole objector in Russia's 2011 edition bid for membership:

The only objector to Russian membership of the World Trade Organization is Georgia. Unsettled conditions for Russian memberships are down to just seven. The chief Russian WTO negotiator Maxim Medvedkov told this to reporters in Geneva on Friday after emerging from the latest round of Russia’s talks with the global trade regulating body. He believed Russia would win full WTO membership in the period between next May and next January.

To put it mildly, I suppose you too wouldn't be happy if another country (Russia) set up checkpoints that prevented transportation within your own territory (into the breakaway republics of Abkhazia and South Ossetia). This, mind you, despite Switzerland being drafted to help mediate between the two previously warring parties.

Switzerland will mediate between Russia and Georgia on joining the World Trade Organization, Alexander Lukashevich, a spokesman at the Russian Foreign Ministry, told reporters in Moscow on Thursday. The Swiss helped arrange three-party talks on Russia's WTO entry that are scheduled to take place in Bern on Thursday.

Russia, the largest economy outside the trade arbiter, rejects "politicization" of WTO accession talks by Georgia, Lukashevich said. "As for the accession of Russia to the WTO, the Russian president stressed the impermissibility of politicization of this issue and the attempts of Georgian officials to debate elements unrelated to WTO membership conditions," he said.

The matter was also discussed between Prime Minister Vladimir Putin and U.S. Vice President Joe Biden in their meeting Thursday. Biden did not give any direct promises to Putin to facilitate a solution to the "Georgian problem," Putin's deputy chief of staff, Yury Ushakov, said following the meeting. The Americans talked with Georgian representatives about a positive solution to the question of Russia's WTO accession, Ushakov said

Russia's entry has faced opposition from WTO member Georgia, with which it fought a five-day war in 2008 over the breakaway region of South Ossetia. Georgia has cited disputes over customs checkpoints in South Ossetia and Abkhazia as reasons to withhold its approval.

To me this is the curious thing: Georgia under Mikhail Saakashvili has courted American favour to (hopefully) distance itself from Russia's overbearing attitude towards its neighbour. Yet, with even the US pressing for Russian membership at the moment, Georgia is still reluctant to let Russia in. Go figure; I guess the scars of conflict remain as forgive and forget are not yet on the menu.

With US and EU powers-that-be pressing quite hard for Russian inclusion, I suppose its foibles are being conveniently forgotten for now. Reasons for this forgetfulness likely include wishing that the biggest trading nation outside of the WTO join to keep the institution relevant. Contrary to the Russian officials' suggestions above, the Russians play politics. Hardball politics. The Khodorkovsky saga suggests arbitrariness in the application and interpretation of the law. Russia's penchant for coming up with random explanations for cutting off gas supplies or raising its price when it suits doesn't inspire confidence, either. As such matters don't fall under the general purview of the WTO, I suppose Russia's case is improved. Then again, be wary of what you wish for is probably the principle in operation here.

The Abyss: Pascal Lamy Broaches Doha Failure

Poor, poor WTO Director-General Pascal Lamy. Forever in search of the completion of the Doha Development Agenda, he must trot out the old reasons that have failed to convince member nations again and again: we're disadvantaging poor nations, we're endangering processes of trade liberalization that have brought the world so many benefits, etc. By now, you'd have thought he'd have come up with other arguments, but we're arguably no better off in terms of the prospects for completing Doha after nearly a decade. Now he's even contemplating Doha failure--not a good sign for the WTO's designated (and voluntary) cheerleader.

At any rate, unbeknownst to all but the keenest of trade followers, Lamy has been pushing negotiators to prepare revised negotiation texts in time for Easter. (Setting an Easter target has been a repeated if futile goal in the past.) In other words, we are not even at a stage wherein participants find common ground on what to discuss. Let's just say things are (surprise!) not progressing to his liking. He says:
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In all honesty, we’re not on target

So, with less than a month to go, are we on track to meet this target?

In all honesty I must tell you we are not. Since the 8 March TNC we have continued to see an impressive level of activity at every level of our negotiating process. On the multilateral track, the Negotiating Chairs have diligently and systematically worked through their individual agendas and I can only express my admiration for the energy and tenacity with which they have approached their task.

On the bilateral and plurilateral levels activity has also been intense.

Overall, there have been elements of progress. But, in truth, far from enough. While the Negotiating Groups are proceeding across the board, including on a number of technical issues, the bilateral and plurilateral discussions on the market access leg have reached an impasse. The outstanding substantive gaps which existed three weeks ago persist today.

The absence of progress in NAMA [non-agricultural market access] sectorals constitutes today a major obstacle to progress on to the remaining market access issues. However, let me be clear, this is not the only market access related problem area. There are other issues whether in agriculture or to a larger extent in services — which have not been resolved either. As G-20 Leaders agreed at Seoul, what is needed overall is a spirit of “give and take” and we need this across all areas.

This is the hard reality that we collectively must face up to. As the Chairman of the TNC I have an obligation to ensure transparency and inclusiveness at the multilateral level and as such it is incumbent on me to share with you my frank and honest assessment of the seriousness of the current situation. In the same spirit it is my responsibility to caution you against the temptation to rush to conclusions or to point fingers. It has been tried before and it simply does not work. In the blame game everybody loses.

Positive reality and consultations

On the contrary, I believe our focus now should be on recognizing and respecting the collective determination among all Members to work hard to overcome the few, yet important, issues that continue to divide you. This, if you wish, is a positive reality facing us all. Clearly, Members will have to take a closer look at individual positions and tactics. Clearly, your political masters will want to know and understand why we are where are. You must all be in a position to answer the call from your leaders who pledged to conclude the Round in 2011. Throwing in the towel now is certainly not what Ministers and Leaders instructed us to do last year, neither is it what they are expecting from us.

Over the coming two weeks, starting April 4, I will undertake consultations with a number of Members with a view to understanding the size of the gaps on the NAMA market access. Once I have done this I intend to report to the entire membership. Together — and on the basis of an across the board view of progress in all areas in the negotiation, including the regulatory part as well as market access — we will then decide on the next steps.

I do not think that today is the time for long interventions. Now is the time for all of you, and in particular those among you who bear the largest responsibility in the system, to reflect on the consequences of failure. To reflect on the costs of the non-Round to the world economy as well as to the development prospects of Members, in particular the smaller and least-developed which are more dependent on an improved set of global trade rules. And above, it is time to think about the consequences of the non-Round to the multilateral trading system which we have so patiently built over the last 70 years. It is the time to think hard about multilateralism, which your leaders, yourselves and myself preach at every occasion. In politics, as in life, there is always a moment when intentions and reality face the test of truth. We are nearly there today.
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The United States remains the biggest demandeur of NAMA or non-agricultural market access to developing countries. In turn, its LDC interlocutors claim that proposed gains from agricultural market access to developed countries alike the US are not substantial enough to warrant the kind of NAMA opening desired. IMHO, the difficulties which lie in negotiating this area are attributable to American decline since it can no longer singlehandedly force the issue unlike in years gone by. From that perspective--making the WTO's power distribution more equitable--cutting America down to size is actually a welcome development.

Gotcha! US Faulted by WTO on Susidizing Boeing

Today, the WTO finally released its panel report on the EU's complaint against the United States regarding American subsidies for Boeing (case # DS353). This, of course, is the countersuit launched by the EU in the wake of the US launching a case against Airbus on launch subsidies (DS316). I have always thought both parties, EU-Airbus and US-Boeing, culpable of subsidizing aircraft development and that it would ultimately prove to be a wash. And so it has come to pass: it seems Boeing too is not scot-free alike its European consortium counterpart.

The key part of the panel report faulting the US on aid to Boeing is here:

The Panel upheld the European Communities' claims that: (a) some of the measures maintained by the States of Washington, Kansas, Illinois and municipalities therein, the NASA aeronautics R&D measures, some of the DOD aeronautics R&D measures, and the FSC/ETI and successor act subsidies, constituted specific subsidies. The Panel estimated the total amount of these subsidies between 1989 and 2006 to have been at least $5.3 billion; (b) the FSC/ETI and successor act subsidies constituted prohibited export subsidies; (c) some of the specific subsidies (i.e. the NASA and DOD aeronautics R&D subsidies, the FSC/ETI and successor act subsidies and the Washington State and municipal B&O tax subsidies) caused adverse effects to the European Communities' interests in the form of serious prejudice, finding that the effect of these subsidies was displacement and impedance (or threat thereof) of Airbus large civil aircraft from third country markets, significant price suppression and significant lost sales.

For the sake of clarity, FSC/ETI refers to "[t]ax break exemptions under legislation relating to Foreign Sales Corporations (“FSC”) and the Extraterritorial Income Exclusion Act (“ETI”) and successor acts. Both function as effective subsidies when marketing Boeing civil aircraft abroad.

Transatlantic bickering has already begun, with EU Trade Commissioner Karel de Gucht (obviously) claiming a victory:

"This WTO Panel report clearly shows that Boeing has received huge subsidies in the past and continues to receive significant subsidies today. The US began this dispute in 2004 and now finds itself with a crystal clear ruling that exposes its long-running multi-billion dollar subsidisation of Boeing through Federal and State programmes as illegal.", said EU Trade Commissioner Karel De Gucht. "These subsidies have resulted in substantial harm to EU interests, causing Airbus to lose sales, depress its aircraft prices and unfairly lose market share to Boeing. The detrimental costs to EU industry from this lengthy and onerous subsidisation run into billions of euro. We therefore welcome the WTO Panel's report and call on the US Government to take the appropriate steps that may assist to achieve a mutually agreed solution to this dispute.", Commissioner De Gucht added.

Meanwhile, the Yankees point out that this ruling pales in comparison to launch aid violations previously found against the EU. (And of course the USTR was similarly chuffed when the findings came out against the EU last year.)

Compared with the ruling over Airbus aid, today’s panel report “reveals a market distorted by Airbus’ practices, with illegal launch aid being the key discriminator,” J. Michael Luttig, Boeing executive vice president and general counsel, said in a statement. Boeing wants its bigger rival to reimburse the illegal portion of so-called launch aid until repayments reach what they would have been had the loans been made at market rates.

Both sides can appeal their respective rulings, with the Europeans already having done so. Still, you have to wonder about how much time and effort is being put into something that will likely be deemed a wash at the end of a long process of litigation.

Who benefits in the end? As in many such proceedings, the (trade) lawyers, of course.

USTR Ron Kirk on Moving Doha Forward

I guess the points put forward here will not surprise many since the US trade representative is tasked with promoting trade liberalization first and foremost. For what they're worth, here is Ron Kirk on the US position regarding the aforementioned topic, all the while emphasizing the reasonableness of American demands vis-a-vis its trade partners--especially major emerging economies. From the USTR site:

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.

Under the Doha package currently on the table, India would make cuts on only 3 percent of the tariffs it applies on industrial goods – a result that can hardly make sense in a 21st century economy in which India plays a major role. As with China and Brazil, we look to India to offer significant liberalization in sectors – such as pharmaceuticals and industrial machinery – where India is doing extremely well as an exporter. That’s reasonable.

These three big players are also major competitors in global trade in services, where we also have considerable work to do to create new market access. China’s telecommunication operators are now the world’s largest; Brazil is the world’s 7th largest Internet user; and India is a world leader in information and communications technology (ICT) services. And yet the current services package would yield little progress in opening markets in sectors that drive global economic growth and development, from communications to financial services, environmental to supply chain services. Any final Doha package simply must do better.

We also have critical unfinished business on agriculture. While the current negotiating texts are abundantly clear on what is expected of the United States, it is still unclear what our farmers will see in return, especially from the key emerging markets.

The United States is encouraged that a new sense of urgency appears to be present in Geneva. But in order to put Doha firmly and finally on the path of success, that urgency must now translate – very quickly – into real negotiations. The United States will shoulder its share of the burden. We will expect and insist, however, that other key players help to lift the load. That’s reasonable.

By the same token, we should ask Ron Kirk why his country isn't so keen on implementing WTO clauses regarding the temporary movement of labour when potential gains from the liberalization of migration vastly exceed those from further trade liberalization. That's reasonable.

UPDATE: IPE@UNC misreads what I mean at the top. While representing US business interests may be its primary task in practice, its formal, stated mission is as follows:

American trade policy works toward opening markets throughout the world to create new opportunities and higher living standards for families, farmers, manufacturers, workers, consumers, and businesses. The United States is party to numerous trade agreements with other countries, and is participating in negotiations for new trade agreements with a number of countries and regions of the world.

You have to wake up pretty early in the morning to put one over ol' Emmanuel--and he certainly isn't at fault here.

Adios Panama Canal: PRC's Colombia Railway Plan

It's been a longstanding ambition of many a would-be-conquistador that may finally come true. For, here's an interesting bit of realpolitik that you may have missed of the early Chinese bird catching the Latin American worm. Among Latin American countries, Colombia is regarded as having among the best ties with the United States in recent times. Aside from the Bush-Uribe conservative rapport of years gone by, the two countries also have an FTA-in-waiting.

Yet, we also know that there's a new sheriff in the world economy spreading its largesse far and wide while attempting to win friends and influence people--the PRC. As Washington's megadeficits plunge the US into an infinite abyss, the loaded Chinese are using their coffers runneth over to this end. As it turns out, even the Colombians are hedging their bets. After all, it doesn't take a genius to figure out that it's probably better to catch a rising star than to be dragged down by one that's fading fast.

In this article, mooted plans to build a railway running across Panama to the Pacific stem from a number of things: First, it could well be an easier overland route for commodities to get to the Pacific, from which they journey on to China. Panama remains in the PRC's doghouse [woof-woof] for continuing to recognize the Republic of China or Taiwan as "China," and this diplomatic tussle has marred their trade relations. Second, the wily Colombians are said to be annoyed with American delays in passing the aforementioned FTA, and think pressure can be applied by appearing to side closer with the PRC. Third, on the Chinese side this time, I personally think it would be a huge blow to American prestige if a landmark infrastructure project were to be completed in the United States' backyard by the PRC. Then again, given the pathetic state of modern America, it has little choice but to sit back and watch those that can show those that can't. From TIME:

...Bogotá and Beijing are in talks to build a multi-billion-dollar railway connecting Colombia's Caribbean and Pacific coasts. Said [Colombian President Juan Manuel] Santos, in a poke at U.S. superpower self-esteem, "Asia is the new motor of the world economy..."

In the past 10 years, annual Latin American exports to China have gone from negligible to more than $40 billion as the Asian giant reaches for commodities like oil, copper and soy beans to fuel its roaring economic growth (10% last year). China is now the top purchaser of exports from Brazil and Chile; and according to the U.N.'s Economic Commission on Latin America & the Caribbean (ECLAC), within five years it should replace the European Union as Latin America's second-largest trading partner after the U.S. In the process, Beijing is lavishing billions of dollars in financing on the region, from hydro-electric projects in Ecuador to development funds in Argentina.

And now, perhaps, a major railway in Colombia to compete with the nearby Panama Canal as an Atlantic-to-Pacific shipping shortcut. Chinese officials confirmed this week that their country has agreed to invest in the $7.6 billion project, which would stretch about 140 miles (220 km) from Colombia's northern Caribbean region, near Cartagena, to an as-yet undesignated site on its western Pacific coast, mainly to ferry Colombia's abundant coal to Asia.

What's less certain, however, is whether a trans-Colombian railway would really be more efficient than using the Panama Canal — especially since that shipping lane is undergoing a $5.25 billion expansion to accommodate more massive cargo ships. (Relations between China and Panama are also cool due to Panama's strong ties with Taiwan.) Ever since the canal was completed in 1914, rail, particularly across southern Nicaragua, has been discussed as an alternative...

Still, both Colombia and China seem to think it's worth the risk. China sees the country "as a good strategic opportunity," says [Inter-American Dialogue President Michael] Shifter, "a good location for conveying a lot of South American commodities but also a place with more sophisticated governance today." The rail partnership is also a pragmatic move for Bogotá, he says...

Many Colombia watchers believe a key impetus for Santos is to make Washington nervous about China's growing involvement with the U.S.'s top South American ally, in the hopes of getting Congress to expedite the free-trade agreement (FTA). But analysts like Shifter doubt that's a consideration, since the Colombians are well aware that the FTA is being held up mostly because of opposition from U.S. labor unions (based partly on concerns about human rights for Colombian workers). Either way, recently leaked U.S. cables, based on conversations with Colombian diplomats, help explain why Colombia, despite its realization that China is out to exploit its natural resources, is building the partnership. "Colombia is wary of Chinese motives," says a March 2009 message from the U.S. embassy in Beijing, released last month by WikiLeaks. "However, Colombia needs new economic partners, particularly given the lack of progress on a U.S.-Colombia [FTA]."

And particularly because Colombia wants to fuel its own boom. Its economy is expected to grow 5% or more this year and next; the World Bank now rates it the 39th best nation to do business with, up from 76th place just five years ago, and Santos has pledged to put it in the top 20 by 2014. He wants its coal production to increase 70% by then, to 124 million tons a year; its oil output by 75%, to 1.4 million barrels per day; and its value-added products to jump from 29% of total exports to 40%.

It's looking to China to help it get there in large part because the Harvard-educated Santos is said to be especially impressed with Beijing's commitment to getting things done. In other words, the can-do spirit Latin America used to expect from the U.S. — the kind that built the Panama Canal.

That'll show those Yanks up, indeed. It also begs the question, will the ongoing Panama Canal enlargement to accommodate larger vessels pay off if the Chinese decide to route their business elsewhere? The answer is likely yes because it's large oil tankers that'd more easily pass through, but still, it demonstrates how the world has moved on.