It’s nice to see the long-stewing Chinese currency manipulation pot bubbling a bit again, thanks to China’s latest blatantly disingenuous move to allow a token fluctuation or two of the yuan.  And it’s great that Sen. Debbie Stabenow’s currency bill is inching towards the floor of the Senate. (The underlying idea, giving American industries formal trade remedies against currency manipulation by foreign governments, was actually thought up several years ago by  Kevin Kearns, president of my organization, the U.S. Business & Industry Council.)

Passing this bill would be a very useful and encouraging step.  Currency manipulation and related trade chicanery have gone on long enough. It’s especially encouraging that the bill’s sponsors grasp—as the trade-clueless Obama administration doesn’t—that trying to change China’s behavior is a losing game.  So this measure wisely dispenses with preaching reform to Beijing and simply authorizes the use of sanctions in particular cases to provide trade relief to victimized American industries.

Preaching reform to China is a complete waste of time for a number of reasons.

First, China is making such enormous profits off of what it’s doing that its government would have to consist of saints for them to change anything because of some idea of what’s “right” or good for the rest of the world economy.  If Beijing cared about any of this, it would not be manipulating its exchange rate in the first place.  Among other legal strictures, the Articles of Agreement of the IMF (Article IV, revised, which went into effect in 1978) prohibit members from manipulating their exchange rates.

Second, with the U.S. having just survived one economic crisis and quite likely drifting paralyzed towards another, we’re not especially credible right now giving anyone else economic advice.  If we’re so smart, and free trade is so good, then why are we the ones in crisis while some of our adversaries enjoying double-digit economic growth rates?  That’s not a question most Americans want to face, but make no mistake, everybody’s asking it, behind closed doors, all around the world.

Third, if the Chinese leadership knows any economic history—and they seem to—then they know that the policies China is pursuing today are, in essence if not in detail, precisely the policies the US itself pursued in the 19th century to wrest economic leadership from the  then-dominant economic power, Great Britain.  So from Beijing’s point of view, we necessarily look like a bunch of decadent hypocritical whiners. (This doesn’t make them right, but it certainly helps explain their lack of interest in our complaints.)

The strange thing in all of this is that the US, which has no difficulty playing  hardball when it comes to its military relations with the rest of the world, remains stuck in a dreamily idealistic Wilsonianism when it comes to international trade.  In our government’s free-trade fantasy world, everything is going to be fine because the sheer truth of the free trade ideal will persuade everyone else in the world to embrace it.  Any hardball we do engage in is confined to helpless Third World nations and is done only because they don’t know what a big favor we’re doing in imposing free trade on them.

The fundamental premise here is that the whole world will embrace free trade, and fairly soon.   But the reality is that the world is not embracing free trade.  It is embracing a construct called FreeTrade^TM, which amounts to 99 percent free trade on America’s part plus completely different policies elsewhere.  Among these are:

1) Mercantilism on the part of shrewd governments from Berlin to Taipei.

2) Imitations of American-style free trade among those dumb enough to believe in it (like the UK) or bullied into it by the economic gunboat diplomacy of the IMF in the Third World.

3) A charade called the WTO which enforces free trade on nations in category #2 and props open export markets for nations in category #1.

Would the Stabenow currency-reform bill get us out of this trap, if it passed?  As noted, it’s definitely a positive move, but it’s still just a start.  Its key limitation is that its approach is gradualist and, above all, reactive, because it depends on victimized industries filing lawsuits under the trade laws. So it will ultimately need to be supplemented with a much more comprehensive strategy.

What America really needs to do is impose an across-the-board tariff on Chinese goods sufficient to offset not only the effects of currency manipulation, but also all the other tricks Beijing has pulled in the past and will continue trying to pull in the future.

What kind of tricks?  Not only obvious policies like tariffs and quotas, but also local content laws, import licensing requirements, and subtler measures—some of them covert, hard to detect, or infinitely disputable—such as deliberately quirky national technical standards and discriminatory tax practices. Then there are policies  that involve outright skullduggery, such as deliberate port delays, inflated customs valuations, selective enforcement of safety standards, and systematic demands for bribes.  It follows that any American response to all this must be broad-based and agile enough to prevent these various forms of circumvention.

Some Americans are still dreaming that a boom in American exports to China will save the day.  The reality is that the dream of selling to the Chinese functions primarily as bait to lure in American companies—which are then forced by the government to hand over their key technological know-how as the price of entry. So the China market remains the mythical wonderland it has been since the 19th-century era of clipper ships and opium wars.

Beijing didn’t invent any of this mischief, by the way.  It is operating from the standard 400-year-old mercantilist playbook, albeit implemented with the exceptional cynicism of a Leninist one-party state running a capitalist economy.  Similar tactics are used—in less aggressive, less disingenuous, and less illegal ways—by governments all around the world.  The two regions where this is most clear are Germanic-Scandinavian Europe and “Confucian” Asia (China, Japan, Korea, Taiwan, Vietnam, Singapore).

Nevertheless, even most trade critics in Congress still shy away from the sweeping measures America needs to blunt this strategy.  A large part of their reluctance to deal with the problems posed is due to special-interest pressures: many of the largest American companies are now so dependent on their overseas operations, and thus so vulnerable to pressures by foreign governments, that they have become outright Trojan horses with respect to American trade policy. As former congressman Duncan Hunter (R-CA), for years one of the outstanding critics of trade giveaways in Congress, once put it, “For practical purposes, many of the multinational corporations have become Chinese corporations.”

Over time, this will probably change, as Beijing repeatedly disillusions those who hope for it to change.  China right now is doing what the Soviet Union did over the decades after WWII, as its repeatedly obnoxious international behavior relentlessly chipped away at the not-inconsiderable sympathy it had once enjoyed.  Eventually, one simply must assume, America will lose patience.

One hopes that by then it is not too late to solve America’s trade problem without an economic debacle of some kind.

Ian Fletcher is the author of the Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95) An Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933, he was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.

Germany is perhaps the best case in point, as this Montana-sized country of 82 million people was the world’s #1 exporter until 2008, surpassing the United States even today and only surpassed by China in 2009. Germany is more culturally familiar to Americans than Japan, another strong performer in the developed world, and thus its policies are easier to understand.  (Both nations, by the way, now pay their workers industrial wages higher than the U.S.)  This is all without significant natural resources to export (Canada doesn’t count) and while supporting a welfare state generous by American standards.  And the rest of Germanic and Scandinavian Europe follows, broadly speaking, similar economic policies, so it is well-worth understanding how the Germans do it.

Germany, like the U.S., is nominally a free-trading country. The difference is that while the U.S. genuinely believes in free trade, Germany quietly follows a contrary tradition that goes back to the 19th-century German economist Friedrich List (who was, ironically, a student of our own Alexander Hamilton, the man on the $10 bill).  So despite Germany’s nominal policy of free trade, in reality, a huge key to its trading success is a vast and half-hidden thicket of de facto non-tariff trade barriers. That these barriers exist is not especially controversial, even among those who espouse free trade and thus deny that they serve any useful purpose. For example, according to a report by the conservative Heritage Foundation,

Non-tariff barriers reflected in EU and German policy include agricultural and manufacturing subsidies, quotas, import restrictions and bans for some goods and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent regulatory and customs administration among EU members. Restrictions in services markets and the burden of regulations and standards exceed EU policy.

Germany’s covert trade barriers—which should perhaps better be called “trade balancing measures,” as it would be a mistake to confuse them with crude protectionism—begin with careful control over Germany’s currency. As Americans presumably realize by now thanks to our problems with China, overt or covert currency manipulation can do a lot to improve a nation’s trade performance at the expense of its trading partners.  When Germany was still on the Deutschmark, for example, it did not allow mass asset sales and foreign borrowing, preventing its currency from being manipulated, and thus it was protected against trade deficits. Germany’s adoption of the euro constituted a de facto downwards manipulation of its own currency, because the euro is essentially a one-size-fits-all “blend” currency, too strong for the weaker economies of Europe, but too weak for the stronger ones.  The net effect is to encourage a trade surplus by the strong countries and the gradual selling-off and indebtedness of the weaker ones.  Because two-thirds of Germany’s trade is with the rest of Europe, euro-related policies have a huge effect on German trade.

Another key policy: Germany does not use the credit system to subsidize short-term consumption as the U.S. does.  For example, Germany has remarkably few credit cards per person. This tends to direct lendable money into investment, not consumption. This tends to favor balanced trade because investment strengthens industrial competitiveness, while consuming more than one produces necessarily means sourcing from abroad (as there’s nowhere else to get goods if you didn’t produce them yourself).  Different tax policies also have a big effect. Above all, Germany has a 19 percent value-added tax (VAT) and the US doesn’t.  So American goods entering Germany pay a border-adjustment tax, but German goods entering America don’t, a fact perfectly legal under WTO rules.  

The corporate structure of Germany also fights trade deficits. Germany’s universal banks, for example, pressure the companies they own stakes in not to source components from abroad, which would weaken supplier companies they have big loans to.  Similar pressures operate in retail and other parts of the supply chain. And the generally high level of German state involvement in industry, ranging from training schemes to state-owned banks, comes with similar strings attached. As one German puts it,

Germany as a whole has a near 48% share of its economy is some shape or fashion state controlled or run. The German is not even really fully aware of the true tax load he’s under nor the proportion of government that controls his life. Tell most Germans that the FRAPORT [airports] is a state entity and they are perplexed and confused. Explain to them about the GEZ, and how ARD, ZDF, HR3, SWF, DW, BR3, NDR, WDR etc. are more or less ‘state’ run entities and they are in disbelief. But the truth is, these agencies get their money through a tax that the state controls and their CEO is state-appointed by a committee. The Deutsche Bahn [national railway system] is another state entity, as is the Telecom.

The excruciatingly high technical and quality standards of many German (and now European) goods, ranging from the need for cars to do 150 MPH to survive the autobahn to the fact that American appliances (other than a few elite brands like the top Whirlpool, Jenn-Air, and Subzero models) are regarded as 1970s junk to European consumers, serve as barriers to penetration of European markets from the low end.  This low end is, of course, the thin end of the wedge, as Americans learned from watching first Japanese and then Chinese imports to this country. Some of these standards are based on actual laws; others are deep set cultural preferences and thus consumer-driven. 

It also doesn’t hurt that the German economy is, thanks to decades of policy, biased towards specializing in highly-exportable manufactured goods, while the U.S. excels in services—which may be nice to consume on a Sunday when the shops are closed in Berlin, but are hard to export and thus don’t help our trade balance.

Although Germany is nominally compliant with WTO rules,  in reality, all manner of legal red tape is employed to discourage imports.  As one web commentator puts it,

The reason why France had Citroen Peugeot and Renault for all these years and even BMW and Mercedes, Fiat, Lancia etc. or Audi and VW could not break into their market is because even Germany, Great Britain and Italy were being kept out of the French market with such games for years. Now they ‘harmonized’ a lot of hidden trade barriers and while they no longer play the games they once did with each other, they still play them with the U.S.

Import duty was (probably even more now from outside the EU) 10 % based on the purchase price + freight costs to the place of destination in Germany + freight insurance. Then comes the Mehrwertsteuer [value-added tax or VAT], and you have to get a German VIN [vehicle identification number] because of course the U.S. VIN in no good, and even if it’s a brand new car you have to take it to the TUV [German equivalent of Underwriters Laboratories] and the Kraftfahrtbundesamt [Federal Motor Transport Authority] has to first say that it’s even allowed to register the car in Germany.

German motor vehicle standards require many modifications to the US car despite the fact that German safety standards (No side impact struts in doors, safety glass that isn’t as good…..etc.) are lower. Example: On U.S. cars you had to disconnect the red brake light in the window of cars many years ago. Years ago (The U.S. used halogen lights first) you had to switch out headlights because the US used halogens on some cars and the Germans didn’t. Why? What safety aspect was impacted? None! It was pure games just to make it hard to import a car.

In sum, as another web commentator explains, “free trade” to a German means:

We should be able to sell all the cars in the US, but please don’t bring your Ami hormone beef Dreckschleuder [environmental hazard] car and silly Mickey Mouse phones to Germany! We have the Telecom and they build perfectly good phones that come in 4 colors (until the early 90s), and our cars without Kat [catalytic converter] are so much cleaner and safer without airbags, without side impact struts that are mandatory in the US and not in Germany (even today), without better safety glass…

In fact, we Germans, with our big foreheads, have determined that despite our BSE [mad cow disease], chicken flu, and the occasional farmer who feeds his cows illegal steroids and antibiotics anyway, these are much safer than U.S. beef that is hormone treated with (regulated) hormones and controlled by the USDA. Also don’t bring your bad tasting US wine to our country! Yes, you use (hybrid) plants and we don’t—and therefore your wine is much worse than our antifreeze wine from Italy and France and should be banned, after all—how dare you do something so uncultured as using hybrid vines?

Ian Fletcher is the author of the Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95) An Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933, he was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.

Great Britain (May 17) – Iceland’s Eyjafjallajokull volcano is once again wreaking havoc with major airports in Great Britain, Ireland, and portions of Europe. Last week a shift, in the jet stream forced the closure of airports in Northern Spain and parts of France.

London’s Heathrow airport one of Europe’s busiest along with other major hubs in Britain were closed once again this weekend as volcanic ash activity darkened the skies. Traffic into an out of Ireland’s main stop over from flights originating out of the United States were unaffected this weekend by the ash cloud however, flights scheduled to land today are being canceled.

In Europe, airports in Amsterdam and Rotterdam are scheduled to be closed for at least eight hours today as officials hope the ash cloud clears the airspace within that period. Flights are being canceled into Schiphol airport, the fifth largest passenger hub in Europe.

These shutdowns come only months after travelers in and out of Europe on holidays were stranded for at least a week when Eyjafjallajokull began belching airplane engine choking ash in to the atmosphere. The volcanic ash has the potential of doing irreversible damage to jet engines prompting these emergency cancelations.

With no signs of Eyjafjallajokull quieting down, airlines are expecting both revenue losses and flight disruptions for the near future.

Protect your PIN.

The Emirates Palace is a top hotel in Abu Dhabi, and to cement their position as the top hotel in the area they have introduced something so utterly pointless, but so undeniably cool that if I was rich, I would travel there just to have a shot.  Known as Gold To Go, it is an ATM that dispenses gold bars and customised coins.

The brainchild of German entrepreneur Thomas Giessler who chose the Emirates Palace because of its reputation for attracting people so rich that a machine that pays out money just isn’t enough, people so rich that the things they buy are prices in ounces of gold.

I do not see it catching on in the UK, although there are a lot of companies demanding you send your gold to them instead of getting off the sofa and taking it to a pawn shop like broke people in the olden days.

The hotel could not have hoped for a better day to launch the gold dispensing ATM as the price of gold hit a record high of $1,245 and ounce.  I wonder what colour of card you get to operate it…  Probably a colour only rich people know about.

- henry hunter

(May 08) – Flights out of Europe disrupted again on Saturday, and Sunday’s flights may see as many delays if not remain at the gates as the jet stream is once again sends choking clouds of ash from Iceland’s Eyjafjallajokul volcano right into the flight path between Europe and North America.

Airlines forced to use routes much further south than normal in recent weeks have found the ash cloud, which is spreading eastward, unavailable as well. Unfortunately, the 1,200-mile long cloud is now causing traffic problems for flights out of both France and Spain which, have already seen an almost 4 hour increase in the flight time between the two continents.

Spain’s Barcelona hub remained closed along with another 19 northern airports. Spain is reporting that 670 flights had been canceled due to the volcanic ash today, with an additional 125 flights from Portugal canceled until noon local time.

The ash cloud is hovering at an altitude of about 35,000 feet just about the same altitude that most transatlantic flights use. With no signs of the Iceland’s volcano relenting, air travel disruptions apparently will become more, “Business as usual” than inconvenience as the airline industry no longer has to battle with governmental restrictions but, are doing battle with Mother Nature, a battle they cannot win.

May 8 – Ottawa (May 08) – The Canadian government announced that 109,000 Canadians found themselves re-employed the month of April bringing the unemployment rate down to 8.1 percent a tenth of a percent decline from Februarys numbers.

The bulk of the job growth was in the private sector with retail, and wholesale companies adding the most jobs. This would be the fourth consecutive month for job growth in a row. According to Canadian resources on the web, building permits are on the increase as well.

Overall wage growth has slowed to 2 percent however; the impact of the jobs report drove the Canadian dollar higher in the currency markets.

The employment number increase was the highest recorded jump since statistics keeping began in 1976. Canadian employment had increased by approximately 285,000 jobs since last July, indicating that the recession in Canada at least, may be ending.

The bulk of the employment activity, or about two-thirds was among young men aged 25 and older an increase of over 72,000. With the retail, and wholesale trades; business, building, and support services, and construction services filling most of the void, the good news was a welcome relief in Ottawa.

Retail and wholesale jobs increased by 21,000 while building and supports services gained 31,000. Construction came in third adding 24,000 jobs with information, culture, and recreation adding an additional 20,000 workers to the payrolls.

Notable losses in April were in the manufacturing, and agricultural industries losing a combined 31,000 jobs.

Employment in Ontario, Quebec, British Columbia, and Alberta respectively were the big winners in the job numbers last month with Manitoba adding a modest 7,000 jobs to help with the jobless situation. Manitoba enjoys the lowest unemployment rate in the country with an unemployment rate of 4.9% whereas, unemployment rates elsewhere ranged from 8.8 to 7.3 percent.

In contrast to the horrible job situation in the United States, the total population of Canada according to statistics found online as of 2008 is 33,311,400 which is roughly double the number of unemployed Americans being counted under the current methods, and just shy of the combination of unemployed and underemployed Americans estimated to be greater than 28 million.

The United States still has a long way to go in creating an atmosphere that will spur both growths in established business, and creation of jobs within new businesses. Even more startling in these numbers, the United States over the last decade ship more jobs overseas than the total number of unemployed in Canada. It would be obvious the United States begins to rethink its tax breaks and incentives to the wealthy and bring those jobs sent overseas, back home in the U.S.

Scotland, (May 5) – The giant volcanic ash cloud that grounded all flights a matter of weeks ago has returned thanks to the jet stream changing pattern.  Since yesterday, airports in Scotland and Ireland have been closing due to the cloud.  Right now only Aberdeen airport in Scotland is open.  News reports suggest that by tomorrow England’s airports will have to begin grounding flights again.

The disruption caused by the eruption last time around caused what can only be described as a massively over the top reaction which I can say because I was not stranded anywhere.  Although, I feel I made my feelings clear about these people in the last article regarding the volcanic ash cloud.

An advisory to anyone travelling in the near future to get in touch with their airline to make sure they will be going on holiday.  It is likely to cause widespread disruption over the summer, as the volcano shows no sign of relenting.

Last month the cloud was responsible for six days of grounded flights.

The EU is discussing the possibility of a “single European regulator for a single European sky.” This regulator is will be available organize flights in cases as severe as what is currently happening thanks to the Icelandic volcano, and to ensure that the millions of people who were affected by the cloud last time around, will never have to re-live the crisis again.  I have no idea how anyone could make that statement.  Let alone Siim Kallas, European Transport Commissioner who went on to say, that it would certainly happen again, whether it be next week or in 20 years.

-henry hunter international freelance journalist

Nigeria (May 1) – The Federal Civil Servants of Nigeria under the aegis of the Joint Public Service Negotiating Council (JPSNC) have threatened to embark on a five-day warning strike Monday to demand a 37% increase in salary. The federal government had previously offered a 10% increase of salary to the government workers. This proposal was refused by workers who stated that the offer was too low.

The Union representative, Comrade Olakunle Olaitan, stated the warning strike was based on the agreement by eight separate union under the JPSNC, and that they will accept nothing below a 75% salary scale. The Union stated workers are prepared to strike to uphold their rights. “The Federal Government of Nigeria does not understand any language in terms of the demands of labor force except a strike action, and we will give them one by embarking on a 5-day warning strike on Monday, if the federal government fails to place the workers on [a] 75% salary scale, which is [a] 35% salary increase,” Olatain added.

Nigeria (Apr 21) – The World Bank has granted a $915 million (USD) loan to Nigeria in the form of aid to help finance Nigeria’s 2010 budget. The grant is expected to be accepted and signed for today by the Federal Government of Nigeria.

The Acting President Goodluck Jonathan previously sought approval from the House of Representatives to pursue a loan from the World Bank, stating Nigeria is in desperate need of funds to finance the 2010 budget and other infrastructure projects. In a letter written by Jonathan, he said, “The loan was in line with the due process of Nigeria and the consent of the House of Representative has been consulted for approval. Out of the $915 million loaned from World Bank $179 million would be allocated to Urban Water and Transport, Human Capacity Development, and Power infrastructure projects.”

The Minister of State for Information and Communications, Labaran Maku, said the budget would be signed today or, at the latest, before the week runs out at the Presidential Villa.

U.S. Senator John Kerry

By: Livia Sappington

On April 8, 2010 the World Bank’s Board of Executive Directors approved us US$3.75 billion loan to South Africa’s power utility, Eskom to achieve a reliable electricity supply.  The loan is the Bank’s first major lending engagement with South Africa since the end of apartheid 16 years ago and was brought about by circumstances including South Africa’s energy crisis of 2007 and 2008 and the global financial crisis.  It aims to benefit the poor directly through job creation.

“Without an increased energy supply, South Africans will face hardship for the poor and limited economic growth,” said Obiageli K. Ezekwesili, World Bank Vice President for the Africa Region.  “Access to energy is essential for fighting poverty and catalyzing growth, both in South Africa and the wider sub-region.  Our support to Eskom combines much-needed investments to boost generation capacity for growing small and large businesses, creating jobs, and helping lay the foundations for a clean energy future through investments in solar and wind power.”

Most of the loan, US$3.05 billion is allocated for completing the 4800 MW Medupi coal-fired power station.  The United States abstained from voting on the loan application and Senator Kerry (D-Mass.) issued the following statements today criticizing the decision:

“The Eskom project and America’s decision to abstain must mark the end of the era of abundant international subsidies for dirty coal-fired power plants. There are better ways to promote urgent energy access in the developing world without exacerbating the looming threat of catastrophic climate change which will ultimately hit Africa and the developing world the hardest…  The good news is that this project triggered a debate that already resulted in improvements since South Africa’s submission. South Africa, working with the World Bank and Treasury, has included additional renewable and energy efficiency components. Perhaps most importantly, South Africa has now publicly declared its intent to devote $1.25 billion of the remaining funding opportunity to emission reduction efforts.”

According to the World Bank Group, its energy portfolio, which in its last fiscal year financed US$8.2 billion in energy projects allocated 76% of the total for non-fossil fuels and less than 3% was for coal.