Hammering NAFTA

In Mexico City yesterday, signatories of the North American Free Trade Agreement (NAFTA) were highly critical of statements made by Democrats Hillary Clinton and Barack Obama during their Tuesday debate indicating they would "opt-out" of the trade pact.

"I will say we will opt out of NAFTA unless we renegotiate," said Clinton.

Obama concurred: "We should use the hammer of a potential opt-out."

But as Michael Luo points out today in The New York Times, despite the harsh rhetoric, the candidates have staked out nuanced positions on NAFTA. Luo quotes David Gergen, an adivser to President Bill Clinton as saying that Senator Clinton was "extremely enthusiastic" about the trade agreement while it was being crafted. As recently as 2004, she claimed that NAFTA had been "good for New York and good for America."

Obama, for his part, while consistently hammering NAFTA, has not differed from Senator Clinton at all when voting in the Senate on trade issues. As Eduardo Porter notes in his article, "Nafta Is a Sweet Deal, So Why Are They So Sour?," the real benefits from a dismantling of the agreement would accrue to powerful industrial and agricultural special interests "who survive behind protective barriers." Specifically, American Big Sugar and Mexican corn farmers.

So why are Clinton and Obama itching to prove just how much more opposed to NAFTA they are then the other guy?

It's Ohio, stupid. The hotly contested state has lost hundreds of thousands of manufacturing jobs in the last five years.

In Ohio, which has lost nearly 225,000 manufacturing jobs since 2001, NAFTA is an easy target. For many working-class Ohioans – and the voters Sens. Barack Obama and Hillary Rodham Clinton hope to win in Tuesday's critical primary – it stands as a symbol for much that troubles their state. Against that backdrop, say experts, it's not surprising it's become a political piñata.

Managing Expectations in Cambodia

Some people are playing down the potential oil and gas boom in Cambodia. The original hope of a possible $2 billion a year in additional revenue has been reduced to an initial $150 million and a possible $1 billion in several years. It is still significant for an $8 billion economy with a $1 billion annual government budget. Still, the government is trying to manage expectations.

As its violent history fades from memory, the government knows that its legitimacy will be increasingly tied to economic performance and better governance. So Cambodian leaders have an interest of not making a big deal about possible oil and gas windfalls. Some observers said that the bauxite deposits may be longer lasting as a source of growth. One Western diplomat speculated that hydroelectric may generate more revenues than oil and gas but the Mekong River area could be severely harmed from the dams.

Two types of risks emerge from the possible energy boom. The first type is the immediate effect from having a large amount of revenue injected into the economy. One effect could include the “Dutch Disease.” Although the Cambodian economy is largely dollarized, thus giving it a chance of avoiding the exchange rate effects of Dutch Disease, other problems could appear such as resources being diverted away from tradable to nontradable goods. The other related effect is the strong possibility that revenues will simply disappear into the pockets of corrupt leaders or “silly” projects, leaving the country with nothing.

The other type of risk includes the possible societal responses to poorly managed revenues. Several people I interviewed agreed that possible responses from most likely to least would be: Social unrest from failed expectations and poor management; political change or instability coming from the emergence of rival factions; and a military coup from a frustrated army.

Cambodia's Future: Norway or Nigeria?

I am in Cambodia this week researching the expected offshore oil and gas boom. The big question is: Will one of Asia’s poorest and most corrupt countries use its newfound wealth to invest in infrastructure and education or will it simply shore up its corrupt practices? Will Cambodia become a Norway or a Nigeria?

Yesterday I met a foreign energy businessman with years of experience in Cambodia. His prognosis for Cambodia’s future was optimistic. He sees Cambodia as becoming a hub for a rapidly growing region, potentially taking advantage of its central location. In terms of governance, he has witnessed several years of improvement and sees things as only getting better.

China’s recent mining disaster is clearly on the minds of businesspeople here. Not only is China's mining sector the world's most dangerous, it is also extremely corrupt. The businessman said many people, including Cambodians, are reluctant to make deals with Chinese investors and partners. He listed several risks: opacity of contracts; hidden stipulations in contracts; lack of employment opportunities for local workers (Chinese use their own contractors); corrupt practices; and outdated equipment. Although Chinese technology will improve within a decade or so, he wasn’t so sure about the other practices.

Corruption is a rotten disease that many businesses are trying to fight. This businessman’s company is partnered with an American company, meaning it must follow the Foreign Corrupt Practices Act. He said it is a lot of work to comply with these rigorous standards, but he sees corrupt practices as antithetical to profitable business for several reasons: first, it is a waste of money that is thrown away without accountability; second, bribes seem to compound and send signals that a company is willing to play a dirty game; finally, good practices are central to ethical business and a calm soul. “I am able to sleep at night,” he said.

Due to his company’s large profile in Cambodia, an international NGO recently investigated how it was able to secure large contracts. After its investigation, the NGO concluded that his company was clean. He wasn’t worried. I only wished that clean companies like that were showcased for their exemplary behavior. If businesspeople knew they had a choice to act ethically, I bet cleaner practices would catch on.

Russia's demographic time-bomb

Two articles currently up on Policy Innovations paint very different pictures of Russia. In Russia and the New Great Game, Sacha Tessier-Stall looks at the emergence of Russia as a player in global energy markets and Chess Takes World, by yours truly, details Russia's decline as the sole chess superpower.

So which is the true face of Russia? The once powerful bear in a desperate search for the glory of lost empire? Or the resurgent modern petro-state with money and muscle to spare?

I don't pretend to have the answer. But, when it comes to Russia, my mind often turns to the question of demographics. Russia is 621,00 square miles in size, with a population of 141 million. That makes it twice the size of the United States, with half the people. That does not bode well for a country with 2,300 mile border with China.

Russia is blessed with an abundance of resources save the one that matters most: people.

Subprime: Is the U.S. Repeating Japan’s Mistakes?

Following a period of rapid growth, Japan in the 1990s, like the US last summer, experienced the bursting of its real estate bubble, which jolted the economy and led to longterm stagnation. Certain parallels have prompted concern that the US may be repeating Japan's mistakes.

The Carnegie Council's New Leaders hosted an event on Tuesday with speaker Edward J. Lincoln, Director of the Center for Japan-US Business and Economic Studies and Professor of Economics at New York University's Stern School of Business. Lincoln discussed similarities and differences between the lead up to Japan's financial crisis and the current economic downturn in the US.

Both countries experienced mistakes related to regulation/deregulation. The US was allowed to develop a junk bond market in the 1980s without enough regulation, while Japan's government asked mega banks to lend money to real estate.

Contributing to the problems in both countries has been the tendency of people to believe they have more insight than they do into how the world works and will be able to avoid negative outcomes. Hubris and greed cause people to ignore or misunderstand risks. In Japan, nobody believed real estate could depreciate in value. By the end of the '90s, the value of real estate is Japan's six largest urban areas had tripled since the 1980s, then dropped back to 1985 levels.

Both countries tended to underestimate the circumstances of the subprime problems. In 1992, the Japanese government asserted that it had fixed its policy and would be back on track quickly. Likewise, this past summer many in the US proclaimed that the subprime crisis could be easily resolved.

But a few key differences set the US circumstances apart from the Japanese crisis.

For one, Japanese banks had a weak inspection system and didn't disclose their bad loans until the end of the 1990s. The US on the other hand revealed their exposure to bad loans early on.

The countries' macroeconomic policy responses also differ. The Bank of Japan, in response to rising prices, raised interest rates and asked banks to stop lending money. The real estate bubble broke and deflation ensued, which made mortgage payment all the more difficult.

In contrast, the US Federal Bank, having learned in part from Japan's mistake, has issued a series of interest rate cuts to help the US economy. Current commodities prices also remain high.

Finally, the scale of the impact differs between the two countries. The face value of financial losses in the Japanese real estate market represented about 20 percent of GDP in a country with a slow economic growth rate and shrinking population. For the US, the figure is more like 8 percent of GDP, while the economy is growing and the population is increasing.

Everybody makes mistakes, but the question is whether or not you can correct those mistakes.

The US is likely to experience a mild recession in the near future. But, according to Lincoln, the bottom line is that the US is not repeating Japan's failure and will correct mistakes more quickly and experience smaller losses than Japan.

Olympic sponsors concerned about image problem

The Wall Street Journal reports today that Hollywood director Steven Spielberg's decision yesterday to resign as an adivser the 2008 Olympics in Beijing could signal a turning point in the effort to shame China for its ongoing relationship with the governement of Sudan. Growing numbers of athletes and entertainers are joining human rights activists in pressuring advertisers to justify their association with the controversial games.

For corporate sponsors, the stakes are high. The opening ceremonies are expected to be the first television sporting event watched live around the world by more than one billion people. In some cases, sponsors have shelled out more than $80 million for the rights to associate themselves with the Beijing Games. And as the first Olympics in China, the event is being used by multinational brands as an opportunity to build credibility with a booming consumer market that is playing an increasingly important role in their global sales.

June Teufel Dreyer, a China specialist at the University of Miami told Evan Osnos of the Chicago Tribune that advertisers "want to get their logos in front of the spectators [and] they will say that the Olympics are about sport, not politics." Dreyer added that she didn't expect any widescale pullout of advertising dollars from the events big corporate sponsors such as McDonalds and Coca-Cola.

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photo by nimboo (CC)

Spielberg directs a hit (at China)

Steven Spielberg has earned acclaim for cinematic depictions of moral courage in films like Schindler's List and Saving Private Ryan. Now he is being praised for a real-life act of public heroism.

The Oscar-winning director of Jaws and E.T.: The Extra Terrestrial had been enlisted by the Chinese government to lend the opening and closing ceremonies of the upcoming Beijing Olympics a little Hollywood razzle-dazzle. This week, he withdrew from that role, citing China's continuing support of the Sudanese government. "I find that my conscience will not allow me to continue with business as usual," he said in a statement.

At this point, my time and energy must be spent not on Olympic ceremonies but doing all I can to help bring an end to the unspeakable crimes against humanity that continue to be committed in Darfur.

China has defied intense international pressure to cease buying Sudanese oil and halt the sale of arms to the regime of Omar Hassan al-Bashir. Bashir's government is acccused of atrocities in the Darfur region of western Sudan.

This embarrassing public reprimand from a major international personality has predictably annoyed the Beijing government. The Chinese Embassy in Washington, DC responded with a statement of its own.

As the Darfur issue is neither an internal issue of China, nor is it caused by China, it is completely unreasonable, irresponsible and unfair for certain organizations and individuals to link the two as one.

Mary-Anne Toy reports in the Australian daily The Age that a recent editorial published in People's Daily, the official newspaper of the ruling Chinese Communist Party, took a defiant tone toward critics of its Sudan policy:

"The international community knows quite well that China has exerted a positive and constructive influence on the Darfur issue," the editorial said, pointing to the deployment of China's troops on the UN-African Union hybrid peacekeeping missions in Darfur. "No country has a perfect human rights record … the practice of politicising the Olympic Games will distort the Olympic spirit and will be denounced by peace-loving and sports-loving individuals all around the world."

Indeed, British Olympics Secretary Tessa Jowell and Culture Secretary Andy Burnham quickly denounced Spielberg's move as unhelpful. "Our position is always one of constructive engagement, working to improve the situation in the country and raise issues around the world and that’s what we will, as the Government, continue to do," said Burnham.

But many more, including Human Rights Watch, have lined up in support of the famous director's decision.
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photo by nimboo (CC)

Rising food prices to jump start Doha?

As my Carnegie Council colleague Evan O'Neil noted in this space nearly a year ago, "Agriculture ... persists as the millstone around the neck of international trade negotiations, grinding the process to a halt." Now it looks likely that there will soon be movement on the so-called Doha round of trade talks at the WTO and it is agriculture that is providing the spark.

The Wall Street Journal's John W. Miller reports this morning that the European Union's recent temporary elimination of import tariffs on cereal may be the first step toward a restructuring of developed-world subsidies for agriculture (permanent link to story here).

The world's scramble for affordable food is tearing at the patchwork of agricultural tariffs that governments have long used to control trade - and offering a glimmer of hope to those trying to kick-start a stalled global trade deal....So far, the situation hasn't forced a rethinking of subsidies that farmers in the developed world receive. But some say that is an inevitable consequence of higher global food prices.

While rising food prices and crumbling trade barriers may mean good news for farmers in the developing world, there is, of course, the potential for downside. In Policy Innovations recently, Christina Madden pointed out the negative relationship between food prices and food aid.

With food prices in the United States rising at the fastest pace in 17 years, the biggest losers are developing nations. The United States is the world's leading food aid donor, but this year aid was cut to less than half of what it was in 2000. Director-General Jacques Diouf of the United Nations Food and Agriculture Organization cautioned that soaring food prices could make it harder for the international community to meet the Millennium Development Goals of halving extreme poverty and hunger by 2015.

Fundamental tradeoffs such as this are responsible for economics' reputation as the dismal science. It is tempting to think of these things as the economic equivalent of Newton's 3rd law: For every action, there is an equal and opposite reaction. But it is precisely in this that economics diverges from the hard sciences: The opposite reactions are often not equal. In this case, poor farmers in the developing world may be better off, and food-poor populations may be worse off, but it is unlikely that they will be so in equal measure. One group's benefit or loss is likely to be out of proportion to the other. Meaning that the possibility exists for an absolute increase in well-being. Which is, after all, the point.

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photo of Palestinian wheat farmers by delayed gratification (CC)

Big Tobacco goes global

Increasingly shut out of developed country markets by regulation, litigation and public opinion, Big Tobacco is taking its act on the road.

Altria Group is the US's largest tobacco manufacturer with about $9 billion in annual sales. In August 2007, Altria announced plans to spin off its Philip Morris International (PMI) unit from its domestic counterpart, Philip Morris USA. Analysts interpreted this as a sign that the company was looking to dodge an onerous US regulatory environment. Altria's board officially approved the spin-off plan on January 30th.

"Honesty, integrity and social responsibility are just as important to the way we measure ourselves [as profitability]," PMI boasts on its website. Yet, the government of Nigeria is suing the company for $44 billion, claiming that PMI has made deliberate attempts to market its products to underage Nigerians and sought to influence lawmakers to block regulation of tobacco sales. British American Tobacco (BAT) is also named in the suit.

A recent page one article in the The Wall Street Journal outlined PMI's plans for an "aggressive blitz" of new products outside the US.

By as early as March, PMI could be operating as an independent company -- the third most profitable consumer goods concern in the world after Procter & Gamble Co. and Nestlé SA. The move will make it easier for the tobacco behemoth to market an array of new smoking concepts, each targeted to different foreign populations, who, collectively are expected to smoke 5.2 trillion cigarettes this year.

Among these new concepts are Marlboro Intense, a half-inch cigarette that packs the full punch of a typically-sized one, and the Heatbar, which is simply described as a hand-held smoking device.

To appeal to customers in some emerging markets, the company is making sweet-smelling cigarettes that contain tobacco, cloves and flavoring -- with twice the tar and nicotine levels of a conventional U.S. cigarette.

And as with nearly everything related to global business, the future for companies like PMI looks decidedly Chinese. China has recenlty entered into a partnership with PMI to market 3 domestically produced Chinese cigarettes. And, since China boasts more smokers (350 million) than the total US population, the future looks exceedingly bright for Altria Group.

photo by noamgalai