Tag Archives: World Trade Organization

Trade Wars: the Partnerships

tpp protest

The American administration is serious about its goal of realising the Trans-Pacific Partnership (TPP) this year (2013), a free-trade agreement bringing together a dozen countries, two-fifths of the world economy and one-third of all trade.Since it also involves Australia, Canada, Chile, Mexico, Peru, Singapore and Vietnam, this is ambitious… But  the secrecy that cloaks the TPP talks, fuel the anxieties of anti-globalisation protesters worldwide. They see a plot to impose American standards and products on an unwitting and unwilling world…

Each of the 12 countries [that participate in the negotiations] wants its own exemptions, known as “carve-outs” in the jargon. Vietnam resists rules that have the effect of forcing textile manufacturers to buy yarn from other TPP members rather than non-members (ie, China). Australia objects to “investor-state dispute-settlement” provisions, which it sees as a threat to the government’s ability to stand up to multinationals. In many countries politicians have expressed concern about new intellectual-property protections. And everywhere, the lack of transparency in the talks feeds conspiracy theories.

Nor is the TPP the only trade game in Asia. Also (and not coincidentally) in Brunei this week there were talks on the Regional Comprehensive Economic Partnership. The RCEP groups the ten members of the Association of South-East Asian Nations with Australia, China, India, Japan, New Zealand and South Korea. Seen as of lower “quality” than the TPP, the RCEP might for that reason have better prospects. But it is at a very early stage….

With provisions that seem aimed at ensuring China’s exclusion, many still see the TPP as the trade-policy arm of America’s strategic “pivot” to Asia. China has said it is “studying” the TPP. But for now, its involvement in the RCEP makes the two pacts look like rivals. America is trying to design a trade regime which China will eventually have to join—rather than getting to set its own rules as its clout increases. It is an ambition worth a few takeaway dinners; but not one susceptible to a quick fix.

Trade, Partnership and Politics, Economist, Aug. 24, 2013, at 40

The Art of Selling Weapons: defense industry

image from wikipedia

[When governments buy weapons] it is standard to supplement the main deal with a side contract, usually undisclosed, that outlines additional investments that the winning bidder must make in local projects or else pay a penalty. Welcome to the murky world of “offsets”.

The practice came of age in the 1950s, when Dwight Eisenhower forced West Germany to buy American-made defence gear to compensate for the costs of stationing troops in Europe. Since then it has grown steadily and is now accepted practice in 120 countries. It has its own industry newsletter and feeds a lively conference circuit. The latest jamboree, hosted by the Global Offset and Countertrade Association, was held in Florida…. Yet its very structure serves to mask a build-up in the unrecognised financial liabilities of companies. It also, critics argue, fosters corruption, especially in poorer parts of the world.

Avascent, a consultancy, reckons that defence and aerospace contractors’ accrued offset “obligations”—investments they have promised but not yet made—are about $250 billion today and could be almost $450 billion by 2016. The industry’s own estimates are lower, but all agree the trajectory is upward.

Offsets come in two types. Direct offsets require investment in or partnerships with local defence firms. The idea is to develop self-sufficiency. Turkey, for instance, now meets half its own defence needs thanks to such arrangements. Indirect (non-defence) offsets include everything from backing new technologies or business parks to building hotels, donating to universities and even supporting condom-makers. Here the stated intention is to achieve more general economic or social goals.

Both types of offset are controversial. Economists view offsets as market-distorting. The World Trade Organisation bans their use as a criterion for contract evaluation in all industries except defence. Anti-corruption groups see them as a clever way to channel bribes. Even if many offset deals are clean, they are widely seen as a “dark art”, admits an industry executive. “Offset” has become a dirty word; the industry now prefers the euphemistic “industrial participation”.

The practice is frowned upon in some advanced economies. The European Commission is trying to impose a ban on all offsets in EU-to-EU contracts, and on indirect offsets when the supplier is from outside the union…

America has long been officially against offsets, though it practises something similar at home under the Buy American Act of 1933, which requires foreign arms-makers to source much of the work locally… And as embassy cables published by WikiLeaks make clear, America’s diplomats are sometimes closely involved in its firms’ discussions with foreign governments, including even squeaky-clean Norway’s, over proposed offsets.

In less developed countries, where defence spending is generally rising, offsets are booming. One appeal is that they can be recorded as foreign direct investment, boosting the government’s economic-management credentials. The two biggest arms-buyers in the Gulf, Saudi Arabia and the United Arab Emirates, have long-standing, sophisticated offset programs…Brazil and India are catching up…

This growth is fuelling a thriving offsets industry. At one end are dozens of small brokers who hawk ideas for offset projects to arms-makers and their clients. With the right contacts in government and the armed forces, even small outfits can service the largest defence firms. Take Dolin International Trade & Capital, a one-man operation run by Dov Hyman from his home in suburban New York. Mr Hyman cut his teeth as a textile trader in Nigeria. Today he advises African governments looking to use offsets while helping multinationals craft offset packages.

Further up the chain are a few sophisticated outfits that structure complex deals and arrange financing. The best known is London-based Blenheim Capital. These are assembling ever more creative packages, including, for instance, helping procuring countries to use contractors’ offset obligations as collateral for loans, backed by the “performance bonds” that firms set aside to cover unfulfilled obligations.

These middlemen are offsets’ most vocal defenders. Mr Hyman cites reams of examples of deals that he believes brought great benefits for purchasing countries’ economies. The best of them are “beautiful solutions”: for instance when arms-sellers satisfy offset obligations by guaranteeing credit lines for local manufacturers, thus reducing their financing costs. Using a multinational’s good standing in this way is “an efficient means of making possible transactions that otherwise wouldn’t be viable,” he argues.

However, some projects take contractors disconcertingly far away from their core competence. Take the shrimp farm set up in Saudi Arabia in 2006 with backing from Raytheon, a maker of radar systems and missiles. Praised at first as a model offset, it reportedly struggled to keep its pools properly maintained in searing temperatures and eventually went bust.

Moreover, the academic literature on offsets suggests that the promised benefits are elusive. There are some technology-transfer success stories: for instance, China has boosted its defence-manufacturing capability by requiring offsets when buying kit from Russia. However, research by Paul Dunne of Bristol Business School and Jurgen Brauer of Augusta State University has found that such deals are generally pricier than “off-the-shelf” arms purchases and create little new or sustainable employment. The offsets associated with the giant South African arms purchases of the late 1990s have created 28,000 direct jobs, claims the country’s government. Even if true, it is well below the 65,000 first envisaged. India’s auditor-general recently concluded that some offsets have produced no value for the country.

Judging performance is hard because of a lack of openness. Asked for confirmation of the fate of the shrimp farm, the Saudi offset authority said it kept “minimum information” on projects after their founding and suggested contacting its commercial backers. Raytheon declined to comment and suggested contacting the Saudis. DevCorp, another backer, did not respond. A study published in February by Transparency International, an anti-graft group, found that a third of governments that use offsets neither audit them nor impose due-diligence requirements on contractors.

Worse, accounting rulemakers have failed to impose any requirement to disclose offset liabilities. Companies can thus choose how, or whether, to put them on the balance-sheet. Defence firms have lobbied successfully for offsets to remain classified as “proprietary”, so they do not have to disclose their obligations. In some ways things have got worse: the Commerce Department’s annual report on American contractors’ offsets no longer even breaks out the numbers country-by-country.

This murkiness makes it hard to determine who really pays for offsets. On the face of it, the defence companies do. But Shana Marshall, an offsets-watcher at George Washington University, believes that they build the cost into their bids (pdf). Politicians and officials in procuring countries know that they are paying the bill through padded prices, but they accept this because offsets give them some grand projects to trumpet and sometimes provide palm-greasing opportunities.

A study in Belgium found that the country ended up paying 20-30% more for military gear when offsets were factored in. If the costs are largely borne by taxpayers, the benefits accrue to individuals and institutions chosen by the procuring government. This make offsets a good way to conceal delivery of public subsidies to interest groups, according to Ms Marshall.

A number of deals have been exposed as, or are suspected of being, corrupt. A commission has been set up to look into South African contracts dating back to 1999; the government has already conceded that offset credits changed hands at inflated prices. Since 2006 prosecutors in Portugal have been investigating offsets connected with a €1 billion ($1.3 billion) submarine contract with Germany’s Ferrostaal, HDW and ThyssenKrupp. Three Ferrostaal board members and seven Portuguese businessmen are on trial, charged with fraud and falsifying documents.  EADS, a large European contractor, is facing multiple inquiries over its sale of 15 Eurofighter planes to Austria. Prosecutors in Vienna and Munich are looking into allegations that millions of euros in kickbacks flowed through a web of offshore firms and side-deals, linked to offset agreements worth €3.5 billion, twice the value of the main contract. (In other words, EADS was supposed to generate €2 of business for Austrian firms for every euro it received for the planes—an unusually high ratio even in fiercely bid contracts.) Tom Enders, EADS’s chief executive, told Der Spiegel, a German magazine, that he “knew nothing about the shadowy world of dubious firms allegedly behind this.” The company says it is co-operating fully with prosecutors and that an internal investigation has so far found no evidence of punishable activity.

Prosecutors are also looking into whether AgustaWestland, part of Finmeccanica, an Italian defence firm, paid bribes to secure the sale of 12 helicopters to India in 2010. Finmeccanica’s former chief executive and the former head of AgustaWestland are due to go on trial next month. According to Italian court filings, suspicious payments allegedly flowed through a sham offset contract for software with help from a Swiss-based consultant. The helicopter-maker and the charged individuals deny wrongdoing.

Industry figures point out that all but the Indian case are at least five years old. They argue that corruption is harder to get away with today because of stricter anti-bribery laws and enforcement in America and Europe. Companies’ general counsels pay much more attention to offsets than they did a decade ago, says Grant Rogan, the head of Blenheim Capital.

Even if graft really is on the wane, offsets’ complexities make it hard to measure the true cost of defence deals. Procuring governments may apply generous “multipliers” to give extra credit to projects they deem exceptionally beneficial, especially if they are keen to buy the kit in question. As a result, defence contractors often find their liabilities turn out to be a lot less than their nominal obligations. A $5 billion sale of military kit might come with, say, $4 billion of gross offset requirements, but after multipliers it might only cost $500m to fulfil. A book on the arms trade, “The Shadow World”, by Andrew Feinstein, describes a contract Saab won in South Africa: to receive more than $200m in credits all the planemaker was required to do, the book says, was to spend $3m upgrading pools in Port Elizabeth and marketing the town to Swedish tourists. Saab says the tourism project cost much more, and suggested that it was up to the authorities to decide what value they put on what it achieved.

This sleight-of-hand helps to explain why industry executives are better disposed towards offsets in private than in public, says Ms Marshall. They say they could happily live without them, but they do not lobby to have them banned. Indeed, some big contractors see their ability to craft a package of attractive offsets as a “source of competitive advantage”, as Boeing’s boss, Jim McNerney, puts it.

The largest such firms will employ dozens of offset specialists to give them an edge in bidding. Lockheed, another American contractor, has about 40. As long ago as 2005 the firm was touting its leadership in offsets to win Thai contracts, according to a leaked diplomatic cable.  A downside for the companies is that dealing with national offset agencies can be frustrating. And though the companies’ offset liabilities are smaller in reality than on paper, they can still be daunting: one American contractor, for instance, has $10 billion of nominal obligations in a single Gulf state that will cost $1 billion-2 billion to fulfil, according to a consultant (who will not say which firm or country)….

How long can the offsets boom last?  But in the shorter term, their growth will be fuelled by American and European contractors’ intensifying efforts to sell outside their shrinking home markets, to big developing countries whose defence budgets are growing…. Remarkably, offsets are now said to be the main criterion in contract evaluation in Turkey and some Asian countries—more important than the price or the technical capability of the defence equipment itself.

The defence industry: Guns and sugar, Economist,May 25, 2013, at 63

Big and Rich: the US-EU Trade

Beef suet raw beef or mutton fat.  It is used to make tallow. Tallow is used to make biodiesel.

The guns of the long transatlantic beef war are silenced. Last year the European Union more than doubled its quota of American beef imports (so long as it is not treated with hormones) and America removed punitive duties on imports of Roquefort cheese. The Americans should soon ease a ban on beef imports imposed in 1997 to prevent the spread of mad cow disease. In November the EU accepted the American practice of decontaminating meat with lactic acid. A final skirmish, over American beef fat, could soon be settled through plans to allow imports of tallow for biodiesel (but not for cosmetics).

After decades of trade rows and lawsuits, the truce is meant to clear the air for an ambitious transatlantic free-trade deal. EU officials speak of creating “something approaching a transatlantic single market in goods”. Even a less grand pact could help to re-energise struggling economies on both sides of the Atlantic. It could also help America and Europe to set international trade rules in the face of a fast-rising China.

Big business wants a deal. Trade unions and greens are no longer so worried about a race to the bottom. The ever-protectionist French and Italians are on board. And yet there is genuine wariness, particularly on the American side. The report of a high-level group that is expected to recommend the start of talks has been delayed. Perhaps, think some, President Barack Obama is trying to squeeze concessions out of the Europeans; or, Europeans worry, he cares more about a transpacific deal?….American officials say they want to ensure that any negotiation is both unusually ambitious and unusually fast. The deal, they say, has to be done “on one tank of gas”, by which they mean in the next two years. Neither side wants a repeat of the moribund Doha round, now in its 12th year.

America and the EU make up the world’s biggest and richest trading partnership, accounting for about half of global GDP and one-third of trade. They are the biggest investors in each others’ economies. But this very closeness makes progress harder. Easy deals have mostly been done; what is left is complicated. Tariffs are low (below 3% on average, though higher on farm products) but non-tariff barriers abound. Many have to do with consumers, public health, the environment or national security. Governments are not usually elected to compromise on such matters.

One European aim is to open up America’s public-procurement market, which is more protected than Europe’s; one reason is that the federal government cannot force states to open tenders to foreign bidders. Another is to dismantle restrictions on services, which represent the lion’s share of output but a relatively small part of exports. European airlines cannot take over American carriers or carry passengers between American cities. Similar restrictions apply to coastal shipping under the 1920 Jones Act. Yet the EU market in services also remains fragmented. A transatlantic deal could spur further integration. Other difficulties include France’s insistence on the “cultural exception” to protect French-language audio-visual products, and the EU’s wish for America to respect hundreds of “geographical indications” on everything from Parmesan cheese to French wines.

For some officials, the biggest prize and the hardest brainteaser will be greater “regulatory convergence”, ie, to get both sides to move towards common rules, or at least regulations that are close enough that each can accept the other’s. There could be big savings if, say, pharmaceutical firms did not have to submit new drugs to two sets of safety tests. The EU has tried to pursue global standards for decades, often acrimoniously, by relying on supranational bodies. Yet across the Atlantic, successive dialogues between regulators have yielded little. The Transatlantic Economic Council was created in 2007 to increase political pressure. Rather than trying to redesign past rules, attention has shifted to new technologies such as electric cars and nanotechnology. Even so, after a year of negotiation on electric cars, one forlorn American official moans that “we have a common standard on the plug.”

Any trade deal will have to be broad to maximise the possible trade-offs. And it will, inevitably, have to address the minor but contentious subject of agriculture. Congressional leaders in America will not support a deal that excludes farming, to which European officials retort that the best way to kill one would be for America to ignore consumers’ fears of “Frankenfoods”, such as hormone-treated beef and genetically modified crops. Part of the answer is to have clear labelling and let consumers choose what they want to buy.

Excerpt from Transatlantic trading, Economist, Feb. 2, 2013, at 44

WTO and the Level Playing Field, European Union and Russia

Europe’s trade chief threatened to take Russia to the World Trade Organization over a string of restrictive practices saying Moscow needed to play by the rules now it was a member of the global body.  Trade Commissioner Karel De Gucht singled out Russia’s ban on European live animal imports, plans to levy fees on imported vehicles, two anti-dumping cases and another trade defense case launched by Moscow against Europe in recent months.  In the same week that the European Commission opened an investigation into Russia’s Gazprom and China’s solar panel exports, De Gucht said the measures sent “the wrong signal”, Reuters reports.

“Membership of the WTO means a country is subject to the dispute settlement mechanism of that organization,” he told an EU-Russia seminar in Helsinki. “Russia should understand that Europe takes that mechanism very seriously and that we will not hesitate to enforce our rights where they are violated,” he added.

Russia joined the WTO last month after an 18-year wait. President Vladimir Putin said on Wednesday the country would use its membership to try to develop freer trade across the world, but he’ll also be hoping it will further boost the energy-driven $1.9 trillion economy.  De Gucht said Russia was violating WTO rules by keeping its markets closed to competitors.  “What these and other measures … have in common is that they affect products where significant market opening is due to take place under Russia’s WTO commitments,” De Gucht said.  “This is the wrong signal to send at a time when liberalization is supposed to be moving forward.”

Russia and the EU are deeply intertwined, with Europe relying heavily on Russian energy exports and Russians hungry for EU products and access to its 500 million consumers.  But the two sides argue over issues ranging from energy supplies, trade and market access to human rights. While relations are at times frosty, both refer to each other as “strategic partners” and meet for twice-yearly summits.  Negotiations between Russia and the EU towards closer economic and political ties have also stalled, and Brussels is concerned by Putin’s plan to develop a “Eurasian union” of ex-Soviet states, including Kazakhstan and Belarus.

EU warns Russia to play by WTO rules or face action, Reuters, Sept. 7, 2012

Russian President Vladimir Putin signed a decree giving the government the right to protect its natural gas-export monopoly, OAO Gazprom (GAZP), from an anti-trust inquiry by the European Union.  Putin’s measure bans strategic companies from disclosing information, disposing of assets or amending contracts without government approval in case claims are made by foreign states or entities, the president’s office said in an e-mailed statement from Moscow today. The Russian leader on Sept. 9 warned the EU, which relies on Russia for a quarter of its gas needs, that there would be “losses on both sides” if the issue isn’t resolved. He accused the 27-nation bloc of trying to shift responsibility for subsidizing former communist EU members onto Russia by forcing Gazprom to cut prices for customers in eastern and central Europe.

Excerpt, By Henry Meyer, Putin Moves to Protect Gazprom From EU Pricing Dispute, Bloomberg, Sept. 11, 2012

World Trade Organization and Regional Deals: the FTAs and TPP

[W]ith the stalling of the Doha round of multilateral trade talks, regional free-trade agreements (FTAs) in Asia have become one of many arenas of strategic competition between America and China.  [So how likely is it that Japan, China and South  Korea will get together to establish a free trade area as they announced on May 13th, 2012?]

There are a couple of shrug-worthy elements to the proposed free-trade area. The first is that it will be terribly hard to bring to fruition. In all three countries, important lobbies will resist the opening to free competition: Japanese farmers, Chinese state-owned enterprises, South Korean exporters hoping to steal a march over Japan through a bilateral free-trade agreement with China. Secondly, any agreement is likely to be a “shallow” one—allowing plenty of exemptions. South Korea has signed “deep” agreements with the European Union and America, though they have been fiercely controversial. But China’s trade agreements, such as that with the Association of South-East Asian Nations, ASEAN, tend to be sneered at by American and European trade negotiators as feeble substitutes for the real thing—FTA-lite. Meanwhile, domestic political pressures suggest that Japan’s government is hardly in a position to negotiate a full-strength one.

It would be wrong to dismiss the effort as pure symbolism, however. China is the biggest trading partner for both Japan and South Korea. All three countries recognise that their futures are intertwined and are sincere in wanting both to ease the suspicion left by historic animosities and to remove barriers—at least to their own exports. At the summit meeting in Beijing where the planned talks were announced, they also agreed on an investment-protection agreement, their first trilateral treaty. And their three-way FTA is seen as a stepping stone to an even bigger free-trade area, including the ten-member ASEAN.

In the dreamland in which some trade negotiators live, this would then merge with another, parallel project, the Trans-Pacific Partnership (TPP), which is being pushed by America, to form a grand Asia-Pacific free-trade area. The failure of global trade negotiations would be mitigated by an encompassing regional achievement. In the real world, however, the TPP is not complementary to the China-promoted trilateral initiative. It is in competition with it. Besides America, the TPP brings in eight other countries (Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam) which met this week in Dallas for their 12th round of talks. America insists it would welcome talks on Chinese membership. But some of the provisions it has introduced to the TPP—such as those directed at the activities of state-owned enterprises—seem designed to hinder Chinese entry.

The Chinese government professes an “open” attitude to the TPP. But the official press has aired reasonable suspicions that the TPP is part of the broader rebalancing of American global strategy towards Asia and the Pacific, which China sees as part of a plan to contain its rise. The involvement of Vietnam, for example, lends weight to this interpretation. At odds with China over territorial disputes, it has strengthened ties with America. But in its economy, too, state-owned enterprises play a big role. It is not an obvious candidate for membership in a “21st-century” trade pact, as the TPP is advertised. Unlike the trilateral FTA, the TPP is to cover, for example, intellectual property and environmental and labour standards, as well as tariffs. These American concerns may be hard to impose on the other TPP countries.  The biggest problem facing the TPP, however, is the failure so far of Japan to join the process.

Excerpt, Trading strategies: China and America compete to lead regional free-trade arrangements, Economist, May 19, 2012, at 50

Regulating Greenhouse Gases; European Schemes, China, WTO and the ICAO

Could a fresh row over airline emissions lead to a global trade war? That is the scariest prospect raised by China’s objections this week to the European Union’s new plan for controlling greenhouse-gas emissions from aeroplanes. The scheme, which came into effect on January 1st, forces airlines flying into the EU to buy tradable carbon credits as part of its broader emissions-trading system.

Many countries are unhappy with the policy, but China’s proclamations this week—official news agencies report that China has “banned” its airlines from participation without specific government approval—appear to be an escalation. Not least because Chinese and European officials are expected to meet for high-level talks in Beijing next week. It also raises the temperature of the row in advance of a meeting of 26 dissenting countries, including India, China, Russia and America, in Moscow on February 21st.

As an effort to make airlines pay for their pollution, the EU’s action is overdue. In global terms, their emissions are modest, about 3% of the total. Yet they are rising fast: between 2005 and 2010 they grew by 11.2%. Meanwhile the UN’s International Civil Aviation Organisation (ICAO), which was charged with taking steps to mitigate them, has done nothing of the sort…The EU decided to push ahead with its plan to make all flights into the EU subject to the emissions-trading scheme (ETS). This is now enshrined in European law. The only ways foreign governments could extricate their airlines from it would be to stop them flying into the EU, or make them subject to an equivalent mitigation regime of their own.

The main objection to the EU’s policy is that it applies to air-miles clocked up outside European airspace. The EU argues that its approach is consistent with ICAO’s own guidelines and that it would be impossible to regulate otherwise. But the dissenters claim this infringes their sovereignty and breaks the terms of the Chicago Convention, which has regulated aviation since 1944. A group of American airlines therefore launched a legal challenge to the policy; but it was dismissed by the European Court of Justice in December. There was a precedent supporting the Europeans: American green laws insist that ships docking locally be double hulled, even though that forces ship owners to pay for unwanted double hulls on international waters en route to American ports.

China also claims that the EU’s policy transgresses UN climate-change agreements which ordain that mitigation costs should be lower for developing countries than rich ones. Yet, even setting aside the difficult issue of how much of a free ride China can expect, the EU’s policy applies to individual companies, not countries, for which there is no such dispensation.

It is a troubling spat. But there is at least time to negotiate a way out. The airlines are not due to be billed for their emissions until April 2013. Even then, they will have to pay for only 15% of them. Under the ETS, they are required to buy tradable permits for a gradually rising portion of their emissions: this year the EU will give the airlines permits to cover 85% of them.  The airlines, naturally, say the cost will be onerous nonetheless. The China Air Transport Association, which represents China’s airlines, estimated the scheme would cost them 800m yuan ($127m) this year, and more than three times as much by 2020. It may well be less. EU officials say the costs of the scheme, if passed on to passengers, would add no more than around €2.50 ($3.30) to the price of a one-way ticket between Europe and China. By slapping ETS surcharges on tickets, as some non-Chinese airlines have done, they may even profit from the scheme.

The best solution would be through the ICAO. In November it resolved to accelerate steps to introduce its own mitigation efforts. It has drawn up a shortlist of options, including a carbon tax or cap-and-trade scheme that would apply to all airlines.

Excerpts, Planes and pollution:Trouble in the air, double on the ground, Economist, Feb. 11, 2012, at 66