Protectionism Doesn't Pay

Trade can help revive the economy, and China is ready to do its part

By CHEN DEMING | From today's Wall Street Journal Asia.

The global financial crisis is no doubt a catalyst for trade protectionism. As the world economy deteriorates, some countries try to boost growth prospects by erecting trade barriers. China calls on these governments not to replay history and revert to protectionism and economic isolationism.

David Klein

Previous global economic crises were usually accompanied by frequent trade disputes. The United States' erection of large-scale tariffs in 1930, for example, triggered a retaliatory global trade war. During the two oil shocks in the 1970s and 1980s, trade frictions emerged when major economies attempted to increase exports by depreciating their currencies. And in the wake of the 1997 Asian financial crisis, there was a notable uptick in antidumping actions, countervailing duties and other protectionist measures.

The financial crisis is now spilling over into the real economy, hitting sectors like manufacturing and services. In almost all countries, factories are closing and unemployment is rising, creating political pressure and social problems. More and more governments are strengthening intervention in their economies under the excuse of "economic security" and protecting vulnerable domestic industries to curb imports from other countries, especially those in emerging markets.

Trade protectionism differs from legally acceptable measures to protect trade. It is an abuse of remedies provided by multilateral trade rules. This kind of protectionism is morphing into more complex and disguised forms, ranging from conventional tariff and nontariff barriers to technical barriers to trade, industry standards and industry protectionism.

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With the economic crisis worsening, caution must be taken even in employing trade protection measures consistent with World Trade Organization rules. At the Group of 20 Financial Summit in November 2008, world leaders called for countries to resist trade protectionism and committed themselves to refraining from erecting new barriers to trade and investment, a message strongly echoed by the Asia-Pacific Economic Cooperation summit at the end of last year, and the World Economic Forum held in Davos last month.

History tells us that trade protection measures hurt not only other countries, but eventually the country that erected that trade barrier in the first place. To counter the Great Depression, the U.S. adopted the Smoot-Hawley Act in 1930, which raised import duties of over 20,000 foreign products significantly and provoked protectionist retaliation from other countries. Faced with that crisis, other countries pursued beggar-thy-neighbor policies that slashed global trade volumes from $36 billion in 1929 to $12 billion in 1932. Among the victims, not the least was the U.S. itself, where exports shrank from $5.2 billion in 1929 to $1.2 billion in 1932. Even in the U.S., the Smoot-Hawley Act was widely believed to be a catalyst that aggravated the effects of Great Depression.

Global trade is now in dire straits. Thanks to shrinking external demand caused by the economic crisis, major trading countries have seen their export growth tumble or have suffered huge contractions. Germany's exports dropped 10.6% in November 2008, compared to the same period the prior year -- the highest one-month drop since 1990. China also experienced negative export growth in November, and a 17.5% decline last month, when compared to the prior year. Protectionist policies would make things even worse and the consequences would be hard to predict.

In the heat of the crisis, it's critical that all countries refrain from pointing fingers at each other or pursuing their own interests at the expense of others. The financial crisis reflects a chronic illness resulting from global economic structural imbalance and financial risk accumulation, and there is no quick fix to this malady. The fundamental interest of every country is to step up consultation and cooperation and keep international trade smoothly flowing. Healthy international trade can help revive the world economy. During the Great Depression, the U.S. recovered from its economic woes because the Franklin D. Roosevelt administration implemented the New Deal and shunned protectionism.

Today's unprecedented financial crisis has inflicted a severe impact on China and other countries as well. China's economic growth has slowed, exports have plunged and unemployment pressure has mounted. Yet even so, China still firmly believes that trade protectionism isn't a solution to the world's problems. In 2008, amid a contraction in global trade, China imported $1.133 trillion worth of goods from countries around the world -- an 18.5% increase over the prior year. These imports are boosting the economic development of China's trading partners. Since the crisis broke out, the Chinese government has decisively put forward a series of measures aiming at stimulating domestic demand. Given the size and openness of our country, the growth in China's domestic markets can be translated into greater market potential and investment opportunities for other countries. This year China will continue to increase imports and send buying missions abroad for large-scale purchase of equipment, products and technology.

China has always championed our mutually beneficial opening-up policy and advocated international economic cooperation. We maintain that the Doha Round of global trade negotiations should be taken forward in a way that meets the interests of members and complies with the multilateral trading system already established. China is ready to stand together with all nations in the world to face up to the challenges of today, tackle the financial crisis through cooperation and guide the world economy into a new period of prosperity.

Mr. Chen is minister of commerce for the People's Republic of China.

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Demand for Gold - Jewellery and Investment

   Demand for gold for jewellery and investment in key consumer 
nations (in tonnes): 
     
                         2008                     2007 
                Jewellery   Investment    Jewellery   Investment 
 India         469.7         190.5       551.7       217.5 
Greater China   353.5          78.6       331.1        34.0 
 China           326.7          68.9       302.2        25.6 
 Japan            28.2         -39.4        30.6       -56.3 
 Indonesia        55.9           2.9        55.2         0.3 
 Vietnam          19.6          96.2        21.4        56.1 
 Middle East     311.4          28.2       325.5        20.1 
 Turkey          153.2          57.1       188.1        61.1 
 Russia           96.1          N/A         85.7        N/A 
 USA             179.1          77.8       257.9        16.6 
     

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The Bull's Case for Investing in Gold

Next stop $1,000? Gold has climbed more than $160, about twenty percent, in the last four weeks, and no matter where it goes from here over the short-term, some bulls think the long-term price is headed higher.

The price of the shiny yellow metal, now trading around $970 an ounce, is dependent, for the most part, on the value of the dollar. When the buck falls, gold rises, and vice versa. Some experts predict that even though the U.S. dollar has rallied since the financial crisis began, the greenback will resume its decline later this year or in 2010, for a couple of reasons.

First, the obvious: the supersize U.S. budget deficit, which has gone from a $128 billion surplus seven years ago to a to a more than $1 trillion deficit now. The government’s inability to pay off its debts each year has led to inflation, the devaluing of the dollar and a seven-year rally in the price of gold. But some analysts say the second reason, President Obama’s $787 billion stimulus plan and other spending to prop up the economy, could have a bigger impact on the value of the dollar. To pay for that stimulus, the U.S. will have to print a lot more money, rack up an even higher deficit (potentially $1.6 trillion by the end of this year, some economists predict) and likely bring inflation back with a vengeance. “In the long run, there are more negative than positive forces on the dollar,” says Geoff Somes, senior economist with State Street Global Advisors.

All that sounds great for gold, but it’s still not a sure thing. Deflation, not inflation, is what worries some analysts in the short term. And when the dollar rose last fall, gold lost around 20 percent of its value. Still, many pros recommend gold as a kind of insurance policy against losses elsewhere in one’s portfolio. The SPDR Gold (GLD¹) exchange-traded fund offers fractional shares of bullion held in a London vault. But gold-mining stocks may be the better value. Many of these companies, such as Agnico-Eagle Mines (AEM²) and Newmont Mining (NEM³), are now valued cheaply relative to the price of gold itself, says John Hathaway, manager of the Tocqueville Gold fund.

¹http://www.smartmoney.com/quote/GLD/
²http://www.smartmoney.com/quote/AEM/
³http://www.smartmoney.com/quote/NEM/

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Why this recession is different

Business Times - 17 Feb 2009

Unlike past episodes, it resides in the state of balance sheets and about half of the losses belong to financial institutions

By AXEL LEIJONHUVFUD

THIS is not an ordinary recession that differs from other recent episodes simply by being somewhat more severe. It differs in kind.

The end of the Cold War brought a decline in military spending and a recession which impinged most heavily on the (American) states, such as California, where the military-industrial complex was an important part of the local economy. The nationwide unemployment rate rose from 5.25 per cent in 1989 to 7.5 per cent in 1992.

It then fell every year reaching just under 4 per cent in 2000. The 'free market' took care of the recession of the early 1990s. Resources moved from the defence industries, trickling into other uses through innumerable channels. The federal government did not need to take a hand. Beginning in 1993, the federal deficit in fact shrank every year turning into a modest surplus in 1998. That was a very ordinary recession.

If the current situation were at all similar we would expect a recession in residential construction with unemployment among construction workers and mortgage brokers. Naturally, recent boom areas would be hard hit but we would expect resources gradually to trickle into alternative employment. Instead, we are threatened by a veritable disaster.

Balance sheet recessions

What is the difference? It resides in the state of balance sheets. The financial crisis has put much of the banking system on the edge - or beyond - of insolvency. Large segments of the business sector are saddled with much short-term debt that is difficult or impossible to roll over in the current market. After years of near zero saving, American households are heavily indebted.

The holes that have opened up in the balance sheets of the private sector are very large and still growing. A recent estimate by Jan Hatzius and Andrew Tilton of Goldman Sachs totes up capital losses of US$2.1 trillion; Nouriel Roubini thinks the total is likely to be US$3 trillion. About half of these losses belong to financial institutions which means that more banks are insolvent - or nearly so - than has been publicly recognised so far.

So the private sector as a whole is bent on reducing debt. Businesses will use depreciation charges and sell off inventories to do so. Households are trying once more to save. Less investment and more saving spell declining incomes. The cash flows supporting the servicing of debts are dwindling. This is a destabilising process but one that works relatively slowly. The efforts by financial firms to deleverage are the more dangerous because they can trigger a rapid avalanche of defaults.

Deficit spending

Richard Koo coined the term 'balance sheet recession' to characterise the endless travail of Japan following the collapse of its real estate and stock market bubbles in 1990. The Japanese government did not act to repair the balance sheets of the private sector following the crash. Instead, it chose a policy of keeping bank rate near zero so as to reduce deposit rates and let the banks earn their way back into solvency.

At the same time it supported the real sector by repeated large doses of Keynesian deficit spending. It took a decade and a half for these policies to bring the Japanese economy back to reasonable health.

The US Great Depression saw no consistent policy of deficit spending on adequate scale in the 1930s. War spending not only brought the economy back to full resource utilisation but also crowded out private consumption to a degree. The deficits run during the war meant that:

1) At war's end, the federal government's balance sheet showed a debt of a size never seen before, but also;

2) The balance sheets of the private sector were finally back in good shape.

At the time, a majority of forecasts predicted that the economy would slip back into depression once defence expenditures were terminated and the armed forces demobilised. The forecasts were wrong. This famous postwar 'forecasting debacle' demonstrated how simple income-expenditure reasoning, ignoring the state of balance sheets, can lead one completely astray.

The lesson to be drawn from these two cases is that deficit spending will be absorbed into the financial sinkholes in private sector balance sheets and will not become effective until those holes have been filled. During the years that national income fails to respond, tax receipts will be lower so that the national debt is likely to end up larger than if the banking sector's losses had been 'nationalised' at the outset.

US predicaments

The Swedish policy following the 1992 crisis has often been referred to in recent months. Sweden acted quickly and decisively to close insolvent banks, and to quarantine their bad assets into a special fund. Eventually, all the assets, good and bad, ended up in the private banking sector again. The stockholders in the failed banks lost all their equity while the loss to taxpayers of the bad assets was minimal in the end. The operation was necessary to the recovery but what actually got the economy out of a very sharp and deep recession was the 25-30 per cent devaluation of the krona which produced a long period of strong export-led growth. Needless to say, the US is in no position to emulate this aspect of the Swedish success story.

Strong contractionary forces are at work in the United States emanating both from the capital and the income accounts. Stabilisation requires major policy actions on both fronts.

First, the financial system must be recapitalised so as to remove the relentless pressure to deleverage from the banks.

Second, a spending stimulus sufficient to reverse the rapidly worsening decline in incomes must be administered.

When the entire private sector is bent on shortening its balance sheet and paying down debt, the public sector's balance sheet must move in the opposite, offsetting direction. When the entire private sector is striving to save, the government must dis-save. The political obstacles to doing these things on a sufficient scale are formidable.

If banking system losses are of the magnitude estimated by Goldman Sachs or Mr Roubini, the banks need capital injections of at least another US$200-US$300 billion. Even if injections equal to all their losses could be effected, the banks might still want to contract, now that they know how dangerous their leverage of yesteryear was.

The American public understands clearly that the present disaster was fashioned on Wall Street (albeit with some stimulus from Fed policy). Outright bailouts are a 'hard sell' therefore. But the American ideological taboo against 'nationalisation' also stands in the way of dealing with the matter in the straightforward way that Sweden did. The present administration, like the last, would like to recapitalise the banks at least partly by attracting private capital. That can hardly be accomplished as long as the value of large chunks of the banks' assets remains anybody's guess. Government guarantees against (some part of) losses that may be incurred might solve this problem. But it would be a strangely contrived way out of a political impasse.

Fiscal stimulus will not have much effect as long as the financial system is deleveraging. Even if that problem were to be more or less solved, the government deficit would have to offset both the decline in industry investment and the rise in household saving - a gap that is rising as the recession deepens. Here, too, the public is sceptical and prone to conclude that a programme that only slows or stops the decline but fails to 'jump start' the economy must have been a waste of tax payers' money. The most effective composition of such a programme is also a problem.

Almost all American states now suffer under self-imposed constitutional balanced budget requirements and are consequently acting as powerful amplifiers of recession with respect to both income and employment. The states will spend everything they get, as will a great many local governments. The point of the stimulus package is to increase spending. Income maintenance for unemployed and other low income households will also be effective. Tax cuts will produce considerably less spending per dollar than these other programmes. However, the political prospects seem to portend a less than ideal programme mix.

Perils, present and future

If government programmes end up not being large enough to turn the recession around, we have to look forward to a deflationary period of indeterminate length. If they do succeed, however, severe inflationary pressures may surface quite quickly.

The US ratio of federal debt to GNP is not particularly high at this time. But it does not take into account the very large off-balance liabilities of entitlement programs. Since the present crisis began, moreover, the Federal Reserve System and other federal agencies have made bailout, loan and credit guarantee commitments totalling many trillions of dollars with uncertain eventual implications for the consolidated federal balance sheet.

Much will depend on the willingness of the nation's foreign creditors to continue to accumulate or at least to hold dollars at low rates of interest. Should this willingness falter, inflation will be hard to contain.

There is much to fear beyond fear itself.

The author is professor of monetary theory and policy at the University of Trento, Italy and professor emeritus, Department of Economics, UCLA. This article was sourced from VoxEU.org, an economics portal which features commentaries by prominent economists

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• FEBRUARY 17, 2009, 5:54 A.M. ET

GIC Loss Is Estimated at Roughly $33 Billion

By COSTAS PARIS

SINGAPORE -- The Government of Singapore Investment Corp. saw an investment loss of around 50 billion Singapore dollars (US$33 billion) in 2008 as a result of tumbling asset prices around the world, two people familiar with the situation said.

"The loss on the investment portfolio last year is estimated at around S$45 billion to S$50 billion," one of the people said. "But GIC has no thoughts to sell down any of its major investments. They'll wait until they recover."

A second person said GIC's investment loss last year was "recently estimated to be similar to Temasek's."

Temasek Holdings Pte. Ltd., Singapore's other sovereign wealth fund, saw its investment portfolio fall 31%, or S$58 billion, to S$127 billion in the eight-month period ended Nov. 30, Senior Minister of State for Finance Lim Hwee Hua said last week.

GIC spokeswoman Jennifer Lewis said the sovereign wealth fund won't comment on individual investments.

GIC, whose portfolio is more than US$200 billion even after the losses, has invested heavily in distressed financial institutions Citigroup Inc. and UBS AG, expecting that in the long term the two banks would provide substantial returns.

In January 2008, it invested US$6.88 billion in convertible preferred securities of Citigroup, which at the time would have given it a 4% stake in the bank if converted to common stock.

According to a U.S. Securities and Exchange Commission filing in late January, GIC owns a beneficial 5.3% stake, or 303.8 million shares, in Citigroup. These include preferred shares that can be converted into 261.1 million common shares. Based on Citi's US$3.49 last closing price Friday, the stake is worth US$1.06 billion.

Beneficial ownership entitles GIC to all the benefits of Citigroup stock, such as dividends, rights and proceeds from a sale, regardless of whether it is the registered owner.

In December 2007, GIC invested 11 billion Swiss francs (US$9.47 billion) in UBS mandatory convertible notes for a 9% stake in the Swiss bank. Since then UBS' shares have fallen around 75%.

According to a July SEC filling, GIC owned 7.9% or 240.2 million shares of UBS. The stake includes 228.8 million common shares that would result from the conversion of the notes.

Based on the 12.88 Swiss franc closing price Monday, that stake, if current, would be valued at 3.1 billion Swiss francs.

"Right now, these investments look very unfortunate but SWFs have the luxury of looking at the very long term," the second person said.

GIC, which manages Singapore's foreign-exchange reserves, has 34% of its portfolio invested in the U.S., 35% in Europe and 23% in Asia, according to its web site. Equities make up 44% of the portfolio, bonds 26% and real estate, private equity and venture capital 23%.

The first person said that, despite falling asset prices globally, GIC has no plans for a major investment anytime soon. "Apart from some investments in real estate not much is going on. They want to see the bottom first and there is no indication we are close to this point.

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Mengniu 2319.hk

Feb. 16,09

Chinese authorities had concluded that an additive
osteoblast milk protein(OMP)
in its milk products (premium milk brands)
was safe to consume. 

Asia's capital markets are hopelessly inefficient

Business Times - 12 Feb 2009

Asia's capital markets are hopelessly inefficient

By ANTHONY ROWLEY
TOKYO CORRESPONDENT

AT a time when just about everything is crashing about our ears - output, employment and investment - it was interesting to hear a group of financial luminaries gathered in Tokyo this week congratulating themselves on the fact that the Asian payments and settlements system has survived the crisis intact. So it has, but this is like taking comfort in observing that the body's vascular system is still working even though the heart has stopped beating.

Somehow it typified the abysmally laidback attitude of Asian policymakers towards reforming the region's economic and financial systems - even now that the folly of over-reliance upon global trade and capital flows has been exposed. While some innovation is admittedly being introduced into ensuring money flows smoothly among counter-parties to the myriad financial transactions that take place in Asia every day (that is, payment and settlement systems), the sad fact is that this region remains hopelessly inefficient in terms of employing its own savings for investment and for monetary support purposes.

If anything was needed to underline the dangers of this situation, then the present crisis is doing so as it transmits shocks through an ever-growing number of channels from the Western world to Asia. The most egregious example is the fact that Asia is about to suffer a capital-flows shock as more of its economies run into current account problems and as they try to finance infrastructure and other government stimulus.

Looming current account problems are apparent from a glance at the downward trend caused by plunging exports. Admittedly, imports are falling too but South Korea has already plunged into deficit while Indonesia is on the borderline, and Thailand and the Philippines are close to it. How long before they join the ranks of Eastern European and other emerging economies lining up for support from the International Monetary Fund (IMF)?

Korea has managed to avoid doing so only by agreeing to large bilateral currency swaps with Japan and China but there is a limit to how far these can be expanded to cover others in need. Asian nations are suspicious of the IMF after their traumatic experiences with its harsh loan conditions at the time of the 1997 crisis, and yet they fall back on plaintive arguments about the need for 'consensus' when it comes to organising an alternative mechanism. Instead of striking out and launching an Asian Monetary Fund, nations of this region experiment timidly with a quasi-fund called the Chiang Mai Initiative, and even then they tie most of its lending to borrowers being vetted first by the IMF. The absurdity of this is shown by the fact that even the IMF has now removed all strings from its short-term crisis lending as Masahiro Kawai, dean of the Asian Development Bank Institute noted at the Tokyo meeting.

But there is an even bigger problem looming on the financial front and this is the fact that private capital flows to emerging regions of the world have, to use what is becoming a rather overworked phrase nowadays, 'gone off a cliff'. This is really bad news for Eastern and Central European nations (as well as Russia) that have borrowed heavily and incautiously from foreign banks.

But Asia has little room to feel smug. The demand for capital in this region is going to be strong as governments seek to finance infrastructure projects and other stimulus. Some have 'fiscal room' for manoeuvre but others will be turning to international banking and bond markets for funds at a time when risk aversion is high and when Western governments (not least the US) will be crowding out the rest by their own borrowing.

Thus, the cost of capital - and in Asia's case of not developing its own capital markets - will be high. Yet here again, policymakers in this region seem to think that they have the luxury of time to deal with the problem and to amble along with bond market development at a leisurely pace that ignores the imminent funding crisis.

Why not a regional summit now, to give a push to bond market development and the launch of a true Asian Monetary Fund? As head of HSBC's payment and cash management division Navin Gupta pointed out during the Tokyo meeting, Asia's financial systems are also horribly inefficient when it comes to serving the small and medium- sized enterprises (SMEs) which are said to represent 99 per cent (by number) of all companies in Asia and perhaps three quarters of the region's total industrial output.

He took as an example the fact that Japan is trading increasingly with India nowadays and yet, whereas the cost of capital to a large importer in Japan is around one per cent, SME suppliers in India need to pay 15-20 per cent. The same goes for small business financing across most of this region (including Japan).

Asia has better than world-class savings but a truly 'third world' system for collecting and investing them, however efficient payment and settlement may be.

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