Back to the Jungle

WTO Faces Existential Threat in Times of Trump

By Martin Hesse

U.S. President Donald Trump has set his sights squarely on the World Trade Organization in Geneva. Even its critics are worried that without the organization, the world of trade would revert to the law of the jungle.

The locks at Three Gorges Dam on the Yangtze River in China

Roberto Azevedo, the director general of the World Trade Organization (WTO), is enjoying the moment. Outside, in front of the neo-classical Centre William Rappard, the headquarters of the WTO, Lake Geneva is glittering in the spring sun, while inside, Azevedo is not facing a particularly challenging start to his day. His agenda calls for him to open the Natural Disasters and Trade Symposium - a routine duty.

Azevedo shows up in the conference hall 10 minutes late, shakes hands and chats briefly with colleagues. He is met with goodwill on all sides - which has become a rarity for the guardian of free trade in these turbulent times.

The director general then speaks about how free trade can help countries recover from earthquakes or hurricanes, listing off a few examples and making a plea for stronger WTO involvement. He ends his talk with a sort of disclaimer: "As ever, precisely how we do this is up to our members."

It is a single sentence that perfectly describes the fundamental dilemma facing the WTO. It is essentially a system of trade treaties between its members, the adherence to which is monitored and moderated by the Geneva-based organization. In times of crisis, everyone looks to the 630 men and women who work in the Centre William Rappard, but the WTO takes no initiative. Everything it does, the organization never tires of repeating, must be at the initiative of its members.

The members, though, in particular U.S. President Donald Trump, have ensured that the WTO is itself being rocked by an earthquake at the moment. And when it is over, the global trade order could lie in ruins.

Ever since Trump introduced punitive tariffs on imported steel and aluminum, it has become clear just how serious the threat facing global economic regulations has become. And that the U.S. president isn't shying away from openly attacking the system of global trade that has been in place since the end of World War II. "The WTO has been a disaster for this country," he ranted in March before imposing the punitive tariffs.

A Symbol of the Madness

Trump has also threatened the EU, and Germany especially, with automobile tariffs and has slapped $50 billion worth of duties on Chinese goods while threatening additional tariffs worth $200 to 400 billion more. Those now under attack from the White House have sought to defend themselves by imposing tariffs of their own -- with the motorcycle brand Harley-Davidson having recently become the symbol of the madness of this trade war.

It is the kind of escalation hardly anyone thought possible only a few months ago.

Azevedo is aware of how serious the situation has become. "There's no question that global trade is facing a crisis," he says. If tariffs were to climb to the levels they were at before the WTO was established, he continues, it could result in an even worse recession than the one seen following the 2008 financial crisis. Still, Azevedo insists, "the WTO is built for these moments."

The problem is that the attacks from the U.S. president are not striking a unified, strong organization determined to defend itself. On the contrary, the WTO has been sidelined for some time. It has been largely forgotten by supporters of free trade because most significant trade barriers were removed so long ago. Anti-globalization activists, meanwhile, have moved away from targeting their erstwhile enemy number one, preferring instead to focus their ire on regional trade deals such as the Trans-Atlantic Trade and Investment Partnership (TTIP) and the EU-Canada Comprehensive Economic and Trade Agreement (CETA).

Yet ever since Trump's election, it is no longer just the influence and relevance of the WTO that is at stake. But its very existence.

Absent rapid and decisive reform, the organization won't survive. But there will be no reform if the U.S. and the rest of the world don't get their acts together. And it doesn't look as though that is going to happen any time soon. It's a real dilemma.

In the hallways and conference rooms of WTO headquarters, the feelings of impotence and anger have become palpable. Employees describe the developments as "concerning," "alarming" and "threatening," and speak of a "catastrophe," a "dark phase " and "Pandora's box" that has been opened and which could bring disaster to the world.

Returning to the Jungle

"The problems are coming from the behavior of a single country that would like to return to the jungle," a senior WTO official says, without identifying the U.S. by name. The WTO, he says, can claim credit for having established a rules-based system that is rooted in the principle of non-discrimination and lent authority by the consensus of its 164 members. It levels the playing field between strong and weak countries, between industrialized and developing economies, with the goal of increasing prosperity for all. But, the senior official says, the spirit of the WTO has evaporated.

Ironically, it hasn't been the critics of globalization on the left that have so weakened the reputation and influence of the WTO. The organization has only itself to blame for its decline -- or its founders, to be precise, with the United States leading the way.

The U.S. and other industrialized nations made several concessions to developing economies when the WTO was founded in 1995 and significantly reduced their tariffs. In return, they were able to push through stronger protections for intellectual property. They hoped that the strategy would help slow China's rise.

But from the U.S. perspective, the system has not been beneficial. And once China joined the WTO in 2001, that dissatisfaction only grew, partly because the Chinese proved adept at taking advantage of the rules. Even today, there is significant dissent within the WTO because the economic superpower China is still classified as a "developing nation" by the organization, which gives it certain privileges. On the other hand, China is fighting for recognition as a market economy, to which both the U.S. and the European Union are opposed because it would mean they could no longer defend themselves against state-subsidized Chinese exports with anti-dumping duties.

On top of all that, the WTO is facing a more fundamental problem: its size and its sluggishness. Negotiating rounds focused on removing tariffs have become increasingly complex. And because everything is up for negotiation at the same time, every member state can paralyze the process by simply exercising its veto. The Doha Round, launched in 2001, is a perfect example: It never achieved any results and has become symbolic of the WTO's failure.

Concentration and Boredom

In Geneva, WTO officials are quick to contradict claims that the organization is failing. Work is continuing, they say, and they insist that it continues to be valuable. Even the Americans, they emphasize, are still playing a constructive role on a day-to-day basis.

That day-to-day looks like this: It's a morning in April and the Market Access Committee is meeting in a sound-proof conference room located in a subterranean floor of the WTO headquarters. Interpreters are sitting in their booths to one side while the moderator of the negotiating round is positioned at the front of the room behind an elevated row of tables. The delegates, a diverse group all clad in formal business attire, are sitting at long rows of tables, each with a laptop on the table in front of them along with the name of the country from which they hail. Their faces alternate between concentration and boredom.

They are the workers in the engine room of world trade. They grease the gears of bureaucracy, optimize the flow of goods and eliminate hindrances. An EU diplomat takes the floor and thanks the U.S. for their bilateral talks focused on details from the world of fisheries and agriculture. The Americans answer just as politely.

Everything here follows a well-established ritual. An issue is introduced with reference to its file number, statements are read out for inclusion in the minutes and attention then shifts to the next item on the agenda.

But that is about the extent of the normality. WTO trade experts have grown extremely concerned about a possible scenario that could spell the end of the organization: the collapse of the dispute settlement gateway used to find solutions to disagreements.

The system, and the Dispute Settlement Body upon which it rests, is at the very heart of the WTO - in a certain sense, it is its raison d'être. It is the most visible improvement made since the General Agreement on Tariffs and Trade (GATT), in negotiations that ended in the early 1990s, reduced tariffs on manufactured goods from 40 percent to 5 percent.

The Dispute Settlement Body makes an initial ruling within an average of 15 months in disputes between two countries. If the country at the wrong end of the ensuing Dispute Settlement Understanding is unsatisfied, it can file an appeal with the Appellate Body.

Appearances Are Misleading

This system has long worked relatively well, with a majority of the 553 conflicts having been resolved. In almost every case, the country on the short end of the verdict has accepted the court's decision and implemented it.

Now, though, all of that is in danger, with the Dispute Settlement Body having become a central battlefield in Donald Trump's trade war. It has been years since the body has received as many complaints as it has in recent months. The EU, Canada, India and others have all filed grievances stemming from the steel tariffs imposed by Washington; the U.S. is going after China due to the alleged violation of intellectual property rights; and the Chinese are complaining about the targeted tariffs introduced by Washington. Just since the beginning of the year, 18 new complaints have been filed.

No country is the target of more grievances than the U.S. And no country has filed more objections than the U.S.

One could see the complaints filed by the U.S. as a sign that even the U.S. government still values and supports the WTO. But appearances are misleading. The Americans use the system when it seems opportune to do so, but they are also doing all they possibly can to sabotage it.

The U.S., for example, has sought to justify its recently implemented tariffs with national security interests. Such a rationale has rarely been used in the history of the WTO and it is not really something that the Dispute Settlement Body can resolve. The determination of what is in a country's national security interests, after all, is ultimately a political question. By making that claim, the U.S. is calling the entire system into question.

The Americans, to be sure, aren't entirely off base with their criticisms of the WTO. Some of the organization's rules are unclear, left intentionally vague out of consideration for national anomalies. China has proven particularly adept at exploiting this. The result is a surfeit of disputes that end up before the WTO court, and the body's verdicts are assailable because they essentially replace political decisions that were never made. "It is not for adjudicators to make law by their rulings," says Ujal Singh Bhatia of India, the head of the Appellate Body. "That is the job of WTO members."

It is this appellate court that is in danger of being paralyzed by Trump's policies. And it is Washington that has been largely blocking the appointment of new members to the Appellate Body to replace those who have left, with the result that the seven-member body has shrunk to four. If the number of members sinks below three, the body will no longer be able to function.

Virtually Dead

That would mean that those countries that lose their cases before the Dispute Settlement Body could avoid compliance by simply appealing the case to a non-functioning Appellate Body. And if rules are no longer enforceable, they lose all meaning. "If the system of settling trade disputes was to erode, the consequences would be dramatic," warns Director General Azevedo.

One could also say: Should that come to pass, the WTO would be virtually dead.

That threat, though, has been enough to awaken the survival instinct in people like Karl Brauner. The wiry diplomat from Germany has been deputy head of the WTO since 2013, having led the foreign trade policy division of the German Economics Ministry for several years before that. When it comes to trade issues, he has seen it all.

But he is enraged by what is currently taking place. "You can't change the rules of football just because one player suddenly begins playing a different style," Brauner says. The basic principles, he says, should not be abandoned. "We have to uphold the accomplishments of the WTO and somehow find our way through this dark phase," he says.

Simply continuing as before, however, is not possible - that much is clear to everyone involved. And that is why the constant references to the fact that only member states can initiate changes has begun to rankle WTO staff in Geneva so much. Each day, after all, they watch anew as some members clearly demonstrate their complete lack of interest in the organization.

Even Director General Azevedo, a man who rarely loses his composure, has begun openly pushing member states to take the necessary steps. "Yes, of course," he responds when asked if the WTO needs to be reformed. "Most of our rules date back more than 20 years to a time when people did not have cell phones or email addresses."

Azevedo says he has spoken about the need for WTO reforms with German Chancellor Angela Merkel and French President Emmanuel Macron. "I have told them both - and other leaders as well - that if members decide that this is the way to go, they will have my full support."

With or Without Donald Trump

Brauner and others have become much clearer about the kinds of reforms they would like to see: They want the WTO to be given the right to take the initiative. Such a change would mean that the director general and his team, independent of changing member-state governments and their interests, would be able to initiate new negotiating rounds and submit reform proposals for the dispute resolution process or other problematic areas.

Berlin and Paris are both open to granting the WTO greater powers. First, though, the EU's Trade Policy Committee would have to review any concrete proposal. Once agreement is reached there, European leaders could then seek to gather the support of other WTO members.

"We can't just suddenly pull the plug on the WTO, says Roland Süss. Coming from him, it is a surprising statement. Süss, after all, is a co-founder of Attac in Germany, an organization critical of globalization, and has been sharply critical of the World Trade Organization for years. "International trade needs enforceable rules," he says. "But also rules for the approach to the environment, labor and human rights."

He believes it was a mistake not to have embedded the WTO within the United Nations at the very beginning, where it could have been linked to the International Labor Organization and other UN groups. As such, Süss isn't surprised that the WTO is in trouble. He believes that the primary reason for the trade organization's struggles is that countries are increasingly finding themselves in direct economic competition with each other. Even within the WTO, he says, member states are pursuing their own short-term interests. America first. Germany first. China first.

Süss, in fact, no longer excludes the possibility of a world without the WTO. "Maybe it won't exist anymore in 10 or 20 years," he says. "But bilateral agreements likewise aren't the solution." He says a discussion must begin on what could replace our current economic order.

Those in Geneva, though, haven't yet gone quite that far. At WTO headquarters, they are still hoping the Americans will turn back from the jungle.

With or without Donald Trump.


Theatre of war

As its trade tussle with America heats up, China is on the back foot

But tumbles in Chinese equities and the yuan stem more from domestic causes



FOR months Chinese officials have stuck to the same script: China does not want a trade war, but will win if dragged into one. As hostilities turn more serious, this confident façade has taken a blow. Chinese equities have plunged into bear-market territory. The yuan had its biggest monthly fall against the dollar on record. Economic indicators have weakened. Even bombastic state-run media have turned introspective, counselling against arrogance.

All this, and the tit-for-tat trade battle is only just getting under way. On July 6th, after The Economist went to press, America was due to impose its first major set of tariffs on China: 25% duties on $34bn-worth of imports, notably machinery and electronic parts. China was set to retaliate with tariffs on goods worth the same amount, hitting products from soyabeans to sport-utility vehicles. Both countries have listed more tariffs to follow, on goods worth another $16bn. Both have also warned that they are willing to inflict much more pain if the conflict escalates.

Donald Trump’s bet is that since China has a massive bilateral trade surplus, it stands to lose more than America as barriers go up against imports. Were their stockmarkets gauges of the two countries’ trade-war prospects, he would seem to have a point. The S&P 500, America’s leading index of big shares, has fallen by 5% since late January; the CSI 300, China’s analogue, is down by more than 20% over the same period. Exchange-rate movements reinforce the impression. The yuan has depreciated by 5% against the dollar over the past three months, a sharp fall for a closely managed currency (see chart).




China is nervous about the perception of vulnerability. A drumbeat of reports in state-run media have talked up the stockmarket. On July 3rd the central bank tried to bolster the yuan, saying that the economy’s fundamentals were strong. But the toll from the trade war is starting to show up in some data. Surveys of China’s manufacturing sector have pointed to falling export orders. Mr Trump could take all this as evidence that he was right when he tweeted that trade wars would be easy for America to win.

In that, though, he would be mistaken. The turbulence in China reflects domestic challenges more than trade tensions. The hit to growth from the $34bn-worth of tariffs is likely to be minuscule, adding up to just about 0.1% of Chinese GDP. Depictions of China as a trade-reliant economy are hopelessly outdated: net exports account for just 2% of national income.

Instead, the bigger cause of China’s market turmoil is homegrown. After a rapid build-up of debt over the past decade, officials have been working to defuse financial risks. This has depressed demand for both equities and corporate bonds. Slower credit growth has weighed on liquidity. Capital spending has slowed sharply. Adding to the gloom was a report published by the National Institute for Finance and Development, a government-backed think-tank, on June 25th, warning that China was “very likely to see a financial panic”. The institute’s head later clarified that he believed the government could manage the risks. But jittery investors latched onto his warning, not his reassurance.

Yet seen from a different angle, China’s market troubles demonstrate one of the reasons why its officials think they can outlast America in a trade war. An authoritarian regime can limit and dictate the public discussion. After the stockmarket tumbled, authorities warned journalists against citing the trade conflict as an explanation, according to a directive published by the China Digital Times, a website that tracks government censorship. Reporters were also ordered to emphasise the economy’s bright spots. In America, meanwhile, the hurly-burly of its public discourse has been on display. On July 2nd the US Chamber of Commerce, the country’s biggest business group, launched a lobbying campaign to explain how tariffs would hurt the economy. Republican lawmakers in Congress are criticising the president’s trade policies more openly than heretofore—though on past form, if Mr Trump pushes ahead, they will probably fall into line.

Another source of confidence for China is the knowledge that it is not fighting America alone. From steel tariffs on Japan to threats of auto tariffs on Europe and negotiations that might wreck the North American Free-Trade Agreement, Mr Trump is taking on every one of America’s allies. China has tried to rally them to its side. It has asked the European Union to join it in condemning Mr Trump’s trade actions, according to Reuters (the EU declined because of its own trade grievances against China). Even as it raised tariffs on soyabeans from America, it removed them from soyabeans from India, South Korea and others in Asia. Xi Jinping, China’s president, has hinted that its markets will become more open to non-American firms.

Still, China’s preference would be to avoid a trade war altogether. That is why its officials had tried in May to hammer out an agreement to buy more American oil and farm goods, which they thought might satisfy Mr Trump. Many in China still cling to the hope that he can be reasoned with. Hawks in the White House had, after all, pushed for harsh restrictions on Chinese investors in late June, but Mr Trump went for a softer option, refusing to single out China. Lu Zhengwei of Industrial Bank, a Chinese lender, says the staggered way in which Mr Trump is imposing tariffs suggests that he wants to leave room for talks. “It feels like a chess match,” he says. With its financial markets in bad shape, China’s opening move looks wobbly. But the game is nowhere close to checkmate.


How the Blockchain Can Transform Government

How Blockchain Technology Will Disrupt Financial Services Firms

The blockchain is one of the most significant, fundamental advances in digital platforms since the internet and also probably the most overhyped technology in current times, according to Kevin Werbach, Wharton professor of legal studies and business ethics, at the inaugural annual Penn Wharton Budget Model Spring Policy Forum, held recently in Washington.

“In many ways, the parallels are striking,” said Werbach, who worked at the Federal Communications Commission in the late 1990s during the dot-com boom. “This is a new infrastructure baseline technology that can lead to lots of benefits — also, it has lots of problems. Blockchain is now the source of a great deal of fraud, of illegal activity and regulatory arbitrage, but it is also sparking innovation across the world in all sorts of areas.”

While most people use the terms Bitcoin and blockchain interchangeably, they are very different things. “At bottom, blockchain is not about money, even though this is the technology underlying Bitcoin and other cryptocurrencies — and it’s not fundamentally about destroying governments and replacing them with purely private, decentralized systems, even though it is a system that creates a new kind of decentralized infrastructure,” Werbach said.

“Fundamentally, blockchain is about something deeper than all of that. It’s about trust.”

Equifax and the Role of Intermediaries

Last fall, a company most Americans don’t know much about was hacked and the private data of 145.5 million people — including their Social Security numbers — was exposed. With its rich repository of private data, credit bureau Equifax became a target of hackers. And the reason why the company and other credit bureaus exist in the first place is due to a lack of trust. Equifax provides credit scores so a bank, car dealer or other lender will have a sense of whether a borrower will pay back a loan.

“The point of Equifax and credit bureaus is not to have credit bureaus,” Werbach said. “It’s to have a mechanism so that a distributed world of actors, companies and individuals can engage in loan transactions with some sense of what people’s creditworthiness is.” But imagine if those same transactions can be done without central, trusted intermediaries, “it would be much more secure and be much more efficient,” he said. Firms like Equifax charge fees for being an intermediary and going through them also adds delays to a transaction.

The basic idea behind blockchain is that one can trust the system as a whole without necessarily trusting any of the participants, Werbach said. The blockchain is a ledger — record of transactions in a database — distributed to people in a network. Everyone on that network has their own copy of the ledger and be “actually confident, based on mathematical structures of cryptography, that every copy is the same.” So even though there is no central intermediary — like Equifax, a bank or the Federal Reserve — all the players in the blockchain network can trust the information.

There is only one ledger in any given blockchain network and everyone works off that record. Each participant gets a copy of the ledger and additions to the record cannot be changed. With all eyes on it, there is no need for a trusted institution to be in the middle to charge fees or delay transactions. “Everyone can maintain their own copy even across different organizations and across different countries,” Werbach said. “This seemingly basic abstract idea is what has led to all the excitement and adoption around blockchain and cryptocurrencies.”

The excitement around this innovation has pushed the value of Bitcoin to $100 billion around the world while cryptocurrencies in circulation are worth around $300 billion, though down from a high of $750 billion in December 2017, Werbach said. More than $15 billion has been raised in crypto-token offerings in 2017 to 2018. He also cited figures from Gartner projecting that the blockchain is expected to add $176 billion in business value by 2025 and $3.1 trillion by 2030.

But there are issues to overcome. “It’s incredibly early. This is not a mature technology.

There’s great uncertainty, there are all sorts of problems, even basic technical programs that need to be worked out, and there are all sorts of non-valuable applications,” Werbach said.

There are “people using this, for example, to commit fraud, or using this capability to engage in money laundering and illegal transactions — and all sorts of regulatory uncertainties.” However, he believes that these challenges are “not indications that this technology is fundamentally flawed or is fundamentally fraudulent or a Ponzi scheme at the heart.”

Why Blockchain Shows Promise

To be sure, one doesn’t need the blockchain to keep a record of transactions. Any centralized database can do the job. “However, there are large swaths of activity where no database will actually get deployed, or actually be successful, because of basic trust problems,” Werbach said. Sometimes the level of trust is too limited. For example, two companies that enter into a transaction typically will not trust each other. So, they each maintain a record of the transaction. If it’s a more complex deal, they have more copies and have to reconcile them back and forth, he said. That leads to delays, duplication, additional costs and errors.

One example of how the blockchain can improve operations is in supply chains — where goods and services flow among many different organizations around the world. Delays come when the companies in the supply chain are not willing to share their data with each other so there’s a lot of back and forth involved. But the blockchain can solve this problem. Werbach pointed to Walmart’s use of blockchain to track its produce. Before, if someone got sick from the produce, it would take the retailer 6.5 days to find out which farm it came from. After using the blockchain, “Walmart got it down to 2.2 seconds,” he said.

The other potential value of the blockchain is that once a network is set up, it can be a platform for ‘smart contracts’ to run on top of it, Werbach said. These are software applications that automatically execute the rules programmed into it. For example, a smart contract on a car loan gives the driver ownership rights while he continues to make payments. If he misses payments, the contract would trigger a process to repossess the car and the ownership would revert to the lender — all done without an intermediary such as a repo agent or collection agency.

For the government, smart contracts can have implications on how it can regulate more efficiently. For instance, auditing functions can be embedded in the smart contract itself. “So, audit doesn’t have to come in by a third party forensically,” Werbach said. “The transactional data can be readily available on the blockchain itself, including to regulators.” The government does not have to rely on records a company provides to audit transactions because it can see the record on the blockchain.

One example of how the blockchain can improve operations is in supply chains — where goods and services flow among many different organizations around the world.

Werbach said two broad approaches comprise the blockchain innovation. One is the crypto-economic system, such as Bitcoin and other cryptocurrency tokens. In this system, the goal and incentives are the cryptocurrency itself. For example, Bitcoin ‘miners’ expend plenty of electricity and computing power to secure and validate blocks of transactions in a blockchain network. Their reward is Bitcoins. “Bitcoin depends on Bitcoin to incentivize miners who are investing their resources,” he said. “Their tokens become an incentive for behavior.”

The other approach is what’s called “permissioned systems,” Werbach said. In this set up, the participants all know each other so there is no need for all the “overhead” of the mining and validation process, he added. “You can create a shared environment. No one’s in control [and everyone has the same copy of the ledger]. It’s still decentralized but [participants can] much more efficiently use that shared ledger.”

Applications for Government

Werbach said at a time when trust in the government is “at an all-time low,” systems that don’t rely on trust have “tremendous potential.” Also, government resources are constrained and so blockchain-based solutions that wring costs out of the system are helpful. Moreover, blockchains tend to be “incredibly secure systems because they decentralize out this process of security and create an alignment of incentives to secure the network,” he added. “They’re designed around an information security and cryptography paradigm that puts security at the core, and … they allow for this integral accountability in the system itself.”

Critics might question the security of Bitcoins after high-profile thefts at several cryptocurrency exchanges. But Werbach said the blockchain of Bitcoins is quite secure. “Bitcoin is a public $100 billion bank vault. It’s out there. Anyone could hack the Bitcoin network. Nobody has been able to do that in nine years of trying,” he said. Where Bitcoin has been stolen is “at the edges.” For example, when Bitcoin leaves the blockchain vault and goes to an exchange and the exchange gets hacked.

Werbach said using blockchain makes sense for the government because much of what it does is actually record-keeping. “These can be put on a blockchain to make them more secure and more accessible.” For example, Cook County in Illinois put its title registration on a blockchain. Once it is recorded, no one can change it. This can be the foundation for smart contracts to handle liens on properties or the need for additional information.


“Bitcoin depends on Bitcoin to incentivize miners who are investing their resources. Their tokens become an incentive for behavior.”

In Delaware, the blockchain is used for corporate share issuance. When an investor buys a stock, it is technically owned by the Depository Trust and Clearing Corp. “If you owned that stock, the system would grind to a halt because you’d have to trade the physical stock certificates back and forth each time,” Werbach said. That’s why Delaware used the blockchain. And the company has the added benefit of seeing all its investors in real time.

West Virginia just did a pilot test to use the blockchain for voting in its recent primary. The target was military service members deployed overseas. “If someone’s on an aircraft carrier, it’s hard to get them an absentee ballot to vote in a primary,” Werbach said. The state hired a vendor to create a system that lets overseas military securely vote using a mobile device and it’s all recorded on a blockchain. “This potentially uses the immutability of the blockchain as well as native digital accessibility,” he said.

But Werbach acknowledged that security experts have concerns about using it for voting. “The question is, where is the real challenge? Is the problem of information security in elections the core record, or all the things around the edges?” The blockchain might be secure, but if there’s malware on a voter’s mobile phone that is used to cast a ballot, maybe it could change the vote. “Blockchain at the core doesn’t necessarily solve that problem.”

Another use of the blockchain by government is for distribution of benefits. Here, Werbach cites the example of the United Nations World Food Programme that provided cash transfers to Syrian refugees in Jordan. Not only did the blockchain system save money by avoiding bank fees, it enabled the refugees to buy food from local merchants through a biometric scan of their eye. They didn’t need any physical cash, vouchers or electronic cards.

Compliance is another area where governments using the blockchain can boost efficiency by eliminating some of the intermediaries, Werbach said. For example, tax collection goes through several intermediaries and steps. “Putting it all on one ledger potentially eliminates those and creates this environment where regulators can get direct access to the transactional data,” he said. It has “great potential for a whole variety of regulatory contacts where traditionally the process of keeping track of activity was something that had to happen after the fact.”

Government borrowing also can be transformed by the blockchain, Werbach said, citing the example of Berkeley, Calif. In May, city officials voted to issue ‘micro-bonds’ in denominations of $10 to $25 to raise money for community projects. The typical muni bond size is $5,000 at the minimum. Typically, finance fees for issuing muni bonds is such that it would not be feasible for small amounts. But the blockchain cuts those costs because it lets the government deal directly with the buyer. Vice Mayor Ben Barlett reportedly said combining ‘micro-bonds’ with blockchain is “meant to get around Wall Street.”

“If you could go back 25 years ago, to the early 1990s, and you knew what the internet was going to become … what kind of bets would you make? It took 20 years for all this to unfold.”

The Berkeley pilot doesn’t “require centralized intermediaries, the value transfer happens directly and potentially allows for much more efficient transactions and allows for much smaller value transactions with direct maintenance and tracking of the information,” Werbach said. “Smart contracts … can be used to manage, track and implement the interest rate process, the repayment process and securitization process of these bonds.” Indeed, government using the blockchain platform for all types of functionalities could yield “new kinds of innovation,” he said.

To be sure, blockchain is still in its early stages. “Many of these will fail. But if you could go back 25 years ago, to the early 1990s, and you knew what the internet was going to become … what kind of bets would you make? It took 20 years for all this to unfold,” Werbach said.

“Something similar will happen with blockchain. We’re at that point now where we can start to see the potential, and so therefore this is the time for public sector agencies as well as enterprises in the private sector to start to experiment and figure out where the real opportunities are, where this technology can actually solve problems in new kinds of ways. So that’s where we are today and it’s a very exciting time.”


The youth and the rich old man

Amid tensions with America, China is turning to Europe

It may not get the comfort it seeks



A REMARKABLE summit between the European Union and China in Beijing on July 16th marked a turning-point in Chinese views of the EU. Rules and laws bind the EU’s 500m citizens together, albeit scratchily at times. Chinese leaders are sniffy about polities that espouse rule of law as a founding principle. The Communist Party prefers to talk of “rule by law”. Rules are tools by which the strong exercise power over the weak. American talk of a rules-based order, notably, strikes China as the purest hypocrisy—a figleaf covering a superpower’s lust for dominance. Unable to bully its way past America, China has often tried to press European governments to bend or break rules that it found inconvenient, seeing the Old Continent as cash-strapped, malleable and easy to divide.

Yet face to face with European bureaucrats this week, President Xi Jinping and his team agreed, in effect, that the one thing worse than an American-led world was one with no rules at all. The cause of this shift, as with so much else, is President Donald Trump. Western governments have spent 20 years telling Chinese leaders that a rules-based global order is not a plot to contain China, but a source of stability that has enabled their country’s rise. Rather than chafe at American-led security alliances in Asia, China has been urged to see how it gains when its exports steam along sea lanes open to all. When Chinese envoys grouse about a world trade and financial architecture designed in Western capitals after the second world war, they have been reminded how globalisation has powered China’s growth.

On paper the big achievement of the China-EU summit was a Chinese agreement that the World Trade Organisation (WTO) must be reformed if it is to survive these Trumpian times.

The meeting also unblocked talks about the further opening of Chinese and EU markets to bilateral investment and trade (see Briefing). But the real drama involved China’s reasons for making those concessions.

In closed-door remarks conveyed to Beijing-based ambassadors from the EU’s 28 member countries, Mr Xi said that China feared a trade war with America but would not flinch from one. He accused Mr Trump’s administration of behaving as if it were taking part in a freestyle, no-rules boxing match. Going beyond his public rhetoric about China as a champion of an open global economy, Mr Xi told his guests that China and the EU could not watch the old order being destroyed, and a vacuum being created.

For his part Donald Tusk, who as president of the European Council represents EU national governments, privately told his hosts that even as they met in Beijing, they needed to reflect on a meeting happening at the same time in Helsinki between the American and Russian presidents, and on threats to the post-war global order. He said that order had brought peace to Europe, prosperity to China and ended the cold war between East and West. Mr Tusk repeated those fears at the summit press conference. Nodding to the meeting between Mr Trump and Vladimir Putin, he declared that “the architecture of the world is changing before our very eyes”. He urged Europe, China, Russia and America “not to destroy this order but to improve it”.

Earlier this year China dreamed of forging an anti-Trump coalition with Europe, which is China’s second-largest trade partner, exchanging goods worth $667bn in 2017. Chinese officials discreetly urged EU counterparts to distance themselves from American complaints about China’s trade tactics and join them in complaining about a welter of American tariffs, slapped on Chinese goods and European steel alike. That was an error. European officials explained that though they disagreed with Team Trump’s tactics, they agreed with the substance of America’s grumbles about China’s forced transfers of technology, uneven protection of intellectual property and state subsidies for its firms.

A new approach

Stung, China changed tack. At the summit in Beijing the prime minister, Li Keqiang, said that talks with the EU on reforming trade rules were not aimed at America, Russia or any other country. Instead Mr Li talked up moves to open China’s economy to Europe, including allowing BMW, a German carmaker, to take a controlling stake in a local partner. He announced a doubling of fines for anyone abusively extracting trade secrets from business partners.

Alas, those warm words fall on sceptical ears. In June almost half of respondents to a business-confidence survey by the European Chamber of Commerce in China said they expected regulatory obstacles to increase in the next five years. Jean-Claude Juncker, president of the European Commission, the EU’s executive arm, noted in Beijing that European direct investment into China had hit a low of €6bn ($7bn) in 2017, compared with €30bn invested by China in the EU. The green light given to BMW proves that China “knows how to open up” when it wants to, Mr Juncker added waspishly.

Chinese interest in the EU hit a peak in 2003, at a moment when it looked as if the union was getting a constitution, a foreign minister and a full-time president, and was defying America over the invasion of Iraq. That honeymoon ended a few years later as Europe proved unwilling to challenge American hegemony. At a policy conference in Sweden in 2009 a Chinese participant captured the mood when he called America a strong man and China a teenager, but Europe a decadent “rich old guy”.

China spent years pressing the EU to lift an arms embargo imposed after the crushing of the Tiananmen Square protests in 1989, to keep quiet about Chinese garrison-building in the South China Sea and to support China’s claim to “market-economy status” at the WTO, which would make it harder for Europe to accuse China of dumping. Chinese envoys unblushingly told EU diplomats to grant these concessions because “we should be given this.” Disputes over the South China Sea, trade and market-economy status meant that EU-China summits in 2016 and 2017 ended testily without joint statements.

Yet at this year’s summit China did not mention the market-economy topic. The once-burning issue of the arms embargo has also been largely shelved. In the words of François Godemont of the European Council on Foreign Relations, a think-tank, China’s urgent concern is propping up a profitable status quo in the global trading system: “What they have they want to keep. That’s the ‘big ask’.”

Keeping the status quo, China now sees, involves defending the rules-based order. Still, differences lurk. China may now accept that the WTO needs fixing, but its motives are not Europe’s. In talks this week between Liu He, Mr Xi’s economic adviser, and Jyrki Katainen, a vice-president of the European Commission, Mr Liu appeared to view stronger trade rules as mainly a way to restrain America. The EU wants to shore up the global trading system to bear China’s fast-growing weight.

Wang Yiwei of Renmin University, who worked at China’s mission to the EU in Brussels, pinpoints perhaps the most important point of difference. China sees Mr Trump as a herald of America’s future as an angry, deindustrialised power, he says. But Europeans hope that Mr Trump is an aberration: “They are waiting for the mid-terms, or another president.”

That leaves China quietly testing Western unity where it can. Days before the EU summit, Mr Li, the prime minister, was in Bulgaria for a meeting of the “16+1” group of former communist countries from east and central Europe. Eleven of its members belong to the EU. Founded at China’s urging in 2012, the group saves China the bother of courting some of Europe’s smaller countries separately and offers those tiddlers an annual meeting with China’s prime minister.

The group increasingly frustrates its larger members, notably Poland, which only sent a deputy prime minister to the recent meeting. Officials in Brussels and Berlin view “16+1” as a bid to divide Europe and thus the West. That is not impossible. For now, though, a united Europe has its uses. China is impatient for great-power status. Rules-free conflict with the West will not help it get there.


Doug Casey on Banking with the Fed


Justin’s note: Abolish the Federal Reserve.


Justin: Doug, what do you make of this idea?

Doug: It's a silly idea, a stupid idea, a disastrous idea. The person who suggested this is glib, but clearly lacks a basic understanding of money, both its nature and its history. Nor does he understand how banking works.

Commercial banking, version 2018, has only a limited relationship with sound classical banking. Most people today are unaware what that is, or how it works. [You may want to read this brief description.]

Historically, private banks had two types of bank accounts, demand deposits and time deposits, or what most people know as checking and savings accounts. These are two separate, and very different businesses.

Demand accounts used to be a safe way to store your money. You paid the bank a fee for storing it, and writing checks against it.

Savings accounts, or time deposits, are quite different in nature. These accounts might pay around 3% in interest per year. Banks lend out this money, perhaps charging borrowers 6%. The difference, or 3%, is the bank’s profit. Your money was tied up for the length of the loan.

Again, banks have historically provided two banking services—the storage of money and the brokerage of money. Money was a commodity, not just an accounting fiction, a floating abstraction. The distinction has already been lost, with checking accounts that pay interest, and “fractional reserve” policies with currency created from nothing. But we’d truly be in fantasyland if the Fed became everyone’s bank. Commercial banks could hardly make loans if everyone parked their money at the Fed. The Fed would be totally in charge of interest rates and all lending policies.
Justin: So this would be even worse than the current system?

Doug: Yes. The current banking system is very dysfunctional. It’s politicized and distorted, and I despise today’s “too big to fail” institutions, which are already practically arms of the State. Horrible things, paying their managements megamillions, while socializing their losses. But this would be much, much worse. You’d have bureaucrats making loans. It would be like banking with the Gosbank of the old USSR.

Still, I can see how someone might think this would be more efficient… or even safer than the current model. I mean the author’s right, in a perverse way. The Fed can’t go bust like private banks. It can just create new dollars whenever it wants.

I'm flummoxed that somebody came up with such a cockamamie idea. But maybe I shouldn’t be. The whole world is becoming so politicized. Governments have become involved in every aspect of existence, reaching into areas of people’s lives that they wouldn't have dared to tread before. To say it’s like an octopus, with its tentacles insinuating everywhere, is now an inadequate metaphor. Government has become like a fungus, or a bacterial disease, infecting every part of the body politic. Anything appears possible.

Justin: Doug, you’ve issued a lot of warnings recently about government-controlled digital currencies. Do you think arguments like this will be used to lay the foundation for FedCoin?

Doug: Yes. Digital currencies are coming. Every major government in the world is trying to eliminate cash, starting with the big bills. The 500 euro note, the $100 bill, and even the $50 bill will all be dead ducks soon. There are parts of China now where cash isn’t even accepted; you have to use a smartphone to buy a coffee at a corner convenience store.

Soon all transactions will be done digitally. It’s wonderful—for the State. They’ll know every source of your income, who’s paying you, and for what. And every allocation of your assets—what you’re buying, what you’re reading and watching, what you own, and where it is. A digital money will make it easy for them to do this. Almost everybody already has a smartphone—even me, although I despise being tethered to the damn thing, and only use it when absolutely necessary.

But, perversely, having one and using it is becoming necessary. The next step will be a set of chips implanted in your body, serving most of the functions of a smartphone. People will love it, thinking of the convenience—you won't be able to lose your wallet with the cash and ID it contains.
Justin: But it comes at a huge cost.

Doug: Right. You’ll have no privacy.

I mainly see the dangers—the State can track you absolutely everywhere, at all times. The government, or one of its agents, could decide to lock you out of your bank account. They could cut you off from your own money. And completely cut off your ability to buy, sell, travel, or do anything, should you be viewed as politically unreliable. I suspect that once you’re on a list, getting off will be much harder than getting off the TSA’s “no fly” list—which is nearly impossible.

It gets much worse than a complete lack of privacy. The Chinese government is leading the way with their Social Credit system. They’ll not only know everything you do, but everything you say and think. And what everyone else thinks about you.

Government digital currencies are an immense threat not just to financial freedom, but any type of freedom. It’s a “kinder and gentler,” but much more insidious, version of 1984. I'm honestly shocked that people aren't up in arms about this. They should be furious that governments are moving towards digital currencies. Or that some fool can put forward the idea of using the Fed like a commercial bank, and be taken seriously.

Justin: I worry that governments could implement their own digital currencies without much resistance. I mean, most people these days value convenience over privacy. So I wonder if we’ll ever reach a point where the average person asks, “Hey, what’s going on here?” Or maybe everyone will just surrender their privacy for the sake of convenience.

Doug: That appears to be the trend. And trends in motion tend to stay in motion.

The average person has been programmed to trust the government. It starts with their grade school civics books, and continues through college courses on “political science,” where Boobus americanus is assured we live in the best of all possible worlds. Sure, everyone knows governments make mistakes and are occasionally clumsy. But the average person actually thinks the government’s his friend.

This is why they're perfectly willing to give up privacy for convenience. They think their interests are in the hands of competent, good humored, and good-natured people. But that’s not the case at all.
The government is an entity with its own interests. It’s like a parasite or a predator that is living off of society at large.

This trend will likely continue until there’s a crisis. And that could take many forms. It could be a financial crisis. It could also be a nuclear attack or an EMP [electromagnetic pulse] attack. Or maybe a solar flare will occur that renders most electronics useless. Or the government itself could simply collapse. That’s happened many hundreds of times throughout history.

My view is that the response of governments and central banks to the crisis of 2007–2009 has sowed the seeds to a vastly different and much bigger crisis. It’s going to have consequences that go way beyond just another financial or economic upset. And it’s way overdue.

When it happens, the people who trust the government with their wealth are going to be out of luck. We’re looking at a trend that’s both very bad and quite unsustainable.

Justin: If digital money controlled by central banks isn’t the solution, then what is? Is physical gold still the answer? Or is a decentralized digital currency like bitcoin better suited for today’s world? Maybe it’s a combination of the two?

Doug: Well, gold has historically been money, with silver a secondary alternative. They’re market-based money. They’ll continue to serve as money in today’s world. Bear in mind that the experiment with central banking and fiat money is less than 100 years old. It’s a blip in history. Like the USSR, which only lasted from 1922 to 1991. Most people idiotically thought it was going to be an everlasting element of the cosmic firmament, but it turned out to be just a delusional scam, with less reality than a criminal version of the Wizard of Oz.

Central banks and fiat money are to real money what the USSR was to real societies. Gold is going be reinstituted as money. One reason I suspect this will happen soon is because the Chinese are going to back their yuan with gold to make it acceptable to all 60-some countries that will be part of their One Belt, One Road system. Ideally, the yuan will be fully redeemable with gold to everyone, like the US dollar was before 1933. Or at least semi-redeemable, as the US dollar was before 1971.

I hope the Chinese succeed. But there’s a chance that the huge distortions that have developed in their economy will prevent them from implementing it.

Ideally, currencies—which started out as government substitutes for gold—would cease to exist. The mark, the lira, the pound, the dollar were just local names for a specific amount of gold. In the future, a dollar could again be just a name for .05 ounces of gold. And it could be transferred digitally on the blockchain. There’s zero reason that money has to be a function of the State in today’s world, however.

I have nothing against using smartphones in general, and see no reason why you shouldn't be able to use your smartphone to buy and sell things in particular. The problem is when the government is involved in the mix. The addition of the State will likely turn a wonderful technological innovation into a dangerous poison.

Justin: And could this be accomplished without central banks?

Doug: Yes. Again, there’s no reason why government should be involved in the money system at all. In fact, there's every reason why the government shouldn't be involved in the money system. Governments have a natural inclination to debase the currency. They do this because creating money is an indirect form of taxation.

Governments have been doing this since money was first coined, in Lydia (which was located in what is now western Turkey) in the 7th century BCE. And yet, everybody still thinks government should be involved in money, and central banks—a much more recent innovation—should regulate it. But neither is the case. Government shouldn't be involved in money and central banks should be abolished.

Justin: Good stuff. Thanks for taking the time to speak with me today, Doug.

Doug: You’re welcome.