VACACIONES OCTUBRE 2016 (CLICK ON LINK)
lunes, octubre 10, 2016
MORE WEALTH, MORE JOBS, BUT NOT FOR EVERYONE: WHAT FUELS THE BACKLASH IN TRADE / THE NEW YORK TIMES
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Etiquetas:
Economics,
Shipping,
Trade,
World Economic And Political
More Wealth, More Jobs, but Not for Everyone: What Fuels the Backlash on Trade
Trade is under attack in much of the world, because economists failed to anticipate the accompanying joblessness, and governments failed to help.
By PETER S. GOODMAN
ROTTERDAM, the Netherlands — For as long as ships have ventured across water, laborers like Patrick Duijzers have tied their fortunes to trade.
A longshoreman here at Europe’s largest port, his black Jack Daniels T-shirt, hoop earrings and copious rings give Mr. Duijzers the look of a bohemian pirate. His wages put him solidly in the Dutch middle class: He has earned enough to buy an apartment while enjoying vacations to Spain.
Lately, though, Mr. Duijzers has come to see global trade as a malevolent force. His employer — a unit of the Maersk Group, the Danish shipping conglomerate — is locked in a fiercely competitive battle with giants scattered from Dubai to South Korea.
He sees trucking companies replacing Dutch drivers with immigrants from Eastern Europe. He bids farewell to older co-workers reluctantly taking early retirement as robots capture their jobs. Over the last three decades, the ranks of his union have dwindled to about 7,000 members, from 25,000.
“More global trade is a good thing if we get a piece of the cake,” Mr. Duijzers said. “But that’s the problem. We’re not getting our piece of the cake.”
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The Mette Maersk, a Danish-flagged behemoth, at APM Terminals in Rotterdam. On a recent afternoon, 18,000 shipping containers were stacked like children’s blocks on a deck longer than three football fields, bearing auto parts, scrap metal and electronics. Credit Ilvy Njiokiktjien for The New York Times
Far beyond the docks of the North Sea, such laments now resonate as the soundtrack for an increasingly vigorous rejection of free trade.
For generations, libraries full of economics textbooks have rightly promised that global trade expands national wealth by lowering the price of goods, lifting wages and amplifying growth.
The powers that emerged victorious from World War II championed globalization as the antidote to future conflicts.
From Asia to Europe to North America, governments of every ideological persuasion have focused on trade as their guiding economic force.
But trade comes with no assurances that the spoils will be shared equitably. Across much of the industrialized world, an outsize share of the winnings have been harvested by people with advanced degrees, stock options and the need for accountants. Ordinary laborers have borne the costs, suffering joblessness and deepening economic anxiety.
These costs have proved overwhelming in communities that depend on industry for sustenance, vastly exceeding what economists anticipated. Policy makers under the thrall of neo-liberal economic philosophy put stock in the notion that markets could be entrusted to bolster social welfare.
In doing so, they failed to plan for the trauma that has accompanied the benefits of trade. When millions of workers lost paychecks to foreign competition, they lacked government supports to cushion the blow. As a result, seething anger is upending politics from Europe to North America.
In the United States, the Republican presidential aspirant Donald J. Trump has tapped into the rage of communities reeling from factory closings, denouncing trade with China and Mexico as a mortal threat to American prosperity. The Democratic nominee, Hillary Clinton, has done an about-face, opposing an enormous free trade deal spanning the Pacific that she supported while secretary of state.
In Britain, the vote in a June referendum to abandon the European Union was in part a rebuke of the establishment, from laborers who blame trade for declining pay. Across the European Union, populist movements have gained adherents as an outraged response to globalization, imperiling the future of major trade deals, including a controversial pact with the United States and another with Canada.
“The trade policy of the European Union is paralyzed,” said the Italian minister of economic development, Carlo Calenda, during a recent interview in Rome. “This is a tragic situation.”
The anti-trade backlash, building for years, has become explosive because the global economy has arrived at a sobering period of reckoning. Years of investment manias and financial machinations that juiced the job market have lost potency, exposing longstanding downsides of trade that had previously been masked by illusive prosperity.
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This tide of animosity may prove nearly impossible to reverse, given that technological disruption and economic upheaval are now at work in an era of scarcity. Today, many major nations are grappling with weak growth, tight credit and a gnawing sense that a lean future may persist indefinitely.
The worst financial crisis since the Great Depression has left banks from Europe to the United States reluctant to lend. Real estate bonanzas from Spain to Southern California gave way to a disastrous wave of foreclosures, eliminating construction jobs. China’s slowdown has diminished its appetite for raw materials, sowing unemployment from the iron ore mines of Brazil to the coal pits of Indonesia.
Trade did not cause the breakdown in economic growth. Indeed, trade has helped generate what growth remains. But the pervasive stagnation has left little cover for those set back by globalization.
The North American Free Trade Agreement, or Nafta, exposed workers in the United States to competition with Mexico, but its passage came in the mid-1990s, just as investment was pouring into the Web, creating demand for a range of manufactured goods — office furniture for Silicon Valley coders, trucks for the couriers delivering e-commerce wares. China’s entry into the World Trade Organization in 2001 unleashed a far larger shock, but a construction boom absorbed many laid-off workers.
The dot-com boom is now a distant memory. The housing bubble burst. Much of the global economy is operating free of artificial enhancements. Lower-skilled workers confront bleak opportunities and intense competition, especially in the United States. Even as recent data shows middle-class Americans are finally starting to share in the gains from the recovery, incomes for many remain below where they were a decade ago.
“The debates that we are having about globalization and the adjustment cost, these are the conversations that we should have been having when we did Nafta, and when China entered the W.T.O.,” said Chad P. Bown, a trade expert at the Peterson Institute for International Economics in Washington. “There were people talking about these things, but they weren’t taken very seriously at the time. There’s a lot of policy regret.
“We do need to have these trade agreements,” Mr. Bown said, “but we do need to be cognizant that there are going to be losers and we need to have policies to address them.”
The extent of the damage suffered by these “losers” has accelerated an erosion of faith in the wealth-creating powers of free trade. A profound skepticism has taken root in some of the largest trading powers, notably the United States, France, Italy and Japan.
Successive administrations in the United States, led by Democrats and Republicans alike, have embraced liberalized trade as a central component of the nation’s foreign policy. Yet only 19 percent of American voters said trade with other countries creates more jobs in the United States, according to a New York Times/CBS News poll released in July.
Even among those who support trade, doubts are growing about its ability to deliver on crucial promises. A 2014 Pew Research Center survey of people in 44 countries found that only 45 percent of respondents believed trade raises wages. Only 26 percent believed that trade lowers prices.
Volumes of economic data tell a different story.
Workers employed in major export industries earn higher wages than those in domestically focused sectors.
Americans saw their choice of products expand by one-third in recent decades, the Federal Reserve Bank of Dallas found. Trade is how raspberries appear on store shelves in the dead of winter.
Lower-income households have benefited from better prices on basic goods. As imports surged, the cost of baby and toddler clothes in the United States dropped by 10 percent between 1999 and 2013, according to an analysis by Pietra Rivoli, a trade expert at the McDonough School of Business at Georgetown University. The price of shoes went up much more slowly than the overall cost of living.
But the fear and anger over trade is well founded.
Vast numbers of laborers have lost jobs as imported goods from low-wage countries arrived. Mills have closed while strip malls fill with dollar stores and payday lenders.
In the fallout, the United States maintained limits on unemployment benefits, leaving American workers vulnerable to plummeting fortunes. Social welfare systems have limited the toll in Europe, but economic growth has been weak, so jobs are scarce.
All the while, automation has grown in sophistication and reach. Between 2000 and 2010, the United States lost some 5.6 million manufacturing jobs, by the government’s calculation. Only 13 percent of those job losses can be explained by trade, according to an analysis by the Center for Business and Economic Research at Ball State University in Indiana. The rest were casualties of automation or the result of tweaks to factory operations that enabled more production with less labor.
American factories produced more goods last year than ever, by many indications. Yet they did so while employing about 12.3 million workers — roughly the same number as in 2009, when production was roughly three-fourths what it is today.
At APM Terminals, where Mr. Duijzers works, a symphony of motion greets every arriving container ship. Cranes rev, lifting containers. But people are scarce. “Robots Running Things in Rotterdam,” proclaims an article on the company website. “Of the 74 machines operating in the yard, 63 run on their own with no human intervention.”
Yet if robots are a more significant threat to paychecks, they are also harder to blame than hordes of low-wage workers in overseas factories.
“We have a public policy toward trade,” said Douglas A. Irwin, an economist at Dartmouth College. “We don’t have a public policy on automation.”
The China Syndrome
When Michael Morrison took a job at the steel mill in the center of Granite City, Ill., in 1999, he assumed his future was ironclad.
He was 38, a father with three young children.
“I felt like I had finally gotten into a place that was so reliable I could retire there,” he said.
The mill had been there — just across the Mississippi River from St. Louis — since the end of the 19th century. It had changed hands, ultimately landing in the portfolio of United States Steel. But the basics held. For those willing to sweat, the mill was a reliable means of supporting a family.
Mr. Morrison began by shoveling slag out of the furnaces, working his way up to crane driver. From inside a cockpit tucked in the rafters of a cavernous building, he manned the controls, guiding a 350-ton ladle that spilled molten hot iron.
It was a difficult job requiring finesse and perpetual focus. He was compensated accordingly, earning $24.62 an hour.
He worked overtime shifts, amassing savings to send his children to college. Last year, he took home $86,000.
His eldest daughter recently finished her master’s in epidemiology. His son completed his sophomore year at McKendree University in nearby Lebanon.
But events playing out on the other side of the world would soon upend his life.
China’s relentless development was turning farmland into factories, accelerated by a landmark in the history of trade: the country’s inclusion in the World Trade Organization.
The W.T.O. was born out of the General Agreement on Tariffs and Trade, a compact forged in 1947 that lowered barriers to international commerce in an effort to prevent a repeat of global hostilities.
In the first four decades, tariffs on manufactured wares plunged from about 35 percent to nearly 6 percent, according to the Federal Reserve Bank of Chicago. By 2000, the volume of trade among members had swelled to 25 times that of a half-century earlier.
Most of this trade took place between wealthy countries with similar wages and labor standards. But the rollout of Nafta in the 1990s put American workers in direct competition with counterparts in Mexico, where wages were much lower and labor rights and environmental standards were minimal.
A washing machine maker with factories in the United States now had a ready way to cut costs: Set up a plant in Mexico.
Still, Mexico — home to about 123 million people — was not big enough to refashion the terms of trade. When China joined the W.T.O. in 2001, that added a country of 1.3 billion people to the global trading system.
China targeted crucial industries for domination, lavishing favored companies with sweetheart credit terms while investing aggressively in ports, highways and electrical generation. Anyone with ideas about organizing Chinese labor risked landing behind prison bars.
In the first 13 years after China entered the W.T.O., its exports of goods swelled from $266 billion to nearly $2.3 trillion in 2014, according to the World Bank.
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The beneficiaries of this surge include anyone who has bought practically anything touched by human hands — an iPhone, a car, a Christmas ornament. Corporations that used China to cut costs raised their value, enriching executives and ordinary investors.
The casualties of China’s exports are far fewer, but they are concentrated. The rugged country of western North Carolina suffered mass unemployment as Chinese-made wooden furniture put local plants out of business. So did glassmakers in Toledo, Ohio, and auto parts manufacturers across the Midwest.
A paper published last year by a trio of economists — David H. Autor at the Massachusetts Institute of Technology, David Dorn at the University of Zurich and Gordon H. Hanson at the University of California, San Diego — concludes that Chinese imports eliminated nearly one million American manufacturing jobs between 1999 and 2011. Add in suppliers and other related industries, and the total job losses reach 2.4 million.
Mr. Trump vows to slap punitive tariffs on Chinese goods. But that would very likely just shift production to other low-wage countries like Vietnam and Mexico. It would not turn the lights on at shuttered textile plants in the Carolinas. (Even if it did, robots would probably capture most of the jobs.)
Granite City sat smack in the middle of this gathering storm.
Between 2005 and 2015, China’s share of global steel production swelled from just less than one-third to fully half, according to data compiled by the Peterson Institute for International Economics. China’s steel exports more than quadrupled.
Last fall, United States Steel began slowing production in Granite City, laying off 40 or so apprentices. As layoffs accelerated, they reached the ranks of more senior workers.
Two days before Christmas, Mr. Morrison finished his shift and went into the break room.
“Everybody was standing there like zombies, looking at the bulletin board,” he said. A list of names was tacked there, along with instructions for those workers to clean out their lockers.
This is how Mr. Morrison found himself confronting a bewildering new state of affairs — joblessness.
“I’ve worked since I was 12,” he said, recalling a paper route, then a job as a cook at his brother’s taco joint.
A blue Steelworkers union T-shirt hugs his burly frame. His calloused hands attest to years of physical labor. Suddenly, his $2,000 biweekly paycheck shrank to a $425-a-week unemployment check, plus some severance. In July, the unemployment checks stopped. He had reached the six-month limit.
He interviewed for a job as a supervisor at an Amazon warehouse, but it required computer skills that he lacks. So he took a position as a “fulfillment associate,” working the night shift, pulling products off warehouse shelves and putting them in boxes. It paid $13 an hour — a little more than half his United States Steel wages.
His first night on the job, his knees gave out. He took painkillers. The next morning he could barely stand up. He called in and said he would not be coming back. He has an interview coming up for a forklift driving position at a warehouse. It pays $12 an hour, another step down.
“I had to tell my son that he can’t go back to McKendree for his junior year,” Mr. Morrison said, straining to choke back tears. “He has to go to community college.”
He swallows hard. Tears emerge from the corners of his eyes.
“It just crushes you,” he said. “I didn’t get to go to college. I wanted my kids to succeed. When you see the disappointment in your kids’ eyes. …”
Falling Without a Net
When Dan Simmons started working at the mill 38 years ago, talk centered on how to make steel.
These days, he spends his days at a job for which he feels little prepared — de facto social worker.
Mr. Simmons is the president of Steelworkers Local 1899, which represents 1,250 workers at the Granite City plant. On a recent morning, only about 375 of his people are employed. He sits at his desk inside the brick union hall, greeting laid-off workers who arrive seeking help.
One man wants guidance scanning online job listings. Another has hit a snag with his unemployment benefits.
A night earlier, Mr. Simmons took a call on his cellphone from the niece of a high school classmate, a laid-off millworker. He had shot himself to death, leaving behind two children.
Trade Adjustment Assistance, a government program started in 1962 and expanded significantly a dozen years later, is supposed to support workers whose jobs are casualties of overseas competition. The program pays for job training.
But Mr. Simmons rolls his eyes at mention of the program. Training has almost become a joke.
Skills often do not translate from old jobs to new. Many workers just draw a check while they attend training and then remain jobless.
A 2012 assessment of the program prepared for the Labor Department found that four years after completing training, only 37 percent of those employed were working in their targeted industries.
Many of those enrolled had lower incomes than those who simply signed up for unemployment benefits and looked for other work.
European workers have fared better. In wealthier countries like Germany, the Netherlands, Sweden and Denmark, unemployment benefits, housing subsidies and government-provided health care are far more generous than in the United States.
In the five years after a job loss, an American family of four that is eligible for housing assistance receives average benefits equal to 25 percent of the unemployed person’s previous wages, according to data from the Organization for Economic Cooperation and Development.
For a similar family in the Netherlands, benefits reach 70 percent.
Yet in Europe, too, the impacts of trade have been uneven, in part because of the quirks of the European Union. Trade deals are cut by Brussels, setting the terms for the 28 member nations.
Social programs are left to national governments.
“You’re pursuing trade and liberalization agreements at the E.U. level, and then leaving to the individual member countries how to deal with the damage,” said Andrew Lang, a law professor at the London School of Economics.
In Granite City, the damage now dominates Mr. Simmons’s day.
Inside the union hall, a supply cabinet has been outfitted as a food pantry. He hands out plastic bags full of canned foods — yellow corn, peas, green beans. He hands one to Mr. Morrison, who initially refuses to take it.
“These are some proud steel workers and it’s very difficult for them to do this,” Mr. Simmons said. “These guys are used to making a living, and not asking for handouts.”
Kenneth Hahn had been working at the plant for more than 40 years when he was laid off in February. He spends most of his time in his garden, tending to vegetables.
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His father lived on a Missouri farm without plumbing or electricity during the Great Depression.
“They grew everything they needed,” he said.
If the mill does not start up again soon, Mr. Hahn is thinking about doing likewise.
“Move down to the holler,” he said. “I can always eat squirrel and rabbit.”
In China, farmers whose land has been turned into factories are making more steel than the world needs.
In America, idled steel workers are contemplating how to live off the land.
The Bounty of the Sea
Rotterdam has a history of looking across the water and finding things that can be turned into money.
In the 16th century, it was herring. A burgeoning fleet set sail in pursuit. Merchants began salting and drying the catch in barrels for an emerging export trade. By the 17th century, local shipyards were clattering away, constructing vessels for the Dutch East India Company as it plied the spice routes to Southeast Asia.
As waterways linking the port to the industrial communities of the Rhine were deepened and channelized, German automobiles and machinery began flowing through Rotterdam on the way to the rest of the planet. Offices filled with law firms, insurance agents and logistics companies.
“The fortunes of this country have been built on trade,” said Wouter Jacobs, a transportation economist at Erasmus University Rotterdam. “It’s our lifeline.”
Yet even here, unease has entered the conversation.
Jacob van der Vis is paid to promote trade. An adviser on international business for the Netherlands Chamber of Commerce, he advertises innovations playing out at the port. He speaks of trade with China as a golden opportunity.
But Mr. van der Vis is skeptical of the enormous trade deal being negotiated between the United States and the European Union, the Transatlantic Trade and Investment Partnership, better known as T.T.I.P. He singles out a provision that would enable multinational companies to sue governments for compensation when regulations dent their profits.
Esso, a subsidiary of Exxon Mobil, the American petroleum company, has operations in the Netherlands. Suppose the government went ahead with plans to limit drilling to protect the environment?
“They could sue the Dutch state,” he fumed. “We are not so sure in the Netherlands whether we want to give the multinationals so much power. We are a trading country, but it’s not always that trade should prevail against quality of life.”
Out at the docks, the longshoremen fret about robots.
On a recent afternoon, the Mette Maersk, a Danish-flagged behemoth, sat tethered at APM Terminals. Some 18,000 shipping containers are stacked like children’s blocks on a deck longer than three football fields, bearing auto parts, scrap metal, electronics — any conceivable thing made on one continent and sold on another.
Robotic arms grip containers, lift them and deposit them on deck with thunderous rumbles. Trucks drive themselves.
Yet to absorb this scene and conclude that robots are about to render humanity jobless is to miss something vital. At offices a few miles away, coders are designing the software powering the automated port system, earning wages they distribute through the economy.
For the longshoremen still employed, automation has tamed their work.
John Arkenbout remembers working through ceaseless wind and drizzle when he started at the port 25 years ago. He lifted huge bricks from a pile and dropped them into rope sacks that a crane operator lifted skyward. He saw three people die — one crushed by a truck, two flattened by wayward containers.
Now, many longshoremen sit in glass-fronted offices set back from the docks, controlling robotic arms via computer terminals.
“Before, it was physically taxing,” Mr. Arkenbout, 51, said. “Now it’s more mental.”
Most longshoremen earn about 50,000 euros a year, or $56,000. Mr. Arkenbout works a maximum of 40 hours a week.
But he sees the robots becoming more sophisticated. He hears from union leadership that as many as 800 jobs could be eliminated by 2020.
The union held a rare strike in January, winning job guarantees while robots are phased in gradually. But labor is playing defense. The robots will win in the end, because robots never strike. Robots improve with time.
Mr. Arkenbout scoffs at the notion that automation and trade are separate. The shipping companies are deploying robots to cut costs.
Trade deals, immigrant labor, automation: As Mr. Arkenbout sees it, these are all just instruments wielded in pursuit of the same goal — paying him less so corporations can keep more.
“When they don’t need me anymore,” he said, “I’m nothing.”
lunes, octubre 10, 2016
LOW PRESSURE: THE FALL IN INTEREST RATES / THE ECONOMIST
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Etiquetas:
Central Banking,
China,
Demographics,
Global Economy,
Inflation,
Interest Rates,
Monetary Policy,
Pension Funds,
Savings
The fall in interest rates
Low pressure
Interest rates are persistently low. In our first article we ask who or what is to blame. In the second we look at one outcome: a looming pensions crisis
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THE story of rich-world central banks and their protracted entanglement with near-zero interest rates was given another twist this week. One of their number gamely announced it still hoped for a more distant relationship, even if it couldn’t bring itself to turn its back on them yet. Another renewed its vows to stick with them.
On September 21st the Federal Reserve kept its target for overnight interest rates at 0.25-0.5% but indicated that, after raising the target for the first time in a decade last year, it hoped to raise it for a second time soon—possibly in December, after America’s presidential elections. Its rate-setting committee said the case for an increase had “strengthened” since its meeting in June, but it decided to wait for more convincing evidence. Earlier that day, the Bank of Japan (BoJ) said it was staying with its target of raising inflation to 2%. Indeed it went further. The bank said it would continue to buy bonds at a rate of around ¥80 trillion ($800 billion) a year, until inflation gets above 2% and stays there for a while. To help meet this “inflation-overshooting commitment”, the bank said ten-year-bond yields would remain at around zero.
The BoJ also stuck with another unorthodox policy. Along with the European Central Bank (ECB) and a handful of smaller central banks, it charges commercial banks a small fee (a negative interest rate) to hold cash reserves. This through-the-looking-glass practice has spread to capital markets. Sanofi, a French drugmaker, and Henkel, a German manufacturer of detergent, both this month issued bonds denominated in euros with a negative yield. Investors will make a guaranteed cash loss if they hold the bonds to maturity. Earlier Germany became the first euro-zone government to issue a bond that promises to pay back to investors less than the sum it raised from them. A large proportion of all rich-country sovereign bonds now have negative yields.
You can’t always get what you want
One side says it is simply the consequence of the policies pursued by the rich world’s central banks. The Fed, ECB, BoJ and Bank of England have kept overnight interest rates close to zero for much of the past decade. In addition, they have purchased vast quantities of government bonds with the express aim of driving down long-term interest rates.
It is hardly a mystery, on this view: central banks have rigged the money markets. They have been aided in this task by new regulations, written in the wake of the global financial crisis, that require banks and insurance companies to keep more of their assets in safe and liquid instruments, such as government bonds. That is helpful, say sceptics, to rich-world governments with large debts which need to keep interest costs low. But it is punishing the thrifty and those who rely on bonds for their income.
On the other side of the divide are those who argue that central banks are merely responding to underlying forces. In this view the real interest rate is decided by the balance of supply and demand for the pool of global savings. The fall in interest rates since the 1980s reflects a shift in this balance: the supply of savings has increased as demand for it has crashed. Short-term nominal interest rates are stuck at zero, or a little below, because, in the absence of inflation, real interest rates cannot fall far enough to clear the world market for savings. Far from rigging things, central banks are struggling to find ways to help the market work so that the economy can function normally. Which side is right?
The present combination of low nominal and real interest rates is unprecedented. David Miles, a member of the Bank of England’s monetary-policy committee, has worked out that the average short-term interest rate set by the bank since 1694, when it was founded, is around 4.8% (see chart 1).
Indeed, for over a century after 1719, the bank kept its main interest rate at exactly 5%. But it is the real (ie, inflation-adjusted) rate that keeps the demand and supply of savings in balance.
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If savers believe inflation will rise, they will demand a higher nominal interest rate to compensate for the expected loss of spending power. Borrowers, by contrast, will be keen to take on debt if they believe they can pay it back in devalued currency. Mr Miles calculates that inflation in Britain was around 2% in the three-and-a-bit centuries after 1694. That means the real interest rate was around 2.8%, assuming that inflation lived up (or down) to expectations.
That is a bold assumption. Thankfully, these days it is possible to work out long-term interest rates in real terms from the yields on inflation-protected bonds. Mervyn King, a former governor of the Bank of England, and David Low of New York University have estimated a real interest rate for G7 countries, excluding Italy, using such data going back to the mid-1980s. It shows a steady decline over the past 20 years. This era of falling real rates might usefully be split into two distinct periods: before and after the financial crisis of 2008-09. In the first period, real rates fell from above 4% to around 2%. Since the start of 2008, real long-term rates have fallen further, and faster, to around -0.5% (see chart 2).
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Down, down, deeper and down
This ongoing glut in savings is due to two factors in particular, according to last year’s Geneva Report, an annual study from the International Centre for Monetary and Banking Studies and the Centre for Economic Policy Research. The first is changing demography, mostly in the rich world but also in some emerging markets. Populations are ageing. At the same time, the average working life has not changed much. So more money has to be squirrelled away to pay for a longer retirement. A lot of that saving takes place during the best-paid years in middle age. The size of the world population (excluding China) of peak-earning age (40-64) was rising over the past two decades relative to those of retirement age. As a consequence of this, saving increased and real interest rates have steadily fallen.
A second, related, factor is the integration of China into the world economy. “A billion people with a 40% savings rate; that brings a lot more supply to the table,” says Randall Kroszner of the University of Chicago’s Booth business school, one of the authors of the Geneva Report and a former Fed governor. Even though a massive slug of its GDP goes on investment, China still has savings left over to send abroad. That is why Mr Bernanke also blamed the saving glut for America’s current-account deficit: if China saved a lot, every one else must save less.
Explanations for its unusually high savings pile are also in part demographic. In the absence of a broad-based pension system, the family is the main social safety net. But family networks are a weak form of insurance because of China’s one-child policy. So working people have had to save furiously.
Ageing is not the only long-run influence that has tilted the savings-investment scales. By skewing income to the high-saving rich, an increase in income inequality within countries has added to the saving glut. A fall in the relative price of capital goods means fewer savings are needed for a given level of investment. Both trends predate the fall in real interest rates, however, which suggests they did not play as significant a role as demography or China.
Others reckon the drop in real interest rates reflects a shift down in underlying trend growth, both before and since the crisis. For Larry Summers of Harvard University, this “secular stagnation” is a consequence of a chronic shortfall in demand. Robert Gordon of Northwestern University reckons the trouble lies with the economy’s supply-side. The new digital and robot technologies cannot match the surge of productivity from past inventions such as electricity, the motor car, petrochemicals and indoor plumbing, he argues.
In fact, the historical relationship between real interest rates and economic growth is weak, according to a recent study by James Hamilton of the University of California at San Diego, and his co-authors. They find that the correlation between GDP growth and the real short-term interest rate across the seven most recent economic cycles in America was only mildly positive—and then only if the brief recovery before the second dip of the early 1980s “double-dip” recession is excluded. Include it and the correlation is negative (see chart 3).
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In the period since the financial crisis, real rates have fallen even faster. The same secular forces have been at work, plus some new ones—notably “deleveraging”. Though middle-aged households were saving hard in the run-up to the crisis, many younger ones were piling on debts to buy overpriced homes. When house prices and incomes started to fall, those mortgage debts loomed much larger and so they saved more.
A related reason for more saving is fear. The severity of the Great Recession belied the relative economic stability that preceded it. Mr Miles calculates that the probability of a decline in British output as sharp as that in 2009 was 0.0004% (or one in 240,000 years) based on the volatility of GDP growth between 1949 and 2006. As people become aware of the possibility of such rare events, their caution could cut the risk-free real interest rate by 1.5-2 percentage points on plausible assumptions.
Low rider
Their defenders say central banks are typically reacting to economic trends, not shaping them.
A lodestar for central-bank policy is the idea of the “neutral” real interest rate, a close cousin of the real rate determined in the market for long-term savings. This is the short-term real interest rate that keeps inflation stable when the economy is running at full capacity, with no idle workers, factories or offices.
When inflation is low and the economy weak, as has been the case since 2008, central banks should aim to set nominal interest rates below the sum of the neutral real rate and the inflation target. The higher propensity to save means the neutral real rate is lower—probably much lower—than in the past. Since short-term nominal interest rates cannot be pushed much below zero, central banks have resorted to bond purchases to depress long-term borrowing rates and push investors into riskier assets, to give a fillip to the economy. And if interest rates and bond yields were really too low, it should lead to overheating and rising inflation. There are no signs of this.
Even so, something is amiss in bond markets when many rich-country government bonds have a negative yield and firms can sell debt by promising to pay back less than they borrow. This might be fitting if economies were in a deflationary spiral. But GDP growth is not collapsing.
Inflation is low, but is in general moving sideways, not downwards. Big budget deficits in many rich countries mean the supply of new government debt is hardly drying up.
Free falling
What is more, the impact of ever-lower rates may be starting to pall. In principle, cuts in interest rates boost the economy by nudging consumers and companies to spend now and save later. But there are forces working in the other direction, too. If savers have a target level of savings in mind to fund retirement, low or negative interest rates slow down the progress in reaching their goals. For such people, low rates mean less spending now, not more. Similarly, a low risk-free rate of interest drives up the present value of future pension obligations for employers who have promised their workers a defined benefit on their retirement.
Such firms may find that the profits they are obliged to set aside to fill the growing holes in their pension funds leave them little left over for investment. They could of course borrow but the magnitude of some pension deficits means that lenders might view such firms as a poor credit risk. It is likely that in the tug-of-war between the parts of the economy that are induced to spend now and save later by low rates, and those that are spurred to do the opposite, the former is stronger. But with risk-free interest rates at such low levels for such a long time, the fight is probably far less one-sided than in normal times.
Indeed attempts to guard against the impact of low rates may perversely become a cause of even lower rates. Accounting rules and solvency regulations are a spur to bond-buying even at super-low interest rates. To understand why, consider the business of life-assurance companies.
They pledge to pay a stream of cash to policyholders, often for decades. This promise can be likened to issuing a bond. Insurance firms need to back up these promises. To do so they buy safe assets, such as government bonds.
The trouble is that the maturities on these bonds are shorter than the promises the insurers have made. In the jargon, there is a “duration mismatch”. When bond yields fall, say because of central-bank purchases, the cost of the promises made by insurance companies goes up. The prices of their assets go up as well, but the liability side of the scales is generally weightier (see chart 4). And it gets heavier as interest rates fall. That creates a perverse effect. As bond prices rise (and yields fall), it increases the thirst for bonds. Low rates beget low rates.
.
This dynamic might materially affect bond yields if the weight of forced buyers were large enough. In 2014-15 yields on ten-year German bonds fell from around 2% to a low of close to zero, in response to expectations of quantitative easing by the ECB. A study by Dietrich Domanski, Hyun Song Shin and Vladyslav Sushko of the Bank of International Settlements finds that the fall in yields induced German insurers to buy more bonds. Insurers started 2014 with €60 billion-worth of government bonds but ended it holding €80 billion-worth.
Such a rapid rate of government-bond purchases was out of keeping with previous years. Long-maturity bonds were particularly sought after. This episode lends support to the idea that demand for bonds increases even as their price rises, where there is a mismatch of assets and liabilities. Those who worry that central-bank actions have led to distortions in capital markets seem to have a point.
If a growing bulge of middle-aged workers is behind the secular decline in real interest rates, then the downward pressure ought to attenuate as those workers move into retirement. Japan is further along this road than other rich countries. Yet its long-term real interest rates are firmly negative. That owes at least something to the open-ended quantitative easing by the Bank of Japan. A concern is that as more people retire, and save less, there will be fewer buyers for government bonds, of which less than 10% are held outside Japan. Another of the Geneva Report’s authors, Takatoshi Ito of Columbia University, reckons there will be a sharp rise in Japanese bond yields within the next decade. There may be political pressure on the Bank of Japan to keep buying bonds to prevent this.
Slip sliding away
But a lesson from the 1980s is that inflation expectations can take a long time to adjust fully to a new target. Each new round of central-bank action seems to bring less stimulus and more side-effects. The concept of using fiscal policy to fine-tune the economy went out of style around the time when economists were trying to work out why real interest rates were unusually high.
Perhaps it is time to dust that idea down.
lunes, octubre 10, 2016
WATER WARS: WHY THE INDIA-PAKISTAN WAR OVER WATER IS SO DANGEROUS / FOREIGN POLICY
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Etiquetas:
India,
Pakistan,
Water Wars
Why the India-Pakistan War Over Water Is So Dangerous
As New Delhi and Islamabad trade nuclear threats and deadly attacks, a brewing war over shared water resources threatens to turn up the violence.
By Michael Kugelman
.
Early on the morning of Sept. 29, according to India’s Defense Ministry and military, Indian forces staged a “surgical strike” in Pakistan-administered Kashmir that targeted seven terrorist camps and killed multiple militants. Pakistan angrily denied that the daring raid took place, though it did state that two of its soldiers were killed in clashes with Indian troops along their disputed border. New Delhi’s announcement of its strike plunged already tense India-Pakistan relations into deep crisis. It came 11 days after militants identified by India as members of the Pakistani terrorist group Jaish-e-Mohammed killed 18 soldiers on a military base in the town of Uri, in India-administered Kashmir.
Amid all the shrill rhetoric and saber rattling emanating from India and Pakistan in recent days — including India’s home minister branding Pakistan a “terrorist state” and Pakistan’s defense minister threatening to wage nuclear war on India — one subtle threat issued by India may have sounded relatively innocuous to the casual listener.
In reality, it likely filled Pakistan with fear.
On Sept. 22, India’s Foreign Ministry spokesman suggested, cryptically, that New Delhi could revoke the Indus Waters Treaty (IWT). “For any such treaty to work,” warned Vikas Swarup, when asked if India would cancel the agreement, “it is important for mutual trust and cooperation. It cannot be a one-sided affair.”
The IWT is a 56-year-old accord that governs how India and Pakistan manage the vast Indus River Basin’s rivers and tributaries. After David Lilienthal, a former chairman of the Tennessee Valley Authority, visited the region in 1951, he was prompted to write an article in Collier’s magazine, in which he argued that a transboundary water accord between India and Pakistan would help ease some of the hostility from the partition — particularly because the rivers of the Indus Basin flow through Kashmir. His idea gained traction and also the support of the World Bank. The bank mediated several years of difficult bilateral negotiations before the parties concluded a deal in 1960. U.S. President Dwight Eisenhower described it as a “bright spot” in a “very depressing world picture.” The IWT has survived, with few challenges, to the present day.
And yet, it has now come under severe strain.
On Sept. 26, India’s government met to review the treaty but reportedly decided that it would not revoke the agreement — for now. New Delhi left open the possibility of revisiting the issue at a later date.
Ominously, Indian Prime Minister Narendra Modi told top officials present at the treaty review meeting that “blood and water cannot flow together.” Additionally, the government suspended, with immediate effect, meetings between the Indus commissioners of both countries — high-level sessions that ordinarily take place twice a year to manage the IWT and to address any disagreements that may arise from it.
These developments have spooked Pakistan severely. Sartaj Aziz, the foreign affairs advisor to Pakistani Prime Minister Nawaz Sharif, said revoking the IWT could be perceived as an “act of war,” and he hinted that Pakistan might seek assistance from the United Nations or International Court of Justice.
If India were to annul the IWT, the consequences might well be humanitarian devastation in what is already one of the world’s most water-starved countries — an outcome far more harmful and far-reaching than the effects of limited war. Unlike other punitive steps that India could consider taking against its neighbor — including the strikes against Pakistani militants that India claimed to have carried out on Sept. 29 — canceling the IWT could have direct, dramatic, and deleterious effects on ordinary Pakistanis.
The IWT is a very good deal for Pakistan. Although its provisions allocate three rivers each to Pakistan and India, Pakistan is given control of the Indus Basin’s three large western rivers — the Indus, Jhelum, and Chenab — which account for 80 percent of the water in the entire basin. Since water from the Indus Basin flows downstream from India to Pakistan, revoking the IWT would allow India to take control of and — if it created enough storage space through the construction of large dams — stop altogether the flow of those three rivers into Pakistan. To be sure, India would need several years to build the requisite dams, reservoirs, and other infrastructure to generate enough storage to prevent water from flowing downstream to Pakistan. But pulling out of the IWT is the first step in giving India carte blanche to start pursuing that objective.
Pakistan is deeply dependent on those three western rivers and particularly the Indus. In some areas of the country, including all of Sindh province, the Indus is the sole source of water for irrigation and human consumption. If Pakistan’s access to water from the Indus Basin were cut off or merely reduced, the implications for the country’s water security could be catastrophic. For this reason, using water as a weapon could inflict more damage on Pakistan than some forms of warfare.
To understand why, consider the extent of Pakistan’s water woes. According to recent figures from the International Monetary Fund, Pakistan is one of the most water-stressed countries in the world, with a per capita annual water availability of roughly 35,300 cubic feet — the scarcity threshold. This is all the more alarming given that Pakistan’s water intensity rate — a measure of cubic meters used per unit of GDP — is the world’s highest. (Pakistan’s largest economic sector, agriculture, consumes a whopping 90 percent of the country’s rapidly dwindling water resources.)
In other words, Pakistan’s economy is the most water-intensive in the world, and yet it has dangerously low levels of water to work with.
As if that’s not troubling enough, consider as well that Pakistan’s groundwater tables are plummeting precipitously. NASA satellite data released in 2015 revealed that the underwater aquifer in the Indus Basin is the second-most stressed in the world. Groundwater is what nations turn to when surface supplies are exhausted; it is the water source of last resort. And yet in Pakistan, it is increasingly imperiled.
There are other compelling reasons for India not to cancel the IWT, all of which go beyond the hardships the decision could bring to a country where at least 40 million people (of about 200 million) already lack access to safe drinking water.
First, revoking the treaty — an international accord mediated by the World Bank and widely regarded as a success story of transboundary water management — would generate intense international opposition. As water expert Ashok Swain has argued, revoking the IWT “will bring global condemnation, and the moral high ground, which India enjoys vis-Ã -vis Pakistan in the post-Uri period will be lost.” Also, the World Bank would likely throw its support behind any international legal action taken by Pakistan against India.
Second, if India decided to maximize pressure on Pakistan by cutting off or reducing river flows to its downstream neighbor, this would bottle up large volumes of water in northern India, a dangerous move that according to water experts could cause significant flooding in major cities in Kashmir and in Punjab state (for geographical reasons, India would not have the option of diverting water elsewhere). Given this risk, some analysts have proposed that New Delhi instead do something less drastic, and perfectly legal, to pressure Islamabad: build dams on the western rivers of the Indus Basin. The IWT permits this, even though these water bodies are allocated to Pakistan, so long as storage is kept to a minimum to allow water to keep flowing downstream. In fact, according to Indian media reports, this is an action Modi’s government is now actively considering taking.
Such moves, however, would not be cost-free for Pakistan. According to an estimate by the late John Briscoe, one of the foremost experts on South Asia water issues, if India were to erect several large hydroelectric dams on the western rivers, then Pakistan’s agriculture could conceivably lose up to a month’s worth of river flows — which could ruin an entire planting season. Still, it would not be nearly as serious as the catastrophes that could ensue if India pulls the plug on the IWT.
Third, if India ditches the IWT to punish its downstream neighbor, then it could set a dangerous precedent and give some ideas to Pakistan’s ally, China. Beijing has never signed on to any transboundary water management accord, and New Delhi constantly worries about its upstream rival building dozens of dams that cut off river flows into India. The Chinese, perhaps using as a pretext recent Indian defensive upgrades in the state of Arunachal Pradesh — which borders China and is claimed by Beijing — could well decide to take a page out of India’s book and slow the flow of the mighty Brahmaputra River. It’s a move that could have disastrous consequences for the impoverished yet agriculturally productive northeastern Indian state of Assam. The Brahmaputra flows southwest across large areas of Assam. Additionally, Beijing could retaliate by cutting off the flow of the Indus — which originates in Tibet — down to India, depriving New Delhi of the ability to limit the river’s flows to Pakistan.
Fourth, India’s exit from the IWT could provoke Lashkar-e-Taiba (LeT), the vicious Pakistani terrorist group that carried out the 2008 Mumbai attacks. LeT has long used India’s alleged water theft as a chief talking point in its anti-India propaganda, even with little evidence that New Delhi has intentionally prevented water from flowing downstream to Pakistan. If India backed out of the treaty and took steps to stop the flow of the Indus Basin’s western rivers, LeT would score a major propaganda victory and would have a ready-made pretext to carry out retaliatory attacks in India. An angry Pakistani security establishment, which has close links to LeT, would not go out of its way to dissuade the group from staging such attacks. Indeed, given the damaging effects India’s move could have on ordinary Pakistanis in such a water-insecure country, Pakistan would be keen to find ways to strike back at India.
What this all means is that India’s cancellation of the IWT would not produce New Delhi’s hoped-for result: Pakistani crackdowns on anti-India terrorists. On the contrary, Pakistan might tighten its embrace of such groups. The mere act of canceling the IWT — even if India declines to take steps to reduce water flows to Pakistan — would be treated in Islamabad as a major provocation, with fears that water cutoffs could follow, and thereby spawn retaliations.
To be sure, India has good reason to be unhappy about the IWT. The treaty allocates to India only 20 percent of the entire Indus River Basin’s water flows, and New Delhi knows it’s gotten the short end of the stick. Additionally, the IWT’s provisions limit India’s ability to build hydro-projects in Kashmir. These are significant matters in a nation with its own severe water stress. According to an estimate by the New Yorker, India boasts 20 percent of the world’s population but only 4 percent of its water. Not surprisingly, more than 300 million people in India face water shortages. Severe droughts have contributed to an alarming farmer suicide campaign that has claimed a staggering 300,000 lives over the last 20 years. And in an ominous indication of what the future may hold, India is consuming more groundwater than any other country in the world.
All this is to say that India has a strong case for requesting a renegotiation of the treaty. That would be a more prudent strategy than unilaterally revoking it.
India should preserve its decision to keep the IWT in place. Rescinding it could have disastrous consequences for Pakistan — and especially for ordinary Pakistanis — and also damaging results for India. With India-Pakistan relations nearly on a war footing, threatening a course of action that risks humanitarian devastation could bring the subcontinental powder keg one dangerous step closer to exploding.
lunes, octubre 10, 2016
FREE TRADE VS. POPULISM: THE FIGHT FOR AMERICA´S ECONOMY / THE FINANCIAL TIMES COMMENT & ANALYSIS
Free trade v populism: The fight for America’s economy
The presidential campaign’s protectionist rhetoric is threatening global commerce
by: Shawn Donnan
On a bright Saturday morning the congressman for Nebraska’s second congressional district is pressing the flesh with his constituency’s growing Latino community. Trailing the loping,
silver-haired Democrat closely as he works the crowd at Omaha’s annual El Grito parade is a translator who repeats quietly in Spanish: “His name is Brad Ashford. He is your representative in Washington.”
Minutes behind, jogging from side to side along the parade route, is Brigadier General (Retired) Don Bacon, a pro-gun, anti-abortion, arch-conservative running as a political outsider to replace Mr Ashford. With “Everybody Loves Bacon” as his campaign slogan, the former US Air Force general’s band of clean-cut, young and overwhelmingly white volunteers is doing everything it can to fire up a Latino crowd that is responding with striking indifference.
“What do we like? Bacon!” one volunteer yells into a megaphone. “Where do we want it? Congress!”
Viewed from the parade route, the race for Nebraska’s second district — whose most famous constituent is legendary investor Warren Buffett — looks like the usual election fare. But this year it is emblematic of a bigger ideological battle. As populist politicians around the world like Donald Trump try to tap into a rich vein of discontent with globalisation, the district is part of a calculated campaign by business and pro-free market groups to fight back.
Time for new arguments
There is no doubt that globalisation is facing its biggest political test in decades. The UK’s June vote to leave the EU and the prospect that this year’s US presidential contest could see the election of an avowed protectionist have raised fears that the model that has governed the global economy for more than 70 years is unravelling.
So too has the growing opposition in the US and Europe to trade deals such as US President Barack Obama’s Trans-Pacific Partnership and the EU-US Transatlantic Trade and Investment Partnership.
But the “globalists” — as Mr Trump dubs them — are fighting back. For all its failings, they argue, globalisation has been good for the world economy, lifting a billion people out of poverty in the developing world and helping to increase living standards in rich economies.
Mr Ashford, who was first elected to Congress in 2014, is embroiled in the fight because he is a rare bird in American politics today: a centrist, pro-trade Democrat.
Unlike most of his party’s members of the House of Representatives — or either of the two main presidential candidates — Mr Ashford is an unabashed backer of the TPP, which Mr Obama negotiated with Japan and 10 other Pacific Rim economies and hopes to pass through Congress later this year.
“Here so many of our manufacturing and [agriculture] related businesses are trade dependent.
The more we expand trade with Asia the more people we are going to be able to employ and wages are going to go up,” Mr Ashford says. “I’m willing to talk about trade and talk about increasing people’s opportunities here. And I don’t know why people don’t put them together.”
The stand has won him the backing of the US Chamber of Commerce and other business groups that normally lean toward small-government Republicans. This year the business lobby is doing everything it can to preserve a pro-trade majority in Congress — regardless of what happens in a presidential campaign in which trade is a toxic Word.
Besides Mr Buffett and his Berkshire Hathaway group, Mr Ashford’s big backers this year include multinationals such as Deere & Co and Honeywell as well as the National Cattlemen’s Beef Association and other big farm groups. Together, they have given Mr Ashford a two-to-one fundraising advantage over his Republican rival, who in any other election year might have been a more natural target of their largesse.
That sort of support is being replicated across the US, with business groups and the Obama administration working particularly hard to secure the 218 votes they will need to get the TPP through the House of Representatives, the lower house of Congress, after the November 8 election.
But the real fight goes far beyond the US and the fate of the TPP. For many business leaders, there is deep concern over the direction of the global economy itself.
Controversial deals 1: TPP
What is it? A trade deal between the US, Japan and 10 other Pacific Rim countries — but not China — was signed in February 2016. It covers some 40 per cent of the global economy and removes most, but not all tariffs and sets new rules for digital trade and the treatment of state-owned enterprises.
Why has it stalled? The TPP still needs to be ratified by parliaments in its member countries. President Barack Obama hopes to get it through the US Congress later this year but is facing stiff opposition, including from both presidential candidates.
Jeff Immelt, the chairman and chief executive of General Electric, warned in May of the dangers of a raucous US presidential election and a rise of protectionism. “A transformational change in globalisation” was coming, he warned, and the way to respond, for GE at least, was a strategy of “localisation”, which in many cases would mean a shift away from US-based manufacturing.
Emma Marcegaglia, the chairman of Eni, Italy’s largest listed entity, as well as the president of BusinessEurope, argues that if opponents of globalisation manage to stop trade deals like the TPP or the TTIP they risk killing prospects for the very growth that many major economies need.
“If we don’t fight this wave of protectionism we will have less growth and less jobs,” she says.
Damaging effects
Yet the backlash against globalisation has also forced some of its strongest proponents to acknowledge that it has had painful collateral damage, particularly for manufacturing-dependent communities in the US and Europe that have suffered as a result of competition from China, and the low-skilled workers that have been left behind.
Addressing the UN on Tuesday, Mr Obama called for a “course correction” in the march to global integration.
Too often, he said, “those trumpeting the benefits of globalisation” had ignored inequality and other real problems, leaving room for “alternative visions” ranging from “crude populism” to “religious fundamentalism” to take advantage of a very real dissatisfaction among citizens.
He also, however, hailed the power of globalisation to reduce poverty and warned against protectionism.
“The acceleration of travel and technology and telecommunications — together with a global economy that depends on a global supply chain — makes it self-defeating ultimately for those who seek to reverse this progress,” he said. “Today, a nation ringed by walls would only imprison itself.”
Controversial deals 2: TTIP
What is it? The EU and US launched negotiations on what could be the largest regional trade deal in history, the Transatlantic Trade and Investment Partnership, in 2013.
Why has it stalled? The TTIP has faced increasing political opposition in Europe based on concerns over everything from different rules on food safety to its inclusion of an international investment dispute resolution mechanism that opponents claim would give US companies special rights to sue EU member governments and block environmental and other regulations.
Christine Lagarde, the IMF’s managing director, has also been among those calling for more to be done to help those left behind by globalisation. In the US she has provocatively urged a policy shift to “redistribution” — including higher taxes on the rich, more focus on education and job training and even an increase in the federal minimum wage.
“What we need is a globalisation that works for all,” she said this month.
The shift in rhetoric resonates with Angus Deaton, winner of the 2015 Nobel Prize for economics. In research published last year, the Princeton economist and his wife, Anne Case, documented an alarming surge in deaths among poorly-educated middle-aged white men in the US largely due to suicides and drug overdoses. One explanation lay in the rising economic insecurity in parts of the country hit by losses of jobs to automation and globalisation, they suggested.
Mr Deaton remains a staunch defender of globalisation’s benefits. “What is crazy is that some of the opponents of globalisation — including some people that ought to know better — forget that a billion people have come out of poverty largely because of globalisation,” he says.
But he also argues that economists and other advocates have a moral responsibility to no longer ignore those left behind. “What is happening right now is a very sharp kick in the shins to tell us that you are not entitled to do that,” he says.
There are also those who argue for a radical rethink — and who view the sort of mea culpas offered by Mr Obama and Ms Lagarde with scepticism.
In his 2011 book The Globalisation Paradox, Dani Rodrik, a professor at Harvard’s Kennedy School of Government, offered what he called the “fundamental political ‘trilemma’ of the world economy: we cannot simultaneously pursue democracy, national determination and economic globalisation”.
Today, Mr Rodrik argues his point is being made for him by volatile politics. And yet, he says, technocrats like Ms Lagarde still miss the bigger picture by continuing to push for trade agreements and ever more open economies despite the protests.
“The main constraint on the global economy right now is not that it is not sufficiently open. It’s very open. The main constraint is really that the system lacks legitimacy,” he says.
Expedient politics
Amid such debates the drive to defend the cause of free trade is creating unusual political alliances.
In a meeting last week to promote TPP, Mr Obama was joined at the White House by John Kasich, the former Republican presidential candidate, and business executives including Michael Bloomberg and IBM chief executive Ginni Rometty.
Mr Bloomberg and Tom Donohue, the long-time president of the US Chamber of Commerce, lambasted both Mr Trump and his Democratic rival Hillary Clinton for opposing the TPP, pointing out that international trade had benefited Americans for decades by bringing down the cost of consumer goods.
“When was the last time you heard a candidate say you ought to pay more for groceries and underwear?” they wrote before the White House meeting.
Also lining up improbably with Mr Obama are political arch-enemies such as Charles and David Koch, the billionaires who have spent millions opposing the president’s agenda over the past eight years.
The Koch brothers have pointedly refused to back Mr Trump, in part due to the businessman’s protectionist trade rhetoric. This year their fire is instead aimed at congressional races and ensuring opponents of “economic freedom” do not make gains, says Tim Phillips, president for Americans for Prosperity, their political vehicle.
They are also trying to ensure that after its flirtation with Mr Trump the Republican party returns to its pro-market roots by opening a special “leadership academy” for activists and candidates that includes lectures on the benefits of free trade. “It is easy to demagogue free trade and it is easy to point to where there are problems. We are going to point out what the virtues are,” Mr Phillips says.
Controversial deals 3: Ceta
What is it? The Comprehensive Economic and Trade Agreement has been negotiated between the EU and Canada and aims remove tariffs and other obstacles to trade.
Why has it stalled? Opponents in both Europe and the US see the CETA as a proxy for the much larger TTIP and object to its inclusion of a controversial mechanism to resolve investment dispute that they argue gives too much power to international corporations.
The case for trade and the TPP has largely been won in Nebraska, a proud farm state that sends beef and soybeans around the world.
“We are the 38th largest state, population-wise, but we’re the fourth-largest agricultural exporter. So you don’t have to study economics very long to figure out that we have to look at markets outside the borders of the United States,” says Greg Ibach, director of the Nebraska Department of Agriculture.
Barb Cooksley, a fourth-generation rancher who is president of the Nebraska Cattlemen Association, says TPP would provide a badly needed boost at a time of rising international competition and lower prices. A recent trade agreement between Australia and Japan, which gives Australian producers easier access to the Japanese market, is costing US exporters $400,000 per day, she says.
But times have been tough for many Nebraskan farmers as a result of the collapse in commodity prices. For that reason Mr Ibach says the tough-on-trade message of candidates like Mr Trump is appealing to many in farm country.
An overwhelmingly Republican state, Nebraska last voted for a Democrat for president in 1964.
Although Mr Obama won a lone electoral college vote in the second district in 2008 and Mrs Clinton campaigned with Mr Buffett in Omaha this summer, there are few signs Mr Trump will lose the state.
Mrs Cooksley’s conservative loyalties are overwhelming her pro-trade economic beliefs. “Who am I voting for? I’m voting for Donald Trump,” she says.
That is in part because she hopes that Mr Trump will change his policies on trade. “I feel there’s an education cure there,” she says. “He is a businessman. If we can show him how this [the TPP] is good business for the nation maybe we can convince him.”
1 1944 More than 700 delegates from 44 countries gather at the Mount Washington Hotel in Bretton Woods, New Hampshire, to hash out the terms of a postwar economic order
2 1948 The General Agreement on Tariffs and Trade takes effect, lowering more than 45,000 tariffs. It remains the basis of global trade rules
3 1957 The Treaty of Rome creates the European Economic Community, which eventually forms the basis of the world’s largest free trade zone
4 1986-94 Uruguay Round leads to the creation of the World Trade Organisation
5 1994 North American Free Trade Agreement comes into force
6 1999 Anti-globalisation protests break out at the WTO’s ministerial meeting in Seattle
7 2001 China joins the World Trade Organisation
8 2008-09 Global financial crisis leads to the biggest collapse in world trade since the 1930s
9 2011 “Occupy” protests break out in the US and other countries
10 2013 US-EU negotiations over a Transatlantic Trade and Investment Partnership launched. They quickly draw fierce opposition in Europe
11 2015 The US, Japan and 10 other countries conclude talks over a Trans-Pacific Partnership. It is opposed by Republican Donald Trump and Democrat Hillary Clinton, who hailed it as a “gold standard” for trade agreements while serving as secretary of state
silver-haired Democrat closely as he works the crowd at Omaha’s annual El Grito parade is a translator who repeats quietly in Spanish: “His name is Brad Ashford. He is your representative in Washington.”
“What do we like? Bacon!” one volunteer yells into a megaphone. “Where do we want it? Congress!”
Viewed from the parade route, the race for Nebraska’s second district — whose most famous constituent is legendary investor Warren Buffett — looks like the usual election fare. But this year it is emblematic of a bigger ideological battle. As populist politicians around the world like Donald Trump try to tap into a rich vein of discontent with globalisation, the district is part of a calculated campaign by business and pro-free market groups to fight back.
Time for new arguments
There is no doubt that globalisation is facing its biggest political test in decades. The UK’s June vote to leave the EU and the prospect that this year’s US presidential contest could see the election of an avowed protectionist have raised fears that the model that has governed the global economy for more than 70 years is unravelling.
So too has the growing opposition in the US and Europe to trade deals such as US President Barack Obama’s Trans-Pacific Partnership and the EU-US Transatlantic Trade and Investment Partnership.
But the “globalists” — as Mr Trump dubs them — are fighting back. For all its failings, they argue, globalisation has been good for the world economy, lifting a billion people out of poverty in the developing world and helping to increase living standards in rich economies.
Mr Ashford, who was first elected to Congress in 2014, is embroiled in the fight because he is a rare bird in American politics today: a centrist, pro-trade Democrat.
Unlike most of his party’s members of the House of Representatives — or either of the two main presidential candidates — Mr Ashford is an unabashed backer of the TPP, which Mr Obama negotiated with Japan and 10 other Pacific Rim economies and hopes to pass through Congress later this year.
“Here so many of our manufacturing and [agriculture] related businesses are trade dependent.
The more we expand trade with Asia the more people we are going to be able to employ and wages are going to go up,” Mr Ashford says. “I’m willing to talk about trade and talk about increasing people’s opportunities here. And I don’t know why people don’t put them together.”
The stand has won him the backing of the US Chamber of Commerce and other business groups that normally lean toward small-government Republicans. This year the business lobby is doing everything it can to preserve a pro-trade majority in Congress — regardless of what happens in a presidential campaign in which trade is a toxic Word.
Besides Mr Buffett and his Berkshire Hathaway group, Mr Ashford’s big backers this year include multinationals such as Deere & Co and Honeywell as well as the National Cattlemen’s Beef Association and other big farm groups. Together, they have given Mr Ashford a two-to-one fundraising advantage over his Republican rival, who in any other election year might have been a more natural target of their largesse.
That sort of support is being replicated across the US, with business groups and the Obama administration working particularly hard to secure the 218 votes they will need to get the TPP through the House of Representatives, the lower house of Congress, after the November 8 election.
But the real fight goes far beyond the US and the fate of the TPP. For many business leaders, there is deep concern over the direction of the global economy itself.
Controversial deals 1: TPP
What is it? A trade deal between the US, Japan and 10 other Pacific Rim countries — but not China — was signed in February 2016. It covers some 40 per cent of the global economy and removes most, but not all tariffs and sets new rules for digital trade and the treatment of state-owned enterprises.
Why has it stalled? The TPP still needs to be ratified by parliaments in its member countries. President Barack Obama hopes to get it through the US Congress later this year but is facing stiff opposition, including from both presidential candidates.
Jeff Immelt, the chairman and chief executive of General Electric, warned in May of the dangers of a raucous US presidential election and a rise of protectionism. “A transformational change in globalisation” was coming, he warned, and the way to respond, for GE at least, was a strategy of “localisation”, which in many cases would mean a shift away from US-based manufacturing.
Emma Marcegaglia, the chairman of Eni, Italy’s largest listed entity, as well as the president of BusinessEurope, argues that if opponents of globalisation manage to stop trade deals like the TPP or the TTIP they risk killing prospects for the very growth that many major economies need.
“If we don’t fight this wave of protectionism we will have less growth and less jobs,” she says.
Damaging effects
Yet the backlash against globalisation has also forced some of its strongest proponents to acknowledge that it has had painful collateral damage, particularly for manufacturing-dependent communities in the US and Europe that have suffered as a result of competition from China, and the low-skilled workers that have been left behind.
Addressing the UN on Tuesday, Mr Obama called for a “course correction” in the march to global integration.
Too often, he said, “those trumpeting the benefits of globalisation” had ignored inequality and other real problems, leaving room for “alternative visions” ranging from “crude populism” to “religious fundamentalism” to take advantage of a very real dissatisfaction among citizens.
He also, however, hailed the power of globalisation to reduce poverty and warned against protectionism.
“The acceleration of travel and technology and telecommunications — together with a global economy that depends on a global supply chain — makes it self-defeating ultimately for those who seek to reverse this progress,” he said. “Today, a nation ringed by walls would only imprison itself.”
Controversial deals 2: TTIP
What is it? The EU and US launched negotiations on what could be the largest regional trade deal in history, the Transatlantic Trade and Investment Partnership, in 2013.
Why has it stalled? The TTIP has faced increasing political opposition in Europe based on concerns over everything from different rules on food safety to its inclusion of an international investment dispute resolution mechanism that opponents claim would give US companies special rights to sue EU member governments and block environmental and other regulations.
Christine Lagarde, the IMF’s managing director, has also been among those calling for more to be done to help those left behind by globalisation. In the US she has provocatively urged a policy shift to “redistribution” — including higher taxes on the rich, more focus on education and job training and even an increase in the federal minimum wage.
“What we need is a globalisation that works for all,” she said this month.
The shift in rhetoric resonates with Angus Deaton, winner of the 2015 Nobel Prize for economics. In research published last year, the Princeton economist and his wife, Anne Case, documented an alarming surge in deaths among poorly-educated middle-aged white men in the US largely due to suicides and drug overdoses. One explanation lay in the rising economic insecurity in parts of the country hit by losses of jobs to automation and globalisation, they suggested.
Mr Deaton remains a staunch defender of globalisation’s benefits. “What is crazy is that some of the opponents of globalisation — including some people that ought to know better — forget that a billion people have come out of poverty largely because of globalisation,” he says.
But he also argues that economists and other advocates have a moral responsibility to no longer ignore those left behind. “What is happening right now is a very sharp kick in the shins to tell us that you are not entitled to do that,” he says.
There are also those who argue for a radical rethink — and who view the sort of mea culpas offered by Mr Obama and Ms Lagarde with scepticism.
In his 2011 book The Globalisation Paradox, Dani Rodrik, a professor at Harvard’s Kennedy School of Government, offered what he called the “fundamental political ‘trilemma’ of the world economy: we cannot simultaneously pursue democracy, national determination and economic globalisation”.
Today, Mr Rodrik argues his point is being made for him by volatile politics. And yet, he says, technocrats like Ms Lagarde still miss the bigger picture by continuing to push for trade agreements and ever more open economies despite the protests.
“The main constraint on the global economy right now is not that it is not sufficiently open. It’s very open. The main constraint is really that the system lacks legitimacy,” he says.
Expedient politics
Amid such debates the drive to defend the cause of free trade is creating unusual political alliances.
In a meeting last week to promote TPP, Mr Obama was joined at the White House by John Kasich, the former Republican presidential candidate, and business executives including Michael Bloomberg and IBM chief executive Ginni Rometty.
Mr Bloomberg and Tom Donohue, the long-time president of the US Chamber of Commerce, lambasted both Mr Trump and his Democratic rival Hillary Clinton for opposing the TPP, pointing out that international trade had benefited Americans for decades by bringing down the cost of consumer goods.
“When was the last time you heard a candidate say you ought to pay more for groceries and underwear?” they wrote before the White House meeting.
Also lining up improbably with Mr Obama are political arch-enemies such as Charles and David Koch, the billionaires who have spent millions opposing the president’s agenda over the past eight years.
The Koch brothers have pointedly refused to back Mr Trump, in part due to the businessman’s protectionist trade rhetoric. This year their fire is instead aimed at congressional races and ensuring opponents of “economic freedom” do not make gains, says Tim Phillips, president for Americans for Prosperity, their political vehicle.
They are also trying to ensure that after its flirtation with Mr Trump the Republican party returns to its pro-market roots by opening a special “leadership academy” for activists and candidates that includes lectures on the benefits of free trade. “It is easy to demagogue free trade and it is easy to point to where there are problems. We are going to point out what the virtues are,” Mr Phillips says.
Controversial deals 3: Ceta
What is it? The Comprehensive Economic and Trade Agreement has been negotiated between the EU and Canada and aims remove tariffs and other obstacles to trade.
Why has it stalled? Opponents in both Europe and the US see the CETA as a proxy for the much larger TTIP and object to its inclusion of a controversial mechanism to resolve investment dispute that they argue gives too much power to international corporations.
The case for trade and the TPP has largely been won in Nebraska, a proud farm state that sends beef and soybeans around the world.
“We are the 38th largest state, population-wise, but we’re the fourth-largest agricultural exporter. So you don’t have to study economics very long to figure out that we have to look at markets outside the borders of the United States,” says Greg Ibach, director of the Nebraska Department of Agriculture.
Barb Cooksley, a fourth-generation rancher who is president of the Nebraska Cattlemen Association, says TPP would provide a badly needed boost at a time of rising international competition and lower prices. A recent trade agreement between Australia and Japan, which gives Australian producers easier access to the Japanese market, is costing US exporters $400,000 per day, she says.
But times have been tough for many Nebraskan farmers as a result of the collapse in commodity prices. For that reason Mr Ibach says the tough-on-trade message of candidates like Mr Trump is appealing to many in farm country.
An overwhelmingly Republican state, Nebraska last voted for a Democrat for president in 1964.
Although Mr Obama won a lone electoral college vote in the second district in 2008 and Mrs Clinton campaigned with Mr Buffett in Omaha this summer, there are few signs Mr Trump will lose the state.
Mrs Cooksley’s conservative loyalties are overwhelming her pro-trade economic beliefs. “Who am I voting for? I’m voting for Donald Trump,” she says.
That is in part because she hopes that Mr Trump will change his policies on trade. “I feel there’s an education cure there,” she says. “He is a businessman. If we can show him how this [the TPP] is good business for the nation maybe we can convince him.”
A timeline of world trade deals
2 1948 The General Agreement on Tariffs and Trade takes effect, lowering more than 45,000 tariffs. It remains the basis of global trade rules
3 1957 The Treaty of Rome creates the European Economic Community, which eventually forms the basis of the world’s largest free trade zone
4 1986-94 Uruguay Round leads to the creation of the World Trade Organisation
5 1994 North American Free Trade Agreement comes into force
6 1999 Anti-globalisation protests break out at the WTO’s ministerial meeting in Seattle
7 2001 China joins the World Trade Organisation
8 2008-09 Global financial crisis leads to the biggest collapse in world trade since the 1930s
9 2011 “Occupy” protests break out in the US and other countries
10 2013 US-EU negotiations over a Transatlantic Trade and Investment Partnership launched. They quickly draw fierce opposition in Europe
11 2015 The US, Japan and 10 other countries conclude talks over a Trans-Pacific Partnership. It is opposed by Republican Donald Trump and Democrat Hillary Clinton, who hailed it as a “gold standard” for trade agreements while serving as secretary of state
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