How the U.S.-led Trade Wars Imperil the Global Economy


Penn's Jacques deLisle, Fordham's Matt Gold and Syracuse's Mary E. Lovely discuss the implications of the Trump administration's trade wars.

The recent trade skirmishes between the U.S. and China escalated into what many are calling an all-out war last week, with the U.S. levying tariffs on $34 billion worth of imports from China and the latter immediately responding with eye-for-an-eye tariffs on imports from the U.S. Those actions come on top of U.S. import levies in January on solar panels and washing machines, and in March on steel and aluminum. They triggered retaliatory tariffs on U.S. exports from its NAFTA partners Canada and Mexico, and from the European Union.

The trade wars are set to escalate as the U.S. and its trading partners have planned further tariff actions for the coming months. Left unchecked, these actions could threaten the global trade order, leaving casualties in disrupted supply chains that will hurt U.S. companies, and potentially lead to a flight of investments and jobs from the U.S., experts told Knowledge@Wharton. Hopes run low for a resolution of the U.S. trade disputes with China in particular, with the Trump administration leaving no “exit ramps,” although the EU might play along until the midterm elections to the U.S. Congress in November, they added.

America’s trading partners have said the Trump administration’s actions are in violation of World Trade Organization policies in some instances. The administration has defended its actions on various grounds, ranging from defense of national security to shielding American investments and jobs from protectionist policies and inadequate intellectual property rights.

The Trump administration’s characterizations of some trade matters as threats to national security are specious, according to Mary E. Lovely, economics professor at Syracuse University and a fellow at the Peterson Institute for International Economics. She referred in particular to Section 232 investigations under the Trade Expansion Act of 1962, which examine the impact of imports on national security. The Trump administration is taking an approach that “does not give our allies any political space to back down,” Lovely added.

“One of the main concerns is how willing this administration is to paint outside the lines to use [provisions] like the Section 232 national security clause for things which are obviously protectionist,” she said. “That has very severe ramifications for the future of the global trading system. It’s a trading system that is showing strains and clearly needs to be modernized, and yet we’re breaking a lot of dishes instead of building anything new.”

Multiple Trade Wars

“This is definitely a trade war,” said Matt Gold, adjunct law professor at Fordham University and a former deputy assistant U.S. Trade Representative for North America. He broke that down to “two or three separate trade wars” and said “none of it is good for trade.” The first is with China for the past 15 years over protection of U.S. intellectual property rights. The second one is over steel and aluminum imports into the U.S. from Canada, Mexico, the EU and China.

The third is over tariffs on imports of automobiles and auto parts between the U.S. and other countries, where the Trump administration wants to renegotiate agreements struck by previous U.S. administrations. Gold said the U.S. tariffs on steel and aluminum imports violated WTO rules, triggering retaliatory action from the other countries.

The actions on imports of solar panels and washing machines were “safeguard tariffs” that were legitimate, he added, but agreed that the Trump administration went about those in an aggressive manner. Lovely said “it was emblematic of the approach that the Trump administration takes, which is largely one of giving our trade partners really no room for political maneuver — sort of a take-it-or-leave-it approach.”
Gold said the U.S. was legally entitled to levy the safeguard tariffs on solar panels and washers, and countries that oppose the move would be willing to sit down and negotiate. “But if [Trump is] threatening to impose tariffs that he’s not legally entitled to impose, it doesn’t even matter how diplomatic he is; the other [country] won’t negotiate,” he said. “And that’s why the latter causes a trade war, and the former doesn’t. It’s an enormous bright-line difference.”

“This is a trade war, but the real risk is of further escalation beyond what’s already happened,” said Jacques deLisle, University of Pennsylvania professor of law and political science and director of Penn’s Center for East Asian Studies. Gold listed the other actions on the cards. The Trump administration is set to impose duties on another $16 billion of imports from China, taking the total value of imports affected by the tariff actions to $50 billion. He expected China to do likewise on imports from the U.S. “Then the ball will be in Trump’s court to do what he’s trying to do, which is add tariffs to another $200 billion of Chinese products,” Gold said.

However, despite the rhetoric from the leaders of the countries involved, deLisle saw reason for hope. “The optimism stems from the almost desperate view that if this gets really bad, it’s so bad we can’t believe people will let it happen,” he said. “At this point, we are in the early stages. There is still room for negotiation, if people want to sit down and do it, but the question is about getting there.” 
No Exit Ramps
Gold was not as hopeful of a resolution, however. “This idea that the world won’t let it happen is unfortunately something we can’t rely on,” he said. “As a former U.S. trade negotiator, I can tell you Trump has left no one any exit ramps here. There is literally no exit ramp except Donald Trump himself unilaterally saying, ‘I was wrong,’ and reversing the steel and aluminum tariffs and also reversing the retaliatory tariffs against China until the WTO approves them, which could take a few years.”

As deLisle read the moves, Trump expects the other countries to step forward and negotiate with him. “But they won’t and they can’t,” he said. “When you threaten to impose tariffs that are WTO-illegal or you impose tariffs there are WTO-illegal, in diplomacy, no country will … negotiate on that. That’s why we’re really stuck.”

Strength in China

China has shown strength in the face of U.S. actions, deLisle noted. “The Chinese position is they can weather this,” he said. “Their view is that they can outlast the U.S. on this because they have obviously a very different system — less pressure from consumers, and this is an issue of almost national pride.”

At the same time, deLisle sensed “some befuddlement in China about what exactly Trump wants.” He noted that the U.S. has accused China of going about intellectual property transfers “in a somewhat coercive way,” as well as outright espionage and dumping.

China has made some overtures such as offering to buy more American products, but they have been rebuffed, deLisle said. “They’re not getting clear signals of what exactly … the Trump administration’s priorities are. Now they feel that they can’t sit by and watch the U.S. engage in WTO non-compliant behavior that they’re [seeing] as bullying. It’s very hard for them not to stick to where they are, but they would like to negotiate their way out of it. The problem is Trump’s not leaving them a lot of off-ramps.”

Widespread Impacts in the U.S.

Gold said the tariffs would hurt all parties. “But the impact is more spread out with regard to the goods coming into the U.S., increasing costs for consumers, but also for U.S. production that has to buy inputs for its manufacturing,” he added. “At the same time, the cost for U.S. exports — particularly agricultural exports — is much more focused on a smaller number of U.S. companies. You’re going to see a louder, clearer or more organized reaction to that particular set of problems.”
According to Lovely, firms that rely on global supply chains would be among the worst affected. “Only one percent of the goods are consumer goods, and the rest are either capital equipment such as machines or intermediate inputs and parts,” she said of the tariff actions against China. Many of those are from foreign enterprises operating in China as part of supply chain trades, she added. “[For example], they are inputs from a BMW operation in China and coming back to plants here in Georgia. So, these tariffs are going to hurt the U.S.”

Much of the value-add in the products that come from China are not added in China, said deLisle. “The vast majority of the value is embodied in components that go into China, are assembled or transformed in various ways and come back here. A big chunk of it is actually U.S.-sourced material and material sourced from other countries that goes into the products that are exported here. We’re hurting those suppliers’ inputs, and we’re hurting the American companies that are working in China with intermediate goods from the U.S. and elsewhere to produce what they’re producing.”

“It’s a little bit naïve to think that by imposing a 30% tariff on solar panels, we are going to be creating jobs,” Wharton management professor Mauro Guillen told Knowledge@Wharton when the U.S. imposed the tariffs on solar panels and washing machines earlier this year. “In fact, if the higher prices depress demand, it could hurt employment. All of those other jobs — most of them service jobs and in some cases paying very nice wages — are not going to grow as much. And some of them might actually be disappearing.”

Trump’s tariff moves are also likely to face strong pushback from sections of the Republican Party, Wharton finance professor Jeremy Siegel had told Knowledge@Wharton when the U.S. imposed the steel and aluminum tariffs. “This was always the part of Trump that the market never liked,” he noted. He recalled that before the presidential election, “the markets seemed to have a clear preference for Clinton over Trump — and it was mainly fear of trade, tariffs, restrictions, quotas, barriers and whatever.”

Unconventional Retaliation

China could retaliate in unconventional ways that could stump the U.S., deLisle pointed out. “China has been very clear that it will use and is using qualitative as well as quantitative measures, to use their terminology,” he said. “We’re starting to hear concerns from U.S. businesses in China that suddenly they’re going to be facing more serious inspections on environment and perhaps labor. U.S. goods imported into China aren’t just facing tariffs, but also stricter quarantines, more spot inspections, and all sorts of delays. There are lots and lots of ways that China has … to make life miserable.”

Beyond that, Chinese consumers could also turn against American branded products, driven by feelings of national pride, deLisle said. Consequent to China’s imposition of tariffs of 25% on soybean imports from the U.S., several large Chinese companies have begun sourcing those agricultural products from other countries, he noted. Some of the American producers are starting to complain about less interest in their products from China, he added.

“A lot of the Chinese leverage will be in these qualitative hard-to-track-down measures, which aren’t traditional trade war mechanisms,” said deLisle. “They’re not WTO actionable; they’re decisions by consumers or decisions by companies; and they’re discretionary decisions by regulators. That’s really where the Chinese have an ability to put the screws to a variety of U.S. companies.” He noted that these concerns are being aired at recent meetings held by the American Chamber of Commerce in China and other such U.S.-China business groups. “They’re really worried about the consequences for their businesses in China — both in selling to China and in producing for re-export to the U.S.”

The U.S. as a ‘Production Island’

Lovely also pointed to some multinationals changing their production plans. “For example, we have reports that some European car makers are already considering changing their production lines that they make [in the U.S.], moving some production lines out, particularly for vehicles that they export to China,” she said. She cited the case of automaker BMW, which could use its production facilities in Pretoria, South Africa to import parts without duties and then export its vehicles without the tariffs. “So [BMW] will still produce in the U.S., but it becomes what I call a ‘production island.’ People will be here to produce for the U.S. [market]. It makes it very difficult for these countries to then use this as a great place to build for exports.”
Notwithstanding claims to the contrary, the most visible evidence of the U.S. tariff impositions is in the threat of a flight of capital and jobs from the U.S. to escape retaliatory tariffs on the EU. Notable among them is motorbike maker Harley-Davidson, which two weeks ago announced plans to shift some manufacturing overseas over the next 18 months to avoid the impact of the EU retaliatory tariffs of up to $100 million annually it would otherwise face.

“America’s trade adversaries have become more sophisticated in understanding America’s political system,” said Gold. “Our trade adversaries are now targeting U.S. brands that they think will tell the story of why Trump’s trade policy is a mistake” directly to his supporters. “That’s why they go after brands like Harley-Davidson.” A similar theme is visible in Canada levying 10% tariffs earlier this month on $12.5 billion worth of imports of U.S. products. They included dairy products that are critical to suppliers of yogurt from Wisconsin, the base of U.S. House of Representatives Speaker Paul Ryan, according to a CNBC report.

Although U.S. consumers “will feel the pinch” of the trade wars, “what is making it easier for President Trump to wage this trade war is the fact the U.S. economy is performing beautifully right now,” said Lovely. While U.S. economic growth is strong, “this growth is being used in a way to mortgage our future because we’re laying down policies which bode ill for future investment into the U.S., and the future competitiveness of U.S. products overseas,” she added. “The great economic growth that we’re experiencing — we’re even beginning to see increases in workers’ real wages — is hiding the pain that we will experience long-term because of these really ill-considered policies.”

Bitcoin’s Hot and Wall Street Wants In Again

The price of bitcoin has jumped above $8,000 this week for the first time since May, just as Wall Street is again looking to get another piece of the action.

By Avi Salzman
Bitcoin’s Hot and Wall Street Wants In Again
Illustration: Bloomberg News

There had been months of doldrums in bitcoin-land, as cryptocurrency prices have slumped and traders appear to have gotten bored.

Bitcoin exchange-based trading activity fell 26% in the second quarter by one measure, according to Coindesk’s quarterly State of the Blockchain report released on Wednesday. Exchange trading in ether, the second most popular digital coin, fell 37% during the quarter. The price of bitcoin hovered around $6,000 for much of the quarter, down from a high near $20,000 last year.

But Wall Street is trying to create crypto-products for institutional investors, and that may be helping boost the price of bitcoin in particular.

The comment period just ended for a new proposed bitcoin exchange traded fund from Van Eck Associates and SolidX Management, and the Securities and Exchange Commission is expected to make a determination on the ETF in the next 90 days. Bitwise Asset Management, meanwhile, has applied for an ETF that would track the top 10 digital coins by market cap.

"My belief is that the recent price increase is being driven by the speculation that the SEC will approve a bitcoin ETF, which would open the doors for the traditional financial institutions (pension funds, etc.) to enter the market," says Akbar Thobhani, the CEO of crypto broker-dealer SFOX.

The SEC has previously thrown cold water on efforts to launch bitcoin ETFs, given the volatility in the sector, among other issues.

Wall Street also has its eyes on ether, a token that trades like bitcoin but has more sophisticated capabilities. At a conference last month, SEC Director of Corporate Finance William Hinman cleared away some of the regulatory uncertainty around ether, saying that he didn’t believe it currently operates as a security (digital tokens classified as securities face more stringent regulation). While his comments were not an official statement from the SEC, they held significant weight given his role.

Cboe Holdings, which owns multiple major financial exchanges and began offering bitcoin futures last year, has been working on an ether futures product, and sees Hinman’s comments as a positive development that clears the way for futures.

“We are pleased with the SEC’s decision to provide clarity with respect to current Ether transactions,” Cboe's president and chief operating officer, Chris Concannon, said in a statement after Hinman’s comments. “This announcement clears a key stumbling block for Ether futures, the case for which we’ve been considering since we launched the first bitcoin futures in December 2017.”

Cboe already has an agreement with digital-asset exchange Gemini Trust that would allow it to use Gemini’s data to create cash-settled ether futures, according to a person familiar with the company’s plans. The company said this week that it had “no immediate news to share” on its plans.

The CME Group, which offers bitcoin futures, is not currently considering offering ether futures.

The Commodity Futures Trading Commission did not respond to requests for comment about whether it would be open to allowing ether futures to start trading. The SEC had no comment on whether Hinman’s comment represents official SEC policy.

The futures products, which have gotten steadily more popular among traders looking to hedge their bitcoin exposure or speculate on prices, have come in for some criticism. Research firm Fundstrat argued in a note last month that prices seemed to dip ahead of Cboe futures expirations, falling an average of 18% in the 10 days leading up to expiration.

Concannon of Cboe responded that “the notion that they have materially affected the bitcoin price overstates their influence and ignores other critical facts. Our strict position limits and the limited open interest in our May and June settlements, suggest that the fall of bitcoin can be more easily explained by other factors, such as the recent regulatory scrutiny around the globe, steps by government tax collectors, the rise of other cryptocurrencies, and declining media interest in the asset.”

The Federal Reserve Bank of San Francisco has also argued that the introduction of bitcoin ETFs, which made short-selling easier, helped cause the decline in the price of bitcoin starting last December.

A CME spokeswoman said that the price drop was likely affected by “other factors in the marketplace, such as governments and businesses banning cryptocurrency or ads about them.” CBOE likewise disputed the conclusions of the report.

viernes, julio 27, 2018



Behind Greece’s Deadly Fires

Yanis Varoufakis

ATHENS – A biblical calamity befell Attica last Monday. I saw its first sign in the late morning at Athens airport, where I was seeing off my daughter to Australia. A strong whiff of burning wood caused me to look up to the sky, where a whitish-yellow sun beckoned, surrounded by the telltale eclipse-like daytime darkness that only thick, sky-high smoke can cause.

By the early evening, the news began cascading in. Many of our friends’ and some of our relatives’ houses in East Attica were destroyed. Forest fires had run amok, spreading toward the heavily built-up coastline, cutting the settlement of Mati and the town of Rafina off from Athens and forcing residents to flee toward the sea.

I first learned of casualties when told of the plight of activists belonging to our political movement, DiEM25. The flames destroyed their house in Mati, along with every other house on their street; but at least they escaped with their lives. Barely. Their next-door neighbors perished; when their corpses were discovered the next morning, they were crouched together, their three-year-old girl in the middle of a heartbreaking huddle.

And the ominous news continued to stream in. A friend and her husband, whose house is in smithereens, are missing. A cousin, whose house sits on a cliff by the sea, had to jump 70 meters into the rocky waters below as his house burned down; fortunately, he was rescued by fishermen. But 26 other people, who had come very close to the same coastline, succumbed to the smoke and flames before they could reach the water. As I write, the official death toll stands at 81, with an indeterminate number of people missing. Words fail me.

Why did it happen? A dry winter had produced large quantities of parched forest and bush, which, on a day when temperatures reached 39ºCelsius (102º Fahrenheit) and winds gusted at 130 kilometers (80 miles) per hour, fueled the conflagration. But on this, our Black Monday, the weather conspired with the chronic failures of Greece’s state and society to turn a wildfire into a lethal inferno.

Greece’s post-war economic model relied on anarchic, unplanned real-estate development anywhere and everywhere (including ravines and pine forests). That has left us, like any developing country, vulnerable to deadly forest fires in the summer and flash floods in winter (just last winter, 20 people died in houses built on the bed of an ancient creek).

That collective failure is, naturally, aided and abetted by the Greek state’s perpetual lack of preparedness: its failure to clear fields and forests of accumulated kindling during the winter and spring, for example, or to establish and maintain emergency escape routes for residents.

Then there are the usual crimes of oligarchy, such as the illegal enclosure of the coast around seaside villas for the purpose of privatizing the beach. Eyewitnesses I spoke to said that many died or were badly injured struggling against the barbed wire that the rich had put between them and the sea.

And, last but not least, there is also humanity’s collective guilt. This catastrophe demonstrates nothing if not the manner in which rapid climate change is turbocharging the natural phenomena that punish our human foibles.

As is often the case when forest fires ravage Greece, the government hinted at arson. While I cannot rule out the possibility of foul play, I am unconvinced. Greek governments have traditionally found it convenient to blame profiteers, arsonists, terrorists, and even foreign agents. With such incendiary claims dominating the news, officials avoid having to admit their lack of preparedness and their failure to adopt and enforce appropriate laws and safety regulations.

What role did austerity and Greece’s ongoing Great Depression play in the ineffectiveness of the response? Fire departments, citizens’ protection agencies, ambulance services, and hospitals are terribly understaffed. While the fires would not have been stopped if we had three times the number of fire brigade workers and firefighting airplanes, a country suffering a decade-long diminution of its public services, its communities, and its morale can scarcely be expected to prepare itself well for a calamity made worse by climate change.

Journalists ask me whether the European Union is helping. The reality is that we had destructive fires before and after joining the EU and swapping the drachma for the euro. The EU played no role in helping us fight the flames, a task not in its remit, and it cannot be held responsible for the fires or for 70 years of Greek society’s abuse of the natural environment. But it is unquestionable that over the past decade the Troika of Greece’s official creditors – the European Commission, the European Central Bank, and the International Monetary Fund – has actively deprived the Greek state of the resources and capabilities it needs in such situations.

Might, therefore, this not be the moment (the same journalists ask) for Athens to rebel and demand the end of austerity and of spending cuts that are detrimental to Greece’s survival? Of course! Every moment is a good moment to confront the Troika over the straitjacket of inane austerity and misanthropic social policies that have created a permanent humanitarian crisis in Greece.

Over the course of a decade, we have lost many more people to the tragedy caused by the EU establishment than to any flood or forest fire. More than 20,000 people have committed suicide since 2011, while one in ten working-age Greeks have emigrated because of the economic depression the EU has imposed on Greece.

I expect crocodile tears to be shed in Brussels over our fire victims, and similarly hypocritical posturing by the Greek government. But I do not expect any reversal of the organized misanthropy afflicting Greece just because nearly 100 died in a single day. Unless and until progressives across Europe get organized, accept local responsibility, and band together to apply pressure at the EU level, nothing will change, except a further strengthening of proudly misanthropic political forces like Greece’s Golden Dawn, Italy’s Lega, Germany’s Christian Social Union and Alternative für Deutschland, Sebastian Kurz’s Austrian government, and the Polish-Hungarian illiberal nexus. In this context, Greece’s forest fires are a tragic reminder of our collective responsibility as Europeans.

Yanis Varoufakis, a former finance minister of Greece, is Professor of Economics at the University of Athens.

Russia's Iraq War

Russia is showing signs of mission creep in Syria.

By Xander Snyder

In September 2015, Russia began a military campaign to support the regime of Bashar Assad in Syria. Russia had a number of goals for the campaign: to crush the Islamic State, preserve a key ally in the Middle East and appear strong to the Russian public. But nearly three years later, the war continues, and Russia hasn’t found a way out of it. As jihadist groups in the country appear to be weakening, Russia’s motivations for staying in Syria are shifting. It wants to establish a regional balance of power and ensure that, when the civil war subsides, it still has ways to limit the reach of its historical adversaries – mainly Turkey but also Iran. Assad will play a role in this, but it is looking ever more likely that the Syrian Kurds will as well.
Iran and Russia’s Diverging Interests
Russia’s position in Syria is inevitably affected by another stalwart Assad ally, Iran. With substantial influence over the regimes in Iraq and Syria and its support for Houthi rebels in Yemen and Hezbollah in Lebanon, Iran has a formidable presence throughout the Middle East. This threatens to disrupt the balance of power that Russia wants to see in the region. But Iran is facing pressure at home, with the unraveling of the nuclear deal and protests since January over the struggling currency and deteriorating economic conditions. And even though they support the same side in Syria, Iran’s losses could be Russia’s gains. U.S. sanctions on Iran, set to take effect in early August, could give Moscow a larger share of the international oil market. Though sanctions could limit Iran’s capacity to support Assad due to declining finances, the Syrian regime’s military needs are likely to change anyway, from offensive to defensive capabilities, as it shifts its focus from retaking territory to holding territory. The need for Iranian support, therefore, may become less critical than it once was.


The remaining pockets of anti-Assad resistance are in the southwestern province of Daraa and the northern province of Idlib. Even if Iranian support diminishes, Russia is prepared to offer Assad air support in these battles because it can’t risk letting the regime fall and having jihadists retake large swaths of Syria – and possibly encouraging jihadists in parts of Russia. A smaller Iranian presence could also make Assad more dependent on Russia and, therefore, more likely to act in Russia’s interests.
Pushing Back Against Turkey
Once Assad retakes Daraa and Idlib, which we expect he will do, he will then turn his attention to semi-autonomous, Kurdish-controlled parts of northeastern Syria. Russia’s role in this fight will be more complicated. Russia has a long history of supporting and working with Kurdish groups throughout the Middle East. It has at different times supported autonomy for Kurdish groups in Iraq and Syria and even advocated for a Kurdish republic in Iran during the Cold War. (Of course, this was when Iran was still a U.S. ally.)

And Russia has another reason to support the Kurds in Syria: They could give Moscow a way to push back against Turkey and Iran in another key region, the Caucasus. Turkey designated the Kurdistan Workers’ Party, or PKK, a terrorist organization, and it sees the group as its most immediate security threat. Aligning with Kurdish groups would give Russia leverage over Turkey and Iran, both of which have the power to destabilize the South Caucasus along Russia’s southern border. Russia, Iran and Turkey have all fought for control over the Caucasus. Most recently, in the early 1990s, Turkey and Russia nearly confronted each other directly in the Nagorno-Karabakh War. When Armenia threatened to invade Nakhchivan (an exclave of Azerbaijan surrounded by Armenia, Iran and Turkey), Turkey sent thousands of troops to the Armenian border to deter the invasion. Russia responded by sending thousands of its own troops to the other side of the Turkish-Armenian border. Then Russia went a step further, proposing the establishment of an exiled Kurdish parliament in Russia. Turkey responded by throwing its support behind Chechen insurgents in Russia. In 2005, the two countries agreed to stop supporting insurgent groups in each other’s territory, but it’s clear from this example that Turkey is a threat to Russia in the Caucasus.

Russia, then, could use the Syrian Kurds to keep Turkey in check. In theory, the same goal could also be accomplished through a unified, Assad-controlled Syria – which was Russia’s strategy in the Cold War. But this has some drawbacks. If Assad were to take full control of Syria, he’d have greater independence of action, and thus could refuse Russian requests to push back against the Turks. But if Kurdish groups in the north retained a semi-autonomous state with Russian support, these groups would be beholden to Moscow, and Assad would have to risk a confrontation with Russia to dislodge them, a maneuver he likely wouldn’t try.

The People’s Protection Units, or YPG, which is the main Kurdish group in Syria, has been supported primarily by the United States, but Russia has provided air cover to the YPG in certain anti-Islamic State operations and has been open to including the YPG in peace talks. What could lead the YPG to lean closer to Russia? The answer might be Manbij, the city that was held by the Syrian Democratic Forces, of which the YPG is the main constituent part, after the group defeated IS there. The U.S. repeatedly insisted that SDF fighters in Manbij were under American protection, and that it would not withdraw from the area. But it nonetheless agreed to leave the region in June, or at least reduce its presence there, after Turkey threatened to sever relations with the United States. The YPG subsequently said its advisers left the town. Currently, Turkey and the U.S. are conducting patrols around Manbij that the U.S. claims are “independently coordinated.”

The remaining SDF forces in northern and eastern Syria are now likely wondering what will happen when they, too, are no longer strategically useful to the United States. Washington still needs to maintain good relations with Ankara, in part to maintain access to Incirlik air base. As the U.S. continues to look for a way out of Syria, Russia will quietly step up cooperation with or support of the YPG so that it is well-positioned in the event of a complete American withdrawal.

Why, though, did the U.S. abandon the SDF in Manbij? America’s interests in Syria are narrower than Russia’s. The U.S. wants to eliminate the Islamic State, and while IS hasn’t disappeared altogether, it has lost almost all the territory it held in the Middle East. As the U.S. reassesses its global commitments, it will be increasingly inclined to limit its presence in Syria – and, therefore, its support of the SDF – if it appears that regional actors are capable of keeping IS in check. This is what the YPG fears, and what Russia is waiting for.
Naval Assets in Syria
We can’t talk about Russian interests in Syria without mentioning the naval base at Tartus. The base is in a strategic location on the coast of the Mediterranean. But it has some disadvantages. Based on a 2016 agreement with Syria, Russia is allowed to dock only 11 warships there, limiting the amount of force it can project from that location. Russia also faces supply problems. It can supply the base by sea either through the Black Sea via the Bosporus (which is controlled by Turkey); through the Atlantic Ocean via the Strait of Gibraltar (which is controlled by Britain); or through the Indian Ocean via the Red Sea and the Suez Canal (which is controlled by Egypt). Russia could also supply Tartus by air, but this would be costly and would limit the number of supplies it could send. In late 2017, Russia announced that it will be making the Russian Hmeimim air base in Latakia province a permanent installation. Hmeimim is only about 40 miles (65 kilometers) north of Tartus and directly accessible via the M1 highway, which runs parallel to Syria’s Mediterranean coast.

A naval base south of the Bosporus that’s allowed to dock a limited number of ships and faces supply challenges provides a small boost to Russia’s power projection capabilities but wouldn’t be a huge help if Turkey were to close the Bosporus and cut off Russian access to the Mediterranean. Still, having naval assets on both sides of the Bosporus is strategically valuable, especially considering that the Bosporus played a key role in the Russo-Turkish wars of the 18th and 19th centuries, as the Russian Empire grew more powerful and sought greater access to the rest of the world.

Like most things in the Middle East, Russian interests in Syria are complicated – which explains why Russia is showing signs of mission creep there. Its goal has gone from propping up the Assad regime to establishing a balance of power in the Middle East. This is where most foreign powers go wrong: Russia in Afghanistan, or the U.S. in Afghanistan and Iraq. Russia could easily get bogged down in a conflict it can’t control. The question now is whether Russia could handle the type of quagmire that the U.S. faced in Iraq. Time will tell.

Why the UK Needs the EU and the EU Needs the UK

British lawmakers are split over Brexit plans, but the country needs a deal.

By Jacob L. Shapiro

The United Kingdom is facing its “most profound political crisis since World War II” – at least according to one BBC reporter – after three key Cabinet officials resigned over Prime Minister Theresa May’s Brexit plan. But this kind of hyperbole from the usually understated BBC misses the point. The U.K. has faced more serious challenges in the past: the 1956 Suez crisis, the 1976 International Monetary Fund crisis and the Troubles, just to name a few. Despite the political storm Brexit has kicked off, the fact remains that the U.K. and the EU need each other and will (eventually) find their way to some kind of arrangement.

Since invoking Article 50 of the Maastricht Treaty, which begins the withdrawal process, May has been performing a balancing act, trying to hold together a fractured Conservative Party. One faction wants a “soft Brexit,” in which the U.K. would still have access to the European Union’s common market. Another faction wants a “hard Brexit,” in which the U.K. would use its leverage as a major consumer of European goods and services to negotiate either a broader free trade deal with the EU or bilateral deals with select European countries. Ironically, the opposition Labour Party is also divided, between those who support Brexit and those who don’t, not to mention those with different ideas about how Brexit should proceed. Since May doesn’t have enough support for her plan within her own party, she will need support from Labour lawmakers if her plan is to survive.

Until this weekend, May had balanced the two factions within her own party by essentially not taking a position. But with time running out to negotiate with the EU, May had to take a stand. After a Cabinet meeting on Friday, she unveiled a compromise agreement, whereby the U.K. would seek a soft Brexit on goods and a hard Brexit on services. In the moment, May seemed almost Solomonic – the Cabinet summit ended with audible grumbles but no resignation letters. But over the weekend, her powers of persuasion failed, and hard Brexiteers within her Cabinet decided they could no longer remain in the government.

The positions May has outlined are not even close to a final status agreement with the European Union. Indeed, May’s plan is the starting point for negotiations with the EU, which is even more divided than the United Kingdom. Just this past week, in the midst of political turmoil in Germany, the German interior minister advocated a tight security relationship with the U.K. after Brexit – only to be dismissed by the German government as a diplomat gone rogue.

Germany is not only the most important player in the EU but the most dependent on a productive trading relationship with the U.K. going forward. Some 6.5 percent of German exports went to the U.K. last year. Germany has an export-based economy that cannot handle losing access to its fourth-largest market right now. And it’s not alone. Eastern European countries are a key part of the German supply chain, so they too would be affected by a downturn in German exports. Many EU countries need access to markets, and the idea of replacing Europe’s second-largest economy with Macedonia or Albania doesn’t add up.

The EU has every reason to drive a hard bargain. European Council President Donald Tusk’s public response to the ordeal was that he hoped Britain might change its mind and stay in the EU. And the EU’s negotiators have spun every meeting with the U.K. as dealing with an ill-prepared and ambiguous negotiating partner. But the EU can’t afford not to make a deal. Its goal is not to make the U.K. suffer by refusing to sign an agreement but to get the best deal possible for the remaining members – a difficult task indeed for a bloc of 27 states that are themselves often at odds.

The U.K. needs the EU too. It’s no shock that May went for a soft Brexit on goods – 47.6 percent of British exports went to EU-27 countries last year. Brexit supporters have argued that pulling the U.K. out of its most important trading relationship would be damaging politically and economically, especially given the state of the manufacturing sector in the country since the 1990s. Northern Ireland, which voted against Brexit, has strong ties to another EU member, the Republic of Ireland, and Scotland’s continued opposition to Brexit is dredging up old questions over devolution of powers. The strongest and most resilient part of the U.K. economy is its financial sector headquartered in London. The British government is betting London can withstand a hard Brexit because of its dominance in foreign-exchange markets and insurance, and the global respect for English common law.

The biggest concern in both the U.K. and the EU is that both sides are hurtling toward the Brexit deadline without a plan for what happens after. And a veritable cottage industry of economic studies penned by authorities from all political affiliations has emerged supporting every which position: that Brexit will mean catastrophe for Britain, or catastrophe for the EU, or the exact opposite. As the chancellor of the Exchequer showed with his predictions of economic crisis in the U.K., the simple fact is no one really knows what the effect of Brexit will be for either side because no country has done this before. Europhiles and euroskeptics alike view the U.K. as the guinea pig – a successful Brexit could open Pandora’s box, while a disastrous Brexit could keep the EU’s demons at bay (assuming it doesn’t also send Germany’s export industry into a tailspin).

May could fall, or she could pull another rabbit out of her hat. She’s already shown herself to be more resilient than most expected after her election gambit backfired last year. But when it comes to Brexit, it doesn’t really matter who resides at No. 10 Downing St. Any British prime minister would be facing a tough battle at this point: The middle ground has become very thin, and British politics has become a long tightrope. As entertaining as the circus is, the bigger picture is that both Britain and the EU are divided on Brexit, and Britain needs a relationship with the EU just as much as the EU needs a relationship with Britain. 

Can Gold Prices Be Manipulated?

By Alex Kimani


Is gold price manipulation a real thing or just another of those myths that have gained popularity in financial and investment circles?

Manipulation in this context is defined as a purposeful effort to control gold prices.

A section of gold investors believes that gold prices are systematically manipulated, generally downwards.

There are several variations to the theory, but the general belief is that precious metals like gold and silver are under the thumb of central banks and other large banks, which use high frequency trading (HFT) as well as derivatives (aka naked shorts) to tamp down prices. There are also worries about discrepancies between paper gold and physical bullion in systems such as the London Bullion Market Association (LBMA) Gold Price.

Then of course the media itself has its own conspiracy theories.

While there hasn’t been that much academic research conducted on the subject, available empirical data suggests that gold price manipulation is possible on a short-term basis but not over the long-term.

How to Manipulate Gold Prices: Selling Naked Shorts

Paul Craig Roberts and Dave Kranzle, Institute for Political Economy fellows, high-yield bonds traders and founders of Golden Returns Capital LLC., provide pretty compelling evidence of gold price manipulation by the collusion of the Fed and several large banks.

The two traders have claimed that the New York Comex exchange is the Fed’s primary venue of the Fed’s manipulation activities. The biggest Comex players include HSBC, JP Morgan and Bank Nova Scotia, which jointly account for a large portion of the exchange’s trading volume.

Comex futures trading takes place through a system known as Globex  which can be accessed by any trader with a computer-based futures trading platform. In addition to Comex, the Fed also manipulates gold prices in the much bigger London gold market where daily transactions exceed $24 billion.

Selling naked shorts simply means that the Fed short-sells gold without first borrowing it or at least ensuring that the metal can be borrowed as is the usual short-selling practice. The Fed presumably does this to protect the dollar and enable banks to repurchase gold at lower prices.

(Click to enlarge)
Source: PaulCraigRoberts.Org

Messrs Roberts and Kranzle cite at least three instances when they were able to detect such suspicious activity on the Comex exchange.

The first happened on Monday, January 6, 2014.

After rallying $15 in the Asian and European markets, gold prices suddenly plunged $35 at precisely 10:14 a.m. after more than 12,000 contracts (more than 10 percent of the day’s trading volume) were sold in the space of less than 60 seconds. The volume of the sale is what gave it away as blatant naked short-selling--12,000 contracts represents 1.2 million ounces of gold, about three times the total amount of gold that was available in Comex vaults at the time.

The style, too, is highly suspicious. A bona fide trader looking to sell a large position would normally try to carefully work off their position over an extended period to disguise their selling activity and also avoid interfering with prices as much as possible. The dumping of such a huge position in such a short period of time is a deliberate ploy to drive down gold prices.

The gentlemen also cite another such activity--this time on Globex. Beginning December 18, 2013, huge volumes of Comex gold futures were sold in several waves via Globex immediately after the FOMC announced its decision to trim its bond purchases by $10 billion per month.

The funny thing is that this happened at a time when the Globex computer trading system is least active. All this selling activity was done presumably to prevent the announcement of tapering from sending the dollar, stock and bond markets into a tailspin.

To cap their argument, the pair points out that central banks have on several occasions failed to honor their obligations when called upon by nations at their time of their need, thus suggesting a depletion of gold bullion at their vaults. For instance in 2014, the Fed negotiated a seven-year timeline to ship back Germany’s 1,500 tonnes of gold, suggesting it did not have the full amount in its possession.

Incidences such as these  tend to lend credence to the selling of naked shorts theory.

Long-Term Manipulation Unlikely

The report by Roberts and Kranzle appears elegant and pretty convincing. There’s a good chance that the heavy and rapid bursts of selling activity described here is the result of the Fed or other large entity trying to push gold prices down.

What is highly doubtful though is whether any trader, the Fed included, could be able to sell naked shorts for any length of time. This is the case because such an activity would create a huge short squeeze with the trader buying in huge volumes (futures contracts and physical bullion) to cover their shorts, which would inevitably push gold prices up.

Over the long-term, empirical evidence suggests that gold prices are determined by global money supply, US trade/debt imbalances, central bank activities, interest rates and commodity prices (especially oil).


Iran, Backed Into a Corner

Now it needs outside help if it’s going to stand up to the U.S.

By Jacob L. Shapiro

Iran and the United States enjoyed a brief rapprochement when they signed the Iran nuclear deal, but the U.S. withdrawal from the agreement backed Tehran into a corner. For months, political infighting and public unrest over the country’s poor economic performance has considerably weakened Iran’s regional position. Now it seems rival political factions have come together to deliver a coherent Iranian response. And just in time: The first wave of U.S. sanctions will be reintroduced on Aug. 6. (The second and final wave will follow 90 days later, on Nov. 4.)

Iranian Supreme Leader Ayatollah Ali Khamenei said during a speech on Saturday that he supported a policy of blocking regional oil exports through the Strait of Hormuz if Iranian trade partners bowed to U.S. pressure to stop buying Iranian oil. President Hassan Rouhani followed that with his own eyebrow-raising speech on Sunday in which he echoed Khamenei’s threat and warned the U.S. about “play[ing] with the lion’s tale.” (Neither leader was specific about how Iran intends to close the strait, but at least they’re on the same page.) U.S. President Donald Trump’s threatening tweets late Sunday have grabbed the headlines, but it was Iran that started the war of words. In the wake of Trump’s reply, Iran’s chief of staff accused the U.S. of preparing to attack Iran, while a commander of the Basij paramilitary force accused it of psychological warfare. Iran’s foreign minister, in a clear message to the U.S., tweeted that Iran had lasted millennia and had seen empires fall, ending with a warning (mimicking Trump’s own threat): “BE CAUTIOUS!”

Iran’s political struggles are notoriously opaque, and the weekend’s developments are not clear-cut. While Rouhani, the president who engineered the rapprochement on Iran’s end, is talking more like a commander of the Islamic Revolutionary Guard Corps, the IRGC has been noticeably silent. Indeed, an aide to the supreme leader had to deny on Saturday that the commander of the IRGC was going to be replaced. If the Iranian government is revving up to pursue a more aggressive foreign policy, it’s hard to figure out how that would mean a shake-up of the IRGC. It’s unclear why the denial was necessary – perhaps Rouhani is attempting to use his swing toward hawkishness to eliminate rivals. Whatever the case may be, it’s premature to say Iran’s newfound internal political coherence will endure.

Even so, no matter what faction emerges on top, whether by consensus or power grab, it is becoming clear that at this point Iran has relatively few options and has been forced into the arms of Russia and China. The logical starting point is Russia. On July 11, a few days before the Helsinki summit between Trump and Russian President Vladimir Putin, Khamenei dispatched his top foreign policy adviser to Moscow. The objective may have been to get the two countries on the same page, implying that they have been coordinating their moves since the summit.

For Moscow, the name of the game is leverage. This is the second time in recent years Russia has looked to the Middle East for leverage over Washington. Russia’s first attempt, of course, was to parlay its intervention in Syria into considerations in Eastern Europe, specifically Ukraine. For the price of having propped up Bashar Assad, whose forces have been critical to the defeat of the Islamic State, Russia hoped the U.S. might be willing to compromise on Ukraine. In the end, Syria was not important enough to the U.S. to bargain, but Iran may be a different story. If Russia can demonstrate the ability to keep Iran in line, the U.S. may be willing to deal. If nothing else, encouraging Iran’s defiance raises the price of oil, which is good for Russia.

China is Iran’s other option. Beijing seems willing to go toe to toe with the U.S., at least for a while, as it assesses the damage from the burgeoning trade spat. China has given no indication that it will stop importing oil from Iran for fear of potential U.S. sanctions. If anything, it looks poised to increase its purchases, especially if the price is depressed because of the barriers around Western markets. For China, too, this could translate into leverage when dealing with the United States. At the very least, it’s cheap oil in a region China will be drawn toward more as its import needs grow.

Iran doesn’t want to be a pawn, but that will be the price of aligning itself more closely with Russia and China, and for Tehran, that’s better than kowtowing to the United States. The U.S. made the first move when it canceled the Joint Comprehensive Plan of Action, and now Iran has shown it has no intention of backing down. The next move belongs to Washington, and it will probably involve Moscow and Beijing.

Like in the North Korea situation, pure interest would dictate that the U.S. defuse the Iran issue, or at least deal with it in such a way so as not to improve Russia’s or China’s position. But in U.S. politics, the Iran issue is hostage to more than pure geopolitical interests. Whatever happens next, the first true ripples of the U.S. withdrawal from the JCPOA are becoming visible, and the U.S. faces hard decisions about how to prioritize its wide-ranging foreign policy imperatives.