TIME trade

It’s Time for Europe to Get Tough With Russia

European Union Foreign Ministers Meet On Ukraine Crisis
Flags of the European Union seen in front of the headquarters of the European Commission on March 03, 2014 in Brussels, Belgium. Michael Gottschalk—Photothek/Getty Images

Europe has a history of coming together in good times but not in bad. Think about the creation of the Eurozone, and the launch of the single currency, juxtaposed with the piecemeal policy reaction over the last few years to the Eurozone financial crisis. This tendency has been on tragic display recently, with the shooting down of a Malaysia Airlines jet that carried numerous European passengers. This event should have strengthened European resolve to put more and tougher sanctions on Russia. Instead, it’s led to half-hearted measures doled out on a country-by-country basis. France is even going ahead with big deal to supply warships to Russia.

The key issue, of course, is that Europe is in very deep with the Russians economically, much deeper than the U.S. Or China, for that matter; The recent Russia-China gas deal was small potatoes compared to the business that the Europeans do. Europeans get about 30 percent of their gas from Russia, and are dependent on other natural resources, like oil and minerals, from Russia too. Indeed, the Netherlands, which lost more people than any European country in the crash, took in the largest share of those exports from Russia last year. They aren’t alone—German banks and multinationals do lots of business with Russia, and countries like the UK are a big destination for oligarchs looking to stash cash outside their home country.

That’s why it’s so crucial that European foreign ministers come together at their meeting over the Ukraine situation and Russian sanctions in Brussels. Until they are on board with more serious sanctions, particularly in the energy sector, it’s unlikely that the current rounds are going to make a serious dent in the Russian economy, which, as a recently Capital Economics report pointed out, still has a strong international investment position.

The bottom line is that Europe needs a much smarter and less Russia-centric energy strategy. As I’ve explained before, that’s a need that’s unlikely to filled by the gas rich US anytime soon. Rather it’s something that will have to be driven internally within Europe. It’s an opportunity not only for Europe to become more secure, but to prove to the rest of the world that it can work together and live up to the promise of the EU itself—in both good times and bad.

TIME China

The U.S. Has Good Reason to Be Fed Up With China’s Economic Policy

U.S. Treasury Secretary Jacob Lew listens during a panel discussion at the North American Energy Summit in the Manhattan borough of New York
U.S. Treasury Secretary Jacob Lew listens during a panel discussion at the North American Energy Summit in the Manhattan borough of New York, June 10, 2014. Adam Hunger—Reuters

Talks in Beijing between American and Chinese officials made little progress on key economic issues

No one expected big breakthroughs from the latest round of the annual U.S.-China Strategic and Economic Dialogue, held this week in Beijing. But the results didn’t even meet those lowly expectations. After two days of talks with Chinese officials, U.S. Treasury Secretary Jacob Lew left empty-handed. A much-coveted but long-discussed treaty to boost investment between the two countries only inched forward. Nor did China offer firm commitments to further liberalize its currency — an issue of great importance to Washington. That apparently left Lew searching for something positive to say to his Chinese hosts. “The commitments China has made here in Beijing over the past two days reflect the economic reform goals set forth” previously, Lew said on Thursday, “and we look forward to future progress.”

Washington has been waiting for progress for quite a while. U.S. officials have been repeatedly pressing Beijing to open markets wider to American companies, improve the protection of intellectual property, and make the economy more transparent and market-oriented. But in return, Washington just gets vague pledges and expressions of caution. Meanwhile, the two continue to bicker over trade practices — most notably these days, Washington’s punitive tariffs on Chinese solar panels. The stalemate in economic ties between the U.S. and China is symbolic of the greater strain between the two nations. China has responded angrily to U.S. charges that its military cyberspies on American companies, while officials from both sides have exchanged hostile barbs over China’s territorial disputes with Japan and other neighbors. Relations between the U.S. and China are arguably at their lowest point in years.

That’s bad news. What happens between the world’s two largest economies has ripple effects around the world. Each country, furthermore, needs the other for its own economic growth. U.S. companies require access to Chinese consumers to keep their profits growing, while China badly needs advanced U.S. technology to upgrade its industry. Still, the two sides often look upon each other warily. As China’s clout increases, the U.S. is frustrated that Beijing is not making the Chinese economy more open or playing by the perceived rules of international commerce. Beijing’s policymakers get upset when Washington badgers them on reforms they consider none of America’s business.

But the U.S. has good reason to be annoyed. Many of the issues that matter to Washington have been dragging on interminably with no resolution in sight. Take, for instance, the sticky issue of China’s currency, the yuan. Washington has complained for many years that Beijing manipulates the value of the yuan to promote its own exports, and during this week’s meetings, Lew again pressed his Chinese counterparts to make the process by which it is valued more market-driven. Though I have written on many occasions that the U.S. has exaggerated the impact the yuan’s value has had on the country’s trade deficit with China, Lew has a right to be fed up with the slow pace of change. The Chinese have been blabbering about allowing market forces to determine the yuan’s exchange rate for ages, and the reform is considered an integral part of China’s greater goal of liberalizing capital flows in and out of the country. But the government still wields tremendous influence over the direction of the yuan — a degree of control is has been reluctant to relinquish, promises aside. In this week’s meetings, China offered only more excuses. “If we move too fast, we will be tripped by the demons of details,” Chinese Vice Premier Wang Yang cryptically responded to Lew. Instead, Wang said Beijing was looking for “balance.”

“Balance,” however, has become Beijing-speak for “do nothing.” Currency reform is only one of many changes Chinese policymakers have promised, but never seem to implement. President Xi Jinping and his team have pledged to liberalize markets, fix the financial sector and allow private businessmen a bigger role in the economy. Economists swooned over a bold policy document released in November that committed the leadership to a sweeping reformation of China’s economic system. No one should expect such major changes to happen overnight, of course. But the fact is we’re still waiting for the process to really get started. Meanwhile, the Chinese economy is facing a host of unresolved problems that threaten its future. Growth has slowed, debt has mounted to dizzying levels, the financial sector is fundamentally flawed, and a property bubble appears to be bursting.

What Lew wants to see from China is a true effort to overhaul an economic model that is badly broken. That would be good for China, the U.S., and everybody else.

TIME Eurasian Economic Union

Russia, Kazakhstan, Belarus Sign Treaty Creating Huge Economic Bloc

Citizens of the three countries will have the right to work freely throughout the member states without any special work permits

Russia, Kazakhstan and Belarus signed a treaty Thursday forming a massive new trading bloc known as the Eurasian Economic Union, Reuters reports.

The treaty will come into effect on January 1, 2015 as long as it’s approved by the countries’ respective parliaments. It will create the largest common market across ex-Soviet states, which its signatories hope will challenge the might of the European Union, the U.S. and China.

Russian President Vladimir Putin said shortly before signing the treaty that their meeting was of “epoch-making significance,” but that it was no attempt to recreate the Soviet Union. Kazakh President Nursultan Nazarbayev said the treaty represented “a bridge between the East and the West.”

Ukraine refused to join the treaty considering the conflict currently shaking the country and Russia’s recent annexation of Crimea. Armenia and Kyrgyzstan are considering joining the bloc, but other countries have turned down the opportunity to do so.

The new treaty unites three countries which have a combined population of 170 million people and a gross domestic product of 2.7 trillion dollars. Two of those countries, Kazakhstan and Russia, are oil producers. The deal will guarantee free transit of goods, services, capital and workers.

[Reuters]

TIME trade

What Chinese Cyber-Espionage Says about the Chinese (and U.S.) Economy

The Obama Administration's outrage over Chinese hacking has its roots in conflicting views of the government's role in private business. So don't expect a meeting of the minds anytime soon.

Imitation is the sincerest form of flattery, but that’s probably cold comfort to firms like Westinghouse and U.S. Steel, which the U.S. Justice Department says have been hacked by Chinese cyber-espionage teams. By indicting the Shanghai-based team allegedly responsible for the attacks, which are largely conducted in order to give the Chinese an edge in the global economy, Attorney General Eric H. Holder Jr. is trying to draw a line between the sort of snooping that the U.S. National Security Agency does for strategic security purposes, and the kind that the Chinese do, which often involves intellectual property theft or the culling of business secrets for competitive advantage.

The problem is that the Chinese don’t recognize that difference, because in China, the state is the economy. I was actually in China as the Edward Snowden story was breaking in 2013, and I remember the Chinese being indignant about what they perceived as U.S. hypocrisy around cyber-snooping.

The importance of the Chinese state in the Middle Kingdom’s economy, which has been growing over the last 15 years or so, is crucial to understanding the hacking affairs. During the period of China’s highest growth, in the years leading up to 1995, the country was all about unleashing the private sector, and paring back the public. A lot of public sector workers were laid off, Beijing liberalized various sectors of the economy, and the private sector took off. But since the mid 1990s, that trend has been shifting.

State-owned enterprises, or “SOEs” have been sucking up more of the countries financial resources (they get about 80% of all debt financing, while providing only 20% of employment), which is one of the reasons that the Chinese economy is slowing. That makes it harder for the country to move up the economic food chain, from lower-end manufacturing to higher-end products and services, which is what it needs to do to move from being a poor country to one in which most of its citizens are middle class. It’s telling that some of the highest levels of unemployment in China are amongst new white-collar college graduates; the country just isn’t creating enough high-level companies, or jobs.

Which goes right to the heart of the hacking indictments. Despite all the hoopla recently over the fact that the World Bank expects China to surpass the U.S. as the world’s largest economy this year, there’s a big difference between being big, and being rich. Average U.S. worker wages are between 6 and ten times what they are in China because U.S. companies produce higher end goods and services. The Chinese economy is still largely a copycat economy—albeit a very good one. Chinese companies tend to take ideas from developed country firms (either legally or otherwise) and try to tweak them slightly to make them cheaper, more suited to local markets, etc. That’s why Chinese hackers were searching for intellectual property secrets at Westinghouse, and probably countless other Western firms. It’s something that American firms in China complain constantly about, and have largely taken as a cost of doing business there.

What’s more interesting, though, are reports that Chinese hackers were also looking for things like the trade deals and strategies of U.S. steel firms. This may speak to one reason that the Obama administration decided to make a big deal of Chinese hacking now. In an age of slower global growth, when all boats are not rising, issues like intellectual property theft and trade tensions become more fractious. The U.S. has been complaining for some time now that China won’t play by the existing rules of the global economy, and that given its size and economic heft, this can’t be allowed to continue. Since the financial crisis and recession of 2008, analysts have been predicting that the U.S. and China would eventually come to blows over trade issues—and it’s interesting that many of the firms being hacked were also those that had approached the WTO about Chinese trade violations.

It will also be interesting to see how the Chinese respond to the Justice Department indictments; needless to say there’s no way they’ll be handing over any hackers and they’ve already pulled the plug on a cyber-espionage working group with the U.S. that was supposed to address some of the tensions between the two countries. One thing you can count on, says Conference Board China economist Andrew Polk, is that the slow growth, increasingly nationalistic environment in the Middle Kingdom is going to “make it tougher for foreign firms to do business there.” As if it was ever easy.

 

TIME Economy

Globalization in Reverse

What the world’s trade slowdown means for growth in the U.S.—and abroad

Recent conflicts everywhere from Ukraine to the Middle East and the South China Sea remind us (as Robert D. Kaplan wrote in TIME’s March 31 cover story) that geography still matters, even in a globalized age. Politically, the world is certainly not flat. New economic figures show how increasingly rocky our world is becoming economically too. Globalization is often defined as the free movement of goods, people and money across borders. Lately, all of those have come under threat–and not just because of sanctions limiting travel and the flow of money among Russia, the U.S. and Europe. Over the past two years, global trade growth has been lower than global GDP growth. It’s the first time that has happened since World War II, and it marks a turning point in the global economy, with sweeping implications for countries, companies and consumers.

There are many reasons global trade is growing more slowly than it has in the past. Europe is still struggling to end its debt crisis, and emerging markets are expanding more slowly than they were. But one of the biggest factors is that the American economy is going through a profound shift: the U.S. is no longer the global consumer of last resort. As HSBC’s chief economist, Stephen King, pointed out in a recent research note, during postwar recoveries past, “the U.S. economy acted as a giant sponge,” absorbing excess goods and services produced by the rest of the world. Booms would bust; markets would crash and recover. And whenever they did, you could be sure that Americans would start spending again, and eventually our trade deficit–the level by which imports exceed exports–would grow. That’s now changing. After nearly five years of recovery, the U.S. trade deficit isn’t growing but shrinking. In fact, it was down by about 12% from 2012 to 2013.

That’s not necessarily a bad thing for us. Part of the reason the deficit is shrinking is that our shale-oil and gas boom means we are buying less foreign fossil fuel, and our manufacturing sector is growing. But part of it is that wages haven’t come up since the crisis, and consumer spending is still sluggish. In order for the U.S. and the world economy to keep growing, somebody has to shell out for the electronics, cars and other goods we used to buy more of.

Unfortunately, no one is doing that. Europeans, still stuck in a debt crisis, probably won’t spend again for another five years. Emerging-economy countries, in various levels of turmoil, are growing at roughly half the rate they did precrisis. The Chinese, who picked up a lot of the global-spending slack after the financial reckoning of 2008, are now in the midst of a financial crisis of their own. Japan did its bit last year, but Abenomics–the government’s plan to encourage spending, named for Prime Minister Shinzo Abe–is running out of steam. Everywhere, says Mohamed El-Erian, chief economic adviser to insurance giant Allianz, “there is a mismatch between the will and the wallet to spend.”

With global economic integration seemingly in reverse, at least for the moment, many economists and trade experts are beginning to talk about a new era of deglobalization, during which countries turn inward. Some of the implications are worrisome. Complaints to the World Trade Organization about protectionism, intellectual-property theft and new trade barriers are rising. Trade talks themselves are no longer global but regional and local, threatening to create a destructive so-called spaghetti bowl of competing economic alliances.

Yet deglobalization isn’t necessarily all bad. As U.S. Trade Representative Michael Froman said at an economic summit in Washington recently, it also “means companies are looking at their extended value chains, supply chains, and deciding whether they want to move some production back to their home country.” That’s already happened in the U.S. A study by the Boston Consulting Group found that 21% of all manufacturing firms in the U.S. with $1 billion or more in sales are actively reshoring, and 54% say they are considering it.

Whether or not those jobs will help boost wages is something the Federal Reserve will be watching carefully. One of the hallmarks of the past 30 years of globalization was an easy-money environment. As Fed Chair Janet Yellen indicated at her latest press conference, we are coming to the end of that era. In this new economic age, not all boats will rise equally or smoothly. Markets, which had more or less converged for the past 30 years, will start diverging along national and sectoral lines. Our economic landscape, like our political one, will become more volatile and less predictable. Get ready for a bumpy ride.

TIME Food

Europe’s War on American Cheese

Feta cheese is seen on display in a delicatessen store in Sa
Graham Barclay—Bloomberg/Getty Images

The E.U. has Wisconsin feta in its crosshairs

Blessed are the geographically accurate cheese makers. In an attempt to defend and expand its piece of the growing global cheese market, the European Union wants the United States to ban the use of certain cheese names that have become ubiquitous for consumers.

The proposal, part of ongoing E.U./U.S. trade talks, would ban American cheese makers from using terms like parmesan, asiago, feta, gruyere, gorgonzola, fontina, romano and others that refer to European regions from which those cheeses originate. Domestic cheese producers would be forced to drop those names and rebrand their products, potentially ceding a major edge to their European competitors in booming international markets like Asia.

“It’s a clever trade barrier,” says John Umhoefer, executive director of the Wisconsin Cheese Makers Association. “There would be a lot of uphill work to do for cheese makers to convince consumers that their ‘salty white cheese in brine’ is feta. They would have to market it all over again.”

The widespread usage of European names has been an issue since the mid-1990s, when the E.U. released its geographical indication registry, which sought to restrict some category names to the regions most associated with them, like Scotland and Scotch whisky or France’s Champagne region for the eponymous sparkling wine. In 2012 the E.U. further shored up its exclusive claim to certain foods when it signed a free trade agreement with South Korea that blocked feta cheese made outside of Greece and asiago, fontina and gorgonzola made outside of Italy from being sold in South Korea.

“That was certainly a big wake-up call for us,” says Shawna Morris, senior director for the Consortium for Common Food Names, a Washington lobbying group formed by U.S. milk producers and dairy exporters to fight the E.U. proposals. Morris says her group is focused on what she believes is E.U. overreach against U.S. suppliers and products they’ve been making for decades. “We simply think it’s ridiculous to decide after so many years that they can no longer use these names.”

The stakes aren’t paltry. Last year, the U.S. cheese industry brought in $22 billion and produced 11 billion pounds of cheese, according to the Wisconsin Cheese Makers Association. ($10 billion of that is in Wisconsin alone.) Barring U.S. cheese makers from exporting feta or parmesan would give Greece and Italy an opportunity to step in. Marin Bozic, an assistant professor of dairy foods marketing economics at the University of Minnesota, says a deal would not only give Europe a non-price advantage in foreign markets, where American cheese exports are booming, but would affect domestic consumers, too.

“People will be confused,” Bozic says. “But the problem is that those names don’t indicate origin. They indicate method of preparation. When you order Greek feta, you don’t expect that it’s feta from Greece. You just expect feta.”

Consumers have come to understand these names as representative of a type of cheese rather than rooted in a certain place, Bozic argues. “It’s not adding anything for consumers. There’s nothing about Greek feta that would make it taste superior. It’s a common food name and reverting back 50 years is no solution. It’s going to be a hard fight, but I don’t see the U.S. relenting on this topic. I think the E.U. would have to make real concessions in other fields to make it beneficial for the U.S.”

TIME European Union

EU Suspends Russia Trade Talks, Threatens Sanctions

European Council President Herman Van Rompuy speaks at a news conference at the end of a European leaders emergency summit on Ukraine, in Brussels, March 6, 2014.
European Council President Herman Van Rompuy speaks at a news conference at the end of a European leaders emergency summit on Ukraine, in Brussels, on March 6, 2014 Yves Herman—Reuters

The announcement by the E.U. follows a move by the White House to impose financial sanctions on people in Ukraine and Russia it believes have instigated unrest in the southern region Crimea amid a tense, days-long standoff with Russia

The European Union said Thursday it suspended talks on two agreements with Russia and opened the door to further sanctions against Moscow over the ongoing crisis in Ukraine.

EU officials said at an emergency summit in Brussels that it was suspending talks on an economic pact and on a visa deal, the Associated Press reports. European Council President Herman Van Rompuy also said the EU would consider travel bans, asset freezes and canceling an EU-Russia summit.

Earlier Thursday, the White House said it imposed visa restrictions on some pro-Russian Ukrainian and Russian officials and called for additional financial sanctions related to the Ukraine crisis.

Western countries are calling on Moscow to end the aggression in Crimea – where Russian and pro-Russian troops reportedly control all access to the peninsula — and participate in talks to put a stop to the crisis, which Rompuy called “the most serious challenge to security on our continent since the Balkan wars.”

[AP]

TIME

Time to Put Trade Above Politics

U.S. Vice President Joe Biden Visits South Korea - Day 1
U.S. Vice President Joe Biden shakes hands with South Korean President Park Geun-Hye, right, during their meeting at presidentisl house on Dec. 6, 2013 in Seoul, South Korea to discuss, among other things, the Trans-Pacific Partnership. Chung Sung-Jun—Getty Images

Washington needs to realize that a free-trade agreement with Asia is good for us all

We live in a world without war or even significant conflict among the major powers. We also live in an age of economic growth. All of this seems normal, but in fact, it isn’t. The current global system of commerce and collaboration instead of war and competition is historically rare. Will it last?

The answer depends largely on Asia, which within 10 years will be home to three of the world’s four largest economies. There are two possible scenarios. The first is that Asian countries will embrace the open, rule-based free-trade system in place today and deepen it. The second is that as these countries grow rich, they will become more nationalist, focus on narrow interests, pursue mercantilism and thus erode if not destroy what some in those countries describe as the “Western international order.”

This is not a theoretical debate; a great game is afoot in Asia. The U.S. wants to strengthen the forces of openness, rules and free trade by concluding an ambitious trade agreement with many Asian countries, the Trans-Pacific Partnership (TPP). China, on the other hand, is proposing the Regional Comprehensive Economic Partnership, a more mercantilist deal for Asian countries. It asks very little of these countries in terms of commitment to real market-based reforms or to environmental and labor standards. It offers them greater access to China as a gift from Beijing. This might advance China’s narrow interests, but it does little for an open, rule-based regional order.

Most Asian countries will naturally sign up to expand into the Chinese market. But they are willing to make painful concessions to sign up for America’s vision of the region. Japan’s Prime Minister, Shinzo Abe, told me recently that he was willing to take on some of his country’s most protected sectors as part of the TPP. But it’s in the U.S. that the American vision has become more cloudy. Congressional Democrats have virtually abandoned free trade, and Republicans balk at supporting President Obama.

The economic reason for Washington to support both the TPP and another ambitious trade agreement with European countries, the Transatlantic Trade and Investment Partnership, is obvious. The U.S. market is already wide open. Last year, 68% of the value of goods entered duty-free. The rest came in at an average tariff of 4.4%. Any agreement will require other countries to make many more concessions than the U.S. simply because their markets remain much more closed. And both trade deals open up markets in other tough areas, like intellectual property, state-owned companies and what are called nontariff barriers (regulations that have the effect of protecting inefficient local industries).

Even in deadlocked Washington, there is a path forward. Republican Congressional leadership remains committed to free trade. Former GOP officials like Robert Zoellick have made a persuasive case for why the party should strongly support both deals. Democratic opposition is not quite as devastating as it appears at first glance. Harry Reid, for example, voted against all three recent trade agreements, but did not obstruct their passage. The number of House Democrats who voted for these deals ranged from 31 to 66; garnering such a range again might still be possible.

Still, the democratic party’s retreat on free trade over the past two decades has been utterly dispiriting and totally at odds with its claim to be modern, future-oriented and open. It’s also at odds with the party’s history. There is FDR nostalgia among Democrats these days as they consider how he battled a depression, created the social safety net and made assertive government admirable. But Democrats forget another crucial element of his legacy: free trade. In a smart essay for the Council on Foreign Relations, Douglas A. Irwin points out that the “fast track” authority–empowering the President to negotiate trade deals–that Reid and Nancy Pelosi oppose was created by the Roosevelt Administration in 1934. FDR and Secretary of State Cordell Hull knew that free trade helps produce not just prosperity but also peace. In fact, free trade was one of Woodrow Wilson’s 14 Points to remedy the mistakes that led to World War I.

Free trade has always required an assertion of the national interest over special interests. Harry Truman vetoed a bill that tried to kill the nascent world trading system. John Kennedy took on domestic producers who feared foreign competition as he expanded that system substantially. And Bill Clinton heroically took on his party’s opposition to NAFTA and turned much of it around.

President Obama will have to spend real political capital, take his case to the country, push his party and work with Republicans. But if he does, history tells us that he–and the U.S. and the world–will win.

TO READ MORE BY FAREED, GO TO time.com/zakaria

TIME China

China Leads International Operation to Seize Massive Amounts of Wildlife Products

A protester with a banner displaying Chinese characters joins a demonstration outside the Chinese embassy in London, on Jan. 25, 2014, to call for an end to the ivory trade in China. Leon Nea—AFP/Getty Images

Month-long effort also sees first Chinese suspect arrested overseas

An international, China-led operation called Cobra II has seized huge quantities of rare wildlife products and marked the first time Beijing authorities have arrested a wildlife crime suspect overseas.

During the month-long effort, involving dozens of countries and organizations, over three tons of ivory was confiscated, as well as 36 rhino horns, 10,000 live eels and pig-nosed turtles, more than 1,000 hides and skins from tigers and leopards plus several hundred kilograms of pangolin scales.

The operation, which ended on Jan. 26, also saw Kenyan authorities extradite a Chinese national suspected of running a criminal ivory trading network from Nairobi.

China, the world’s leading market for ivory, has been under pressure to take more action against the illegal wildlife trade, and appears to have significantly increased efforts. Cobra II follows last month’s destruction of a 6.15-ton stockpile of seized ivory.

[CNN]

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