Tuesday, 2 June 2015

The land of the dinosaurs

The dinosaurs missed a trick when the comet (asteroid ?) hit the Yucatan peninsula 65 million years ago. They should have taken refuge in India. They wouldn't have gone extinct. India is veritably the land of the dinosaurs.

Well, at least corporate India is. In India, no company ever dies. It is extremely difficult to shut a company down in this country. They will live on for ever. Take the case of Andrew Yule.

If you had lived in British India and looked for a job, the bonanza would have been a job in Andrew Yule. It was one of the largest conglomerates of that time with businesses in jute, cotton, coal, tea, engineering, electrical, power, chemicals, insurance, railways, shipping, paper and printing, in addition to being a zamindar (land owner). The company was founded by, yes, a Mr Andrew Yule in 1863. He and his family ran it until India's independence in 1947.  The Indian government took majority control in 1948 under circumstances not very clear - perhaps it was socialism, perhaps the family decided to leave. It became a government majority owned company and then under the wave of socialism that Mrs Gandhi championed, the government took it over entirely.

It today is a pale shadow of its British India days. It currently does some engineering business and also owns some tea gardens. Long ago it became "sick" - Indian euphemism for bankrupt. Dinosaurs which fall sick come under the umbrella of the Bureau of Industrial and Financial Restructuring (BIFR), which is Ramamritham's idea of socialist utopia. Today , it has a turnover of Rs 400 crores ($ 70 m) and is still lumbering along. This year it managed to turn a small profit and declared its first dividend in 21 years.

Companies like this abound . Many have been taken over by the government under the misguided view that nothing should ever be closed down. The taxpayer funds this indulgence. The accumulated losses of such dinosaurs is Rs 60,000 crores ($10 bn). Veritable luminaries adorn this list. Air India is of course, numero uno, but there are other stars like Hindustan Photo Films (which still makes  the old film rolls), ITI (which presumably turns out analog telephone exchanges) and HMT (which makes mechanical watches). I have little doubt that there is also a company existing which makes music cassette tapes, or the telex machine, or something like that.

India is a culture that believes in the cycle of birth, death and rebirth. Regeneration is intrinsic to the belief of the Hindu faith. And yet, when it comes to companies, we do not accept the same philosophy. Maybe the companies are not Hindu !

And yes, in case you wondered, the East India Company is very much alive. In a nice twist of fate, it is now majority owned by a Mr Sanjiv Mehta !

Monday, 25 May 2015

I agree with Elizabeth Warren !

Readers of my last few posts on TPP would have noticed my complete disagreement with one Elizabeth Warren - junior Senator from the Bay State of Massachusetts. In this blogger's humble opinion she is a card carrying member of the loony left. And yet, here is proof that even from the loony left, an occasional wise word may arise (granted this is as rare as a bright sunny day in the great state of Oregon, but ..... !)

Her utterance was actually from last year - "The message to every Wall Street banker is loud and clear. If you break the law you are not going to jail", said the good lady. Well, let us pass lightly over the fact that there are no banks on Wall Street and that the New York Stock Exchange is not the same as banks. She has a point, which has been doubly proven in the events of lastweek.

It was a familiar story. Six banks agreed to pay $5.6 bn in penalties for manipulating currency markets. Five of the six admitted to the crimes. And yet, there is not a single banker going to jail. In fact , in all the settlements (LIBOR rigging, abetting client tax evasion, etc etc), the penalties are in billions of dollars. And nobody has gone to jail.

The details of the current forex manipulation case are not the purpose of this post. The  banks formed a cartel and used coded communication in online chat rooms to rig the daily fixes of the exchange rate between the Euro and the US dollar. We won't get into the details. Suffice to say that this is a fraud, and that if prosecution were to be brought against the perpetrators, they would go to jail. Yet this never happens. Why ?

Firstly it is hellishly difficult to prosecute banks. They have access to the best lawyers, tons of money, and their actions are of such a highly specialist nature that proving the fraud in a court of law is extremely difficult, time consuming and expensive.  Secondly the authorities drool at the prospect of these huge settlements and greed wins them over the principle of criminal deterrence.  Thirdly, even though banks agree to these huge settlements, it is far from clear that a criminal act was actually involved - banks are so terrified about losing a case and having their banking license revoked (an automatic consequence) that at the first possibility, they agree on a settlement however outrageous the amount is and however strong or weak the case against them is.

Look at who wins and loses. The shareholders of the bank lose (after all these settlements are being paid out of their profits). Their customers lose - by rigging forex rates they essentially screwed their customers. The winners are firstly the bank management and the actual employees who committed the fraud. Nothing happens the bank management. As for the employees caught in the act, they get fired allright, but simply join another bank or fund house across the street. Worse, they get to keep their bonuses.

This is an outrageous state of affairs. This will keep happening again and again. Fines, even of such gargantuan amounts, mean nothing to them. The bank committing the fraud must be taken to court. The employees who actally did the deed must be locked up in jail. The bank must lose its license and suffer the consequence. Only such a deterrence will prevent such monstrosities from happening again and again.

In this stand I am in the camp of the said Elizabeth Warren, the Tea Party (they are outraged at this too) and The Economist ! Strange bedfellows, eh ?

Friday, 22 May 2015

In defence of TPP - Secrecy in Negotiations

One of the biggest criticisms of the TPP in the US has been that the negotiations with other countries have been carried on in secrecy by the US government. US politicians have been falling over to yell themselves hoarse against this. When Wikileaks published confidential negotiation documents in their expose, there was much ballyhoo of how evil the government was.

Stuff and Nonsense. (The Queen would appreciate this remark !!)

I have not read Wikileaks and the very fact that I, an outsider sitting a million miles away with no access to any negotiating document, is able to write this series should be ample evidence that there is no Fort Knox secrecy. The principles with which the US (and every other country) are negotiating are well known and have been well known for years. None of the contentious issues are any different from what the US has been stating and signing in bilateral agreements for the last 20 years. Neither is any of this different from the positions the countries took in the Doha round of  the WTO. The arbitration clause I referred to three posts ago has been touted as a major googly being slipped in secretly through the back door. Bullshit. It has been there in every US bilateral agreement for years. The principles and the US stand have all been open and perfectly well known. You may agree or disagree with them, but you can't say they are secret.

What has certainly been kept secret are the details, the fine print and the negotiating documents. Yes, I know, the devil is in the details. In fact there is an unprecedented levels of security including telling pompous US Senators that they can't take notes - a tactic designed to exploit their infantile memory. You can disagree with this level of secrecy, but it is at least understandable. Negotiations involve give and take and involve messy compromises. When they are made in the glare of publicity, no agreement can be reached at all. Nobody negotiates under the glare of television cameras. Single issue activists and voluble gassy politicians (you know who I am referring to) will pump money lobbying and make so much noise that no agreement is ever possible.  For example the US is currently leaning towards accepting agricultural tariffs being retained in Japan with a quid pro quo that tariffs on Japanese automobiles will also remain in the US. This is an ugly compromise, but there is no way any deal is possible without bowing at the sacred altar of Japanese rice. As it stands the American sugar producers are vigorously lobbying for TPP (since it will protect their domestic subsidies), while the US Chamber of Commerce is furiously lobbying against and are being egged on by Australian sugar exporters. This is just on one minor item - sugar. Imagine the chaos and cacophony if every lobby group were to be shouting at 10000 decibels on Clause 4a, subsection ii of a negotiating document. We might as well not attempt any agreement at all. Anybody who wants negotiations in the full glare of publicity is either a cynical manipulator with a huge self interest or has never done a negotiation in her life (notice the gender).

The second big  controversy is the granting of fast track authority to the President to negotiate trade deals. Fast track gives authority to the President to negotiate a trade deal which Congress cannot subsequently amend or filibuster - they can either approve in toto or reject in toto. Predictably, the biggest noise on this is coming from the good lady. Of all the self serving and pompous stands, this takes the cake.

Firstly the fast track procedure is nothing new. It has been in existence since 1975. Successive Republican and Democrat presidents have been granted this power. This is not some Obama evil invention.

Secondly how, and with who, does any other country negotiate with the US ? You only negotiate with somebody who has the power to negotiate. Who is that person in the US ? What is the use of spending 3 years negotiating with the President when after a deal has been reached, 100 Senators and 435 Representatives can then amend at their will. This is the US Congress which can attach completely unrelated amendments to any bill - they of the crowning glory of killing a human trafficking bill by attaching a clause on abortion. So if the President cannot make a commitment on behalf of the US, then who can ? Does Japan have to negotiate with 535 Congressmen ? Or with a committee of Congressmen ? - imagine negotiating with an American team comprising of Elizabeth Warren, Ted Cruz,  Bernie Sanders and Eric Cantor !!!!!! There is no greater laughable concept than that.

I will conclude this series with an appeal to the Americans I know. You have elected a President. Give him some credit - he is not a traitor selling off Mom and Apple Pie. Sure, disagree with any policy, but be prepared to negotiate and make compromises with the rest of the world . Do not listen to Elizabeth Warren and Ted Cruz - both the loony left and the rabid right will lead you to a hell hole. Not only are they unhinged, they act with zero responsibility. Weigh the pros and cons of any policy in total - there are always positives and negatives. It is easy to throw out any initiative simply because you strongly disagree to a single clause.

The TPP may not be the best deal ever. It is however not a bad deal. It is to America's benefit. You have been the champion of free trade in the world. Your own prosperity arose because of your commitment to enterprise and trade. The world has grown following your footsteps. Do not kill your greatest strength.

Thursday, 21 May 2015

In defence of TPP - Environment and Intellectual property

In this post I'll tackle the  issues raised against the TPP in the areas of environment and intellectual property.

The opposition to the TPP from environmental activists comes from two contradictory positions - one is that any promotion of trade and economic activity leads to degradation of the environment and therefore must be stopped. The second argument is that the TPP does not go far enough to make environmental and climate change issues at the heart of any trade deal.

The first argument is not worth debating, for it is a loony left idea that deserves contempt. Denying the opportunity of economic advancement to the world's poor should be treated as a crime; for that is what it is. It would be far better if these activists were to specify how growth can happen with minimum effects on the environment (for eg what energy sources could be acceptable) and what the trade offs and choices should be. This they do not do and simply oppose everything. Such a position is not worth a shouting match.

The second argument is worth serious consideration. The US over many bilateral trade agreements has been pushing the following principles

* A binding agreement that countries would not lower their environmental standards in order to attract investment
* That their obligations under other multilateral climate control agreements would override any provisions of the Free Trade Agreement
* A long list of prohibited activities - like logging, deforestation, trade in wildlife, etc

In the TPP negotiations, the US is actually on the defensive as internally the Republicans will block any deal that contains significant provisions on climate change. Countries like New Zealand and Australia which are far more advanced on climate change issues are pushing for tighter provisions. These will have to be negotiated through, but given that the US is such an important player, it is unlikely that they would be able to do much progress. The activists are right to push for greater environmental standards. But the TPP is the wrong place to fight this. They should force the US, which single handedly screwed up the Kyoto Protocol, to come with an alternative.

I approach the second issue of intellectual property rights with some trepidation as that would mean arguing with Medicines Sans Frontiers (MSF) , a saintly organisation, which I am neither competent nor entitled to do. The issue is primarily of patent protection to pharmaceuticals. The US would like patent protection similar to what it has inside its own country. This would mean high prices for drugs for a long time in other countries and inhibition of development of far cheaper generic drugs. As this would disproportionately hurt the poor, MSF has been objecting to patent advancement through Free Trade Agreements. It is a difficult and thorny issue on which there are no easy answers . I am ducking this issue as this is not a big issue with the opposition to the TPP in the US, which is the prime theme of this series of posts. To its credit, the US negotiating team is trying to promote the principle  of "active window" - a period of time which would be longer for developed countries and shorter for developing countries when patent protection would exist and after that the country would be free to promote generics. That might be the best compromise.

This is probably an easy post - neither of these issues are ones on which US politicians should  kill the TPP. Despite the lunacy of a not insubstantial number of US politicians, this is unlikely to happen.

Tomorrow I will conclude this series with examining the secrecy surrounding the negotiations which is common cause made both by my good friend and Elizabeth Warren !!

Wednesday, 20 May 2015

In defence of TPP - the loss of jobs

The opposition from labour unions in the US ( and labour activists everywhere in the world) to the TPP is that it will lead to the loss manufacturing jobs (read in the US) and therefore it is anti labour. I have some sympathy for the view of the labour unions in the US, but absolutely no sympathy for the "global labour activists".

In every change of  the status quo, including opening up of trade, there will be winners and losers. When international trade is made more easy, by whatever means, the risk of American manufacturing jobs being lost is real. Labour intensive activity will migrate from higher cost locations to lower cost locations - that's an indisputable fact of economics. Therefore there has to be some sympathy for the US unions' opposition to every trade deal with a foreign country.

The balance sheet of wins and losses for the US looks like this. Jobs will be lost, especially in manufacturing. US consumers win in terms of lower costs of products. If international trade were to be substantially reduced, inflation will soar in the US. Prices of all goods will rise to levels which will put them out of reach of many people making it hard for even the poor in the US to enjoy the quality of life they currently have. Increased economic activity leads to rise in taxes for the US government - don't believe all that spin about evil corporations hiding their money overseas ; this is a point I am happy to debate separately. The increased economic activity does create more jobs, but not enough to compensate for the loss of jobs and in any case it is mismatched in terms of skill levels. So the only constituency that has some case for objecting to the TPP ( and every trade deal) is the US labour unions.

The group that deserves utter contempt are the international "labour activists" who are protesting against the TPP.  As we have seen, jobs will be lost in the US, but they will migrate to lower cost, and poorer countries . These are the societies that desperately need economic betterment through jobs.  Secondly, by lowering the cost of labour, there is a defence against machines taking over these jobs. That is why iPhones are still assembled by hand in China and clothes stitched by hand in Bangladesh. In sum total, there are more jobs created and preserved in the world than it would have been if manufacturing were to be done in high costs countries. You would have thought this is in net good for the world.

It is also an indisputable fact that labour is exploited in poor countries.The US, to its credit, through various trade agreements and via the TPP, is trying to minimise this. In particular, US negotiators want TPP members to implement and enforce the 1998 Declaration on Fundamental Principles and Rights at Work of the ILO. This includes the freedom of association, right to collective bargaining, a ban on forced or compulsory labor, the abolition of child labor, and a ban on discrimination in employment. The US also wants countries not to exempt their special economic zones from the labour laws of the rest of their country. These are all sticking points in the negotiations, but this is what the US has been strongly negotiating for.  If there were no TPP, it would be laissez faire for labour exploitation in each country. The TPP at least attempts to get some common protection for labour in every country. And the "international activists" are opposing this.

So yes, international trade will hurt US jobs. It has been doing so for many decades. But if you see it from a global perspective, the world would be a better place with the TPP, than without it. Having said that, I have sympathy for, and would not argue against the opposition of the US trade unions.

Tuesday, 19 May 2015

In defence of TPP - the arbitration clause

One of the big issues in a trade relationship involving multiple countries is what happens if a country unilaterally decides to ban a product, or raise import duties astronomically, or take a similar form of unilateral action that dramatically affects the viability of a foreign investor's project. This might go against something that the government itself contractually agreed with the investor. What does the investor do.

The investor can take the government of that country to court, but in many countries of the world  there is no hope of winning, or it would take years in court. After all a government can simply change laws retrospectively (as India often does) and the courts can do little else but enforce them. It is precisely for this reason that the United States for many years has been insisting on independent forums for resolving Investor-State Disputes (ISDs). The US position has been that the legal system of every country outside the US cannot be trusted and therefore there must be an independent mechanism for resolving disputes. In current bilateral trade agreements with 5 of the 12 countries in TPP, the US already has ISD clauses.  In recent years the US has an ISD mechanism in every trade agreement it has signed, bar the US-Australia one. In fact the biggest opponent of the ISD clause has been Australia, rather than the US. In a blatant double facedness, Australia has ISD clauses in trade agreements with developing countries, but refuses with developed countries.

The principle is not new either in the commercial arena or in governmental ones. Every commercial contract has arbitration clauses - parties submit to the jurisdiction of arbitrators rather than courts. This is both cost effective as well as time saving and is universally used in commercial contracts. There are well established global rules governing arbitration - the "capitals" of arbitration being London, New York and Singapore. If each commercial dispute came to the courts, the judicial system in every country in the world will come to a grinding halt - it is partly for this reason that courts themselves encourage arbitration.

It is therefore rich for US politicians, and especially Elizabeth Warren to argue against the ISD clause on grounds of loss of sovereignty. Firstly it is the US itself over successive Republican and Democrat administrations that has championed this principle. Secondly it the US which is usually the gainer in such matters - for example it prevents countries from outrightly nationalising companies and industries, as say for example, Argentina is wont to do. 

Two cases are often used to illustrate how "greedy companies are milking countries" - the Veolia Egypt case and the Philip Morris Uruguay case.

Veolia , a French firm was executing a project to reduce greenhouse gases in Alexandria in Egypt. The firm executed a contract with the government whereby the government would compensate the company for cost increases because of governmental action. Egypt then raised the minimum wages in the country and Veolia then took the Alexandria authorities to arbitration for compensation for rising costs. The matter is in dispute and has not yet been decided. This is a contractual matter and the spin that Warren & Co are mouthing that this is a corporation suppressing minimum wages in a poor country is pure balderdash.

The Philip Morris case is more nuanced. Uruguay passed laws requiring that 80% of the pack contain graphic images and the risks of smoking. It raised taxes, banned advertising, and sponsorships. Philip Morris took this to arbitration on the grounds that this makes it virtually impossible to do business. The matter is yet to be decided. Uruguay is a signatory to an ISD arbitration and hence this came up before the arbitration panel rather than the courts in Uruguay. There  is no evidence that just because it has gone to arbitration  the ruling would be "unfair" or "unjust".

As a consequence of this case, in the TPP negotiations, the US has sought to prevent misuse of the arbitration clause by recognizing each country’s “inherent right” to regulate for health and safety. This will probably get incorporated into the final deal so that unilateral action by governments on grounds of health or safety  cannot be legally challenged.

As far as the US is concerned, the TPP provisions are no different from the existing situation it already has in some 50 odd agreements.  So why all this noise from Warren ? The noise is not because she has a better mechanism for dealing with an investor government dispute. It is in reality because she is against globalisation & trade. That is a different argument and battle.

Monday, 18 May 2015

In defence of TPP

The Trans-Pacific Partnership (TPP) is a trade deal that 12 countries bordering the Pacific Ocean are negotiating. The countries include the USA, Japan, Australia and Canada, but exclude China. The TPP is being vigorously opposed by a collection of groups - Democrats in the US, environmental groups, labour unions  and even Medicines Sans Frontiers. There is much fear mongering and shrill yelling, especially from US politicians, and this blogger believes a reasoned debate on the real issues would be useful. This series is also in response to this post from my good friend.

Firstly, we must clarify what TPP is. It is an attempt at a trade deal between 12 countries. The WTO was (is ?) an attempt to do a trade deal across most of the countries in the world. The TPP is far less ambitious - it attempts to cover only 12 countries, most of whom see eye to eye on many issues. And yet, this is proving to be very difficult to achieve, with much of the noise in opposition emanating from the US.

Why do we need any trade deals at all ? It is necessary simply to make imports and exports between countries possible. It can be as simple as a Double Taxation Agreement - two countries agree that the same income will not be taxed by both countries. It can be an agreement between both countries not to raise huge tariff barriers that make trade impossible. It can be to respect intellectual property rights in both countries, etc etc. It can be an agreement on a single issue (piecemeal and suboptimal) or a more comprehensive multi issue pact (preferred and in which case it becomes a full blown trade deal) .

In the past countries did bilateral trade deals with one another. This led to a complex plethora of agreements which came in the way of trade, as the world started to become more and more globalised. Therefore countries tried to form groups and do a single trade deal amongst themselves in order to create level playing fields and facilitate trade and commerce between all of them. The European Economic Community is perhaps the earliest and deepest bloc. NAFTA tried to create a far less ambitious trade deal in the Americas. Trade zealots tried to achieve a global deal amongst all countries - first called GATT and then WTO, but this is proving impossible to achieve and perhaps a pipe dream. The TPP is a far more modest attempt by 12 countries, but even this is proving so tough to do.

I hope you would agree that some sort of trade deals are necessary for the globalised world of today. If you are in the camp that says all globalisation is wrong and no trade deals should ever be done at all, then I will not debate the matter with you as our positions are on different ends of the universe. If you accept that trade deals are good in principle, then let us turn our attention to the TPP and the issues which are most objected to by the opponents of the deal.


 * The setting up of arbitration panels to decide disputes, including where a government is a party to the dispute, instead of taking the matter to national courts (This has what got my friend's goat in his post referred to earlier and is also the point on which a certain Elizabeth Warren is making the maximum noise)

 * The fear of loss of jobs in the US , which is the chief complaint of the trade unions

* The fear of increased economic activity creating more pollution and climate change, which is the chief objection of the environmentalists

* The enforcement of intellectual property rights, which is the chief objection of Medicines Sans Frontiers

There is also the added objection in the US that the negotiations are being done in secret by the US government- another issue that has aroused my friend's ire.

I will cover each of these issues in detail in subsequent posts.

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