Piss off US Government

Disclosure : This blogger is hopping mad and this post is written in a state of fury . Readers beware !

Why is it so difficult for the United States to understand a simple principle - the laws of the United States apply to the geographical boundaries of the country. It does not apply globally. It certainly does not apply to me.

The trigger for this rant is the case between the US government and Microsoft that is now up before the US Supreme Court. The case involves the US government demanding that Microsoft give up emails of foreign citizens stored in its server in Ireland. Microsoft refused. Hence the case. As the case wound up through the layers of the US justice system, two lower courts ruled for the US government. However the Appeals Court in New York ruled with Microsoft. Now its in the Supreme Court.

The US government's position is that Microsoft is a US company and therefore its laws apply worldwide - a notion that is seductive, but flawed. We've been there many times before. What is a "US Company" ? Is it because it is headquartered in the US ?  If that is the logic, then its easy to beat it. My contract when I use Microsoft services can easily be modified to be with Microsoft India, an Indian company. That will make it outside the US jurisdiction.

Wait a minute, will say the US worthies. Microsoft India is a subsidiary of Microsoft US. So ultimately it is a US company. So, is beneficial ownership the norm ? That's easy to refute too. Who are the shareholders of Microsoft US ? Bill Gates holds most of the shares but there are foreign entities as well. Take Citibank. The largest shareholder is the Emirate of Abu Dhabi. The second largest holder is Prince Alwaleed of Saudi Arabia. So , Citibank is an Arabian company subject to GCC laws ?

Complicating the matter is the obsolete US constitution. The constitution , which  Americans swear by, is written in prehistoric times. They have a system where the constitution can never be amended. And they have packed the Supreme Court with "originalists" (RIP Antonin Scalia), who interpret the words literally. Nobody ever thought of globalisation and the Internet when the US constitution was written. The protection is only under the Fourth Amendment which relates to unreasonable searches and seizures.

The country actually most pissed off by all this is Germany which has strict privacy laws. The German Government has declared that if the US chooses to read every email and access every data, it will simply stop using "American" companies altogether.

Just because you can do something does not necessarily mean that its a good thing to do. Here is a poser to Americans. Consider a situation where E Bay is acquired by Jack Ma (an entirely plausible scenario). Alibaba is a Chinese company. So if the Chinese government decides to monitor every transaction on E Bay and required Alibaba to hand over all details to it. Would Americans take to that meekly ? 

The right thing for America to do would be to execute treaties with other governments on data sharing and then operate under the framework. Sure, that's difficult. But that is the right thing to do.

The US won't do that of course. It has never done that. Principles of natural justice apply only when convenient. They poke their ugly noses into every aspect of my life - I am still signing the damned FATCA forms . I can only rant and rave. Hence the title of the post.

This post is being stored on a Google server in the US. Presumably this will be handed over to John F Smith II from Topeka, Kansas (the American equivalent of Ramamritham). I hope he can see my middle finger !

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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 !!

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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.

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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.

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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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No french fries in Japan

If you go to a McDonald's in Japan, be prepared for no french fries (freedom fries ?). Or, at best, if you smile nicely at the young girl, you might get a small fries. No wolfing down the one tonne abomination called large fries. The end of the world has arrived !! What on earth has happened ?

Well, the problem is not in Japan, but in the US. There is a big mess in the ports on the US West Coast. McDonald's ships frozen fries to Japan through these ports. Shipments are getting massively delayed. McD don't make french fries in Japan at all - all of it is sourced from the US. Hence the problem in Japan.

What is the mess on the US West Coast ports ? Well, almost everything is a mess. They account for more than half of all US maritime trade and the two ports of Los Angeles and Long Beach account for some 40% of US shipping.  There are are a number of problems across all these ports.

Firstly there is a labour dispute going on. The union and the management of these ports have been negotiating for 7 months now and have made no headway. As usual, pay, working hours, etc etc are in dispute. Now the Pacific Maritime Association, the management group, wants President Obama to intervene and appoint a mediator. As if the President has nothing else to do. Solve your problems yourselves, you lot. I thought businesses wanted governments to leave them alone, not intervene. Well, this speaks of the real demands of businesses from governments - leave us alone when the times are good and come in and pick up the pieces when times are bad.

Secondly, as is happening in almost everywhere in the US, infrastructure is not keeping pace. Container ships have doubled in size and yet US ports have made little investments to handle such behemoths. This is a general problem with US infrastructure everywhere - ports, airports, roads, whatever. Everything is slowly going down and there is little money to spend on them. The citizens of the US would rather spend on dropping bombs on others (Defence),  doling themselves out (Social Security) and cossetting the elderly, even if they are comatose (Medicare). The crumbling of infrastructure is slow and therefore incrementally not noticed. It takes an infrequent visitor to see how far the US has slipped. Today, the drive from JFK to Manhattan, is inferior to the drive from Bangalore Airport to Whitefield - and that really says something.

The third problem, of all things, is a shortage of truck chassis to haul containers in and out. I have no idea why this is so. And apparently there are more factors, unique to the region and specific to the industry.

This is a real shame. When economic growth is at a huge premium, surely you cannot afford to lose because of bad planning, poor infrastructure and intransigent unions.

Ah well; Mr Tamaguchi has to simply control his craving for fries. Perhaps the union workers in Long Beach are concerned about his cholesterol levels ! It just goes to show, how in today's interconnected world of business, a completely unrelated problem in one corner of the world might have repercussions in the other corner. And "drastic repercussions" if you are like Mr Tamaguchi looking for his fix.

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My sympathies are entirely with Argentina this time

Thomas Greisa is an ass. Thomas who , you might ask. This specimen is a Judge of the Southern District Court of  New York. Why should you bother about the "Southern District Court of New York", you might want to know. Unfortunately, the state of the world is that, we have to. For the USA is back to its old game - imposing its laws on the rest of the world.

The problem is Argentina. Remember the many times I have railed against Argentina, here , here and , on the same matter, here. This time my sympathies are entirely with them.

It all stems back to 2001 when Argentina defaulted on its international loan obligations. As is usual in such cases, an agreement was reached with most of the creditors , rescheduling the interest and repayment obligations. The operative word is "most". A few funds simply sold  their debts at a deep discount to whoever was willing to buy them. Up stepped a bunch of hedge funds, whom we shall justifiably call "vulture funds" as the Argentianians have labelled them. This lot have bought up the debt at a deep discount. They have then held out against any settlement and insisted that they be paid in full. They went to court in the US and thus entered  His Lordship  of Southern District Court fame.

Forget all the arguments about a petty judge of a "Southern District Court" imposing his will on a sovereign nation. The worthy has now ruled that the vulture funds should be paid in full, paid before the others who settled and no payment should be made to the others until the vultures have been paid. No less a body than the United States government has backed Argentina, calling Judge Griesa's ruling "impermissibly broad" and raising concerns that it could undermine U.S. foreign relations. The IMF has said that Griesa's ruling could make it easier for a handful of creditors to disrupt a country's efforts to reduce its debt burden. The  pedant is unmoved. He has ruled thus.

The consequence is that Argentina is in default again. They had a payment required to be made to the parties who settled yesterday. They duly deposited this amount which they had to do in a US bank. Unfortunately the judge has ordered that this money be frozen - because Argentina is in violation of his order and have not paid the vultures.

Argentina has basically said that they would honour the obligations of the rescheduled debt, but they are no way going to pay the holdouts in full. In this, they have a case. Restructuring of debt obligations is a common practice everywhere in the world, and more so in the US. The US bankruptcy law, on which the entire business system in the US relies in, has this as a fundamental precept. Business activity in the US, leave alone in the world, will come to a grinding halt if a few vultures are allowed to block any debt rescheduling process.

Why has the judge ruled like this ? Officially he has taken umbrage under the Ramamrithamesque parri passu clause, which is a technicality not worth elaborating. The real problem is that Argentina long refused to accept his jurisdiction over a soverign matter , and when it was forced to, basically showed him its finger. It is a dangerous strategy to show the finger at such a man. He has basically showed Argentina the finger back.

Pointed fingers apart, the original problem was of course Argentina's ridiculous management of its economy, piling of debt and reaching a point of default in the first place. In this, they are of course, not unique. Other notable members of the club - Greece, Portugal, Cyprus, Ireland keep them good company. India is also making every effort to join them. You could argue that the US is also an honorary member, given the levels of its debt. I wonder what the reaction would be if Judge Li Ping of the Second Sessions Court in Beijing ruled that the United States had to pay Chinese bondholders before Social Security cheques were despatched to US citizens. Perhaps he could cheekily rule that the bondholders must also be paid before the Medicare claim of Thomas Greisa is honoured.

The only beneficiaries out of this decade old saga are the lawyers. Imagine the fees they must be raking up.

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China , Taiwan - Not same same

If you are a Taiwanese company boss or worker , currently working in Vietnam, you deserve much sympathy and can be excused if you are bawling loudly. How unfair can the word get.

The background is this. China (Mainland China , that is) has been sabre rattling in the South China Sea and picking up a fight with every other country for the last two years now. In typical bully fashion, it is claiming almost the entire South China Sea as its own and pissing off Japan, South Korea, Taiwan, the Philippines, Vietnam and God knows who else. Every so often it does a provocative act - the latest was that it started drilling in waters claimed by Vietnam.

The reaction from Vietnam was unexpectedly massive. Vietnam is also a Communist Party driven totalitarian state and nothing happens without government sanction. In a country that allows no dissent,  it allowed protests, including street protests against China. That triggered a mob response. Chinese factories in Vietnam were attacked, Chinese workers were assaulted and an orgy of looting has happened.

Wait a minute. Now where does Taiwan fit into this. The problem is that many "Chinese" factories in Vietnam are actually Taiwanese. The average Joe (or Nguyen) on the street can't differentiate between a mainland Chinese and a Taiwanese. So Taiwanese factories have been torched. Poor guys - they are pissed off at China's action too, but are instead getting targeted.

This is a world over problem of the average Joe being geographically and culturally challenged. Sikhs being mistaken for Muslims and attacked is an occasional occurrence in the US of A. Closer home, for a number of people , every South Indian is a Madrasi. And 99.9% of Indians can't differentiate a Naga from a Manipuri or a Khasi from a Bodo - so everybody is a "chinkie" - the worst insult to our brothers and sisters from the North East is the ignorant bumpkin asking them if they are Chinese or Indian.

In this globalised world, this sort of lack of awareness is just unacceptable. In the old days, when you pretty much lived in one place and met the same set of people, it just didn't matter. Now in a globalised world blissful ignorance is a recipe for disasters of the Vietnamese kind.

The responsibility is two fold. The locals need to make a special effort to understand and appreciate the cultures of the "foreigners" living amongst them. Equally the new comer should make an extra attempt to learn and appreciate the land he has come to and not live in the metaphorical ghetto. We are privileged to live in an era where  both travel and communication is possible on an unprecedented scale. Sitting on our bums, we can appreciate and gain from the fantastic diversity in cultures in the world. Diversity is a great boon to the human race - if we were all exactly the same, the race would have been wiped out long ago.

So, here's my plea to Nguyen. Invite Hsi from Taiwan and Xi from the mainland to your home. And go to the factory and stay with them to tell them that you would protect them when there is trouble, By all means, march to the Chinese embassy and protest for all you want if you don't like China's action. But go to China's embassy. Not Taiwan's.

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JP Morgan - you did that ?

JP Morgan ought to feel at least a modicum of shame.

Look at their sweeping action last weekend - they have reportedly closed every foreign diplomat's account. In fact they have closed every current and former  government official's account and frozen their credit cards if he was not American. The reason is that they are facing increasing compliance costs because of US government requirements that non US "politically exposed persons" have to be subject to added scrutiny. The logic behind the American government action is that every foreign diplomat is, of course, laundering money - since all non American diplomats are crooks while American diplomats are saints. JP Morgan has been facing penalties on this account and they have got so fed up that they chose to simply close every diplomat's account.

If this is not rank discrimination, then I am not sure what is. US government and officials are fine. Only non US government officials are in trouble. The good José Antonio Ocampo, former finance minister of Colombia and a past nominee for the President of the World Bank was one of those affected and he has complained to the regulatory authorities of discrimination. I hope a class action suit emanates from somewhere.

Actually the problem is not JP Morgan although they must be made to pay for this action. The real problem is the US attempting to impose unilateral laws on the world. This is part of a growing trend of holier than thou practices of the US government. Every foreign diplomat is surely a crook and must be dealt with on that assumption. The rule of law is paramount in the US and all lesser mortals please bend and obey. When reciprocity is meted out, then of course, the host country laws are not "fair". Bullshit.

The justification for all this is that this happens on US soil and therefore the US can pretty much do what it wants.  Fine, then we should simply extend that principle in every country. Ramamrithams of the world unite and go after American diplomats everywhere. Subject every diplomat to the same "added scrutiny" including the principle of guilty until proven innocent and very soon we can have a wonderful balkanisation of the world.

World diplomacy acts on give and take - not on pedantic and narrow minded imposition of unilateral laws. The US presumably acts in this manner because it has the power and therefore it can do so. That's against every principle that the US, a noble country, itself stands for. It is a measure of a strong and powerful man/community/nation as to how humbly it can exercise that power. The onus is on the strong to prove that it is fairer than fair. Soft power is often achieved by not exercising any hard power at all. There are a million ways of going after money laundering, much of which the US and many other countries do today. Blanket discrimination against foreign diplomats is not one of them. The thought that a non North American, non Western European, country invariably has lesser standards than them is exactly the stuff racism is made of. Find and punish the guilty by all means, but to assume that Asians, Africans and Eastern Europeans are likely to be guilty is, well, disgusting. The United States might wish to ponder why it is, despite all its extremely great qualities,  viewed with such disdain in most of the world.

There's a fine line between being powerful and being a bully. If it does not revoke this action, a just action by the rest of the world would be unchain Ramamritham and let him loose on American diplomats everywhere.

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How about a WTO deal inside India

If you can get 159 people to agree to anything, you must be a magician. Well, Roberto Azevêdo, did just that. The Brazilian is the Director General of the World Trade Organisation and today 159 countries agreed to a treaty. For years and years, nothing but bickering has the been the result - in Geneva, in Seattle, in Cancun, in Doha.  But at last in Bali today, something has been signed. Modest it may be, that will set common customs standards and ease the flow of goods through borders around the world. But to get all 159 countries to sign up (even one could scuttle any deal), is a major achievement.

They almost didn't. The chief spoiler was India - at the end of the negotiations, virtually every country was pissed off with India. India was threatening to veto the deal on the issue of its programme to feed 75% of its population at subsidised rates (the unfortunate Right to Food Programme).  India's stand in most multilateral forums is to shout loudly, be a spoiler, pontificate, and in general be a nuisance. Such a position was usually the role of the United States, which remains very good in pontificating. But in the last decade, the developing countries have been big noise makers - none more so than India. At the end of the Bali round, Anand Sharma, India's Commerce Minister is not going to be very welcome in most parts of the world. But finally he did relent and India signed too.

A global free trade agreement is in everybody's interests, although the loony left usually rail against any form of globalisation. Most countries have come to realise the value of free trade, except for the problem that they want it to be free when it suits them and want to shamelessly protect when they encounter some lobby or the other. One of the chief culprits is the self appointed bastion of free trade , the United States. It champions free trade to other countries, but has horrible market distorting subsidies in a wide range of industries - chiefly farming. So does the EU. Both of them want free trade, but do everything in their power to stop free movement of services - the draconian visa restrictions is as trade blocking a move as any customs barrier. India wants the US and everybody else to let it freely export IT services (the one thing it is good at), but refuses to import say wheat or onions . China wants to export to the world, but will not allow foreigners anywhere near banking, insurance, etc. Everybody is protecting special lobbies and screwing the consumers in the bargain - the consumer has a right to the best and cheapest product, wherever it may originate from and yet governments do their best to block this, citing the need to protect some powerful lobby, usually of the rich.

It is not this blog's intention to make the case for free trade - it has been well made by far more illustrious men and women.  In any case, no rational argument is going to convince the loony left and the rabid right - so why even try ? This post instead is going to plead for a "National Trade Organisation" inside India itself. If you thought there is free trade inside India, you are grossly mistaken. Each state draws it boundaries, and the sight of the long queue of trucks on the state border is enough to tell you that every possible block is made on the free movement of goods. The honourable lady in charge of one of our Eastern states went even to the extent of banning the movement of potatoes from her state to the North East recently, ostensibly to reduce potato prices in her state. She was literally playing with a nuclear bomb - first of all her act was grossly unconstitutional and secondly if every state decided to copy her, what will become of India.

For years, India has been trying to implement the Goods and Services Tax - a common indirect tax regime across the country.  Nobody can get the States to agree (although I am sure none of the honourable finance ministers of any state can cogently argue why he is opposing this ). BJP Chief Ministers are the chief blockers although the idea itself came about when Vajpayee was the Prime Minister and the move was a BJP brain child. Freeing up the state borders will do wonders to India's economy. The only person it will hurt is Ramamritham - and he along with his political masters are doing their best to block this.

Mr Anand Sharma is not going to be very welcome outside India. Maybe he may want to sit in Delhi and try and get a national treaty signed by all states. After all, there are only 35 states and union territories. And if 159 countries can agree to a treaty, surely 35 states  can. Oh I forgot. In the WTO, there is only 1 India - Inside,  there are 35 India types, each worse than the other. Fat chance of a deal.

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Inquilab Zindabad ? No ! _____ (fill in the blanks) Murdabad .

What is common between a park demolition and a raise in bus fares. Well, something profound , I believe. Because in the last one month, I dare suggest that these were the two most important events in the world (NSA be damned ; as if that was a surprise)

The park issue was the first and it happened in Istanbul, Turkey.  The government had planned to demolish the Taksim Gezi Park and use the space to reconstruct the historic Taksim military barracks. About 50 environmentalists occupied the Park in protest. The police , predictably evicted them. That snowballed into massive nationwide protests and a huge Occupy Taksim Square movement started.  The issue of demolition of the Park has now given way to a protest against all sorts of unrelated issues and drawing crowds numbering in the tens of thousands. It is now an anti government protest without a coherent theme or leaders. A big section of the population is just protesting without a clear understanding of what they are protesting against and what the solution is. This mind you, in a country where the President Erdogan has won repeated elections with a strong mandate.

In Brazil, the government decided to raise some bus , train and metro fares. A few protested, notably the  Movimento Passe Livre (Free Fare Movement). The police broke up the protests. Again this has snowballed into a nationwide protest movement, involving millions of people. The government quickly withdrew the bus fare hike, but the protests have snowballed into something bigger - a whole range of issues, including protests against the Football World Cup and the Olympics all scheduled to be held in Brazil in the near future.  If Brazilians are protesting against football, something serious is happening. Again this is in a country where Dilma Rousseff won a resounding mandate in the elections and is the chosen successor of the extremely popular Lula.

As of today, both these protests are going on. You can see parallels with the Occupy Wall Street movement in the US and a few other places. In all these protests, there is no coherent theme, there is no leadership organising the protests. But these protests have been massive, cover a whole range of grievances and are significantly aided by social media.  They largely cover the middle class, not the poor. They tend to die down because they are not coherent and not "organised". But they are symptoms of a deep underlying problem.

This is a profound sociological change and one that should be researched deeply.  I believe the underlying issue is economic. Despite a big economic improvement globally across the last two decades, there is deep resentment. Large swathes of the population do not believe that there is a bright economic future ahead of them. This, despite the fact that the future is significantly brighter than what our parents, grandparents and forefathers ever had. And that is the problem governments and societies cannot ignore. There is no easy solution, and aspects of the solution will be different for different societies. But the root of the solution is economic. We have to have economic growth.

PS - In the title of the post - Inquilab Zindabad means Long live the revolution, in Urdu, a favourite phrase of protests of the past in the Indian subcontinent. Murdabad means "Down with".

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Alibaba and the Fourteen Years

Which is the biggest ecommerce company in the world ? Take a guess. Amazon ? E Bay ? You would be wrong if you guessed either of them. The biggest e commerce company in the world is Alibaba. Its portals handled a sales volume of some $ 170 bn. That is more than the volumes handled by Amazon and E Bay combined.

No, this is not some elaborate hoax dreamed up from 1001 Nights. Alibaba is indeed the largest e commerce company in the world. The reason you may have never heard about it is that it operates almost exclusively in China. It started life as simply Alibaba.com , a business to business portal. It then added Taobao - a consumer to consumer portal, whose similarity to E Bay is, of course, entirely coincidental. Now it has started Tmall, a business to consumer portal, which again, bears a completely coincidental similarity to Amazon. All this in just fourteen years. The last two, if you click on the link, you will see are entirely in Chinese. And therein lies the issue. Can Alibaba really be a global major, while being largely only in China.

One of the trends you may have not noticed is that China has overtaken the US as the largest ecommerce market in the world. Chinese love to shop. And they are merrily shopping online. There is terrific internet penetration in China. And Alibaba, thanks to its visionary founder, Jack Ma, is reaping the rewards.

But then, can it be really the dominant player in the world ? I can't see shoppers of virtually any other country migrating to Taobao or TMall, even if it is in English.  "Open Sesame" worked for the fictional Alibaba, but its hard to see the doors opening that easily for the real Alibaba. There is a huge brand image problem to be overcome, not just of Alibaba, but even of China. As Huawei and a clutch of Chinese companies have discovered, it is not easy going global.

Even in the home market, Alibaba's position will surely be under threat from competition. However big the Chinese market may grow into, its hard to see any company being the world's dominant major, being exclusively in China. As Britain discovered a century ago and the US is discovering now, the sun does set on everybody who thinks he alone can dominate the world.

What of the supposedly more tech savvy India. India does not even have a pipsqueak of an ecommerce company. Why ? The blame for that is squarely on Ramamritham. He has made internet connectivity one of the most difficult things in India to obtain. He has virtually made impossible an Internet Cafe industry. He does not allow easy payment systems to emerge. He goes after those who try, like Flipkart,  and brings his full attention on them by lodging all sorts of cases. And he does not allow the global majors to come in.

And therein also lies the risk for Alibaba. Thus far, the Chinese equivalent of Ramamritham , Li Xiao has left them alone. But then Li Xiao is not a bureaucrat. Li Xiao is from the Party. Ramamritham is completely predictable - he will create every obstacle possible, but do nothing else. Li Xiao is entirely unpredictable. If Alibaba attracts political attention, then its fate is sealed.That's probably why the wily Jack Ma is stepping down as CEO. And he is planning an IPO. An IPO that might even best the Facebook IPO.

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Companies need a geography lesson

Ahhh ! If only the world was as simple as 50 years ago. Global companies found it quite simple then to divide the world ; there were only three regions in the world - America, Europe and Rest of the World. If you were an American company, 70 % of your revenues came from America, 27% came from Europe (Oh god; we have to improve there) and 3% came from Rest of the World (where's that ?). If you were an European company, 70% came from Europe, 27% from America (the bloody Yanks) and 3% from Rest of the World (where's that ?) Quite simple.

 

Alas life has got a bit more complicated for global companies. How to cut the world ? A popular division is to split as America, Europe and Asia Pacific. That threw up a problem - what about Africa (where's that ?). So came EMEA - Europe Middle East and Africa. Right - President Americas, President EMEA and President APAC.

 

That threw up more problems - does it make sense to group France and Mali in the same group ? And Venezuela and US didn't seem the same either.  So companies moved to split as per the continents - North America, Latin America, Europe, Africa and Asia.

 

That threw up more problems. In Europe, Western Europe was dead and declining. Central & Eastern Europe was growing at 35% per annum. Lumping them together under the same management seemed daft - they required completely different strategies. And what to do about Japan & China. Japan was more like Europe. China was an altogether different story. And was Dubai Asia or Africa ??

 

So companies started inventing "clusters" - the world was North America, South America, Western Europe, CEE, Africa & Middle East, South Asia, North Asia and South East Asia & Australia. Each had a President.

 

But that's got its own problems. Australia was more like the UK than Asia. Japan and China got still grouped together. So what to do ??

 

So, how to carve up the world ? In the good old days, geriatric Brits (since Britain owned most of the world), in smoky pubs, took out a world map and drew some random straight lines - how straight the line depended on how many beers they had had.  That's how country borders were created - if you see a map of Africa for example, that's why many so many national boundaries are straight lines. Never mind that it divided tribes, or ran halfway through a lake , and so on.

 

Now the same thing has been going on in companies. Substitute geriatric Brits for political company bosses, and smoky pubs for company boardrooms, and exactly the same things happen. There isn't a single company where this is being rearranged every three years.  Empires are made and they fall, just like in the political world.

 

I suggest that company bosses enroll for Geography 101 with Sriram,  before they start to draw their lines ! They might become a little more educated on the world.

 

Meanwhile readers are invited to present their own pet carve up of the world !

 

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Grow, baby, grow - all the guar you can

I don't know what to make of this story. An economics soap opera ? How the most unexpected things can happen  ? How sometimes prosperity can hit you from the strangest of directions ? Read on - judge for yourself.

The story starts in a very boring manner. Everybody knows Americans guzzle gas. With the Sheikhs turning the screws, Americans are feeling the pinch. Ouch - the price of oil is hurting. Drill baby drill, is fine, but oil is, alas, not to be found. Need new forms of cheap energy so that Americans can continue to guzzle away. Suddenly they discovered a new "source" - Shale gas.  Apparently natural gas is  found in rocks called shales. And apparently shale gas is rather plentiful in the US. Wonder of wonders, use of shale gas even releases lower greenhouse gases than evil Oil.. Voila, the new gold rush is on. 

All very good. What's new. This sort of thing happens all the time. The real interesting bit is that, in order to extract this gas, you have to do "hydraulic fracturing" or "fracking". Without getting too technical, an essential ingredient in this process is an obscure agricultural product called guar gum. You simply can't extract the gas without guar gum ! Guar gum is derived from the , rather ordinary, guar bean.

Cut to Basni, on the outskirts of Jodhpur in Rajasthan state in India. This is a drought prone area, near the desert. The sight of fat , sweaty Americans is not new in this area as they come to tour the Thar desert and see the palaces and forts of Rajasthan. But suddenly the villagers started to see far more Americans than usual. This lot was different. They did not want to see forts or palaces. They wanted to buy all the guar you had !

You see, Rajasthan is the guar producing capital of the world. The farmers here are mostly poor - this is after all desert area. They have been cultivating guar for centuries to feed their cattle. For some strange reason guar doesn't grow well anywhere else in the world. 90% of guar is grown in India - the balance 10% in neighbouring Pakistan. Some 70-80% of guar in India is grown in Rajasthan.

It was, as if, money was raining from the sky. Guar used to sell at Rs 10 a kilo. At Rs 40, the farmer made a nice profit.  In December last year it touched Rs 70. And in March, this year,  it touched an impossible Rs 300 !!

Farmers who were in debt , or dirt poor, are suddenly seeing untold riches.  They've built a house. They've bought colour TVs. Two wheelers are plentiful - even the odd car is seen. Thousands of farmers have suddenly been lifted out of poverty into, what for them, is a quality of life they could not have even dreamt about. Guar gum is suddenly, back gold. The largest Indian agricultural export last year by far, more than basmati, more than cotton, was guar gum !

Of course, it has all the makings of a stampede. Everybody, man, woman and dog, is trying to grow guar.  Factories have sprouted adding crazy capacity to extract gum from the guar beans. Traders, middlemen and the usual scoundrels have descended to trade on the guar market - there was so much of the Wild Wild West going on that the government has banned the futures market in guar.  There has also been much stockpiling by the energy firms that the next season demand for guar might plummet. Lots of punters will burn their hands.

But for the next few years at least, the trend is inexorable. Shale Gas will be an important source of energy in the future. The largest reserves are in China, another energy guzzling economy. Nobody has yet found a way to extract this gas without guar gum. Nobody has also found a way to grow this economically outside of Rajasthan. So there is much prosperity waiting in store for the agriculturists of Rajasthan. Its a great story - those hardy souls deserve every bit of it. However you could be forgiven for some rather puzzled faces as to how come money is raining from the sky when even water doesn't. And the even more puzzled stare of their cow which is wondering, whatever happened to the guar bean it used to chew contentedly, not so long ago.

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Team USA Made in America Act

If ever there was a nonsensical piece of legislation addressing a farcically trivial issue it is the introduction of the "Team USA Made in America Act". If ever there was proof that US senators and congressmen do nothing useful, here it is.

A hullabaloo started when it was discovered that the US Olympic Team's uniforms for the London Olympics were actually made in China. Senators clambered over each other in expressing righteous indignation at this outrage. They are now passing a law that seeks to mandate that future olympic team uniforms have to be made in the US of A.

This triggered some admittedly nostalgic memories of my first ever post when I took up blogging three plus years ago. My very first post addressed precisely this issue; so much so that I couldn't resist dredging it up. 

Has much changed in three years ?

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Dead Right Carol - but you could have put it better

Carol Bartz, the CEO of Yahoo, said a few days ago, that it was “not our job to fix the Chinese government". She was responding to a question from somebody from Amnesty International who asked a question at the company’s AGM about filtering of internet information in China.

She’s dead right. It is not the job of companies to advance political or social causes. That’s the job of governments, the United Nations, religious institutions like the Church, etc. Not companies.

She could have put it better though. Her choice of words was not exactly great.

Companies come under increasing pressure from all sorts of organizations who want to promote their agenda and find companies as soft targets. They use pressure tactics and publicity to force companies to further their agenda. These range from very worthy causes to cranky, and to , frankly, batty causes. But the worthiness of the cause must not cloud the issue. It is the not the business of companies to further political, social or religious causes at all.

Companies must follow the law of the land. Period. Fully, in letter and spirit. Since laws are mostly national, they must follow the law of the country they operate in. 150%. If they do not, then by all means quarter, censure, kill them.

But what is to be done if the laws of any particular country are “not right” in the eyes of another country or some non governmental organization. That is the business of governments to sort out. They need to take it up , either bilaterally, or in multilateral institutions, like the United Nations. If they dislike the laws of a country so badly, they can prohibit their companies from operating there at all – like the United States has with Cuba and Iran, or many countries in the world had with South Africa in the apartheid era. Once they allow companies to do business with a country, then companies should obey the laws of that country fully – its not their business to question these laws.

The US Congress, periodically summons executives from Microsoft, Google, Cisco and Yahoo and lectures them on the "morality" of their business in China. Wants them to admit to shame. The shame is actually on the US Congress for hitting at soft targets. If you are so concerned, why don't you preach this to Hu Jintao.

In the case of internet censorship, I, living in China, find it abominable. But I don’t blame Yahoo, or Google or Microsoft for it. I don’t want them to solve the problem.

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Is globalisation a dirty word ?

Whenever there is any event of importance anywhere in the world, you are sure to find some form of "anti globalisation protest". "Globalisation" seems to a be a dirty word. Also dirty are 'multinational", "capitalism", etc etc.

If you ignore the loonies and listen to the arguments of the sane protesters, their logic for anti globalisation usually converges on the following

• It exploits poor people in developing countries and sometimes deprives them of their traditional livelihood (farming)
• It is harmful to the environment and contributes to adverse climate change
• It deprives people in richer countries of their jobs
• It does not promote human rights and democracy in the countries they operate

Underlying this is the assumption that multi national companies , in their single minded pursuit of profit, will not care about any of these.

Consider this for a moment. The protesters argue against multinational companies. Is it then OK for home grown companies to do exactly the same thing ? Is there any evidence that multinational companies are worse in their behaviour than domestic companies - surely the opposite is true.

The problem is that companies can freely move across borders ; ordinary people cannot. Economic globalisation has happened far ahead of social and political globalisation. Hence the inevitable conflict.

As I mused before on the bad connotation that companies in general ignite, companies have to think global, but act local. They must not make a big virtue of their globalisation. They should keep that very low key. They must be seen to be local.

Only when the social and political fabric of society becomes global (if ever), should companies come out their closet and declare themselves global.

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Global businesses, National Laws - the woe of taxation

Business are global, but the laws they have to follow are national. Nowhere is this conflict more severe than in the arena of taxation.

Every nation has the right to tax as it pleases. And businesses have to abide by the tax laws in every country it operates in. But when businesses go global, it causes a real problem. Its common these days for a company to buy materials from 10 countries, manufacture in 5 others, transport via 3 others, sell in 20, account for them in 3, have employees in 15, be headquartered in 4, - all completely different countries. The profit it makes is of course a composite one. Where does it get taxed ?

The answer is, in all of them ! Welcome to the world of a monster called transfer pricing. The only people who salivate on the very mention of this term are the accountants and the tax lawyers. Only one thing is for sure in transfer pricing - you will pay more tax collectively across all these countries than if you paid all your taxes in the country having the highest rate of tax. And you will be dragged to court irrespective of what you do.

Businessmen being businessmen, will try and find the lowest tax option out. Enter the world of tax havens. Countries you may have never heard of. And countries who use tax as a competitive advantage. Like Ireland in the past. Now Switzerland where many European supply chain operations are being headquartered. Singapore in Asia.

Is this all not simplifiable ? Actually the world has made huge progress in the area of indirect taxation, especially customs duty through the WTO. Likewise, it must surely be possible in income tax as well.

How's this for an idea ?

• Tax bands are globally agreed. Income tax on companies cannot be lower than x and cannot be greater than y by multilateral agreement
• Double Tax agreements are multilateral (through the WTO) and not bilateral between countries.

This will remove much of the pain global businesses face from the inevitable conflict of national tax laws.

Nobody can do justice to this area without writing a 1500 page PhD thesis. I have absolutely no intention of doing so ! All I am catalysing is a thought.

Tomorrow I'll post on another aspect of globalisation - why it seems to be dirty word in the minds of many.

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Global businesses; National laws

Businesses are going global. But the laws they have to follow are national. No two countries can agree on any law. The result is a massive blocker to globalisation. Today, I focus on one aspect of the law that affects businesses - anti trust.

My immediate trigger for this post was the hold up by the Chinese competition authorities of Mitsubishi Rayon's takeover of Lucite. This is an interesting case. Neither of these two companies is Chinese. Mitsubishi Rayon is Japanese, Lucite is based in the UK. But both these companies have operations worldwide. So to get approvals for the takeover, they have to go to the competition authorities in each country they operate. They got approval from every authority, bar one. China . Now the deal is in trouble.

In the good old days, there were only two competition authorities that you needed to worry about, in any global deal. The US and the EU. Anywhere else, it didn't matter. The authorities in other countries rarely blocked global deals and even if they did, the operations in those countries were likely to be minor and could be dealt with. But China's competition authority, Mofcom, is now important as well. Last month it blocked Coca Cola's acquisition of Huiyuan, a Chinese juices company . A year ago they interfered in InBev's acquisition of Anheuser-Busch.

Its China flexing its muscles today. No doubt it would be India, Brazil and Russia tomorrow. And the others, the day after. Increasing no global business would exist without major operations in these countries. So no deal can go through without every single authority approving it. Fat chance of that happening.

Global M&A will undergo fundamental changes. Investment Banks, Strategists, Financiers and the like will have a lesser role than Lawyers.

This is a problem business will face increasingly in the future. Business is going global, much faster than the socio political environment it operates in. That is not sustainable, for it will inevitably provoke a conflict. Tomorrow, I will post on the worst example of the impact national laws have on global business - tax.

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