Tag Archives: regulation

Chinese Rejection of US Grain

Corn Harvest As Crop Falls to Three-Year LowChina rejected 545,000 tons of corn imported from the United States after discovering the corn included a genetically modified variety not approved in China. The variety, MIR 162, is a Bt variety developed by Syngenta for greater insect resistance. MIR 162 received regulatory approval in the United States in 2008, and has since received approval in ten other countries. China is the world’s fifth largest producer of genetically modified crops, with approximately 4 million hectares under GM cultivation (the United States, the world’s largest producer by far, has approximately 70 million hectares under GM cultivation).

But Chinese production of GM crops has largely been confined to cotton. While the government has granted safety certificates for varieties of genetically modified corn and rice, it ordered further testing before it would issue licenses for commercial production.

The Chinese response to food biotechnology reflects an interesting internal dynamic.More than 80 percent of Chinese citizens surveyed expressed opposition to genetically modified food, and the anti-GM lobby has unified Maoists, nationalists, and environmentalists. This unity presents a challenge to the Chinese government. While the Chinese government has been willing to move against environmentalist groups in the past, it has been much more hesitant to disrupt Maoist groups. But those groups have come out strongly against genetically modified products, evoking the specter of the Opium Wars and arguing that GM crops are an American effort to weaken China. According to one film produced by the groups, “America is mobilizing its strategic resources to promote GM food vigorously. This is a means of controlling the world by controlling the world’s food production.”

It’s an interesting problem for the Chinese government, which clearly views genetic modification as a mechanism to expand production on scarce land in the country. The Ministry of Agriculture has commenced an education campaign intended to convince Chinese consumers of the safety and necessity of genetically modified agriculture. But more broadly, China’s rejection of US grain this week might be seen as an effort to reassert the government’s position among Maoist opposition groups—a fascinating example of the local politics of global food.

[This story was originally blogged at Global Food Politics and is reprinted here by permission].

Rising Global Food Prices

Algerians protest cuts in government subsidies amid food price increases.

Algerians protest cuts in government subsidies amid food price increases.

There’s been a great deal of discussion about the impact of the recent spike in global food prices. From Oxfam to the UN Food and Agriculture Organization to the World Economic Forum, there’s been considerable concern expressed that global food prices are threatening political and economic stability around the world. David Bosco, blogging at Foreign Policy, suggested that the recent surge in political protests across the Arab world, from Algeria to Egypt, may be in part connected to increases in global food prices. Recent Gallup polling  found that respondents across 18 Sub-Saharan African countries ranked food security and hunger as the primary concern.

The spike in food prices is a concern for governments around the world. But few clearly understand the causes, and there remains considerable debate about both what is driving the price increases and what should be done about them. In a recent column for the Financial Times, Javier Blas argued that,

The current spike in food prices has followed the chain of events of the crisis of 2007-08 in almost every aspect, a worrisome prospect. First the crop failures; second the export restrictions; and third the initial food riots followed by governments taking emergency measures to control rising food costs, including price caps and cuts to import tariffs. And now the fourth element of the 2007-08 food crisis is emerging: panic buying.

And now, Paul Krugman has chimed in on the debate. According to Krugman, the recent spike is due primarily to production shortfalls linked to erratic weather patterns, which in turn are likely connected to global climate change. While I generally find Krugman’s analyses compelling, I think here he’s too quick to dismiss the impact of speculative investment in food commodities. Speculation clearly has an important role to play in smoothing out market fluctuations. But, as Timothy Wise argues on the Triple Crisis blog,

Some $9 trillion in trades take place in commodity derivatives, with 80-90% in over the counter (OTC) trading, outside of public scrutiny. Five banks control 96% of derivatives activity, giving a few players decisive market power. The ratio of non-commercial speculators to commercial hedgers (those with a commercial interest in the traded commodity) is by some estimates 4:1, roughly a reverse of the shares ten years ago when speculators accounted for 20% of the activity. Then, such speculators indeed provided liquidity to the markets without overwhelming them. That is no longer the case.

The problem, in other words, is not the existence of speculators, but the dramatic increase in the scope of speculative investment. And given the size of the trade, there’s little governments may be able to do to curb these activities

China and the US: A Case of Mutual Dependency?

There’s been a lot of interesting discussion about President Barack Obama’s Asian tour this week. And I don’t mean the controversy over whether or not the U.S. President should bow to the Japanese Emperor (though if you’ve been watching the domestic news media, you’d be hard pressed to realize there were any other issues at stake).

Far more important has been Obama’s visit to China. While the U.S. government has shied away from the more controversial topics (perhaps forced to do so by the more than $1 trillion in U.S. treasury bills currently held by the Chinese government, notes Stephen Walt). It also failed to win any concessions on the major issues it has hoping to address (again, not a surprise).

The most interesting story, though, was noted by John Cassidy at Rational Irrationality. Cassidy wrote,

Speaking at a conference in Beijing just hours before Air Force One arrived, a top Chinese financial official attacked the Federal Reserve, and, by extension, the rest of the American government for stoking another speculative bubble, which could have disastrous consequences for the global economy…Liu Mingkang, China’s top banking regulator, said the Fed’s policy of keeping interest rates artificially low “is boosting speculative investments in stock and property markets and will pose new, real and insurmountable risks to the global recovery and particularly to the recovery in emerging markets.” In particular, Liu said, the Fed’s cheap-money policy was encouraging investors to borrow heavily in dollars and then use the money to buy higher-yielding investments in other countries, such as stocks, bonds, and real estate. This “huge carry trade” was having a “massive impact on global asset prices,” Liu insisted.

Cast in this light, the United States and China appear to be in a situation of mutual dependence. The United States depends on China to purchase Treasury bills, essentially financing the day-to-day operations of the U.S. government. But China already holds more than $1.6 trillion in dollar-denominated assets, primarily U.S. treasury bills. Any decline in the value of the U.S. dollar undermines China’s position as well.

The debate over the value of the renminbi is one part of a much bigger debate over the broader regulation of the global economy, as Arvind Subramanian observes at Baseline Scenario. Efforts to resolve the financial crisis in the United States (by maintaining loose monetary policy(glossary)) drive capital into emerging markets, including China, where returns on investment are greater.

We certainly appear to be living in interesting times…

Explaining Global Capital Flows

The World Economic Forum  [glossary] released its annual Global Competitiveness Report earlier this week. This year’s report is the first to take account of the impact of the global economic crisis. The report is intended to outline and measure those factors which facilitate economic growth and make national economies more competitive. The index is thus developed from twelve “pillars”: the strength and stability of political institutions, the extensiveness and effectiveness of infrastructure, macroeconomic stability, access to health and education, the efficiency of goods markets, the efficiency of labor markets, the sophistication of financial markets, technological readiness, the overall size of the domestic market, business sophistication, and innovation. A number of variables are then used to weight and rank each of the twelve pillars (readers who are interested in this aspect of the rankings can read more about the process in the appendix to the full report.

This year’s rankings saw some minor shifting in positions but few dramatic changes. Some countries (e.g., New Zealand and Taiwan) improved their rankings, and a number predictably declined. Iceland, for example, saw its overall ranking fall from 20th place to 26th place, largely as a result of the fallout from the banking crisis that undermined financial institutions in the country last year. The top ten performers were:

1. Switzerland (up from 2nd in 2008)
2. The United States (down from 1st)
3. Singapore (up from 5th)
4. Sweden (position unchanged)
5. Denmark (down from 3rd)
6. Finland (position unchanged)
7. Germany (position unchanged)
8. Japan (up from 9th)
9. Canada (up from 10th)
10. The Netherlands (down from 8th)

The bottom ten performers, which also saw few dramatic changes, were:

124. Paraguay (position unchanged from 2008)
125. Nepal (up from 126th)
126. East Timor (up from 129th)
127. Mauritania (up from 131st)
128. Burkina Faso (down from 127th)
129. Mozambique (up from 130th)
130. Mali (down from 117th)
131. Chad (up from 124th)
132. Zimbabwe (up from 133rd)
133. Burundi (down from 132nd)

The differences between the top and bottom performers are probably obvious. But the composition of the top ten performers also tells us something interesting about the nature of global economics. Although the vast majority of foreign direct investment [glossary] occurs between developed countries, the conventional wisdom, particularly among critics of multinational corporations, is that foreign direct investment tends to flow to the countries with the lowest tax rates, lowest wages, weakest environmental regulations, softest labor standards, and so on. But the countries that top the list of “most competitive” according to the World Economic Forum—hardly as bastion of anti-capitalist rhetoric—suggests something very different. Indeed, many of the countries in the top ten (e.g., Sweden, Denmark, Finland, Germany) have incredibly strict labor and environmental standards and among the highest corporate and individual tax rates in the world. Clearly, some other factors are compensating for the higher cost of doing business in these countries.

Five Stories You Might Have Missed

It’s been a weekend of high-profile political resignations in the United States and China. On Sunday Morning, President Barack Obama’s top environmental policy adviser, Van Jones, reigned after it became public he had signed a petition alleging U.S. government involvement in the September 11th attacks. Jones had also been a key player in the Color of Change group, which has spent considerable money trying to influence the tenor of the health care debate in the United States. His resignation comes at a poor time for the administration, which is simultaneously trying to salvage passage of health insurance reform legislation in the U.S. Congress, address the ongoing economic downturn, and beginning to consider efforts to address climate change and green jobs, Jones’ area of expertise.

On Saturday, the Chinese government fired the top party official in Urumqi, where ethnic unrest has been raging between ethnic Uighurs and the majority Han. Li Zhi, the Chinese Community Party Secretary for the city of Urumqi, was replaced by Zhu Jailun, who had previously served as the head of the regional law-and-order committee. Li’s firing has also raised speculation that regional party boss, Wang Lequan, may also be forced from office. In firing Li, the Chinese government is hoping to quell unrest and prevent another outbreak of violence like that of July, when almost 200 people were killed in ethnic violence.

And on Friday, the head of Google’s China operations, Lee Kai-Fu, resigned. Lee was responsible for the launch of Google.cn, Google’s Chinese-language search engine. But Google’s operations in China have been marred by tensions with the Chinese government and debates over the degree to which the company should allow the Chinese government to censor search results. Lee’s resignation came amid a new round of tensions, with some inside Google arguing that the company should reconsider its efforts to break into the Chinese market.

In other news from the last week:

1. The G20 concluded two days of meetings in London on Saturday with a preliminary outline for tougher regulations on financial institutions. While the final statement stopped short of imposing limits on financial bonuses, it would increase the size of capital reserves and require the development of “living wills” for banks, and require that banks retain a portion of loans they sell as asset-backed securities. But the G20 avoided dealing with some of the most controversial elements of banking reform, choosing instead to forward those issues to the Financial Stability Board, an institution comprised of central bank governors and treasury secretaries from around the world. 

2. The situation in Afghanistan continues to be marred by uncertainty. On Friday, a NATO airstrike against two fuel tankers hijacked by the Taliban killed an estimated 90 people, nearly all of whom were civilians, according to local village elders. The airstrike provoked an angry response among Afghans, and represented yet another setback for the U.S. mission in Afghanistan. On Sunday it became apparent that the NATO airstrike was ordered by German commanders on the ground, a fact which will likely play an important role in upcoming German elections. The European Union issued a statement criticizing the airstrike on Saturday, one day before EU foreign ministers were scheduled to meet to consider efforts to improve stabilization efforts in Afghanistan.

Meanwhile, results from the Afghan election continue to trickle in. By Sunday, the Independent Electoral Commission had tabulated returns from just almost ¾ of country’s polling stations. So far, incumbent President Hamid Karzai leads his closest challenger, Abdullah Abdullah 48.6% to 31.7%. Under Afghan law, the winner must receive an absolute majority of votes cast, so if Karzai is unable to secure at least 50% of the vote, a runoff election would be held in October. But accusations of voting rigging continue to be raised, particularly by Abdullah, who contends that the vote was characterized by widespread fraud. The IEC announced that it had excluded an unknown number of votes from 447 polling stations in which suspicious returns had been found. But the scope of electoral fraud remains unknown.

3. The World Trade Organization issued its preliminary ruling in the U.S. dispute against EU assistance to aircraft manufacturer Airbus. Although the report is still confidential and the final report will not be issued for several months, the WTO panel found that some of the estimated €3 billion offered by the EU to Airbus was an unfair subsidy. Nevertheless, both sides are claiming victory. The WTO panel dismissed 70% of the U.S. claims against the EU and several of its member states, including France, Germany, Spain, and the United Kingdom, which the U.S. had claimed offered as much as $15 billion in illegal loans since the 1970s. Although the United States is celebrating the decision, the European Union is withholding its formal reaction until its case against U.S. subsidies to Boeing is resolved. In a case filed at the WTO several years ago, the European Union accused the United States of offering more than $27 billion in illegal assistance in the form of tax breaks, research contracts, and defense spending. A ruling on that case is expected within the next few months. 

4. Israeli Prime Minister Benjamin Netanyahu is moving forward with a plan to expand settlement activity in the West Bank, offering approval for the construction of hundreds of new homes. The United States government was quick to condemn the move, asserting, according to White House spokesperson Robert Gibbs, “The U.S. does not accept the legitimacy of continued settlement expansion and we urge that it stop.” Netanyahu is under pressure from rightwing member of his coalition to remove restrictions on new settlements in the West Bank. But the status of settlements in the West Bank remains a key stumbling block in negotiations between Israel and Palestine, and Israel’s decision to increase settlement activity will likely undermine hopes for progress in rekindling stalled peace talks when President Obama’s Middle East Envoy, George Mitchell, visits Israel next week.

5. Last week’s presidential elections in the West African state of Gabon sparked violence after the ruling party candidate, Ali Ben Bongo, claimed victory. Bongo’s father, Omar Bongo, had been Africa’s longest serving ruler, presiding over Gabon since 1967. Under his rule, Gabon’s oil and wood resources were used to expand his personal wealth.  At the time of his death, he was under investigation by the French government, which had identified 39 properties, 9 cars, and more than 70 bank accounts owned by the dictator in France alone. Sunday’s announcement that Ali Ben Bongo had won a plurality of the vote to win the presidency sparked unrest by the supporters of his two rivals, former interior minister Andre Mba Obame and opposition figure Pierre Mamboundou, each of whom received approximately 25 percent of the vote. Supporters of Obame and Mamboundou targeted the French embassy and facilities owned by foreign oil companies. But according to the French government, the election “took place in acceptable conditions.”

Five Stories You Might Have Missed

It was a busy week for the U.S. Federal Reserve. Addressing a meeting of bankers on Friday, the Chair of the U.S. Federal Reserve, Ben Bernanke, called on legislators to address the need for regulatory reform of global financial markets. On Wednesday, the Federal Reserve undertook announced new plans intended to improve the position of the U.S. credit markets. With the federal funds rate remaining near zero percent, the Federal Reserve has been forced to turn to a program of qualitative easing, under which it purchases mortgage-related securities, removing them from the market and expanding the amount of cash in circulation. It is coordinating policy with the central banks of England, Japan, and Switzerland. But the dramatic move carries a number of risks, including the introduction of high rates of inflation and a decline in the value of the dollar

In news from outside the United States last week:

1.  A two-day meeting of the European Union last week produced a number of important outcomes, including a commitment to increase the E.U.’s contribution to the International Monetary Fund by €75bn. The European Union also staked out its position on reforming global financial market regulation, the focus of an upcoming G20 meeting in April. Current speculation is that the meeting of the G20 will likely pit Germany and France, which favor stricter regulation, against the United States and China, with the United Kingdom falling somewhere in the middle. However, all sides are currently playing up the likelihood of compromise.

2. On Saturday, the Abhisit Vejjajiva’s government in Thailand survived a no confidence motion in the national legislature. Vejjajiva has been in office for only three months, but has been under fire nearly the entire time, as Thailand has been plagued by political and economic instability compounded by declining exports, part of the impact of the global economic crisis. 

3. On Thursday, the government of China announced it would step up naval operations in the South China Sea, specifically targeting the disputed Spratly Islands. The Spratly Islands are claimed (in whole or in part) by at least six countries, including Brunei, China, Malaysia, the Philippines, Taiwan, and Vietnam. The announcement comes after a standoff between U.S. and Chinese naval vessels earlier this month, when the U.S. accused China of harassing a U.S. naval vessel operating in the South China Sea. China maintains the vessel was operating illegally in Chinese waters.

4. Israeli President Shimon Peres last week granted Likud party leader Benjamin Netanyahu two more weeks to form a coalition government. Netanyahu’s right-wing Likud party was named by Peres as formateur party after extremely close restuls in national elections earlier this month.  Netanyahu has the option of forming a coalition with a group of far-right and religious parties, but has been seeking to form a more centrist coalition with either Ehud Barak’s Labour party or Tzipi Livni’s Kadima party. A more centrist coalition, Netanyahu believes, would be better positioned to avoid potential clashes with the United States. But both Labour and Kadima remain hesitant to join a coalition government with Likud.

5. Andry Rajoelina was sworn in as the new president of Madagascar on Saturday. Brought to power under the auspices of a military rebellion, Rajoelina committed the new government to routing out the corruption of the previous regime and to re-establishing democracy within two years. But may observers remain skeptical. On Friday, the African Union suspended Madagascar from the organization, many donors have announced they will freeze aid, and the United States

And a bonus story this week:

6. A standoff between farmers and the government in Argentina last week threatens global food markets. Farmers are angry about the imposition of a 35 percent duty on soya exports and bans on export of some other food commodities. A similar standoff last year resulted in nationwide strikes and export bans. The standoff in Argentina has the potential to influence global food prices, as Argentina is one of the word’s largest food exporters—second only to the United States. China is the largest consumer of Argentinean soya exports.