Archive for category China

China Has a PLAN For TPP

This week, it’s all about the Trade Promotion Authority being sought by the administration in pursuit of the Trans Pacific Partnership, a massive and massively complex free trade agreement being negotiated among 12 nations, including Japan, Mexico, Canada, and the US, along with a variety of Pacific nations seeking freer trade with the US.

Free trade hasn’t been this hot a topic since NAFTA and the “giant sucking sound,” the phrase for which Ross Perot is probably best remembered.

Much of the objection has centered around the alleged secrecy of TPA.  Of course, there is exactly zero secrecy around the Trade Promotion Authority, something which has routinely been granted Presidents since Roosevelt.  It’s merely the authority to seek an up-or-down vote on the package once agreement is reached.

The TPP itself is still secret, and it needs to be.  While it’s amusing to see libertarians like Sen. Rand Paul argue for aggressively Wilsonian ideas like open negotiations, such an approach would almost certainly never lead to an actual trade agreement – there are simply too many competing interests to balance for such talks to be held in public.  If and when an agreement is reached, there will be plenty of time to examine it, and if, on balance, our interests are not served, Congress will get a chance to vote it down, and send our negotiators back for another try.

One element that isn’t being discussed is the silent role that China is playing in these negotiations, and the stake that it has in their failure.

China is becoming dangerously overconfident in its assertion of sovereignty over the international waters of the South China Sea.  It’s developing strategic weapons designed to prevent our navy from operating effectively anywhere in the Pacific.  And it will likely try to declare an Air Defense Identification Zone (ADIZ) over the South China Sea sometime this summer.

The US has an unstated, but increasingly clear, policy of pulling together bilateral and multilateral relationships in opposition to China’s hegemonic ambitions.  This includes even Vietnam, a country with which the US has not always enjoyed the closest relationship.  (How amusing would it be for the US Navy to obtain rights at Cam Ranh Bay?)

The TPP not only serves the purpose of strengthening economic ties, it also begins to establish the habit of working together with these countries, building trust, and improving on general diplomatic and working relationships.  Successfully pursuing TPP would help persuade these countries that the US was serious about doing business in Asia.  This would likely be true even if the agreement itself were to be rejected by Congress and sent back for renegotiation.

China is not included in the talks.  Naturally, it would like to see them fail, and then, citing their failure (especially on a procedural vote) as evidence of the US’s unreliability, walk in with its own proposed agreement.  Countries already nervous about Chinese encroachment might be inclined to listen, turn away from us out of fear, frustration, and disgust, and then cut a deal with the closer, more committed power.

The role that Chinese intelligence plays in this should not be underestimated.  Their new friends, the Russians, and their subsidiary, Wikileaks, probably published what are purported to be sensitive portions of the TPP specifically in order to ramp up opposition sow discontent in the US in advance of the vote.  Moreover, the catastrophic security breach at OPM, which now includes overseas contacts of US citizens, could be used to intimidate those operators in Asian countries who might not want the relationship with China to be exclusive.

One hesitates to freight any particular negotiations with too much importance, but it’s hard to see how walking away from the talks at this point could be anything but bad.

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Tonight’s Surprise – China?

In trying to anticipate Monday night’s debate, we’re all thinking about Benghazi.  (Well, all of us except the New York Times, in whose Sunday edition the word does not appear.)  But the White House has more or less gone silent on Benghazi in the last few days, refusing to answer questions about it.  And they have to know that Romney will know the timelines backwards and forwards, ready to remind people of what they know they’ve heard.

What if, instead of trying to rebut the charges – surely a futile task – President Obama tries instead to divert attention?  Where would they turn.

I think the answer is China.  First, reports are that the administration is going to trot out a 5-year-old video from Mitt Romney’s last presidential run, showing him, ah, not hating China.  Here’s what he says:

You know, I think it’s important first for the American people and our leadership to understand that China is not like the Soviet Union of old.  The Soviet Union, Khrushchev in particular, wanted to bury us.  China doesn’t want to bury us, they want to see us succeed and thrive so that we can buy more Chinese products and they’re a competitor economically.  More power to ‘em, we know how to compete.  We want to make sure that competition is fair and legal, and that they protect our intellectual property rights and that they have a monetary policy that’s fair, so we’ve got some challenges to make sure that the playing field is level with China, but we can compete, we can be successful with China, and I will reach out to them, I’ve already met with their leadership and will do so again if I’m lucky enough to be president. Making China a partner for stability in the world will be one of my highest priorities.

China is really key in many respects as they become a very large economy; their GNP is going to surpass ours at some point just given the scale of the nation’s population.  We have to recognize that they’re going to be an economic powerhouse like us.  And with that reality we gotta make sure that we are friendly, that we understand each other, that we’re open in communicating, and that we’re collaborating on important topics, like keeping North Korea from pursuing the nuclear armament which they’ve begun, getting Iran to abandon their nuclear ambitions, China and we together will have a great deal of positive influence for stability if we’re able to work that relationship properly.

It’s unclear why the Obama campaign thinks this is damning, but I suppose you could take the words, “China doesn’t want to bury us, they want to see us succeed and thrive so that we can buy more Chinese products,” out of context, and try to portray Romney as a flip-flopper on China.  I don’t think it’ll work.  I think Romney knows what he said, and in his calm, smooth, reassuring style will remind us that he was insisting that we make China play by the rules, because it’s in everyone’s interest.

I suppose it’s also possible that they’ll use the second half of the statement to claim that Romney is naive on China.  But coming from a president whose naivete on the Middle East is unsurpassed in several generations, and whose “pivot to Asia” is about to be undermined by drastic budget cuts to the Navy, that probably won’t work too well, either.

Obama may also try to use China to salvage his Solyndra payoff investment, inasmuch as that company’s remnants are suing Chinese solar companies, trying to blame them for Solyndra’s failed business model.  Doing that would give him a two-fer: getting to play the Romney-the-outsourcer card, while saying that China is eating our lunch on green technologies, and that he’s the guy to put a stop to it.  (Never mind that China’s paying a heavy price for its own market interventions, even as they continue to blame the West for it.)

So keep an eye on China this evening.  That may be where the real fireworks come from.


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Who says real estate’s been a bad investment over the last few years?  Not if you’re buying midwestern farmland.

The Chicago Fed puts out a quarterly survey of farmland prices, and this past quarter, prices were up 17%, year-over-year.  Here’s what the chart looks like since 1964:

A couple of words on how this chart was derived.  The Fed’s survey only lists quarter-to-quarter  and year-over-year changes, not the raw number, and the data for download is only the year-over-year change, rounded to the nearest percentage point.  So I had to work backward, getting the last four quarter-to-quarter changes, and then backing out the annual changes for each year.  As a result, I can’t tell whether there’s an actual seasonality to land prices (which wouldn’t surprise me) or that annual dip is a result of some small variation in a recent year, that gets carried backwards (which also wouldn’t surprise me).  Thus the prominence of the 1-year moving average.

You can see the bubble starting around 1976, popping in 1981, and taking until about 1986 to return to the trend line.  Those of you hoping to recoup your recent residential real estate losses – sorry.

You also see the line take a nice bend upwards about 2002 or so, hits a little hiccup in 2008, and then resumes the trend.  There are a few reasons for this:   consolidations of small family farms into large operations plays a role, as do the expanding suburbs.  Unike houses, they can’t build more farmland.  Recently, you can add to that better-fed Chinese, who are buying lots of American corn to feed their soon-to-be mooshu pork.

All of which goes to explain why it’s a terrible idea to be sending about 1/3 of our corn crop to ethanol.  Farmers may like them, the ethanol industry couldn’t survive without them, but the demand subsidies – the requirements that a certain percentage of our fuel come from ethanol – are clearly helping to drive up the price of corn, and the price of the means of production of that corn, and its sometime substitute, soybeans.

(As mentioned before, it also drives up the price of natural gas, needed for the fertilizer that soil-depleting corn needs, in order to grow year after year on the same plot of soil.)

People borrow to buy farmland, too.  The interest rates on farmland loans have been trending downward for a long time, and have been mostly under 6% for the last 10 years.

Suffice it to say, this is not going to end well.

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The Revolution Eats Its Own

We may have to wait a little longer to start breaking China’s stranglehold on the world’s supply of rare earth metals.  Something called the Western Watersheds Project has filed a lawsuit to derail a solar project in San Bernadino County, and that same lawsuit may have the effect of shutting down a spur from an existing gas pipeline that Molycorp will need to power its mine.  The offended species?  Tortoises.

Concerning Molycorp, Connor pointed to an 8.6-mile pipeline proposed to carry natural gas to Mountain Pass for power generation. The so-called Mountain Pass Lateral will, if allowed, carry gas from an existing line owned by Kern River Gas Transmission Line near the Ivanpah Solar Project. “The lateral will pass by the Ivanpah Power Plant, the area where the tortoises are to be relocated, Connor said. “They were given no consideration.”

George Kenline, San Bernardino County’s mining geologist, who issues mining permits and other relevant county permits, praises Molycorp’s new direction. Once a major polluter, Molycorp, he said, “It (Molycorp) decreases the amount of impact because it eliminated the evaporation ponds,” which were a major problem before and have been completely removed from the new project.

Ironies about, the most obvious of which is the attack on a solar project by an environmental group.  But then, there’s the fact that the Watersheds Project is seeking to derail a mining operation that has completely changed the way in which is uses water, recycling almost all of its water and getting rid of evaporation ponds.  As well as the fact that the rare earths are used extensively in high-power magnets in hybrid vehicles, electric vehicles, and wind turbines.  Environmental groups, which enjoy specially-granted standing to file these sorts of suits, are now standing in the way of the kind of change they claim will save us all from catastrophe.  Revolutions do eat their own, after all.

Molycorp may have the permits to operate the mine, but it can’t do so without natural gas.  It’s further evidence that while a strategic stockpile of rare earths might be a good idea, the real solution is clearing away the regulatory underbrush that ties down useful projects in the first place.

In the meantime, engineers are trying to create high-power magnets that don’t use rare earths at all.  This is equally big news in the longer-term, but for the moment, as in so many other similar efforts, the problem will be scaling the magnets up to useful sizes, which may take years.  In the meantime, it would be nice to know that these new magnets are competitive in their own right, and not merely because the cost of their competition is being driven up by regulation.

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Chinese Futures Markets

The Wall Street Journal reports this morning that China is seeking to upgrade and expand its commodities futures markets in order to influence commodities prices, arguing that on-shore exchanges will help increase market efficiencies:

Government officials say the country is positioning its futures markets to be major players in setting world prices for metal, energy and farm commodities. By letting the world know how much its companies and investors think goods are worth, China hopes to be less at the mercy of markets elsewhere.

But what’s more likely is that China wants to lure traders on shore in order to use its national bargaining power to obtain more favorable prices.  It’s not until the very end that the reason to be suspicious is mentioned:

International futures-market benchmarking has been slow to shift to China from long-established exchanges like the New York and Chicago venues. Despite China’s huge volumes, its futures markets allow foreigners limited access. By contrast, the London Metal Exchange says 95% of its business emanates from overseas.

General Motors Co., Ford Motor Co. and Tyson Foods Inc. are some of the companies that use futures in the U.S. to protect themselves from volatility in commodity prices. Despite expanding production in China, and being technically eligible to hedge on China’s exchanges, all three say they haven’t used its futures markets.

Instead, the big footprints in China’s futures markets belong to state-owned groups, primarily commodity trader Cofco Corp. and Beijing’s secretive stockpiling agent, the State Bureau of Material Reserve. That makes the government both player and policy maker. (emphasis added)

Right.  Which means that China, which has a classic mercantilist approach to economics – seeking to use national power for the benefit of its industries – will be able to set the trading rules to its own benefit.  China has been practicing what can only be described as a neocolonialist policy all over the world in pursuit of cheap commodities.  It has been, as the article notes, deploying its navy to protect shipping routes, discovering the colonial truth that far from trade following the flag, the flag necessarily follows trade.

In fact, as the first paragraph in the above quote points out, these are world markets, and there’s no reason that China can’t trade openly in accounts no matter where they’re located.  In fact, the three companies mentioned in the second paragraph manufacture in China, and hedge on the US markets.  One likely advantage of trading with a home field advantage is that its government players won’t have to reveal their moves the way they will in more tightly regulated London and New York.

One expects that eventually, with the trading markets established, the right to continue doing business on favorable terms will come with increasing conditions, one of which may be that a company has the hedge its local commodities exposure with Chinese futures.  Given the compromises that companies make to do business in China in the first place, including rarely owning 50% of their own subsidiaries and seemingly deferring profits until the late 22nd Century, hedging on local markets will just be another in a long line.

The eventual effect of such a policy, if successful, would be to drive up commodity prices for the rest of the world while keeping them low for China, hampering competition, shutting down industries in competing countries, such as the US, while allowing China’s exports and domestic markets to develop.  Such a strategy only works, of course, if there’s no comparably-sized competitor, which argues for countermeasures by the US, combined with more open trade with India (which has protectionist problems of its own).

In the long run, of course, such a strategy is doomed.  The imbalances that it creates will inevitably provoke a reaction from the rest of the world, such as what Japan saw in the 1980s.  Moreover, it’s not sustainable forever.  Exports demand markets.  China is aging, and is an unlikely autarky, which is why it’s seeking to use its political (and eventually militaryp) power to secure resources.  But the long run can be very long, indeed, and the damage that China can inflict on us in pursuit of this policy can be great.  Which, of course, may also be all part of the plan.

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