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April 21, 2008

Asian competitiveness is engendering a Western anti-free trade backlash

By Chan Akya

No good deed ever goes unpunished. Asians are quickly discovering the wisdom of this idiom, as they suddenly confront staggering shortages in basic food items. The price of rice has gone up exponentially in the past few weeks, crossing US$1,000 a tonne, despite the absence of any discernible decrease in global production nor a concurrent increase in consumption.

The upshot for Asian governments is increased social tensions in many countries where food shortages were unheard of until very recently, as well as a number of others where economic fragility has increased on the back of rising food prices. People have to eat, and if it costs them too much to eat, they will in turn demand to be paid more. This creates a vicious cycle of inflation that will eventually reduce the living standards of pretty much every second person in the region.

The source of this sudden spike in food prices, led by rice, has been the weakening purchasing power of the world's favorite currency. The second reason is what military strategists would euphemistically term 'collateral damage' from the ongoing reshaping of the world economic order, namely increased difficulties being faced in international trade.

Tackling the second problem first, the world appears inexorably headed for a period of increased trade confrontations that would make trade terms much more onerous for most countries. The primary target is Asian exports, which are much more competitive now than say 10 or 20 years ago.

Grumbling about the losses of jobs in America and Europe, and using the environment as an excuse, the West is already imposing substantial penalties on the natural advantages of Asian manufacturing. This will lead to higher tariffs on most products, as well as the tying of investments with trade, a key demand from Western countries seeking to overturn the savings advantage of Asians by erecting monopolistic structures around their entrepreneurs.

Agricultural produce has been the source of much abuse by the Europeans, whose Common Agricultural Policy (CAP - surely an acronym that deserves an "R" as its second letter) is uniquely responsible for keeping a billion people in dire poverty. The American response has been both through their own subsidies, and by increasing the alternative uses of agricultural crops such as ethanol for corn that is heavily subsidized in the name of energy self sufficiency.

CAP ensures that vast farms producing overly expensive produce in Europe are sustained at taxpayer expense, leaving fallow the fertile lands of Africa and many parts of Asia as excess production is dumped on global markets. These countries cannot export to Europe or the United States due to the tying of agricultural trade with unrelated items, creating astounding tariff and non-tariff barriers to trade.

A simple example is sugar. Over a fifth of the world's sugar is derived from beet, even though it is more than five times inefficient compared with sugarcane product due to its higher consumption of energy and other factor inputs. The reason that beet sugar is produced at all is the CAP subsidies in Europe, which in turn make it uneconomical for many farming countries in central Africa to grow sugarcane. The result is a constant search for employment, income in turn creating a mess of tribal conflicts across the region.

Any European who talks about how much more civilized the continent has been relative to America's war-mongering clearly doesn't understand the horrific costs on poor farmers elsewhere in the world. Put simply, while it's easy to count America's war dead perhaps in the hundreds of thousands, victims of European farm subsidies number in the hundreds of millions.

The eagerness of unctuous European politicians to protect schemes like CAP has proved to be the biggest stumbling block in talks in free up global trade and has led to a complex web of tariffs on agricultural produce. Each layer of tariffs imposed by a country creates an additional issue for every bilateral agreement. If you wanted to picture this, the best would be a large spider's web, but with every node hosting a separate web connecting with a specific group of countries.

The upshot of all this is that trading in agricultural products is by far the most complex issue in international trade with lack of uniform standards, multiple layers of bureaucracy, zero price transparency and most importantly, a complete absence of free markets.

All too often, these arrangements fail - imagine the spider's web above and think that a ball bearing were to fall through multiple layers - and you get the idea that what starts as a minor problem, such as a weather disturbance, in one country can quickly degenerate into global panic on the price of the produce affected.

This is what has happened to rice of late. The largest consumers of rice being in Asia, a few minor weather disturbances caused exports to decline and as prices rose as a consequence, quickly caused a domino effect of trade bans and other barriers, accentuating the problem. The Philippines is the worst affected by the mess, but others like Indonesia are also suffering.

Rice may be an Asian problem, but the unnecessarily complex system of trade agreements in place is clearly a legacy of corrupt European governments, who bear all the moral shame in this matter.

There is however another culprit here, one that gets away scot-free usually. As most regular readers of this column know, I am referring to the root cause of the current mess of inflation amid excessively depressed interest rates, the US dollar. More simply, the idiot central bankers of Asia who squander their responsibility at the altar of conformity by purchasing billions of dollars worth of useless financial assets have done their region a great disservice.
This is really simple to understand for even a child of five, but since central bankers often forget basic things like tying their shoelaces, lets remind them.

Purchasing too much of anything increases its price, not its value if the latter is defined purely as the marginal utility of consumption. The US dollar is too strong relative to inherent industrial and service sector advantages of the US economy today. Put differently, America's economy if far bigger than it deserves to be, thanks mainly to the unregulated appetite of Asian central bankers in accumulating US dollars and its overvalued counterparts such as the euro.

This is why Americans continue to drive gas-guzzling SUVs to collect their unemployment benefits from an increasingly indebted US government that in turn borrows the money from Asian governments by giving them IOUs that return less than the domestic inflation rates of all these countries. (Note: if you are a central banker, you are encouraged to read that sentence a few times. Anyone else will have understood it in the first read and can proceed).

The other side of this wealth transfer is that Asian currencies are stupidly cheap compared with the competitive advantages that have been heaped on the region for the past few decades. That in turn attunes an excessive number of factor inputs to the production of goods for the US consumer rather than serving domestic consumption. Looking through the economic make-up of most of the region, only Australia and India stand out as countries with a defensible mix of domestic consumption against goods produced for exports.

Locking up savings in a currency that has terminally declining purchasing power means that Asian authorities have less fiscal and monetary policy leeway to regulate the dynamics of their own economies. This is what causes structural inflation, that is, the achievement of a new level in prices, as different from a cyclical increase in prices, which has in turn manifested in food prices.

As governments in countries like the Philippines scurry for cover, very little is being said about the main culprits, namely European farm subsidies and the overvalued US dollar.

Asia Times

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