WTO DISPUTE: RUSSIA AGAINST EU OVER REGULATIONS IN THE ENERGY SECTOR

Gas pipeline over Russian and European Union maps

Introduction

On April 30, 2014, Russia filed a request for consultation against the EU over its new energy market law – the 2009 “Third Energy Package”. A panel was established later, but the dispute has not been composed yet. This dispute is very controversial. On one hand, countries in EU largely depend on the gas exports from Russia and they are struggling to reduce such reliance. On the other hand, Russia is trying hard to maintain its absolute competitiveness in gas industry and to control the European market with political intentions.

30 percent of the natural gas consumed by the EU came from Russia, most of which was transported through Ukraine. Some of the countries in East Europe even have all their natural gas imported from Russia. Given the political instability and economic sanctions on Russia at that time, the EU started to carry out various plans to restrict the exports of natural gas from Russia and “Third Energy Package” was one of them.

The 2009 “Third Energy Package” put restrictions on the production, supply and transmission of natural gas or electricity, the alleged discriminatory certification requirements in relation to third countries in this sector and the requirement in respect of granting access to natural gas and electricity network capacity by transmission service operators. In this case, natural gas exporters in Russia, including a monopolistic company Gazprom, were forced to give up their control over pipe lines inside EU. Obviously this was a devastating news for Russian suppliers since companies in EU, who took over the control, then had the right to choose their new trading partners.

Due to series of actions adopted by the EU, Russia filed a complaint in 2014. Its claim was based on the General Agreement on Trade in Services (GATS), General Agreement on Tariffs and Trade (GATT) and some other measures. Then the EU turned to accuse the illegal terms in contracts between companies in EU and Gazprom, the largest supplier in Russia, claiming that Gazprom violated the anti-trust agreement. However, Gazprom and other suppliers in Russia have been actively connecting with firms in the Europe, hoping to expand their consumer bases. Conflicts remaining unsolved, both parties continue to explore new means to guarantee their own profits.

Influence On Russia

With most of their revenues coming from the EU, Russia is clearly afraid of EU’s possible reduction of natural gas importing. To reduce the risks brought by EU’s sanctions, Russia has found two ways out. One is seeking new international partners, especially in the Asian market, while the other is gradually switching their pipelines in Ukraine to newly-built pipelines in Turkey.

South Stream Pipeline

South Stream Pipeline and Blue Stream Pipeline
Source: Honoré

The new pipeline, Blue Stream Pipeline is designed to start from the north of Caucasus, passing through the Black sea and to end in Ankara in Turkey. Russia plans to transport 630 billion m3 natural gas through the pipeline, four times the annual consumption of Turkey. The excess amount will then be transported to other countries in south Europe via Turkey. Obviously it is very costly to build a new pipeline, which is much longer than the former one. However, from a long-term point of view, the new pipeline helps to guarantee annual amount of exports to Europe while getting rid of the political uncertainty in Ukraine. In addition, Russia is expanding its trading towards Asia, especially China which has a huge demand for natural gas, via the new pipelines under construction West Siberia.

Influence On The EU

Russia Gas Supplies to Europe

Russia Gas Supplies to Europe: Borders and Delivery Points
Source: Oxford Institute for Energy Studies (OIES)

After putting various restrictions on natural gas exports from Russia, EU themselves are facing difficulties in alternative energy. The first question is what other countries that the EU can import from are. The EU is considering fuels and liquefied natural gas from other parts of the world. The second question is how will the new source of energy be distributed throughout Europe. These two questions both bring up the huge cost of transportation and the construction of new distribution channels. The amount 30 percent is not a small proportion, let alone the rapid demand in winter, and thus it is very difficult for EU to completely get rid of Russia in a short period.

Possible Solution

The trade of natural gas is just one of the conflicts between the EU and Russia, and given complicated political relationship and other critical factors, these two parts probably won’t compromise a lot to reach consensus. If trade of natural gas between them does decrease by a large amount, Russia could still be fine with new contracts with other countries and EU could also satisfy citizens’ need by exploring new channels. However, theoretically we have learnt that free trade could benefit both parties. With existing contracts and pipelines, Russia could save a lot of money not building the Blue Stream Pipeline to Turkey and EU could remain a relatively low cost of transportation and storage.

To conclude, WTO should help to reach consensus between both parties to maintain their former trade of natural gas. At the same time, allow both party to take their structural reform in their energy sector in reasonable ways. For example, EU could try to diversify their basket of energy consumption and Russia could continue to explore new partners in Asia.

 

References:

1/ DISPUTE SETTLEMENT: DISPUTE DS476 – World Trade Organization

2/ EUROPEAN UNION AND ITS MEMBER STATES – CERTAIN MEASURES RELATING TO THE ENERGY SECTOR

3/ Pipe Dream: No quick energy-fix if EU plugs Russian gas pipelines

4/ Energy Security: How can Europe wean itself off Russian gas?

5/ Russia-EU Gas War: Poland accuses Russian Gazprom of using energy as a weapon

6/ Russia turns to WTO over EU energy package

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The Iron-y of the Steel industry.

On April 1st 2016 an article appeared on The Telegraph in which China raised its steel import tariffs from 14% to 46% from the European Union (EU), South Korea and Japan alleging that it had suffered “substantial damage” from their trading abuses. Unlike the U.S., which imposed recently a 256% tariff, the U.K. cannot implement on its own a similar measure due to restrictions of the EU trade laws that allow a 13% tariff.

tata stock 2

This measure comes in perfect timing to kill off the remaining steel factories left in the EU zone which have been struggling to revert a continual strain of losses from the previous 5 years, and with special notoriety, U.K’s biggest steel producer Tata Steel at Port Talbot, one of the oldest welsh industries, will pull out its operations due to imports of Chinese steel, high energy costs and weak demand.

This tariff coincidently comes right after British prime minister, David Cameron confronted the Chinese president Xi Jinping at a meeting in Washington, pleading for action to slow the flood of Chinese steel exports reaching Europe. Although this measure will not impact directly the U.K.’s steel industry, it may be a concern on a wider market effect.

This implemented measure does not have a trade explanation since china is the biggest steel producer of the world, It seems that recrimination, as small as it may be, was the desired effect.

china production

world steel production.

Beginning of a Trade War.

While this particular tariff is going to have virtually no impact on European steel, mainly because the biggest steel producer is China, this is more of a warning shot on any future tariff implemented on their products will be met with equal recrimination.

The big picture of course is that China has been accused of dumping their steel for below what they sell it for in their home market, and that has destroyed British steel. Now the British government is trying to find a way to keep from losing 50,000 jobs from their steel industry.

Unfortunately, this is how trade wars start: a little bit of eye for an eye treatment soon descends into an orgy of recriminations and counteractions thus diminishing the wealth of all countries involved. Taking the protectionist side will not necessarily produce the best results in this case.

Problem spreading over the Eurozone:

industry com 2

Over the past year, stock prices of european companies have had difficulties with the rising imports of steel from developing countries. Big steel mills, such as Acerinox (Spain), Aperam (Holland) and Thyssenkrupp (Germany) have had a rough period and bad fiscal results. This problem has to be tackled not separately by the U.K. but get involved the whole EU to determine if China is engaging in the unlawful practice of dumping and if so, what measures the block should take.

European steel asosiation (EUROFER) “Competition Guidelines” link:
http://www.eurofer.org/About%20us/Eurofer%20Portrait.fhtml

European commission “The EU steel industry report” link:
http://ec.europa.eu/growth/sectors/raw-materials/industries/metals/steel/index_en.htm

Evans-Prichard, A. April 1st, 2016 “Defiant China slaps steel tariffs on Britain as trade war looms” The Telegraph.
http://www.telegraph.co.uk/business/2016/04/01/defiant-china-slaps-steel-tariffs-on-britain-as-trade-war-looms/

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From Footwear Industry to Trade Policy: Do it or don’t do it?

by Xiaoyi Wang, MAief ’17

Summary: Nike supports the removal of tariffs on footwear for efficient production and lower costs, but New Balance, the sole American footwear brand that manufactures shoes domestically, argues that signing the TPP will bring unemployment in manufacturing industry. This article analyzes the two company and industry, discusses reasons of the disagreement, and makes comments about the issue.

U.S. President Barack Obama delivers remarks on trade at Nike's corporate headquarters in Beaverton, Oregon

U.S. President Barack Obama delivers remarks on trade at Nike’s corporate headquarters in Beaverton, Oregon May 8, 2015. Sports shoe maker Nike Inc put its weight behind Obama’s push for a trade deal with Asian countries on Friday with a promise to create up to 10,000 U.S.-based manufacturing jobs if the pact is approved. REUTERS/Jonathan Ernst

In the spring of 2015, several events regarding the Trans-Pacific Partnership happened in Oregon, headquarter of Nike. On May 8, President Obama visited Nike headquarters and made a speech to support his decision of signing the TPP. Various protests, like ‘Flush the TPP’, by labor unions have been going on at the same time for job losses in manufacturing and other industries.

Nike VS New Balance

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There is another disagreement between two major footwear brands, Nike and New Balance. New Balance, unlike most of its footwear competitors, doesn’t outsource all of its production and offers the unique customized ‘Made in America’ businesses. On the other hand, none of Nike’s 38,000 workers are manufacturing workers. New Balance wants a gradual cut in tariffs to protect its 5 American factories, but Nike supports an immediate cut by signing TPP. Nike has also promised to create 10,000 new jobs if TPP is approved.

New Balance opposes TPP because it will cause manufacturing unemployment, and destroy small Maine towns that hugely depend on footwear factories. Nike, as well as Obama, supports TPP because it well benefit US footwear industry, create high-value jobs, and increase consumer surplus by lowering costs and prices.

Free trade improves production efficiency and optimizes comparative advantages, but in terms of manufacturing and footwear industry, which of the two sides is really defending American economic interest?

Industry Overview

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Despite the steady growth and dominant position of US footwear industry, manufacturing employment experienced a 40% decrease over the decade, while office and admin support jobs only declined by 25%, and management positions almost remain the same. The rising domestic labor wages and fierce competition from low-cost countries like China and Vietnam account for the dramatic manufacturing employment decline.

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Let’s take Vietnam as the outsourcing market for example. Nike estimates that the costs of ‘Made in Vietnam’ shoes are around $20-25, and New Balance estimates that costs are 25-35% higher for ‘Made in America’ shoes. Low labor costs, low labor and environmental standards, and reliance of labor unions on government all contribute to Vietnam competitiveness. While removal of tariff brings more contracts to Vietnam and increases workers’ wages, it is a question whether the increasing demand will worsen the forced labor, child labor, and sweatshop problems in Vietnam.

Thoughts about the Disagreement

tlumacki_newbalance_business002

Isali Ruiz formed running shoes on a mold at the New Balance manufacturing plant in Lawrence. BOSTON GLOBE/John Tlumacki

This is an interesting start point to look at TPP, from the footwear manufacturing perspective. At first glance, I was opposed to the new policy as it ignores interests of the lower working class, and hurts New Balance, a great company with social responsibility. Also, I thought that it will worsen Vietnam workers as well because managers will force the labors to work extra hours for higher production, and hire more illegal child labors. Some people even fear that TPP will turn those small Maine towns into the next Detroit.

We should look at quantitative aspects behind the issue closely. Though New Balance is the only major footwear brand that hires US manufacturers, only a quarter of its production comes from the States. New Balance also heavily relies on Asian countries, including China, Vietnam, and Indonesia. In terms of wages, New Balance offers workers about $10 per hour, while Vietnamese workers earn less than $1 per hour. Also, part of the TPP agreement requires partner countries to meet certain labor standards. Otherwise, you are out.

According to researches by Peter A. Petri and Peterson Institute, the projection is that US employment will move from sector to sectors, and won’t change in total numbers. Labor forces tend to move from less productive industries to more productive ones. The study also found significant gains to a country and improvements in wages, both in US and in Vietnam.

It is true that some workforces, usually with lower education level and transferable skills, will be negatively impacted by the trade policy. I believe that it is the duty of the government to give work trainings to manufacturing workers, subsidies to factories and local economy that heavily depends on manufacturing, and enough confidence that certain industries will benefit with the country. More official statistics and research should be published to reveal the sweet or bitter truth behind the partnership. Many rumors have been created by labor unions or some parties. The conflict between Nike and New Balance may be a marketing event, who knows. It will take time to see the true influence after the deal, but currently government subsidies, help, and support should be provided.

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References:

Aeppel, Timothy. “New Balance Sweats Push To End U.S. Shoe Tariffs”. WSJ. N.p., 2016. Web. 10 Apr. 2016.

“Assessing The Trans-Pacific Partnership, Volume 1: Market Access And Sectoral Issues”. PIIE Briefing (2016): 6-30. Print.

Brodeur, Simon, and Ari Van Assche. “Nike Versus New Balance: Trade Policy In A World Of Global Value Chains”. Harvard Business Review (2014): n. pag. Print.

“Footwear Manufacturing – May 2015 OES Industry-Specific Occupational Employment And Wage Estimates”. Bureau of Labor Statistics. N.p., 2016. Web. 10 Apr. 2016.

“How More Business With Nike Could Affect Workers In Vietnam”. Washington Post. N.p., 2016. Web. 10 Apr. 2016.

“New Balance Wants Its Tariffs. Nike Doesn’t”. Bloomberg.com. N.p., 2012. Web. 10 Apr. 2016.

Petri, Peter A, Michael G Plummer, and Fan Zhai. The Trans-Pacific Partnership And Asia-Pacific Integration. Washington, DC: Peterson Institute for International Economics, 2012. Print.

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The “Great Firewall” is a Trade Barrier

China’s notorious online controls, most commonly known as the “Great Firewall” which has long been criticized as censorship by human rights groups and pro-democracy activists, now has earned a new label from the US government: trade barrier[i].

china-firewall-censorship

For the first time, in an annual report on trade conditions, the U.S. trade representative said Chinese filters blocking access to websites “posed a significant burden to foreign suppliers, hurting both Internet sites themselves and users, who often depend on them for business.”  The report also said, “Over the past years, the outright blocking of Web sites appears to have worsened.” [ii]

Around 3,000 website are blocked in China under the country’s policy of internet censorship[iii]. China blocks some of the biggest Internet names including services offered by search engines like Google and Yahoo, video sharing companies like Youtube and Vimeo, social media companies like Facebook, Twitter, Instagram and Flicker, news and business sites like Bloomberg, WSJ and Reuters, and other internet service providers like Dropbox etc[iv].In the 3,000 companies that China has blocked, cooperate names are chosen without a published details of restrictions. The report said much of the blocking appears arbitrary, for example a major home improvement site is swept up by the “Great Firewall”[v].

This censor hinders the accessibility of over millions of foreign companies to Chinese markets and vice versa. More and more companies relying on the Internet for business could be hampered whether through blocked internet sites or workplaces that cannot reach Gmail. Almost 80% of foreign companies that responded to a survey released in January by the American Chamber of Commerce in China said that they were “negatively impacted”, more than half said that they were blocked from using online tools or accessing information, and only 5% said they were not hindered in any way.

The “Great Firewall” have given Chinese Internet companies such as search engine Baidu to gain business by blocking its strong foreign competitors of Google that dominates global markets. The QQ and WeChat are widely used as social media replacements of Facebook, Messenger and Whatapp[vi].

Some of the largest US Internet companies and foreign trade groups have taken actions from different approaches. They have lobbied the US to treat censorship as a trade matter. For example, Google’s deputy general counsel testified before a US Senate subcommittee that the US government should make the matter a central issue in trade talks. China has blocked Gmail, Google Map, Google Drive, Google Cloud, Google Plus and Google photos. In the negotiation with Google, China has conditionally allowed users in China to use some of Google’s functions but this proposal was rejected by Google.

Some internet companies take more positive and flexible moves to comprise the censorship in order to gain access to the vast Chinese market. Facebook has attempted hard to establish rapports with Chinese government. “How can you connect the whole world if you leave out a billion people?” said Facebook CEO Mark Zuckerberg who visited China in March 2016 during which he jogged through Beijing, participated in a two-man panel discussion with Alibaba founder Jack Ma and then held a meeting with the country’s propaganda chief[vii]

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Both American companies and the government understand how important this market to their business, and the new report highlights the growing concerns. The move from the US government side, which is not likely to have immediate repercussions but the US government can file complaint based on WTO rules that requires member governments to publish details of restrictions that might affect business and take other action in retaliation by blocking Chinese internet companies’ access to US market.

mainland-china-mobile-app-market

China has more web users than any other country in the world – nearly 730 million, and the Chinese Internet market is expected to grow considerably as this country continues to industrialize[viii]. Chinese companies heavily rely on the internet to contact world-wide customers and conduct businesses. Closing up the internet and getting into a retaliation war will hurt both sides. This censor represents a big problem to Chines government as it is trying to maintain its political stability and control over information as essential to protecting the Communist Party’s monopoly on power while attempting to adapt to the free market economy system. China has been struggling with this ever since Deng Xiaoping took power and started open the doors to the world. It will be even harder to achieve the balance, with the new economy that is more depend on Internet.

 

[i]Annual National Trade Estimate Report, released on March 31. The insertion was reported on April 1 by Inside US Trade, a trade publication.

[ii] http://www.foxbusiness.com/markets/2016/04/09/us-cites-chinese-internet-filters-as-trade-barrier.html

[iii] “GreatFire.org – Bringing Transparency To The Great Firewall Of China”. Retrieved 9 January 2012.

 [iv] https://en.wikipedia.org/wiki/Websites_blocked_in_mainland_China

 [v] http://www.businessinsider.com/ap-us-cites-chinese-internet-filters-as-trade-barrier-2016-4

[vi] http://www.bbc.com/news/world-asia-china-35875968

[viii] http://www.slideshare.net/Metaps/mainland-china-mobile-app-market-101-what-you-need-to-know/4-2014_Metaps_Inc_All_Rights

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Tensions on TPP Run High on US Presidential Campaign

As US’s presidential contest moves forward, tensions over the Trans-Pacific Partnership (TPP) continue running high. Questions like when and whether Washington lawmakers will ratify the deal even as the White House continues to make the case for its swift passage arose and renewed, and also the deliberations on the TPP are now underway in the legislature of Japan.

Trade has been taken as a high-profile role in the debate between the Republican and the Democratic because the candidates in both parties keep arguing over the past deals such as the North American Free Trade Agreement and the potential benefits or costs of passing the TPP.

Obama Administration officials think that TPP is feasible although the political climate is difficult. They think that the issue is about better explaining the issues in order to counter anti-globalization narratives.

The US commerce chief Pritzker even stressed the value of the trade pact in response to Hillary Clinton’s criticisms of the final TPP outcome. He thinks that the TPP is a gold standard which is the toughest trade agreement in the world. Clinton was previously the US Secretary of State from 2009 to 2013, during which she supported the TPP pact as a gold standard for trade agreements.shutterstock_328825151

New Zealand Prime Minister John Key also thinks that TPP is a very good deal in a challenging set of negotiations. And he also suggested that the trade deal could still get passed in Washington after the new US President is elected.

Trade Enforcement Report

The success of the Obama Administration in trade enforcement was also touted in this year’s National Trade Estimate report which was released late last week. The report highlights various WTO dispute rulings that have found partially or fully in favor of Washington, ranging from Chinese trade remedy actions on high-tech American steel to Argentina’s various import restrictions.

The Administration has brought more enforcement cases at the WTO than any other member, used pre-dispute engagement to push trading partners to live up to their obligations, and strengthened US government enforcement capacity, in response to barriers highlighted in previous NTE reports.

The US trade chief also pledged that Washington would continue its efforts to boost enforcement of international trade rules while highlighting the importance of reducing existing trade barriers through other avenues, such as the negotiation and implementation of trade agreements.

The 474-page report features repeated mentions of the TPP, outlining the areas where Washington envisions potential trade growth or other key benefits with respect to each of its TPP partners.

Japanese Legislature Kicks off TPP Debate

In the meantime, Japan started to ratify TPP this week, prompting the heated debates in the Japanese legislature.

Japan’s Democratic and Communist parties both are in the opposition of the trade pact while the ruling Liberal Democratic Party is in favor of the pact and holds solid majorities in both legislative chambers.

Japan was the last country to join in the negotiations. The trade pact has long been controversial in the Asian economy with the difficult domestic politics on areas such as agriculture and automobiles largely credited with delaying its earlier entry into the talks.

The threshold needed for TPP to enter into force is the ratification by all 12 signatories within a two-year window, or if that fails ratification by at least six countries with 85% of the group’s GDP. Ratification by both the US and Japan is essential for the pact to move forward.

Both Obama and Shinzo Abe have made the TPP a signature part of their respective policy agendas. Obama has touted the TPP’s potential for setting the “rules of the road” in the Asia-Pacific region, and Abe has included it as part of the structural reforms that make up the “third arrow” of his highly-scrutinized “Abenomics” economic plan. They believe that with US, Japan as well as other countries’ participating in the TPP, the members will achieve great profit and gain chances for growth.

Above all, whether the TPP will work effectively still depends. Economists have both positive and negative comments over the TPP. The TPP will not only affect the members but also other countries beyond the TPP. Countries that are not parties to the negotiation will likely be asked to accede to the TPP as a condition of bilateral trade agreements with the U.S. and other TPP members

References:

https://www.eff.org/issues/tpp

http://www.ictsd.org/bridges-news/bridges/news/tensions-run-high-on-us-presidential-campaign-trail-as-tpp-debate

https://ustr.gov/tpp/

https://www.washingtonpost.com/news/wonk/wp/2013/12/11/everything-you-need-to-know-about-the-trans-pacific-partnership/

 

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How did euro adoption affect Greek trade?

“… (W)e believe that it’s legally not possible in the Eurozone to have a debt write-down.” Responded German Chancellor Ms. Merkel to in face of IMF’s urge to ease Greece’s debt burden before it continues a bailout for Greece.

After five years of fiscal austerity and internal devaluation, the Greek economy is 27.6 percent smaller than the pre-crisis year and it still doesn’t signal a robust recovery. And there emerges the “structure reform fatigue” across EU, with some stating that austerity had crippled the European economy.

So let us come back to the very beginning to find out the effect of euro adoption on Greek trade and economy – and was it worth it?

What do Greeks trade?

Greece is a relatively closed economy, with its total trading value as a share of GDP of only 67% in 2014. However, the country has “sustained” an average of 8% GDP trade deficit for the past 50 years until the deficit topped at 12.6% in 2008 and led to its sovereign debt crisis in 2009. Was Greece a developed country with so many investment opportunities that it could sustain a capital account surplus to offset its current account deficit, like the US? Not likely seen from its trade pattern.

Exhibit 1 illustrates the revealed comparative advantage (RCA) of Greece across goods categories from 2000 to 2014. For each category, the 15 bars from left to right stands for RCA for 2000 through 2014. A grey bar stands for RCA > 1 (revealed comparative advantage), while a red bar stands for RCA < 1 (revealed comparative disadvantage).

Exhibit 1

Several findings can be summarized from this chart:

  • Overall RCA of Greece has been consistently declining, a phenomenon due to erosion of competitiveness.
  • Greece has changed from showing comparative advantage to disadvantage in product categories like iron and steel, textiles, and clothing.
  • Greece now specialize in agricultural products and fuels and mining products (esp. oil refinery). Both fall under the mid-to-low tech category.

It seems that Greece should neither be categorized as labor abundant nor capital abundant, instead the country takes advantage of its marine resources and convenient water transportation. If the RCA statistics were calculated within the EU, both comparative advantage and disadvantage would be enlarged – in terms of specialization, joining the EU should have more beneficiary effects.

To Which Countries Do Greeks Trade?

Chart 2 illustrates the trade deficit pattern of Greece after the government took on the fiscal austerity policies. Half of the trade deficit happened within EU, which is no surprise since intra-EU trade had less tariffs and non-tariff barriers than extra-EU trade. The worrying fact is that 75% of the deficit was attributed to trade with the four core Eurozone (EZ) countries – Germany, France, Italy and Netherlands. This deficit cannot be adjusted through the floating exchange rate regime, since Greece and the four countries use the same currency.

Exhibit 2

Adoption of Euro

Greece entered the Eurozone on January 1, 2001, and was given a one-year period to transit from the original currency (drachma) to the new currency. The official conversion rate was set at 340.75 drachma to €1, which was close to the product of drachma-dollar and dollar-euro exchange rate at the end of 2000. However, the drachma was experiencing a continuous depreciation since 1985, partly offsetting the erosion of competitiveness in Greece. By adopting the euro, Greece effectively fixed its exchange rate at the level of year 2000 and experienced a jump in labor wage (Exhibit 3). This phenomenon was never found in Germany during its adoption of euro.

The adoption of euro might also lure the Greek government into spend more than it had earned to keep the national welfare from declining. A strong currency provided temporary advantageous terms of trade, because the major trading partners needed time to switch from Greek exports to lower-cost exports, and the Greeks could use euro to import more. Further pushing the Greek government into the debt trap, Goldman Sachs had helped to disguise the huge public debt under the vein of a “swap” contract. And the “deficit bomb” created by apparently conflicting economic forces finally exploded in late 2009.

Exhibit 3

Was it worth it?

Many people tried to figure out whether Greece would be better off or worse off had it never adopted the euro and complied to the market discipline of external borrowing. An article from the Economists pointed out that Greece enjoyed a tamed inflation of 4% during the 2000s and a faster catch-up growth during its euro stint. However, the achievement quickly faded away after the crisis broke out.

Without further integration in fields like tax coordination, it is hard to let the more developed countries like Germany and Netherlands to use the same currency with the less developed countries like Greece. The current regime of EMU extracted more wealth from poorer countries to the wealthier countries than had provided sustained growth. I think it was not worth it for Greece to join the Eurozone in economic perspectives. Perhaps unifying with Greece had more political and symbolic importance to the EU, provided the contribution to European culture of the ancient Greek and the important geopolitical position of Greece.

Reference:

http://www.nytimes.com/2015/07/25/opinion/why-greece-should-leave-the-eurozone.html?_r=0

http://www.economist.com/blogs/freeexchange/2011/07/greece-and-euro

http://ec.europa.eu/economy_finance/euro/countries/greece_en.htm

http://www.wsj.com/articles/imf-determined-to-help-greece-but-significant-reforms-needed-christine-lagarde-says-1459881681

 

 

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Trump and Sanders in Agreement? Against NAFTA and Free Trade

To win over support from Wisconsin voters, presidential candidates begin to focus on economy and employments rate. Both Trump and Sanders said they led the opposition to NAFTA and permanent normal trade relations with China, which they said have cost millions of U.S. jobs and led to “a race to the bottom” for workers.

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(Bernie Sanders picketed against Nafta in the Nineties and has slammed the treaty for suppressing US wages in televised debates)

Politicians declare to bring the lost jobs back to America by means of abandoning trade agreement of NAFTA and also in terms of incoming TPP. However, free trade, in fact, would benefit the whole US instead of robbing jobs from US to other countries.

The North American Free Trade Agreement (NAFTA) provides preferential tariff treatment on goods originating in and traded among Canada, Mexico and the United States. Such trade agreements are not only economic, but political, developing closer relations and partnerships among the member countries.

The most direct and short-term effect of trade partnership is reducing jobs, because in the less comparatively competitive industry companies will lose the protection by tariff and have to fire part of workers. That’s why the insurrection handed Michigan’s Democratic primary to Bernie Sanders while continuing to buoy the insurgent Republican candidacy of Donald Trump two weeks ago.

In fact, free trade agreements bring significant advantages and most of the low-wage job loss is more part of ongoing modernization and globalization than a consequence of the trade agreements themselves. For example, now that NAFTA is a relatively mature 22 years old, it appears that it has been a net positive, but neither as great as its proponents once argued nor as bad as its opponents warned. Trade among the three members (Canada, Mexico and the U.S.) is up 300% and they are now each other’s largest trading partners. Economies have been modernized and integrated, more direct investment in the poorest country, Mexico, has been facilitated, and real wages are up. Ross Perot’s “giant sucking sound” of jobs moving to Mexico was never heard—though manufacturing jobs are down, manufacturing is up and productivity, not NAFTA, is the difference. Jobs move because of cheaper labor, not lower import costs. And many higher-skilled jobs have been added.

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(Inspecting a Ram 1500 at the Chrysler Warren Truck Assembly plant in Michigan.CreditFabrizio Costantini for The New York Times)

NAFTA could create more jobs in other divisions other than those lost, by creating regional integration. Taking auto industry for example, the main competitors for US is not either Canada or Mexico in the partnership, but Japan and Germany. The integration of North America would increase the comparative advantage in US auto industry: as a platform of much lower wage, Mexico could focus on providing car accessories to US at a lower rate and manufacturing, thereby increasing the scale of production. Even car manufactures from other countries could take advantages of this e.g. the Honda CR-V assembled in El Salto, Jalisco, for example, uses an American-made motor and transmission. The industrial clustering in Mexico would bring job opportunities to the whole North America and prevent the potential production chain which could be developed in Asia.

Tearing up NAFTA won’t bring benefit to US citizens. If we were to follow Mr. Trump’s saying and to raise a big tariff on imports, (and cope with the barriers raised by other countries in retaliation), huge disruptions would rise up in the short term, for both suppliers and workers.

Those presidential candidates are simply focusing on short-term and most obvious part to attract votes for themselves. Free trade benefits the world by allocating the resources more smartly. Workers harmed by free trade need better ways of adjusting to it — as do those threatened by domestic competition or new technology. What the government can do is care more about management cost and provide assistance to blue-collar workers. Banning trade agreement, no matter NAFTA or the incoming controversial TPP, is clearly not the solution to the economy anxiety.

 

 

References:

http://www.nytimes.com/2016/03/30/business/economy/nafta-may-have-saved-many-autoworkers-jobs.html?_r=0

http://www.forbes.com/sites/daviddavenport/2016/04/01/trump-and-sanders-in-agreement-the-strange-politics-of-free-trade/#76f9b54728bc

http://www.telegraph.co.uk/business/2016/04/03/anti-nafta-rhetoric-in-us-presidential-race-marks-fresh-attack-o/

http://www.nytimes.com/2016/03/16/business/economy/on-trade-angry-voters-have-a-point.html?_r=0

 

 

 

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