Litigation

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Will the WTO Die on Dec. 10, 2019?

♠ Posted by Emmanuel in Litigation,Trade at 11/22/2019 03:03:00 PM

Meet (trade) Killer BOB.

To those following international trade, it's been no secret that the United States has been blocking the appointment of appellate judges to the WTO's Dispute Settlement Mechanism--international trade court, if you will. Without having judges to hear appeals on different trade-related rulings at the WTO, a critical component of the organization will be terminally wounded--its legal one.

With an avowed isolationist like Trump as the US leader--and a US trade representative with a similar view of the world in Robert Lighthizer--this outcome was perhaps inevitable after the 2016 elections:

The world will not end on December 10, yet for many who have spent their careers within the global trading oversight system, the date has apocalyptic consequences. That is when the World Trade Organisation’s (WTO) highest dispute-resolution body will cease to function after the administration of US President Donald Trump blocked reappointments to its panel. Without a working appeals system, international trade disputes may never see resolution and could quickly evolve into tit-for-tat tariff wars that spiral out of control.

Lighthizer makes no efforts trying to disguise US efforts to kill of the Appellate Body:

The US sees the Appellate Body's role as one which strictly enforces a “contract” agreed to by WTO members. The European Union and many other countries, however, view the body as more of a court that is able to create new laws for the organisation, WTO deputy director general Alan Wolff said recently.

Lighthizer made that same point in a rare public speech in 2017 when he said the European Union views the WTO and its dispute-settlement rules as “sort of evolving kinds of governance.” “There’s a very different idea between these two things,” Lighthizer said. “And I think sorting that out is what we have to do.”

So what is the US position, then? Either it gets what it wants--a much-circumscribed set of issues the appellate body can rule on to avoid "judicial overreach" on trade matters--or it will simply blow up this international legal mechanism.

Despite criticisms that the WTO--its rules and legal rulings--favor wealthy countries, think of what the alternative situation is of a world without the WTO. It would be a move away from a (relatively more) rules-based order to, well, a move back to more of the law of the jungle. The realist situation awaits us once more--and Trump and his boys will be quite happy with that situation, actually:

But even if the US manages to ram through its fixes to the dispute system, American officials have a litany of other changes they want to see at the WTO. They include making it harder for countries like China to self-proclaim “developing” status, which affords them certain preferential treatment on trade. The US also wants more transparency from all nations, especially from China, on subsidies given to domestic businesses that export overseas.

A weakened WTO could bring back an era that allowed economically strong countries to steamroller other nations. Before the WTO established a rigid dispute process, trade was governed by the General Agreement on Tariffs and Trade, which determined trade disputes through diplomatic muscle rather than a deliberative, legal manner.

That may not necessarily be seen as a bad thing for Trump and his group of trade officials, who have long viewed the WTO as a suspect institution aimed at undermining US economic sovereignty.

Welcome (back) to the jungle--coming to an international trade partner near you December 10, 2019.

WTO ‘National Security’ Ruling Meets Trump

♠ Posted by Emmanuel in Litigation,Trade at 3/30/2019 07:36:00 PM

From Crimea to America: considering the plight of "national security" trade barriers.

Here's a heads-up for everyone; over the next few days, the World Trade Organization is expected to rule over Russia hitting the Ukraine with trade sanctions on "national security" grounds [DS512]. In the past, such claims were considered unquestionable by the WTO. However, the expectation now is that the WTO will rule against Russia and in favor of the Ukraine.

You should be asking by now, "What do Russia-Ukraine 'national security' dust-ups have to do with the United States?" Well, it sets a precedent for the WTO proceeding with cases having to do with national security and ruling in favor of the complainant. And, insofar as the United States has hit so many of its trade partners with such claims for limiting imports, the WTO's change of heart would render the US vulnerable to a world...of hurt:

The World Trade Organization is set to rule for the first time on a dispute involving a member’s national security, challenging a key justification for President Donald Trump’s tariffs and putting the arbiter of international trade conflicts on a collision course with the U.S. The WTO will issue a ruling on a case in which Russia imposed trade restrictions on Ukraine, saying they were necessary in the interest of national security, according to an official with knowledge of the report who asked not to be named because the process is private.

The decision could still be appealed or settled outside of the WTO. The ruling confirms the WTO’s authority to determine whether such measures are necessary to protect a country’s security.

The ruling could set up a showdown as US trade partners take it to the WTO dispute settlement mechanism over similar "national security" tariffs:

A WTO ruling on the Russia dispute could force the U.S. to justify why the European Union, Canada, Mexico and a half-dozen other nations that have filed disputes against Trump’s metal tariffs, pose a security threat. “The fact that the panel is actually going to engage in an inquiry of whether there is basis for these national security measures means things are looking really bleak for the U.S.” Nicolas Lamp, a former dispute settlement attorney at the WTO, said in an interview on Wednesday. “For the U.S., this finding could confirm all their worst fears about the WTO.”

To be sure, the isolationist-nationalist Trump would like nothing more than to pull the US out of the WTO, and being taken to court there over "national security" could be the last straw. Then again, Trump is still not the United States, and there may be a more united pushback from the business community and business-minded legislators if Trump threatens WTO withdrawal.

At any rate, the fate of the WTO is going to be shaped a lot over the next few days. Stay tuned.

China and the Fog of Trade War

♠ Posted by Emmanuel in Litigation,Trade at 3/23/2018 12:15:00 PM

Watch out: blowback may be severe.

The Trump administration is a triumph of gesture over substance, so it should be no surprise that his China-bashing trademark has the feel of a really lousy made-for-TV "special" wherein signing ceremonies matter more symbolically than the actual policies being implemented. Specifics can wait: see the example of tariffs on steel and aluminum that are still up in the air despite being announced at the start of the month.

That Trump is improvising on trade policy with less-than-comprehensive details from his economic ministers is obvious. My favorite current example is that there isn't even clarity on whether the forthcoming tariffs on Chinese-made goods supposedly taking advantage of intellectual property [IP] violations are worth $50 or $60 billion dollars. Trump likes to style himself as a dealmaker, and so something in that range would be his "opening gambit." This, however, introduces a lot of market uncertainty as to who might be able to wangle "special deals" to limit the harshness of trade penalties.

What we haven then is the fog of trade war in the era of Trump. A reason why I haven't written more about these assorted China-bashing penalties is that, well, many of the details are still up in the air. From what we know so far largely based on (limited) information provided by the USTR, the intellectual property offensive has three parts to it:

I. The unilateral component - applying tariffs on IP-related Chinese exports makes use of the United States "Section 301" concerning sanctioning unfair trade practices by other nations. The reason most are unfamiliar with it is that the law was more widely used during the 1980s before there was a WTO to adjudicate such matters--when current US Trade Representative Robert Lighthizer was busy trying to bash the Japanese (not the Chinese) during the Reagan (not the Trump) administration. The whiff of antiquity about its current use is that it hasn't really been deployed all that much since, well, Trump made the old trade warrior Robert Lighthizer his point man after a hiatus of nearly four decades.

Usually, an order of the cease-and-desist variety (here of allegedly unfair trade practices) clearly states which behaviors must be halted immediately. Unfortunately for the Chinese, the grand signing ceremony was all show; Lighthizer has yet to unveil what exactly it is that will be targeted:

The President has instructed the Trade Representative to publish a proposed list of products and any tariff increases within 15 days of today’s announcement. After a period of notice and comment, the Trade Representative will publish a final list of products and tariff increases.

So in response to $50-60 billion worth of Chinese goods to be penalized, the PRC has only identified $3B worth of American exports to China to retaliate against. It's early days still, and China cannot be expected to calibrate its response when these American unilateral actions are under a cloud. Alike the tariffs on steel and aluminum, these are eminently questionable from the standpoint of WTO legality. Speaking of which there is also...

II. The multilateral (WTO) component - for a guy criticizing the WTO for allowing unfair practices of American to persist for so long, it's interesting that Trump and his administration are nonetheless attempting to bring a case against China regarding IP. Just today, the United States filed a case there:

"China appears to be breaking WTO rules by denying foreign patent holders, including U.S. companies, basic patent rights to stop a Chinese entity from using the technology after a licensing contract ends," the U.S. Trade Representative's office said in a statement.

"China also appears to be breaking WTO rules by imposing mandatory adverse contract terms that discriminate against and are less favorable for imported foreign technology," it said. Such policies interfered with foreign technology holders' ability to set market-based terms in licensing and other technology-related contracts, it said.

Parts I and II are inconsistent in the sense that I undermines the whole WTO system by suggesting might makes right: because the US is such a powerful country economically, it can pretty do what it pleases unilaterally. Yet, in the same breath, II wants to use the very same WTO it undermines by taking such courses of action to pursue IP remedies. What will it be? China will certainly be looking at making its own WTO case against forthcoming tariffs on its goods in I. Maybe the real question in the meantime is whether the WTO still matters by then while the US alternately seeks to undermine and uphold it.

III. The investment component - as many have noticed, preventing further Chinese investment in US firms to presumably stop the PRC from gaining more American technology is rather redundant. Since the Committee of Foreign Investment in the United States (CFIUS) has dissuaded Chinese firms for a long time from buying American technology companies on "national security" grounds, what's different here? This from the Obama era circa 2015:

For more than a decade, China has complained about what it maintains has been a pattern of erratic and politicized treatment of Chinese investors when they attempt to acquire US companies. The Chinese want the Committee on Foreign Investment in the United States (CFIUS) to be more open and transparent in its rulings and to not discriminate against Chinese firms. The United States is not likely to accede to these demands in any formal or legal manner.

How much more PRC "technology-" or "security-"related investment in the US is there to stop when almost all of it is stopped while subject to CFIUS scrutiny? See the egregious example of Jack Ma's Ant Financial being stopped from buying money transfer service MoneyGram or even (Singapore-based) Broadcom's proposed merger with (US-based) Qualcomm. Broadcom is not even PRC-based, but they made it sound like another unwanted Chinese intrusion in the technology space.

BOTTOM LINE: In a sensible world, the Chinese would accede to American wishes to not so explicitly make technology transfer provisions for foreign companies wishing to enter the Chinese market. In exchange, the free-spending Americans would acknowledge that such profligacy inevitably means foreigners would come to own more and more of its largest debtor's (US) properties. In the real world, though, we get few of these things and a trade war in which many details are...covered in fog as mutual grievances fester. Stay tuned as we navigate this opacity.

And no, I don't believe anyone "wins" a trade war.

Cultural Revolution 2: PRC Targets Apple, Mercedes-Benz

♠ Posted by Emmanuel in China,Litigation,Trade at 8/07/2014 01:30:00 AM

Begone ye foul capitalist roaders; the second Cultural Revolution has begun.

I have written a lot--far too much for my tastes--about recent Communist Party efforts to wean the PRC off foreign products and services as if the country never opened up to the rest of the world [1, 2, 3]. However, this juggernaut keeps rolling on. After all, with all and sundry multinationals having set up shop in China as the ultimate emerging market, there is no shortage of them to bash for the next hundred years or so. On today's hit list are (surprise!) another American tech firm. For variety, though, also on the menu is German automaker Mercedes-Benz.

I. Despite nearly all their stuff being made in the PRC--nearly everything they sell says "Designed in California...Assembled in China"--Apple has reportedly been blacklisted from government procurement as well:

China’s government excluded Apple Inc. iPads and MacBook laptops from the list of products that can be bought with public money because of security concerns, according to government officials familiar with the matter...

Apple is the latest U.S. technology company to be excluded from Chinese government purchases amid escalating tensions between the countries over claims of hacking and cyberspying. China’s procurement agency told departments to stop buying antivirus software from Symantec Corp. and Kaspersky Lab, while Microsoft Corp. was shut out of a government purchase of energy-efficient computers...

Apple depended on Greater China for about 16 percent of its $37.4 billion in revenue last quarter, according to data compiled by Bloomberg. IPad sales in the world’s biggest market increased by 51 percent and Mac sales by 39 percent, Chief Executive Officer Tim Cook said July 23.

Unlike Norton and Kaspersky, I venture that Apple does not have much to worry about insofar as their sales to apparatchiks for official use are minimal. What's more, their reliance on government purchases which have to be legitimate is likely lower since pirated hardware is much less salable to Jian Q. Public than commonly pirated software. Still, it's ironic that they would so willingly bash China-made goods for being a security threat since it implies Apple is doing the American government's bidding by installing spying apparatus right in their own backyard. It makes China look dumb, doesn't it?

II. The more novel move here is hitting Mercedes-Benz with an antitrust suit. Why would M-B be considered a monopolist when virtually all of the world's car brands are now represented in the PRC? It goes back to a nice "captive market" luxury car marques have all to themselves and abuse with impunity as owners of these cars will attest: incredibly costly car parts, Apparently, Mercedes-Benz was hit by an unannounced raid:

Foreign auto makers came under new pressure in China on Tuesday, with Daimler AG DAI.XE -2.38% saying it is assisting Chinese authorities in an investigation into the car maker's Mercedes-Benz brand and Chrysler unveiling wide-ranging price cuts on some of its cars and spare parts. Chrysler said its move is a "proactive response" to an antitrust probe. The investigation into Daimler comes after efforts by the German auto maker to appease regulators with price cuts on spare parts two days earlier. A Daimler spokesman couldn't be reached for comment Tuesday on the company's pricing policy in China...

Foreign luxury-auto makers have been facing mounting pressure in what has been a lucrative market. China's state media have accused auto makers of earning exorbitant profits in China by dominating the market, overcharging consumers and controlling auto-parts sales. In recent weeks, Chinese regulators have increased scrutiny of the industry, people familiar with the matter have said. On Sunday, Daimler said it would reduce prices on average by 15% for aftermarket auto parts to address Beijing's concerns about anticompetitive behavior in the domestic auto industry. It followed a similar move by VW's Audi the week before, and that of Tata's Jaguar Land Rover brand for a few models.

This action I am more sympathetic to. Maybe some Communist Party bigwig's S-Class broke down overheating in Beijing traffic and he was outraged by Mercedes-Benz spare parts pricing that the rest of the world knows is a ripoff. He then called his ol' buddy Xi Jingping to strong-arm, I mean, mount an antitrust investigation into German automakers' monopolistic practices. Now, if they could only down the prices of spare parts worldwide I'd be so appreciative.
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Anyway, to the Cultural Revolution analogy. We are witnessing the following actions which mirror those that occurred during the cultural revolution:

1. Purification of thought from malign foreign influences;
2. Leadership purges;
3. Adversarial relations with neighbors (India/Russia then, Japan/assorted SE Asia now)

It's all part of a cleansing process to restore the ideological purity of the Communist revolution. Sure it's backward-looking and "corruption" is in the eye of the beholder, but that it isn't over yet is clear.

Dumb capitalist roaders apparently don't know what hit them as China turns back the clock to 1966. Having gained Western know-how, the Chinese leadership probably believes their country is now rich and smart enough to turn the screws on the West. It's payback time for indignities the West foisted onto China.

Russia Fun: Ruling on $100B Yukos Expropriation Claim

♠ Posted by Emmanuel in Energy,Litigation,Russia at 7/25/2014 01:30:00 AM

Those were the days--and some hope to bring them back.

Five years later, we are about to hear the decision on Russia's liabilities from expropriating Yukos. Readers will remember Mikhail Khodorkovsky, formerly a favored oligarch who then irked Vladimir Putin by entering politics. Shortly thereafter Khodorkovsky was thrown in jail, the firm he controlled was dismembered, and its assets were subsumed by the state-owned giant oil concern Rosneft. In post-USSR Russia, the unspoken arrangement among the beneficiaries of the fire-sale of state-owned commodities firms was that they could enjoy their, er, unusually acquired fortunes for as long as they did not criticize the men who made it possible. This guy had other bright ideas in biting the hand that fed.

While Khodorkovsky has become the poster boy for Putin's arbitrariness and venality, there were other shareholders adversely affected by the expropriation. The case they made to recoup lost investment--they claim over a whopping $100 billion--is about to be ruled on by the Permanent Court of Arbitration which handles these sorts of cases:

Russia will discover next week how much it may be asked to pay for the confiscation a decade ago of Mikhail Khodorkovsky’s Yukos Oil Co., then the country’s biggest oil producer. The Permanent Court of Arbitration in The Hague will rule on July 28 on a $103 billion damages claim the company’s former owners filed against Russia in 2007, Tim Osborne, head of GML Ltd., former holding company of Yukos, said by e-mail. Court official Willemijn van Banning said by phone she couldn’t comment on the date for the ruling.

As you know, Putin and Co. play hardball. They are not going to fork over whatever compensation is determined gladly. What most observers expect to occur is for Russia to balk at payment of an amount rather less than $100 billion. This intransigence will result in a fight to freeze Rosneft assets waged the world over to provide compensation:

GML has a good chance of winning partial damages, according to Gus Van Harten, a professor specializing in arbitration at York University’s Osgoode Hall Law School in Canada. There’s “very limited room” for appeal and Russia will resist paying, so any amount awarded would trigger a global legal battle to seize state property, including assets of OAO Rosneft (ROSN), which acquired most of Yukos in a series of forced auctions, Van Harten said.

The largest shareholder that brought the case, former Yukos holding company GML, is composed largely of other Russians who benefited greatly from the fire-sale of Soviet era energy assets. Ironically, Russia is being taken to task by those who it enriched prior to the state reincorporating what it previously owned. Russian politics are weird. Given its rich human capital, you would have hoped that the country moved past extractive industries and diversified into others from those that make it reliant on commodity-based industries.

Rather, the back-and-forth between the state and those it (questionably) enriched goes on and on. The resource curse lives on in Russia, then, as the emphasis of its political economy centers on nasty quarrels over redistributing existing wealth as opposed to generating more wealth from other industries. The rents may have increased since the Soviet era, but the assets generating those rents--hydrocarbons--are continuously dwindling.

7/28 UPDATE: The ruling has now been issued amounting to a fairly stunning $50 billion. I am absolutely certain the Russians will not be handing this money over easily. Expect legal machinations aplenty--appeals, stays, and so forth. While those are going on, energy assets which can be frozen to help recoup this expropriation award like those of Rosneft worldwide will be contested tooth and nail. A great game of cat and mouse has just begun.

Send Lawyers: Russia Sues EU at WTO on Energy Law

♠ Posted by Emmanuel in Energy,Europe,Litigation,Russia at 5/02/2014 12:24:00 PM

So Gazprom avoids Ukraine, but not the long arm of the EU.

In their ongoing tussle with Western Europeans, the Russians have already deployed lots of guns and money, so I guess it was only a matter of time before they sent lawyers, too. To be sure, the Russians have been quite active as both complainants and respondents at the WTO since officially joining in 2012. With so many special interests to serve, you would expect as much. However, ongoing mudslinging and the application of more Western sanctions has now prompted Russia to secure its cash cow. Namely, commercial rights for the distribution of gas in Western Europe going forward (no matter how thorny EU-Russian politics become).

The center of attention is the so-called South Stream pipeline that Gazprom is building to various European customers that will not only enhance deliverable volumes but also bypass Ukraine for obvious reasons. Having addressed Ukraine as a geopolitical impediment by avoiding it altogether, the Russians were then hit by another impediment with the EU passing its "Third Energy Package" in 2009 designed to encourage competition in the energy industry. The European Commission states that "[a] competitive and integrated energy market allows European consumers to choose between different suppliers and all suppliers, irrespective of their size, to access the market."

Being a 50% investor in the project, Gazprom has long expressed displeasure in having to accommodate other gas suppliers in a pipeline that is costing a fortune to build. How does Gazprom guarantee rents in the face of EU competition law when Russia is now a WTO member? Well of course you take the EU to court, but you need to be crafty about what to complain about. Hence Russia's gambit of claiming that the EU should not retroactively apply the "Third Energy Package" to an energy distribution deal struck with Gazprom before the law came into effect in 2009. In other words, it's an appeal against "grandfathering":

At the heart of the Russian complaint are expected to be EU provisions which prevent a single company from both owning and operating a gas pipeline. EU lawmakers agreed the rules, known as 'ownership unbundling', as part of its Energy Package on rules governing the bloc's gas and electricity market. The new framework, which was agreed in 2009, is aimed at stimulating competition in the EU's gas market and lower prices.

For its part, Russia claims that its state-owned energy giant Gazprom is the only company with the right to export gas and that the EU rules should not be backdated to cover contracts signed before 2009. "These and other elements of the Third Energy Package, in the opinion of Russia, contradict the obligations of the EU in WTO on basic principles of non-discrimination and market access," Maksim Medvedkov, a trade spokesman in Russia's Economic development ministry, told local news agencies.

Unfortunately for Russia, there is precedent at the WTO ruling that retroactively applied laws are acceptable. Moreover, I doubt whether a neoliberal institution like the WTO would gladly approve of monopoly-preserving practices. That said, who exactly are the other potential gas providers that Russia fears? It would have to be one of the transit countries. Bordering the Black Sea, Bulgaria is mostly a transit point. Romania OTOH has shale gas reserves, but protests there over foreign firms exploiting them are holding back development.

So I guess it's Russia being proactive on both fronts to decouple ownership from operation as well as forestall the rise of other energy suppliers who could capitalize on the pipeline once it's built. Unless Russia could build South Stream in such a way that circumnavigates central Europe altogether, it had to deal with this issue sooner or later. While I doubt its case, the legal challenge has now been made.

If Russia and the EU cannot resolve this matter in 60 days during bilateral talks, a panel will be formed to adjudicate this case as per WTO dispute settlement mechanism practice. I will update the particulars of this case once they are posted on the WTO site.

Meanwhile, here is Gazprom's description of the South Stream pipeline:

The South Stream gas pipeline is Gazprom's global infrastructure project aimed at constructing a gas pipeline with a capacity of 63 billion cubic meters across the Black Sea to Southern and Central Europe for the purpose of diversifying the natural gas export routes and eliminating transit risks [that's you, Ukraine]. The first gas will be supplied via South Stream in late 2015. The gas pipeline will reach its full capacity in 2018.

South Stream's offshore section will run under the Black Sea from the Russian coast to Bulgaria [to avoid Ukraine]. The total length of the Black Sea section will exceed 930 kilometers and its maximum depth will be more than two kilometers. A 1,455-kilometer onshore section will cross Bulgaria, Serbia, Hungary, Slovenia and will end in Italy. Gas branches from the main pipeline route will be built to Croatia and to Republika Srpska.

Loser's Lament: Delta Air Sues US Ex-Im Bank

♠ Posted by Emmanuel in Litigation,Trade,Travel at 4/05/2013 05:02:00 PM

The hapless and pathetic US carrier Delta Airlines seems less interested nowadays in running a viable business than in taking on quixotic wild goose chases. A few months ago it made the headlines by buying an oil refinery to help bring its costs under control. Nevermind that it's the cost of crude oil that's particularly high and not that of refining it, but hey, it made for a pretty good 5-minute publicity stunt if it did not neccessarily improve Delta's bottom line.

Now we have another act of desperation with virtually no chance of paying off: Delta has filed a case against the American Export-Import Bank for allegedly providing "subsidies" to foreign carriers it is in competition with by offering export finance to Boeing when it sells jetliners abroad. Aside from the sheer chutzpah of believing that the US government would prioritize the interests of a constant drag on its purse alike the airline industry at the expense of a viable export industry alike commercial jet exports, the term "subsidy" is arguably being abused here.

How does export finance effectively reduce the purchase price of aircraft to foreign carriers? That is the question Delta will have to build a case on. Export finance is exceedingly common especially in countries with sizeable exports. And, of course, the WTO would not entertain a case in which a domestic firm sued its own government--it's always a government taking a case against another country or countries on behalf of a firm domiciled in its boundaries. At any rate, here's to Delta for the comic relief in an otherwise bleak Stateside airline industry:

Delta Air Lines Inc has sued the Export-Import Bank of the United States over loan guarantees given to support purchases of Boeing Co's widebody planes by certain foreign airlines, according to a court filing. Delta said that Ex-Im bank's subsidies to foreign airlines, including Emirates Airlines, Etihad Airways and Korean Air Co Ltd, to help them buy Boeing planes would cause adverse economic effects on airlines and their employees.

Delta said in the filing that the bank did not properly analyze the adverse economic impact and has requested the district court in Washington D.C. block any loan guarantees...In a complaint filed in federal court in Washington D.C. late on Wednesday, Delta said one of the types of exports that Ex-Im Bank subsidizes is the export of aircraft by U.S. manufacturers, especially ones made by Boeing.

"In 2012, the bank's total exposure to outstanding financial commitments was $106.6 billion. About 46 percent of this amount was for air transportation loans and loan guarantees, more than the three next largest industrial sectors combined," Delta said in the filing.

Delta said the Ex-Im Bank loan guarantees help lower the cost of capital for foreign airline companies. "These foreign airlines will recoup their investment in their new aircraft faster or reduce ticket prices on competing routes without adversely impacting their relative rate of return on those investments," Delta said in the filing. Delta argued that unsubsidized U.S. airlines will be forced to respond by "reducing their prices and reducing or altogether eliminating their capacity to serve those routes where they compete with bank-subsidized foreign airlines."

The whole point of trade finance is to make goods alike American-made jetliners available for purchase in LDCs where commercial finance is not sophisticated enough. To brand this kind of activity "illegal" would hurt any number of American exporting industries by precedent.

Why would the US sacrifice substantial exports to satisfy the (protectionist) interests of an utterly substandard airline like Delta? Even in present-day America, rewarding mediocrity has its limits.

Priceless: Mastercard/Visa Win at WTO vs China

♠ Posted by Emmanuel in China,Litigation,Trade at 7/18/2012 03:33:00 PM

Yours truly has long noted that the PRC has not been too forthcoming about allowing foreign financial services providers to do business in China. As it turns out, not only is it difficult for foreign banks to set up branches in the mainland, but it is also difficult for American credit card firms to get into the RMB payment card transaction business. While the Chinese have acquired a reputation as savers, perhaps it's partly due to a lack of available consumer credit since the government promotes a domestic alternative that precluded the likes of MasterCard and Visa peddling their brands there. While they dominate in the rest of the world, they are minnows in the high-stakes RMB game.

In the interest of remedying global economic imbalances, I am thus quite happy to report that the WTO has for the most part ruled in favour of the United States in its case against China over discrimination against international payment card transaction firms in the RMB-denominated arena [DS 413]. From the WTO, no less:

[T]he panel concluded that China maintains CUP [China UnionPay] as a monopoly supplier for the clearing of certain types of RMB-denominated payment card transactions. The specific transactions in respect of which the panel determined that CUP is a sole supplier involve RMB payment cards issued in China and used in Hong Kong, China or Macao, China, or RMB payment cards issued in Hong Kong, China or Macao, China and used in China. Article XVI:2(a) requires Members not to limit the number of service suppliers where market access commitments have been undertaken. The panel found that China acted inconsistently with its mode 3 market access commitment under Article XVI:2(a) of the GATS by granting CUP a monopoly for the clearing of these types of RMB payment card transactions.

Mode 3 concerns commercial presence commitments, here obviously those which China made to welcome payment card firms from abroad. Continuing...

Regarding the other Chinese requirements at issue, the panel found that China maintains a requirement that all payment cards issued in China must bear the “Yin Lian”/“UnionPay” logo and be interoperable with that network, a requirement that all terminal equipment in China must be capable of accepting “Yin Lian”/“UnionPay” logo cards, and finally, a requirement that acquiring institutions post the “Yin Lian”/“UnionPay” logo and be capable of accepting all payment cards bearing the “Yin Lian”/“UnionPay” logo. The panel found each of these requirements to be inconsistent with China's mode 1 and mode 3 national treatment obligations under Article XVII of the GATS. It found, through these requirements, that China modifies the conditions of competition in favour of CUP and therefore fails to provide national treatment to EPS suppliers of other [WTO] Members, contrary to China's commitments.

That said, some are still pessimistic that this ruling will open the floodgates for the American giants in China since they lack economies of scale against the obviously state-sponsored entity:

China requires all foreign card companies to piggyback on UnionPay's network when accepting yuan payments. This means Visa and Mastercard must give a cut of every credit or debit card transaction to UnionPay and the card issuing bank. In most other countries, the foreign card issuers pay only the bank because they use their own network.

High interbank transfer charges and the inability to charge fees means the credit card business is unprofitable for most banks unless they achieve a scale that has so far been the preserve of domestic lenders. A senior bank executive interviewed by auditing firm PricewaterhouseCoopers for its annual Foreign Banks in China report said scale of at least 20 million cards was needed for the business to be successful.

Do not doubt though that China is a lucrative market; unbeknownst to the rest of the world, UnionPay has already more cards in circulation than Visa thanks to the sheer size of the Chinese market (where it largely operates as well as in Hong Kong and Macau):

Mastercard estimates credit card spending in China will reach $2.5 trillion by 2025 from just over $1 trillion now, in a country where it remains common to see wads of cash being handed over for big ticket items such as luxury watches. Some 55 million new credit cards were issued in 2011, up more than a fifth from 2010. There are now 285 million credit cards in circulation in China, according to the country's central bank.

Set up in 2002, UnionPay is already the world's largest card payment scheme. Its logo appears on 29.2 percent of the 8 billion cards issued worldwide, higher than Visa at 28.6 percent, according to a study by Retail Banking Research in London. It says its cards can be used in more than 100 countries.

It's a story worth following since there's a lot of money at stake. To paraphrase the late Carl Sagan, trilyuns and trilyuns, to be sure.

Lamborghini Aventador, US-Subsidized Supercar

♠ Posted by Emmanuel in Litigation,Marketing,Trade at 1/31/2012 07:43:00 AM

Now for one of my occasional Robb Report impersonations--albeit with an IPE twist. (We've got style, baby.) In 1998, Lamborghini became a wholly-owned subsidiary of Audi AG, which in turn is a luxury brand of the almighty Volkswagen Group--the real largest automaker in the world. What if the Germans overran not the world's territory but the global automobile industry? I'd venture that it would look a lot like the present-day VW Group: (British) Bentley, (French) Bugatti, (Italian) Lamborghini, (Spanish) SEAT, (Czech) Skoda and the father brands (they're from the Fatherland, right?) Audi, Porsche and Volkswagen. Being made to point out this fact because of Obama's disingenuous SOTU address jogged my memory of this post which I planned to write sometime ago. Many blogging ideas; too little time.

The debate over whether Volkswagen or General Motors is the world's largest automaker obscures a number of things we should also consider in which firm outdoes the other. First, VW has never, ever needed any bailout from the state of Lower Saxony (which owns part of it) or Germany itself. This is partly down to the astute management of Ferdinand Piech--a real automotive genius who is none other than the grandson of Ferdinand Porsche (of the eponymous marque and the designer of the VW Beetle). Piech has proven himself to those in the motor trade by, among other things, designing the Le Mans-winning Porsche 917 in his early days. Second, VW's profitability is secured by owning a lot of luxury brands that can command higher margins on the market. The cachet of Audi, Bentley, Porsche and so on is unmatched by anything Goverment Motors offers.

Recently, I've succumbed to an admittedly unproductive diversion I've had growing up which should be familiar to males the world over: reading car magazines. Having not read these darned things in a while despite watching Top Gear fairly regularly, I like many was struck by today's supercar du jour, the Lamborghini Aventador. Just watch that mighty beast in action. To achieve truly astounding performance feats alike accelerating from 0 to 60 MPH in 2.9 seconds, this "Italian" supercar embodies among the most advanced technologies you can find in a production car.

Thus the third point that underscores just how far the once-mighty GM has fallen is the advancement of VW Group designs over their American counterparts. In particular, the carbon frame pictured above of the megabuck Lamborghini Aventador is impressive, combining very low weight with very high strength. The most galling thing for USA #1 cheerleaders--and there are too many out there in the part of the blogosphere I come across--is that this technology comes from the American commercial jetliner maker Boeing. In turn, Boeing gained this technological edge via subsidies from the US government. Don't believe me? Fine. How about a WTO ruling which suggests just that?

Boeing received at least $5.3 billion in improper subsidies from the United States government to develop its 787 Dreamliner and other jet models, giving it an unfair advantage against its European rival, Airbus, the World Trade Organization confirmed...

In an 850-page report, the Geneva-based trade body accepted a claim by the European Union that research and development grants provided by United States space programs contributed substantially to the technologies used in building the 787, Boeing’s latest flagship aircraft.

Trade watchers will want to scrutinize the nitty-gritty details of DS 353 - Measures Affecting Trade in Large Civil Aircraft which are available on the WTO website. As for the rest of us, just keep in mind that the Lamborghini Aventador shares the carbon fibre space frame technology found on the 787 Dreamliner. Notably, the Aventador has not only starred in a car show but also an advanced materials show:

Whoever said “beauty is only skin deep” apparently never watched a Lamborghini get built. Thanks to the Italian automaker, those shallow types can head over to the Paris 2011 JEC composite show, and see their latest supercar, sans skin.

Built with a reinforced carbon fiber composite that was developed in conjunction with Boeing, the Aventador LP700-4’s naked chassis looks right at home in the showcase of materials and technology. And since composites also comprise many of the car’s other components, including wheels, frame and seats, there’s a little more to look at than just a carbon tub.

And here's the Lambo press blurb:

Automobili Lamborghini's participation in the 2011 edition of the JEC Composite Show in Paris - one of the world's most important exhibitions of composite materials - is intended to emphasize the company's leadership in this highly specialized sector, not only in applying these materials in mass production (as shown by the new Aventador LP 700-4), but also in the investigation and development of new manufacturing technologies and the resulting product spin-offs.

The use of composite materials reinforced with carbon fiber is becoming increasingly widespread in the automotive sector, as revealed by a study by Lucintel that foresees a growth of 65% over the next 5 years. Many manufacturers are working on developing and applying these technologies so they can build lighter vehicles that make an important contribution to reducing fuel consumption and air pollution, through improvements that include increasing the strength of the vehicle's structures.

The overall point is that the main beneficiary of Boeing's advancements in carbon fibre technology which are partly down to DoD and NASA inputs are not fellow US companies but a German-Italian concern. In other words, what's best for Boeing is not what's best for GM. With their superb application in road cars as exemplified by the Lamborghini Aventador, this knowledge gap between automakers will only become larger. There is a "trickle down" of technologies here, but for the benefit of non-Americans' bottom line. While you can of course argue that GM cannot sell such a premium vehicle, it calls into question why its marketing prowess does not extend to luxury cars. Remembering GM's Saab fiasco gives me shivers.

Bailouts aside, the world has moved on. Isn't it great that all those US government subsidies that funded Boeing are helping...a German-Italian automaker? VW is rolling on the tarmac laughing all the way to the bank. American industrial policy (whatever that is) is so inept and uncoordinated that they can't even tilt the playing field in the favour of their own companies consistently.

NOTE: Making these carbon fibre thingamajigs is a costly, proprietary process as demonstrated by the even more exclusive (if not higher performance) Lexus LF-A.

Long Time Coming: Int'l Derivatives Court, Now Live

♠ Posted by Emmanuel in Casino Capitalism,Litigation at 1/29/2012 04:02:00 PM

Here's something that I found in the LSE employee newsletter, of all places. Given the often legalistic culture of Western economies, it is no surprise that they prefer the settlement of economic disputes in formal fora. The WTO's dispute settlement mechanism exemplifies that for trade. Meanwhile, the likes of the International Court for the Settlement of Investment Disputes (ICSID) and the International Chamber of Commerce (ICC) Court of Arbitration do the same for disputes involving foreign investors and governments. Think of Hugo Chavez's latest fulminations against international energy companies.

Whatever you think of derivatives or financial instruments that derive their underlying value from that of another instrument, there is no denying their proliferation. Trade volumes have simply exploded, with notional amounts of existing contracts now amounting to the hundreds of trillions of dollars. Some even implicate them in both the US subprime crisis and the European debt crisis. Warren Buffett famously called them "financial weapons of financial destruction"--before taking out some derivatives of his own and losing money on them in the process. Ah well, I guess that it underscores their ubiquity.

But, along with their ubiquity comes the realization that these are not often technically straightforward contracts to interpret--especially the more esoteric derivatives. Hence, the lack of many nation's courts of the necessary technical understanding means that there is much scope for interpretation, especially when things go awry. From the press blurb:

A tribunal devoted to settling the world's most complex and contentious financial cases opened for business today in The Hague. Comprised of a group of judges and other international legal and market experts with more than 2,000 years of relevant collective experience, the P.R.I.M.E. Finance Disputes Centre will take on cases which are too specialised for many national or local courts.

It also aims to create an internationally-agreed body of law in areas where different countries often hand down conflicting rulings. It was the brainchild of Professor Jeffrey Golden of LSE's Law Department and he is chairman of its management board. The tribunal expects to handle multi-billion-dollar cases in fields such as derivatives and structured financial transactions. Its role is all the more urgent, argue its founders, because of the uncertainty created by world financial crisis.

P.R.I.M.E. Finance (the Panel of Recognised International Market Experts in Finance) is backed by the Dutch government and will hear cases at the Peace Palace in The Hague, where it will be formally opened by Jan Kees De Jager, Finance Minister of the Netherlands. Its advisory board is chaired by Lord Woolf, former Lord Chief Justice of England and Wales.

Our Professor Golden [great name, that, for what he does] explains the rationale for P.R.I.M.E. in terms of there being a need to reconcile often conflicting opinions passed down in national bodies:

Professor Golden said: "This project emerged against a backdrop of financial market crisis and legal uncertainty. The amounts at stake are staggering, the legal and contractual issues are complicated and the volume of complex cases is increasing.

"To date, national courts and ad hoc arbitration have been unable to produce a settled and authoritative body of law. Decisions are unpredictable, too decentralised, often taken too slowly and not always enforceable in other jurisdictions. The global marketplace needs a more innovative method of settling disputes and we believe this tribunal is the answer."

P.R.I.M.E. sounds too close to S.U.B.P.R.I.M.E. to my tastes. All this finance makes me want to cry U.N.C.L.E., but there is definitely a niche market to be found here. Even a necessary one insofar as there has been no great climbdown in the use of these instruments.

Lastly, do note that P.R.I.M.E. is not a free-floating body but one which aims to institute the arbitration rules set forth by the UN Commission on International Trade Law (UNCITRAL).

Apple & Samsung: Who's Got Whom by the Balls?

♠ Posted by Emmanuel in Innovation,Litigation,Marketing,South Korea,Supply Chain at 1/17/2012 01:08:00 PM

[NOTE: For those who don't get the title, play this AC/DC song.] There are two broad debates going on regarding the current dominance of Samsung in the consumer electronics space. First we have the perennial question about the role of industrial policy for its success. Widely lauded for being a source of South Korea's competitive advantage during its rise to "Asian tiger" status, industrial policy was subsequently derided as a mechanism for harmful corruption during the Asian financial crisis. Surely there are those who criticize the continued state favoritism shown towards chaebol and its effective stifling of the emergence of smaller, nimbler Korean startups.
Me? I say the results speak for themselves.

Second and more interesting to me at the moment is the ongoing legal battle being waged by Apple against Samsung. At the same time that the Korean firm manufactures a number of the components used in the Apple iPhone, it makes its own line of smartphones. Samsung has been very successful in this regard, overhauling Apple as the world's largest seller of such devices in Q3 2011. Samsung's explanation for this strategy is that being a parts maker and a branded seller helps achieve economies of scale which it otherwise would not have had if it did not spread development costs to other customers. On the other hand, Apple is very much in line with the modern vision of an American "knowledge economy" firm that does not concentrate on manufacturing (the gritty stuff whose value-added tends to fall over time) but on branding and design (the glamorous stuff whose value-added tends not to fall). That is, who wants to be stuck with plant, property & equipment when they eventually become obsolete--isn't it worth a lot more "up there" in your head?

In many ways it's a next-generation debate between those who see the "knowledge economy" or a broader shift towards services as a source of comparative advantage (especially Americans) and those who perceive that industrial policy is still viable in the 21st century with tweaks here and there (especially Asians). Yet to paraphrase an ad slogan from long ago, Korea no longer practices its grandfather's reverse engineering but one wherein it sets the pace in new industries ahead of its Western competitors. It has certainly done well in this regard during the 21st century with bets that have paid off:

In 2000 Samsung started making batteries for digital gadgets. Ten years later it sold more of them than any other company in the world. In 2001 it threw resources into flat-panel televisions. Within four years it was the market leader. In 2002 the firm bet heavily on “flash” memory. The technology it delivered made the iPhone and iPad a reality, and made Samsung Apple’s biggest supplier—and now its biggest hardware competitor.

Or so the Koreans would like to think. As you know, Apple has taken Samsung to court over, indeed, copying the look and feel of its products (imitation is the sincerest form of flattery and all that):

Competitors also balk at the way that Samsung scales up quickly to supply parts to other firms as well as to price its own gadgets keenly. Supplying the rest of industry drives down Samsung’s costs yet further, with its rivals in effect financing its success. This strategy can create problems. Samsung is Apple’s most important supplier in the smartphone and tablet-computer markets. Samsung components, which include all the product’s application processors, account for 16% of the value of an iPhone. It is also Apple’s greatest competitor in those markets. Apple is now suing the socks off the company for copying the look and feel of its products. At the same time it is urgently seeking new ways to diversify its supply chain.

There may thus be limits to the symbiosis said to be going on between these firms. Apple may want to broaden its component supplier base in case Samsung tries to get back at it for legal contretemps. Meanwhile, Samsung may want to devote more attention to the software side as the hardware side of the consumer electronics equation. That is, an amount of overlap in expertise is perhaps inevitable for each to maintain competitiveness vis-a-vis each other. While the Economist views this relationship as rather unique, B-school professors Brandenburger and Nalebuff already noticed how widespread the phenomenon of "co-opetition" was back in 1997 when Steve Jobs had yet to sell a single iProduct (having just rejoined Apple). Been there, done that, saw the movie, bought the T-shirt.

Returning to the post's title, who has whom by the balls? In the short term it's to an extent mutually assured electro-destruction if either backs out in a significant way. In the long term it's probably not a question we will be asking as Apple seeks to broaden its supplier base and Samsung does what it's done many times before and moves on to other industries it deems more promising--which are not necessarily those in the consumer electronics space. Remember, Samsung was not originally a consumer electronics company. Tis but a momentary convergence of interests.

That said, the broader debate on the prospects for the "knowledge economy" which America has in large part bet its economic future on compared to those for the reworked conception of industrial policy which Asian nations have staked a claim to should be interesting to watch. Who says both cannot work--and purchase stocks of both firms to diversify one's portfolio? More importantly from a political economy perspective, which specific strategy will be most beneficial to their home nations? I've already criticized the Apple model for not doing much that is good for America, for instance.

Hugo Away: Chavez Ignores World Bank on Exxon

♠ Posted by Emmanuel in Bretton Woods Twins,Energy,Latin America,Litigation at 1/09/2012 10:31:00 AM

File this under: pre-emptive strike. It appears that the indefatigable Hugo Chavez is back on the warpath against all things American. A few days ago he publicly suspected the United States of unleashing cancer on fellow left-leaning Latin American leaders. In less improbable news, however, we now understand that his Venezuela will not abide by subsequent rulings that find the country liable for nationalizing ExxonMobil oil fields in the Orinoco Belt. At the end of last year, forum shopping ExxonMobil received a favourable $746.9 million verdict against state oil company PDVSA at the International Chamber of Commerce (ICC) Court of Arbitration over the expropriation. While a victory nonetheless, ExxonMobil believes that this sum amounts to less than a tenth of its original investment.

Now, as most of you know, the International Court for the Settlement of Investment Disputes (ICSID) is a World Bank body that does what it says on the label. That is, it addresses legal conflicts over the handling of international investment--most often cases of expropriation alike what Venezuela is said to have done to ExxonMobil. ICSID is currently set to pass judgement on ExxonMobil's investment in Venezuela alike many others who've similarly complained about expropriation at Chavez's hands.

Anticipating a more negative ruling, Chavez is already signalling that Venezuela will not honour the decision of the Washington-based institution:

Venezuela won’t accept any verdict from the World Bank’s International Centre for Settlement of Investment Disputes, including Exxon Mobil Corp.’s claim for its nationalized Cerro Negro project, President Hugo Chavez said. The Washington-based court is considering Exxon’s claim in one of about 20 suits filed there against the Venezuelan government. Chavez, a self-professed socialist revolutionary, has taken over assets in the energy, metals, cement and telecommunications industries.

“We won’t recognize any decisions from the ICSID,” Chavez said on state television yesterday during his first Sunday program since announcing he had cancer last year. The company is “seeking the impossible, that we pay what we will never pay.” Exxon, the world’s largest oil company by market value, was the first to abandon Venezuela after Chavez expropriated industry assets in the Orinoco heavy crude belt in 2007. The president forced foreign oil producers into joint ventures as minority partners that year and is also in arbitration with ConocoPhillips, which rejected the terms...

Despite being a buffoon in many respects, Chavez logically assumes that the World Bank's ICSID and its usual American influences will result in a less favourable outcome. Here's a thought for you, though: What if the ICSID awards ExxonMobil an even smaller amount than the ICC's International Court of Arbitration or even finds in favour of PDVSA? The willingness of PDVSA to compensate ExxonMobil for what the ICC adjudged means it believes that it's as good as it gets:

In a separate case, the New York-based International Chamber of Commerce, an arbitration court, ruled last month that state oil company Petroleos de Venezuela SA must pay a net $746.9 million for the nationalization. Venezuela will compensate Exxon for the Cerro Negro project as ordered by that court, Chavez said yesterday.

“If Exxon gets an award in the ICSID, the enforcement mechanisms are strong,” Michael Nolan, a partner in the Washington office of Milbank, Tweed, Hadley & McCloy who has represented clients in arbitration with Venezuela, said in a telephone interview last week. “There’s a treaty.” Exxon in 2010 reduced its claim to $7 billion from $12 billion, according to PDVSA, as the Caracas-based company is known. The Venezuelan company said Jan. 2 that it would pay $255 million in cash for the International Chamber of Commerce judgment, after accounting for about $300 million in a frozen New York bank account and $191 million of Exxon debt that it will cancel.

Perhaps unsurprisingly, ExxonMobil is again forum shopping for the best result. Having been disappointed by the ICC ruling, it now awaits that of the ICSID which is supposedly considering a more strictly enforceable bilateral investment treaty (BIT) as evidence as opposed to a contract between just ExxonMobil and Venezuela. On the other hand, PDVSA is also looking for the best deal to get ExxonMobil off its back for now which it believes can be done by promptly (or at least by Venezuelan standards) paying at least part of the $746.9 million. I leave you to (enjoy?) more Hugo-isms:

“It’s insane!” Chávez said. “It’s such an insane position taken by this company than the decision [of the court] recognizes less than 10 percent of what they were asking for. How much must these companies have robbed in the last hundred years? They stole from us; they had to pay us back for damages made in the last hundred years; the capital they have wouldn’t be enough,” Chávez said.

Even Hugo knows a good deal when he sees one (perhaps). Still, I would be gobsmacked if the average Venezuelan knows what the ICSID is when most persons don't. Moreover, permanently blowing off those with the actual know-how to extract extra-heavy sour crude may not be the best course of action insofar as PDVSA does not necessarily have this expertise on its own.

Manifold Destiny: PRC Slaps Tariffs On US Autos

♠ Posted by Emmanuel in China,Litigation,Trade at 12/16/2011 05:44:00 AM

You can say that eventual trade war is written in the stars above between the world's two largest nations, though here's another example of a skirmish testing the waters. There I was enjoying the holiday season, watching A Charlie Brown Christmas for the nth time when the Yahoo! front page news item from Forbes caught my eye about how "China Gets Revenge On Obama With Tariff On US Autos." The first few lines provide the gist of the PRC argument against alleged US subsidies to the automotive industry:

President Barack Obama hit China automobile tire makers with a trade tariff in 2009 and now Beijing has struck back with a potentially more punitive tariff, as much as a 21% tax hike on U.S. car exports bound for China, the world’s largest auto market.

This week, the Chinese government upped the ante in the Obama-China trade dispute by surprisingly imposing new tariffs on imports of Honda and Cadillac models, Chrysler Jeep Grand Cherokee, the BMW X5 and X3 and Mercedes Benz models made in Michigan, Alabama and South Carolina. China argues that the U.S. provided illegal subsidies to these companies during the economic downturn in 2008 and is selling those vehicles cheaper in China than they are sold for in the U.S.

Tire-car metonymy aside, it seems odd to me why China would retaliate directly in response over tariffs on China-made tires given the time lag and the relatively small volume of such tires being sold in the US. To be sure, the proportion of affected American automobiles affected by this new ruling--those with engines larger than 2.5 litres displacement--will be relatively small as well. More pertinently, the Chinese should have a job on their hands proving that 'transplants' or US-made cars from foreign brands alike the aforementioned Honda, BMW and Mercedes-Benz (ML series) benefited from government subsidies during the Great Recession.

Yes, Chrysler and General Motors received substantial, money-losing state support to keep them alive during the recent recession. However, the case is not clear with regard to the transplants. It is true, for instance, that the state of Alabama gave Mercedes a hefty $300M worth of subsidies to locate its SUV plant there, but that was in 1994, not 2008. Though the states and incentives in question vary, the other transplants like BMW also chose to locate in the (largely union-free) American South during the Nineties and not in the aftermath of the subprime crisis.

In addition to subsidy claims, the New York Times' Keith Bradsher notes that the Chinese are oddly making dumping claims given that these cars sell for much more in China than in the US after all levies are accounted for:

The new tariffs, totaling up to nearly 22 percent of the import prices, will probably have a mainly symbolic function, rather than reducing the already skimpy sales of such vehicles in China. Other tariffs and taxes already in place have limited sales of American imports by helping raise their retail prices by about three times what the same cars and S.U.V.’s sell for in the United States. [my emphasis]

The new tariffs China imposed Wednesday will be antidumping duties of 8.9 percent for G.M. vehicles, 8.8 percent for Chrysler, 2.7 percent for Daimler and 2 percent for BMW. The ministry separately imposed additional antisubsidy [countervailing] duties of 12.9 percent for G.M. and 6.2 percent for Chrysler.

Is it the United States manifold destiny [no sic] to take China to the WTO over this action? That the US is hardly a saint on the matter of propping up its automakers is evident. Hence, the subsidy claims against GM and Chrysler probably pass muster. However, the dumping claims are quite far-fetched IMHO given how much these types of US-made vehicles sell for in China. Still, the PRC is adamant that their actions will hold up even if the US takes the WTO litigation route. Chinese Commerce Minister Chen Deming added the following:

"China according to WTO rules ... conducted in an open manner and rule-based manner investigations into US car imports in China and decided to impose anti-dumping and countervailing measures," he said. "This is in line with WTO rules and not a form of protectionism...[i]f anyone begs to differ, the best solution is to ask the WTO experts to rule," said Chen, adding that China will respect the trade watchdog's verdict.

The pile-up of US cases against China in tires, chickens and solar panels probably made China hurry up with a retaliatory measure to make the larger point that the US is not Mr. Clean, either. However, singling out the big-engine American automobile import sector minimizes the domestic political cost of making this point by angering more price-insensitive luxury brand buyers instead of Jiang Average:

Wednesday's announcement came amid Chinese anger over a U.S. investigation into whether China unfairly subsidizes its solar panel makers. But China's previous experience with trade disputes have taught its officials the lesson that American firms can be allies in opening American markets. In recent years, the U.S. poultry industry lobbied actively against a Congressional ban on negotiating with China to import Chinese cooked chicken -- imposed after Chinese food safety scandals -- because they feared losing the lucrative Chinese market for chicken feet.

China's choice of targets is limited by its reluctance to alienate Chinese consumers with higher prices for imported foodstuffs or raw materials. The value of soy and oilseeds imports from America so far this year is triple that of cars, at about $12 billion. Making imported cotton, chemicals or grains more expensive would also only contribute to inflation in China.

Imported cars, however, appeal mainly to China's wealthiest consumers, who aren't very price sensitive to begin with.

China has laid the gauntlet down by practically daring the US to take it to WTO dispute settlement.

PRC Rare Earth Metal Hoarding: Fake Trade Issue?

♠ Posted by Emmanuel in China,Environment,Japan,Litigation,Mining,Trade at 7/06/2011 12:03:00 AM

Given several new developments, today's a mighty fine time to update our coverage [1, 2] of worldwide rare earth metal availability provided its importance to modern industrial production. Beginning a year and a half ago, the US, EU and Mexico filed related WTO cases [DS 394, 395 and 398 respectively] challenging the PRC's use of quotas, export duties and licence requirements to limit exports of rare earth metals required in many high-technology products. With 95-97% of these metals emanating from the PRC at the present time, it is not a trivial problem for various manufacturing concerns abroad that rely on their supply. Although the PRC has claimed that environmental protection and conservation were the grounds for limiting exports, such claims have been undermined by largely unfettered access by local firms to these rare earth metals. The NY Times cheat sheet above graphically illustrates China's dominant position in sourcing these valuable materials.

To make a long story short, China has just been found in violation of trade rules via a ruling from the WTO's dispute settlement mechanism. Bloomberg offers a summary. The naturally pleased US Trade Representative claims victory while offering this version of what has just transpired:

U.S. Trade Representative Ron Kirk announced today that a World Trade Organization (WTO) dispute settlement panel has agreed with the United States, finding that export restraints imposed by China on several important industrial raw materials are inconsistent with China’s WTO obligations. China’s actions were not justified as conservation measures, environmental protection measures, or short supply measures. The raw materials at issue include various forms of bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus, and zinc, and are used in a multitude of downstream applications in the steel, aluminum and chemicals industries...

The export restraints challenged in this dispute include export quotas and export duties, as well as related minimum export price, export licensing, and export quota administration requirements. These types of export restraints can skew the playing field against the United States and other countries in the production and export of numerous processed steel, aluminum and chemical products and a wide range of further processed products. The export restraints can artificially increase world prices for these raw material inputs while artificially lowering prices for Chinese producers. This enables China’s domestic downstream producers to produce lower-priced products from the raw materials and thereby creates significant advantages for China’s producers when competing against U.S. and other producers both in China’s market and other countries’ markets. The export restraints can also create substantial pressure on foreign downstream producers to move their operations and, as a result, their technologies to China.

The USTR's claims on "market distortion" grounds are straightforward: the Chinese are responsible for rare earth metal shortages worldwide that disadvantage foreign firms by limiting their availability while raising their prices. However, local producers do not face similar limitations. What's more, perhaps consistent with China's wish to be on the technological leading edge via knowledge transfer, such limitations encourage foreign manufacturers to bypass such restrictions by locating in the Middle Kingdom.

But is that all there is to this story? While the US, EU and Mexico chose the route of litigation to free up more supplies from China, Japan appears to have found a (potentially) superior solution: get these materials from non-PRC sources. And so we have another tale hot off the presses touting Japan's newfound sources that both cut out China and make these metals appear less rare than at first glance. Instead of being in Inner Mongolia, these finds are under the sea:

Vast deposits of rare earth minerals, crucial in making high-tech electronics products, have been found on the floor of the Pacific Ocean and can be readily extracted, Japanese scientists said on Monday. "The deposits have a heavy concentration of rare earths. Just one square kilometer (0.4 square mile) of deposits will be able to provide one-fifth of the current global annual consumption," said Yasuhiro Kato, an associate professor of earth science at the University of Tokyo.

The discovery was made by a team led by Kato and including researchers from the Japan Agency for Marine-Earth Science and Technology. They found the minerals in sea mud extracted from depths of 3,500 to 6,000 meters (11,500-20,000 ft) below the ocean surface at 78 locations. One-third of the sites yielded rich contents of rare earths and the metal yttrium, Kato said in a telephone interview.

The deposits are in international waters in an area stretching east and west of Hawaii, as well as east of Tahiti in French Polynesia, he said. [Kato] estimated rare earths contained in the deposits amounted to 80 to 100 billion tonnes, compared to global reserves currently confirmed by the U.S. Geological Survey of just 110 million tonnes that have been found mainly in China, Russia and other former Soviet countries, and the United States.

We then return to the geopolitics of it all:

A chronic shortage of rare earths, vital for making a range of high-technology electronics, magnets and batteries, has encouraged mining projects for them in recent years. China, which accounts for 97 percent of global rare earth supplies, has been tightening trade in the strategic metals, sparking an explosion in prices. Japan, which accounts for a third of global demand, has been stung badly, and has been looking to diversify its supply sources, particularly of heavy rare earths such as dysprosium used in magnets.

Kato said the sea mud was especially rich in heavier rare earths such as gadolinium, lutetium, terbium and dysprosium. "These are used to manufacture flat-screen TVs, LED (light-emitting diode) valves, and hybrid cars," he said.

As you would expect, there are qualifiers. First, Japan is not free and clear to mine them unlike if they were in its exclusive economic zone, i.e. its territorial waters. If it wishes to abide by international law which I presume it does, then it will have to consult with UNCLOS authorities--and likely with other countries which have manufacturing interests such as the litigants mentioned above. The Economist offers this take on potential complications:

Seafloor mining beyond countries’ territorial waters is regulated by the International Seabed Authority, set up under the United Nations Convention on the Law of the Sea. So far it has issued only eight licences, all for exploration, not production, all for nodules, not massive-sulphide deposits, and all to governmental or quasi-governmental agencies (of China, France, Germany, India, Japan, Russia, South Korea and an east European consortium). No wonder. Commercial miners want both a clear title to their holding and exclusive rights to exploit it. They also have to answer to shareholders.

Second, there are likely more technical obstacles to deep sea mining and, third, its environmental sustainability than the Japanese let on. From Nature News:

Current on-land mines, and sites picked out for future mines, have rare-earth concentrations of about 3–10%, he points out [whereas those found by the Japan researchers are in the 0.1-0.2% range]. The much lower concentrations at the Chinese clay mine mentioned by Kato and his colleagues are only economically viable because the material is much easier to access than it would be in hard rock. That's not true for mud located below 4 or 5 kilometres of water, which would require expensive ship time and equipment to pull up. "There are better options," he says.

Craig Smith, an oceanographer at the University of Hawaii at Manoa, notes that companies are exploring the idea of mining manganese nodules from the sea floor to exploit their commercially-valuable contents, including copper and nickel as well as rare earths. Commercial mining of nodules is "probably a decade away", says Smith. Ocean mud could prove another possible source of the increasingly valuable elements.

Smith and others have raised concerns about the environmental consequences of deep-sea mining, particularly around hydrothermal vents, which host unique worms, clams and other life. Kato points out that gathering the metals from mud won't involve disturbing the vents; he found the highest concentrations of rare-earth elements thousands of kilometres away from vents. Closer than that, the rare earths were diluted by other deposits. But Smith notes that sea-floor life away from vents could also be fragile. Ecosystems on the cold ocean floor regenerate very slowly, he says, so any damage done by mining could take decades or centuries to heal.

Qualifiers and all, it's a potentially significant discovery. Whether Japan itself stands to benefit from this find is a matter of interpretation concerning the law of the sea and the state of deep sea mining technology. (If you're further interested, io9 has a map depicting where these deposits lie as per the Nature Geoscience article.)

Returning to the main story, China also has the opportunity to appeal the WTO ruling, though I firmly believe that the PRC's claims are covers for protectionism plain and simple. Perhaps other countries ramping up the capacity to mine rare earth metals on land will be more viable than either the route of litigation or deep sea mining. That said, China being alone in continuing large-scale mining of such resources remains a testament to its foresight and long-term planning. In a way, it's being punished for being resourceful, dubious PRC claims at the WTO notwithstanding.