Tag Archives: politics

Foreign Investment Risk

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The People’s Republic of China seems about to illustrate one form of this risk.

The State Council, China’s cabinet, will soon announce new measures that subject many overseas deals to reviews of “strict control,” according to people with direct knowledge of the matter and documents reviewed by The Wall Street Journal.

Targeted for particular scrutiny by the pending measure are “extra-large” foreign acquisitions valued at $10 billion or more per deal, property investments by state-owned firms above $1 billion, and investments of $1 billion or more by any Chinese company in an overseas entity unrelated to the investor’s core business.

This is nothing but an overt attempt to restrict capital flows across the PRC’s borders.  Restricting such flows from one nation to another, no matter the rationale, elevates the risk of foreign investment.  The investor, whichever the nation of his domicile, cannot count on a reliable income flow from his investment or even being able to get his money back from that investment at the expiration of the arrangement.

Separately, it demonstrates an attitude toward law and government that’s been extant in the PRC and its antecedents for thousands of years: “I don’t like what you’re doing—this investment plan of yours—here’s a nice ex post facto law that makes your activity illegal.”

Federal Green Expenditures

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Watts Up With That has some ideas for budget cutting in the next administration.  Or, actually, these ideas come from Salon (!) via WUWT (never mind that cutting isn’t what Salon meant).

  • Energy Department

2017 climate-related budget: $8.5 billion

  • Interior Department

2017 climate-related budget: $1.1 billion

  • State Department

2017 climate-related budget: $984 million

  • NASA

2017 climate-related budget: $1.9 billion

  • Environmental Protection Agency

2017 climate-related budget: $1.1 billion

  • National Oceanic and Atmospheric Administration

2017 climate-related research and development: $190 million

That works out to $13.8 billion of “useless waste.”  Yes, indeedy.

While we’re about it, let’s cut the “green” subsidies, too.  Every single one of them.  The fossil fuel (coal, oil, and gas) enterprises don’t need the $3-$5 billion (depending on who gets asked) in subsidies they get, either.  That’s yet more budget cutting.19+, although fossil fuels get much less than the “green” money being tossed down rat holes.

Systemic Importance and Institutions

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Minneapolis Federal Reserve President Neel Kashkari is on the right track, but he’s not there yet.  He’s one of a very small number of financial regulators (of any sort of regulator, come to that) who has the self-assurance and intellectual honesty to say, and to mean, things like

I start with the assumption that regulators are going to miss the next crisis.  We’re going to miss it.

He’s got a solution to that, too, but it’s only a partial solution, and that incompleteness stems from a fundamental lack of understanding.

The lesson he drew [from the Panic of 2008] is that if you want to reduce the risk that taxpayers will have to finance another rescue, financial giants need to be much better fortified before the next panic hits.

This is a start (we can argue with specific levels of fortification, of capital reserves, that are suitable, but the principle is sound), but he needs also to recognize the other side of this cash coin: businesses, including banks and systemically important institutions, need to be allowed to fail without taxpayer monies.  We have a perfectly fine bankruptcy system that works admirably well.

But the lack of understanding that regulators have of their capabilities, even with Kashkari’s degree of understanding as a start, makes much of that two-part solution less than fully relevant.  The lack of understanding is this: if the regulators can’t predict the next financial (or any other) crisis, if they can’t characterize what it will look like, on what basis do they presume to be able to predict the institutions that are/will be important to those crisis systems?

Foolishness

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This time regarding the Iran nuclear weapons deal, exemplified by this excerpt from a Wall Street Journal article concerning the Obama administration’s efforts to strengthen that deal during these last two months of overt lameduckness.

The picture they [Obama officials] plan to articulate for Mr Trump’s team is stark: if the agreement falls apart, and the US is blamed for its collapse, Iran would resume its nuclear program more aggressively. In that case, the US risks alienating Europe, as well as China and Russia, and limiting its ability to use sanctions again to contain Iran. Military action against Tehran’s nuclear facilities, these officials argue, could be the only alternative.

If the deal falls apart, Iran surely will accelerate its nuclear weapons development program.  But this is a program that Iran has never stopped, nor even held in abeyance, the deal notwithstanding.  Iran is aggressively pursuing development of missiles capable of delivering nuclear warheads against Israel and Europe, and Iran already has been caught—twice—with more heavy water than the deal permits.  Honest mistakes, that water.  Sure.

The US risks alienating Russia and the PRC?  They already are alienated from us, and have been for some time: see Georgia, Ukraine, Kaliningrad, the East China Sea, the South China Sea, the two nations’ cyber attacks against us, and on and on.

Limiting our ability to use sanctions again?  That was lost when the guy who sits in the Secretary of State’s chair, John “Motorboat Skipper” Kerry, with President Barack Obama’s (D) backing, browbeat France into accepting a much weaker deal than even the French wanted.  It was lost, too, when the Obama administration lifted so many of our sanctions and agreed to the lifting of UN sanctions.

Military action is the only alternative left?  To the extent that’s true (and it isn’t; alternatives remain, even if many of them have been made harder to use by this administration), it is so strictly as the outcome of the Obama administration’s foolishness.

Free Trade

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Specific trade deals might be good or bad, but that’s specific to the deal; such efficacies don’t say much of anything about free trade or free trade deals in general.  There are, in fact, two primary reasons for encouraging free trade, zones of free trade, and the deals that enhance free trade and generate free trade zones.  One reason is the economic benefits for the partners of the free trade deals, including lower costs—and so downward pressure on price inflation—for the citizens of the nations involved, and net (if small) job creation, which stems from those lower costs and domestic companies benefiting from the increased demand that flows from those lower costs.  It’s true that particular jobs disappear as production moves to lower cost areas (and that’s true for entirely domestic regions, too), but other jobs get created as other businesses crop up to take advantage of production shifts.

The other reason, though, and the reason that’s the emphasis of this piece, is free trade and free trade zones as instruments of foreign policy.  There are lots of ways free trade operates here, ranging from enhancing relationships among the members of the free trade arrangement to demonstrating the economic benefits of free markets to potentiating the freedoms associated with free markets to countering the influence of our enemies.

The Trans-Pacific Partnership pending deal and the People’s Republic of China’s responses present an example of that last.  The TPP initially involved a dozen nations rimming the Pacific including the US, Canada, Chile, and Peru on the eastern side and, importantly, including Japan and many of the nations surrounding the South China Sea.  Recall that the PRC has seized and is actively occupying the South China Sea and is attempting to seize the East China Sea; these aggressions are at the direct expense of those South China Sea nations and of Japan.  Aside from the naked grab aspect, the PRC’s behavior is aimed at harming American interests in the Pacific through those harms to our friends, allies, and potential allies, the aggressions are aimed directly at those nations: to subordinate them economically, and then politically, to the PRC.  Keep in mind that 30% of the world’s seaborne trade goes through that South China Sea, including more than $1 trillion of trade bound for us, with the bulk of the rest not going to the PRC being critical to the economies of those rimming nations and Japan.

The TPP by design did not include the PRC.  The failure of the TPP is being filled by a PRC-led trade pact in the offing in conjunction with its in-progress Regional Comprehensive Economic Partnership.  But neither this new trade pact nor the RCEP are agreements among trade equals.  The members of these deals will be required to toe the PRC line regarding censorship, intellectual property rights, cyber security, so on.

And

In the next five years, China will import $8 trillion of goods and invest $750 billion abroad, [PRC President Xi Xinping] said.

Those are $8 trillion of goods—and services—that could be going to members of the TPP and to us rather than to the PRC.  Further, that trade imbalance—to the extent that President-elect is correct about trade imbalances—constitutes a lever that could be used to…encourage…the PRC to withdraw from its occupation and attempted occupation of those two Seas.  Frankly, I don’t think Trump is right on trade imbalances, per se, but the economic isolation of the PRC possible from those numbers, to the extent Xi believes it, still represents a long lever.

Japan has gone ahead and ratified the TPP, and other members of the pending pact should do so, as well.  This would not only work to the mutual prosperity of the ratifiying nations, it could serve as a strong economic check to an aggressively expansionist PRC.  The economic integration potentiated by the TPP would enhance the region’s own leverage against the acquisitiveness of the PRC by making them, as a group even without us, much closer to the PRC’s equal in economic power and leverage.  Details of the deal may well want improvement, but that should be for Round Two of the negotiations while the deal’s effectivity and weaknesses are observed empirically.

The containment of the PRC makes the deal as it stands worth it.  Especially with a Round Two.