Power Politics

The Financial Times reports that European and American trade officials are conducting a last ditch meeting in an attempt to resolve the Airbus-Boeing subsidy battle before it reaches the World Trade Organization court. I have previously discussed this issue, considering the suits ill-advised and broadly detrimental. I stand by my previous assessment.

If this lawsuit is decided through the exclusive jurisdiction of a WTO arbitration panel, it’ll have undeniably negative effects for both Washington and Brussels. Although the recent warming of the transatlantic relationship has been predicated mostly on the realities of national interest, a bitter fight between Europe and America (the sheer acrimony of the dispute is evidenced by the hostility of the final telephone call between US negotiator Zoellick and EU representative Mandelson) would strain the relationship and have a chilling effect on future trade cooperation.

More importantly, the fallout for the WTO would be enormous. As demonstrated by the, comparatively minor, dispute over the illegal Byrd amendment (in which the US Congress adopted and now refuses to repeal a protectionist measure deemed illegal under WTO rules), protectionist elements in the American legislature have grown increasingly powerful. Empowered by reactionary sentiment against foreign competition on the part of domestic constituents, these protectionists are willing and able to subvert WTO rulings they find to be objectionable. In this case, the constituents (industrial workers and powerful commercial interests) opposed to a ruling against Boeing are extremely important and very powerful. Without a doubt the protectionists would seize upon this ruling as political ammunition against the WTO and refuse to end the industrial subsidies. Europe, dependent upon EADS as a counterweight to American industry and benefitting greatly from its subsidization, would similarly evade any ruling against it. Precedent, the case of Canada (Bombardier) versus Brazil (Embraer), strongly suggests that the panel will come down against the subsidies of both Europe and the United States. Thus the doubling ruling would assuredly be made, and even more assuredly not be carried out, and the WTO would be severely impacted in terms of its prestige and legitimacy. As I noted before:

However, the greatest risk of this battle will be to the legitimacy of the WTO as a final arbiter of trade relations. Since the US and the EU will be blatantly ignoring the ruling for at least some time, the body risks losing credibility as a forum for resolving large-scale trade disagreements involving powerful vested interests. If nations lose faith in the WTO, upcoming trade disputes (such as those over intellectual property rights, agricultural subsidies, and governance) won’t be adequately resolved through the efficient WTO mechanisms, and will instead drag on for years. The current system of international commerce will be set back, and the process of forging standardized rule sets for global trade will be stunted for some time.

From a more basic perspective, these subsidies are actually beneficial for both Brussels and Washington to maintain. Although free trade is almost always a positive and productive policy for those who partake in it, in this case it is not. In this case, both market failure and the intersection of geopolitics render free trade unproductive. As Adam Smith once noted, the defense industry cannot be supported through normal market mechanisms. The government, through the law, has made the defense industry into a oligopsony (it has only a few customers, each with great buying power, who often coordinate). The government must therefore provide financial support for the defense industry to remain viable. Furthermore, geopolitics requires that a nation’s defense industry be kept as innovative and modern as possible. This is not possible without state assistance under the current organizational framework. Now, this is not to suggest that unbridled support of the military-industrial complex is necessary (in many ways defense contractors have become far too powerful and corrupt); merely that some level of state intervention is required. As far as launch aid for the Airbus airliners, it’s pretty reasonable. The European trade commissioner put it best in a recent Op-Ed:

Here is how it works: Since 1992 European governments have committed some $3.7 billion to Airbus for its new ventures; all this investment, including interest, must be repaid by the company, on the basis of a levy for each plane sold. Once that initial investment is repaid, the company pays royalties on additional sales. It’s a win-win arrangement — Airbus pays the nations back as it is able to sell its planes, and over time the governments concerned make a handsome profit.

The question now is how this unfortunate situation can be resolved. As before, I believe the best way out for both governments is to negotiate a settlement. Mr. Mandelson’s solution seems particularly reasonable and pragmatic. An intermediate agreement trimming both the European launch aid and US subsidies by a decent amount would be a good compromise. If future reductions are deemed necessary and proper, it would provide a platform for a more expansive agreement. If not, it would amicably conclude the contentious issue and allow it to fade quietly into the night.

However, I’m not very optimistic that such diplomacy will work. As it stands now, the issue will at least be heard at the WTO. Hopefully the suit can be withdrawn before a verdict is issued, but that’s very much up on air. This last-ditch effort seems to be almost entirely without chance of success.

Mr Zoellick, who has retained some influence over some trade issues despite being moved to the State Department following President Bush’s re-election, told reporters last week he did not think a deal was likely by the deadline

Although, recognizing that it leads to superficial debate and pointless anti-intellectualism, I almost always avoid engaging in partisan politics on this blog, the issue of regulating human cloning on the international scale simply cries out for it. It is precisely because of President Bush and the Christian right that this issue has come to such a miserable conclusion. This is a clear and explicit case of the Christian right putting its morality above social and economic progress. Were it not for their intransigence on this issue, something positive could actually get done.

That said, the substantive issues now deserve more careful consideration.

Reproductive cloning, or cloning for the sake of creating a new person, is undeniably wrong and should be internationally prohibited. It is a cruel indignity upon the clone, who’ll be forced to live with the physical appearance and genetic code of someone else (thus taking away a good measure of their unique individuality). The process itself is rather crude and rudimentary, involving the imprecise physical transplant of DNA and cellular material. This leads to cellular spindle damage and other imperfections in the egg, which make most cloning attempts immediately inviable. Those that progress into births are almost always accompanied by early death, early onset genetic diseases, and a life plagued with medical problems. Forcing this upon a non-consenting person is simply immoral, as well as a burden on the public health system.

Therapeutic cloning, on the other hand, is an extremely useful and beneficial process for treating disease and advancing basic science. Essentially, an embryonic clone of an individual is created in the lab. It never passes beyond the embryonic stage, and never becomes anything even closely resembling a person. No one is exploited by this process. Since the clone has DNA that is functionally identical to the patient, stem cells and other organic parts can be taken from the clone and transplanted into the individual without fear of rejection. Genetic miscoding can even be corrected before the new tissue is transplanted. Some have speculated that it may be possible to harvest fully grown organs for transplant. The opportunities for curing disease and advancing medical science are enormous. The opportunities for extending life and making healthcare more efficient are similarly enormous. Yet the Bush administration continues to block measures in support of therapeutic cloning.

Since reproductive cloning is such a major world bioethical problem, it should be addressed through international law. The United Nations is the perfect forum for drafting a measure against reproductive cloning and lobbying for support. It would almost certainly receive near-universal endorsement, and thus could be passed into force as a recognized international norm. Failure to strengthen and solidify opposition to reproductive cloning would almost certainly allow rogue doctors to carry out experiments in countries where the law hasn’t yet been updated. By tying the fate of a ban on reproductive cloning to a ban on therapeutical cloning, the US doomed any chance of passing a binding treaty. Instead, the UN passed a nonbinding blanket statement intended by the White House to condemn all forms of cloning, which may very well discourage continued financial support for therapeutic cloning. In fact, if anything, the legislation actually weakened international opposition to reproductive cloning. A number of powerful countries are refusing to recognize the resolution, and its meaning is vague and far from clear. Rather than solidifying together in opposition to the immorality of reproductive cloning, the international community has been driven apart by US intransigence.

Britain, Belgium, China and other countries that support “therapeutic cloning” — the cloning of human embryos in medical research aimed at finding cures for diseases — said they will not honor the declaration.

“The United Kingdom is a strong supporter of therapeutic cloning research because it has the potential to revolutionize medicine in this century in the way that antibiotics did in the last,” said Emyr Jones Parry, Britain’s U.N. ambassador.

Diplomats and experts on cloning said that the language in Tuesday’s declaration was ambiguous and that its meaning would be disputed. For example, it is unclear whether therapeutic cloning is considered “incompatible with human dignity.”

All in all, the Bush administration almost entirely bungled this issue. Therapeutic cloning came under attack, while no meaningful international legislation against reproductive cloning was passed.

In the latest move of an escalating trade dispute between Washington and Brussels over subsidies to aircraft manufacturer Airbus, the United States has filed a formal complaint against the European Union through the World Trade Organization. The lawsuit alleges that European governments provide illegal repayable loans (known as launch aid) to the EADS subsidiary, distorting the market by nearly eliminating the risks of aggressive product development, and is the culmination of a long running series of negotiations over state aid to both Airbus and Boeing. As promised, the European Union has filed a countersuit in the same court, accusing the United States of illegally subsidizing Boeing’s research and development (among other things). The countersuit leaves open the possibility of future filings against Japan, which is perhaps the most profligate aerospace subsidizer in the world, as well as against other American trade partners.

This battle is perhaps the most important development in international trade politics since the formation of the WTO. Never before have the United States and Europe directly clashed over such an important sector of the economy through the WTO’s dispute settlement body, which has been built up as the ultimate arbiter of international trade policy. Merely a few times before have great powers so directly challenged the ability to maintain and shape a military-industrial complex through government intervention, which serves as a cornerstone of modern military research and development. Never before has the institutional power and legitimacy of the trade court been tested so strongly. The eventual outcome of this case may very well shape the direction of trade policy for years to come.

In many ways, Washington filed the lawsuit more for political than economic reasons. Politically, the employees of Boeing (and manufacturers in general) are a key constituency in key swing states. Their dissatisfaction with the current economic and trade order discourage many from voting GOP. John Kerry, capitalizing on that sentiment, has made increased protectionism a significant part of his economic plank. The President has felt pressured to follow the Senator’s example, and probably decided that challenging European subsidies to Airbus was the optimal way to maximize votes among this constituency. The lawsuit may also have been filed as part of a game of brinksmanship, with Washington hoping to force Europe to accede to its demands of a dramatic reduction in subsidies (which have greatly aided Airbus in overtaking Boeing).

Economically and geopolitically, however, this is already shaping up to be a very poor decision for the United States. First and foremost, the chosen target (EADS) is among the worst candidates that could have been sued. EADS is a central player in the European defense and aerospace sector, and its products are essential to the security policies of the European countries. The defense sector is so intertwined with and dependent on the national government, in fact, that even free-marketeer Adam Smith acknowledged the need for government subsidies and intervention. The international arms trade cannot compensate companies for the extremely high product research and development (not to mention manufacturing) costs associated with the industry. Trying to interfere with this aspect of government policy is tantamount to interfering with the military policy of a sovereign, independent nation. It’s bound to fail, and prohibitively costly. Furthermore, the choice of EADS as a complaint target simply invited Brussels to countersue against Boeing’s subsidies, an issue on which it has the legal upper-hand.

But not only did Washington aim at one of the most politically sensitive sectors in Europe, it did so at the worst possible moment. The World Trade Organization currently enjoys respect and legitimacy as an impartial body for facilitating international commerce and breaking down trade barriers, and is imbued with the credible power of authorizing sanctions. In nearly all of the small-scale cases it has become involved in, a fair and proper solution has been reached. However, there has been some resistance to WTO rulings (unfortunately, much of it emanating from protectionist elements in the United States Congress), and the WTO presently lacks the guaranteed credibility and power it needs to function as an authoritative final arbiter on grand international trade schemes. This credibility was slowly being built up, and was set to be fully tested by a contentious series of cases against agricultural subsidies. These cases, while being bitter disputes, were focused on less politically integral industries, and did not arouse the type of passion that the flagship military-industrial complex does. They would have been an excellent lever for bolstering the WTO, and preparing it to tackle the largest issues of worldwide commerce. Now, however, the high visibility and sensitivity of this lawsuit will propel it to the spot of central importance.

If the case comes to trial, the WTO will almost certainly find merit in both the lawsuit and countersuit, and declare both American and European subsidies illegal. This outcome is suggested by both fact (European countries and the United States both grant illegal subsidies) and precedent (a very similar dispute in the WTO between Canada (Bombardier) and Brazil (Embraer) over aircraft subsidies ended in a double ruling against both). Like in the Bombardier-Embraer fiasco, these rulings will without a doubt be immediately ignored or bypassed due to the critical importance of the companies to Brussels and Washington (for reasons involving all three facets of foreign policy - prestige, wealth, and power. The protectionist bloc in the US Congress will use the body as a whole to sponsor more counterproductive legislation like the Byrd amendment (perhaps applying retaliatory sanctions against high-stature European products, such as French champagne). The powers of Europe will use the opportunity to advance their own economic interests, possibly retaliating against the American high-technology industry. Eventually, both sides will realize the futility of this particular trade conflict, and hammer out a compromise agreement.

However, the greatest risk of this battle will be to the legitimacy of the WTO as a final arbiter of trade relations. Since the US and the EU will be blatantly ignoring the ruling for at least some time, the body risks losing credibility as a forum for resolving large-scale trade disagreements involving powerful vested interests. If nations lose faith in the WTO, upcoming trade disputes (such as those over intellectual property rights, agricultural subsidies, and governance) won’t be adequately resolved through the efficient WTO mechanisms, and will instead drag on for years. The current system of international commerce will be set back, and the process of forging standardized rule sets for global trade will be stunted for some time. As this standardization is an essential component of long term American grand strategy in the world (both for facilitating global commerce and improving world stability), any setback must be avoided at all costs.

That’s not to say that the aforementioned consequences are preordained: far from it, in fact. It appears that Washington has realized that it’s on the losing side of the debate, and is willing to compromise with Brussels rather than force the dispute into a trial. If Washington does indeed see its folly and is willing to back down on the issue, everything could be resolved rather amicably, and a detrimental outcome could be averted.

Petroleum, already one of the most important factors in global affairs, has seen a resurgence in its power. With supplies flat and demand high, petrol prices have surged, and oil has seen a return to preeminence in the strategic calculus of policymakers. In the first half of 2004, economists believe, high oil prices suppressed economic activity and slowed down the economic recovery. This has had a dramatic effect on the vitality of the world economy at large, and particularly on the United States. The shortage of oil intensified the struggle in Asia over energy deposits in the South China Sea (and other bodies of water). And to make matters worse, volatility in the oil market is only expected to increase over the next decade.

Continued violence in Iraq recently prompted officials to suspend pumping oil to two major terminals. This suspension dramatically reduced Iraqi oil exports, and demonstrated the great vulnerability of Iraq’s oil infrastructure. There is little hope that the violence will subside anytime soon; indeed, it is entirely possible that the country will erupt in a lengthy civil war. Even if a central government realizes power in Baghdad, it will be some time before it can establish security around the lucrative and highly desired oil facilities. High risks, meanwhile, will scare off private investment, leaving Iraq’s infrastructure to deteriorate even further. And despite the great utility oil income would have for the reconstruction effort, US forces lack the capabilities to guard the highly vulnerable oil facilities necessary for oil exportation. In effect, Iraq will be unable to consistently export even a modest amount of oil for at least a decade.

In Russia, the long term situation is positive, but the short term prognosis is poor. Putin continues to press ahead with his assault on Yukos, again seizing Yukos’ main production facility despite a court order not to do so. He has essentially destroyed Yukos, and will now proceed to sell its parts to Kremlin allies. While the long term consequences of this may not necessarily be too severe (that’s not to say the industry isn’t at long term risk), the short term damage is immense. Until the dynamic between the government, investors, and Russian businesses is firmly established, companies will adopt a very defensive mentality. New ventures will be put on hold temporarily or hedged, and expansion will be tepid. Over the long term, Russia will be able to exploit its vast reserves, but production won’t increase greatly within the next decade (both because of the unstable legal situation, and the lengthy period between investment and facility operability).

In Venezuela, a close recall vote may trigger instability in the oil supply. Hopefully, Chavez will prevail decisively, as he seems friendly toward international investment. However, I suspect that popular resentment runs so deep that he may in fact be kicked out of office. Thus, although Venezuela’s growth potential is massive (at present levels, oil production can expand by more than 50%), Caracas’ future prospects are uncertain. In any case, development in Venezuela won’t be able to fill the near term shortfall in energy supplies, as new facilities won’t come on line for some time. Bolivia, where international investment is under siege and a leftist leader is threatening to derail the oil industry, won’t be exporting much oil for a long time to come. Libya, the most promising of the “new” oil powers, lacks the reserves to compensate for skyrocketing demand.

Over the next five years, the world economy will be hit especially hard. With production flat and consumption rapidly rising, there’ll be a great (but temporary) shortfall in petroleum supplies. The price of oil will probably rise to an all time (real) high, and the US economy will be mired with sluggish growth. Any prospect of a European recovery will be crushed by high prices, and China’s red hot economy may actually slow down of its own accord. Japan will fare the best, as one of the core pillars of its economic policy has been to shield the economy from oil shocks. However, even Tokyo will have its economic recovery slowed. Competition in Asia over energy deposits will further intensify, although it won’t come to direct violence. Then, later in the decade, as new lines of production open, the oil squeeze will lessen. After 2015, it’s likely that the power of oil to strangle the world economy will decrease, because new sources of energy will be on equal terms with it.

Unfortunately, there is little that the United States can do to ease the economic consequences of tight oil supplies. Releasing the strategic petroleum reserve would merely provide temporary relief, and would leave America unprotected from future oil shocks. Instituting stricter efficiency standards would simply impose an unnecessary burden on industry, as oil would remain a powerful force acting on the economy (and China would eat up the excess that was created). The only thing that can be done (but won’t be) is authorizing the construction of more refineries and terminals. Unfortunately, the power of environmental interests precludes that option, and it would only provide long term relief. The best course of action is to weather the difficult period (the US economy will still expand, but at a reduced pace), while investing in liquified natural gas terminals (LNG is a plentiful energy source that will come to supplant oil within a few decades) for future energy “security.”

Platts features an incisive report on Iraqi oil, detailing future oil prospects and challenges. With the Iraqi reconstruction costing much more than anticipated, oil revenue will serve as an essential source of financing for security programs and new projects. As such an important source of investment for the new Iraqi republic, people should become well informed about this oil. Ensuring that the Iraqi government does not come to depend on oil (as other countries have to a disastrous extent) and that the oil revenue is well spent will be one of the US’s most important tasks after the hand-over of sovereignty. Independent oversight and private sector involvement are absolutely essential.

When the US-led Coalition Provisional Authority (CPA) transfers limited power back to an Iraqi interim government on June 30 after more than a year of occupation, oil revenue is expected to flow directly into Iraqi coffers for the first time since the Gulf War of 1991.

But with only limited investment made in Iraq’s oil infrastructure under US control as a result of sabotage and violence that have scared off foreign investors, Iraq’s oil industry has all but stood still since the fall of Saddam Hussein, and the condition of some of its installations is now even below pre-war capabilities.

All that interim Iraqi authorities can hope for in the immediate future is a restoration of oil production to a pre-war level of 3-mil b/d by the end of 2004 with the work that has been done so far by Halliburton subsidiary Kellogg Brown and Root (KBR) and the US Army Corps of Engineers.

Iraqi oil minister Ibrahim Bahr al-Ulum said May 11 that current oil production was running at between 2.3- and 2.4-mil b/d, and he forecast that output would rise to 2.8-mil b/d in the next few months and then to 3-mil b/d by yearend. Iraqi oil production reached a peak of 3.7-mil b/d in 1979.