Everyday International Law » Credit Crisis

Twitter Updates for 2009-04-27

Joshua Lenon — Tue, 28 Apr 2009 05:21:00 +0000

Chile’s domestic fiscal policy in boom times sustains it during the global recession: http://bit.ly/VQk5n (Bloomberg.com) #

China’s Bailout Plan – WWWTOD

Joshua Lenon — Mon, 03 Nov 2008 20:40:00 +0000

China is starting to worry about the effect of the global slowdown on their economy.

China’s State Council announced a plan to increase export tax rebates in order to protect domestic industries. Rebates would go to labor-intensive products like garments and textile to high-value products like mechanical and electrical products.

These measures may be against China’s obligations under international law.

Worth noting, the U.S. Bush administration has become so dependent on China’s purchasing of Treasury bonds needed to finance a bailout of the American financial system that they have stopped criticizing China’s trade and currency policies.

China may be violating international law and there is nothing the U.S. can do.

Or is there? Let’s go to EIL’s big three questions:

WHAT ARE THE ISSUES?

1.) Does China’s export rebates violate international law?

2.) Can China’s trading partners do anything to stop China’s violation of their international legal obligations?

WHAT IS THE CONTROLLING INTERNATIONAL LAW?

Issue 1′s Legal Analysis

When you see a trade issue in an international setting, you should immediately look to the World Trade Organization (WTO).

Export rebates fall under the WTO’s Agreement on Subsidies and Countervailing Measures (SCM).

The SCM defines a subsidy in Article 1 to be an act that either is a direct transfer of funds or failing to collect funds – by a government, public body, or a private group entrusted by the government – to confer a benefit (on domestic producers).

Article 3.1 states that subsidies would be prohibited if they fall into two types:

(a) subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I;

(b) subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.

The Annex I is the Illustrative List of Export Subsidies (ILLES).

In this list is the key to determining if China’s export rebates are illegal under the WTO.

Part (g) of the list reads:

(g) The exemption or remission, in respect of the production and distribution of exported products, of indirect taxes in excess of those levied in respect of the production and distribution of like products when sold for domestic consumption.

What does that mean? It means a government can give back to exporters the taxes they paid for materials needed to produce their goods – but only for products being exported.

Part (g) of the ILLES also limits the amount of money that can be given back to producers. The money rebated can be no more than the taxes levied on the same product being sold in that nation.

For example, a company in China manufactures televisions. Some get sold in China; some get sold abroad.

For the televisions that get sold in China, the Chinese government collects taxes. The components and raw materials used to make the television are taxed when this company buys them. Taxes are also paid when the televisions are sold. China uses a value-added tax system (VAT). Eventually, the manufacturing company gets a tax break due to the taxes on the final sale of the TV to a Chinese consumer.

For the television sold abroad, the Chinese government would not get taxes from the final sale. Those taxes would be collected by the government in whatever nation that television arrives. So the manufacturer loses money as they no longer get the tax break they would normally get for domestic sales.

Part (g) of the ILLES allows China to rebate to the television producer a similar amount as if the TV had been sold in China – but no more than that.

This is the crux of whether China’s export rebates are legal.

Is China giving a rebate higher in excess of the indirect taxes levied on similar products consumed domestically?

So far, I’ve seen no hard details on what the final export rebate amounts will be. Some articles indicate that rebates may be raised up to 9 – 13 percent. Some rebates go as high as 17 percent.

These articles fail to compare that with the VAT for each product domestically.

If the rebates are too high, China will be in violation of their obligations under the WTO.

Issue 2′s Legal Analysis

What can China’s trading partners do if China’s subsidy violates the WTO?

Article 4 of the SCM has a dispute resolution method.

First, the SCM encourages member nations to consult with each other when a dispute arises.

After 30 days, if no resolution can be found through consultation, members may file a dispute with the Dispute Settlement Body (DSB).

From there, a panel and experts begin reviewing the subsidy. If they determine that it is prohibited under the SCM, the offending nation is required to withdraw the subsidy without delay.

There are other processes, including possible delays and appeals.

There is a formal process in place for resolving such disputes through the WTO.

WHAT DOES THIS MEAN FOR THE READERS?

China exports a lot of goods – $1.22 trillion in 2007. Nearly 20% of those goods were shipped to the U.S.

It is in China’s interest to keep their exports high. This brings in tremendous revenue to the country. These rebates allow Chinese producers to keep the costs of their products extremely competitive in the world market.

It is in the U.S.’s interest (to a degree) to keep the prices of goods low too. Consumer spending in the U.S. is dropping to record lows. Considering that consumer spending accounts for 2/3 of the U.S. Gross Domestic Product (GDP), pursuing a dispute resolution that leads to more costly goods from China may not be a smart short-term move.

What will probably happen is that China’s higher export rebates will be scrutinized by their trading partners.

At some point, a trading partner will file a complaint with the WTO DSB.

Resolving the dispute will be a lengthy process that allows China to keep the costs of their manufactured goods low long enough to help their manufacturers.

Consumers worldwide will benefit from the cheap goods to which we’ve become addicted. When the economy rebounds, the DSB can rule on the matter of the rebates.

China can then withdraw the rebates without harming their own economy.

The imperfect system may actually work.
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www.joshualenon.com

Potential Financial Summit Already Lurching

Joshua Lenon — Sun, 19 Oct 2008 21:10:00 +0000

President Bush recently met with French President Nicolas Sarkozy and European Union President Jose Manuel Barroso.

They discussed a potential summit to address the financial crises spreading throughout the world.

As I predicted, the U.S. is already refusing to commit to any significant action on the international level.

First, no date has been set for this summit.

But this could just be because of the looming revamping of the U.S. government. No matter which presidential candidate wins the upcoming election, they will need time to prepare for such a meeting.

Secondly and more telling, Bush is arguing that no action should be taken that hampers the ‘the commitment to free enterprise, free markets and free trade.”

I think it can be argued that the markets have been too free lately. Allowing large scale speculation in land, housing, commodities, and oil has led to disastrous consequences that are just now playing out.

The rest of the world is not amused with Bush’s lack of leadership on this issue.

France’s Sarkozy views U.S. participation in an international scheme as necessary.

“Since the crisis started in New York, maybe we can find the solution in New York,” he said. “This is a worldwide crisis, and therefore we must find a worldwide solution.”

What does this mean to the readers?

I think the media will focus lots of attention on this proposed summit.

Some type of joint statement of purpose will come out of the summit.

The statement will be generic, with not a lot of details on any real action. No participant will be required to do anything specific, but each will pledge to be more vigilant on policing unregulated behavior that could lead to another financial crises.

Readers should expect no real legislative action on any proposals that come from such a summit.

Instead, readers may see executive orders requiring regulatory agencies to consider the statements expressed from the summit.

That’s my cynical take on how this summit is shaping up.

Of course, results from the upcoming U.S. presidential election may make it necessary to revisit this prediction.

Germany Supports Financial Summit

Joshua Lenon — Wed, 15 Oct 2008 16:26:00 +0000

Germany has announced support for a summit to create an international regulatory scheme to prevent future worldwide credit crises.

Such a summit was proposed by France back in September.

As predicted, it looks like the summit will happen.

Will a new regulatory scheme come out of the summit?

Well, you know my thoughts on the matter.

International Credit Check

Joshua Lenon — Tue, 14 Oct 2008 19:41:00 +0000

The CSM has a great article about international coordination and cooperation between industrial countries towards the credit crisis.

You can read the article here.

Still, this increased cooperation is not a regulation of the international flow of capital. For that, I still see soft law as the best hope for future international law.

Can the U.S. Bail Fast Enough? Rising Tide of Worldwide Resentment

Joshua Lenon — Wed, 01 Oct 2008 12:48:00 +0000

The BBC has two great collections of quotes from world opinions regarding the U.S. House of Representatives failure to pass a bailout package for the financial markets.

They can be read here and here.

My personal favorite comes from Business Daily in South Africa:

“Even with (a US bail-out plan), the world will be a tense place for a good while yet, especially if nothing is done to tackle the underlying causes of the credit crunch.

And what the demise of European banks has highlighted is that the solutions will have to cross borders rather than involve the US alone. Financial markets and those who play in them will have to be subjected to more and better regulation.

And regulators from different countries will have to work together in ways they haven’t until now. But all this is not going to come together quickly, so the road ahead will be rocky. ”

I think this quote reflects a growing realization that cross-border capital trading will have to be regulated on an international level.

The question is, ‘Can a real framework for international financial regulation exist if the U.S. refuses to participate?”

I think so, but it will have to come about through soft law provisions.
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www.joshualenon.com

Can Soft Law Lead to Hard Financial Regulations?

Joshua Lenon — Wed, 24 Sep 2008 18:04:00 +0000

President Nicolas Sarkozy of France called for a summit meeting to develop greater international regulations of financial markets at the recent opening of the United Nations General Assembly. This was done in response to financial turmoil in the United States stock & credit markets that has affected the global economy.

Will there actually be a summit?

Probably.

Will the summit achieve any lasting international regulation?

Not a snowball’s chance in the heart of the sun.

What are the issues?

Can comprehensive international regulation of the financial market exist? Yes, but history teaches us that it will be ineffective without universal participation.

International law works on states – in part – because they choose to be bound by international law.

A nation that refuses to sign a treaty is not bound by that treaty.

And the United States has refused to sign a lot of multilateral treaties. We’ve also failed to ratify even more.

With the U.S. holding regulatory control over the NYSE and its affiliated indexes, not having the U.S. as a signor is likely to have very little effect in the short term.

What is the controlling international law?

Stock exchanges tend to be regulated in two fashions, domestic regulation and domestic regulation that applies to corporations.

But stock exchanges also impose their own regulations on their listed members – even though the stock exchange is a private corporation.

What this means, is that stock exchanges help create a body of practice – given legal effect – even though the stock exchanges have no legislative abilities.

They cannot create real laws that are legally binding in a court. But they can create practices through contracts with their members that are so widespread they might as well be law.

In the practice of international law, these widespread types of self-regulation are called Soft Law.

Soft law is a controversial concept. Some legal scholars argue that soft law does not even exist. Many cite that lack of binding commitment or enforcement mechanisms mean that soft law cannot exist, except as a theory.

However, when state actors fail to take action, sometimes all we are left with is soft law.

It has been seen in areas relating to such as human rights law and environmental law that soft law can make a difference in the actions of non-state actors.

An example of soft law would be the Fair Trade Coffee initiative. There are few laws governing the purchase of coffee. The Fair Trade Coffee initiative has set standards followed by individuals and multinational corporations alike.

Soft law has the potential to affect the world.

What does this mean to the reader?

If the U.S. plays to type and refuses to sign any multilateral treaty with new obligations and financial regulations, soft law may the world’s only method for creating new regulations and preventing future financial meltdowns.

Chances are pretty good that the U.S. will not sign such a treaty. Our track record says we will refuse.

So, it will be up to the stock exchanges and the countries regulating their own stock exchanges to impose regulations that might save the U.S. financial sector in the future.

Oddly, this may work through a survival-of-the-fittest model among companies.

For example, say the Toronto Stock Exchange required new types of reporting from its listed members. Companies that met this reporting standard would be considered a better investment. Their transparency would reduce the risks associated with the stock.

Those companies that are considered better would raise more capital, and potentially acquire companies that do not meet the new reporting standards.

To survive, companies would have to meet the new reporting standard or risk being acquired or driven out of business.

In this age of international business competition, even companies not listed on the Toronto Stock Exchange would have to compete with these new reporting requirements – even though they are not required.

Non-binding regulations, that affect actors around the world, that’s soft law.

And it may be the only way to regulate future financial stability.
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www.joshualenon.com

WWWTOD? – What would the World Trade Organization Do? U.S. Bailout Edition

Joshua Lenon — Mon, 22 Sep 2008 15:46:00 +0000

What is the Issue?

Does the massive bailout of the U.S. financial services sector by the U.S. government violate international law?

We already know that the last series of bailouts has been viewed with skepticism by the rest of the world. The bailouts have been seen as either an example of U.S. hypocrisy when insisting on deregulated markets in treaties or an admission of the failure of the U.S. guiding financial policies.

But is the bailout illegal under an international law regime?

What is the controlling international law?

The World Trade Organization governs many obligations – including domestic regulation – relating to trade and business.

The United States is a member of the WTO – voluntarily assuming obligations imposed by the Marrakesh Agreement, signed in 1994 and entering force in the U.S. in 1995.

The section of the Marrakesh Agreement that applies to financial services – like banking – is the General Agreement on Trade in Services (GATS).

Annex 1B of GATS contains the following provision in Article XXIX; Annex on Financial Services; Paragraph 2(a):

“Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement.”

(Source: WTO.org)

The seems to clearly indicate that actions taken to prop up failing domestic financial service suppliers are exempt from the WTO limits.

This includes throwing unprecedented sums of money at financial institutions in the hope that investment banks land softly and they can then proceed to swim about like Scrooge McDuck.

All perfectly legal under international law.

How does this affect the readers?

Readers can expect that many countries around the world will not contest the U.S. bailout in WTO tribunals. Get ready for your cash to help pay for executive golden parachutes.

Instead, foreign banks – like UBS - will be lining up to receive U.S. taxpayer cash. We’re already seeing it happen.

The next question is, are we obligated to pay money to foreign banks as well as domestic ones?

Paul Stephan over at International Economic Law and Policy Blog tackles that issue here.

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www.joshualenon.com