Commodity dependence of Brazil

The Globalizer, via MR:

When Lula won the presidency in 2002, Brazil’s main trading partners were the United States (25.5%), the Netherlands (5.3%), Germany (4.2%) and China (4.2%).

Over the eight years, the U.S. share collapsed, while the Chinese share more than tripled. By 2009, Brazil’s main trading partners were China (13.2%), the United States (9.6%), Argentina (7.8%) and the Netherlands (5.0%).

The writing was on the wall. As long as demand in these two nations continued for commodities, Brazil will continue to grow — but if demand were to fall abruptly, the situation could get difficult.

Brazil is currently a darling of economic and political progress, but lots (most? >100%?) of the underlying growth has been driven by commodity exports, and that story has ended badly before.

This article on Lula, also via MR, is also worth reading - it starts:

... in democratic conditions, to be more popular at the close than at the outset of a prolonged period in office is rare. Rarer still – indeed, virtually unheard of – is for such popularity to reflect, not appeasement or moderation, but a radicalisation in government. Today, there is only one ruler in the world who can claim this achievement, the former worker who in January stepped down as president of Brazil, enjoying the approval of 80 per cent of its citizens. By any criterion, Luiz Inácio da Silva is the most successful politician of his time.

Who are the real cotton speculators?

The WSJ (and the InterContinental Exchange, for that matter) always seem so quick to jump on financial speculators as the cause of price rises in any given commodity. Cotton prices more than doubled from Dec 2009 to Dec 2010, and have risen another 20% in 2011.

The top cotton-futures exchange is clamping down on speculation amid soaring demand that has sent prices up, threatening losses for mills, commodity merchants and apparel producers.

... Over the past year, the number of cotton contracts outstanding has grown by 21%, aided by an influx of hedge funds and small speculators.

ICE is apparently worried, although I can't tell how much of this is journalistic dramatization.

In response, ICE on Thursday said it will increase its scrutiny of big positions from now on.

"Increase its scrutiny," huh? A pretty threatening step!

A few maxims for analyzing commodity price spikes. First, always look to supply and demand first. Second, as Paul Krugman reminds us, speculators can't sustainably increase prices without actually withholding physical supply from the market, so if inventories aren't increasing, be skeptical.

What do we find in this case? First, the supply-demand picture looks tight, as the WSJ itself acknowledges:

Low global stocks of cotton and growing demand, particularly from China, have caused concerns of shortfall in the fiber this year. Rains in Pakistan and India, the second-biggest grower, and recent floods in Australia have fed fears of a shortage.

Second, there is actually cotton hoarding going on at scale - by cotton farmers in China (via Krugman). That is physical speculation (seems morally reasonable when it's farmers doing it, and incidentally not subject to ICE position limits). Finally, political uncertainty makes commodity markets jittery, and Egypt is a major cotton exporter. I think there might be something going on there.

P.S. Egypt is indeed a major cotton exporter, but I was surprised to learn that in 2004, Benin, Mali, Syria, and Greece exported comparable volumes, and FAPRI doesn't even track Egypt for cotton. Based on price per ton from FAOSTAT, Egyptians do the high-end stuff.

Chicken meat discrimination

Via John Durant, I never thought to wonder what happens to all the dark meat?

There's no question that Americans overwhelmingly prefer white chicken meat to dark. We eat chicken almost 10 times a month on average... but on less than two of those occasions do we choose chicken legs, thighs, or drumsticks.

The historical answer is: to Russia.

... in the 1980s, when chicken consumption in the United States increased at a phenomenal rate, the poultry industry needed new outlets to absorb the growing numbers of discarded legs.

It was most fortuitous, then, that the Soviet Union collapsed in 1991, resulting in the relaxation of trade restrictions that had hindered commerce with the formerly Communist state. U.S. chicken exporters, eager to exploit this fresh market, were able to underprice virtually all other animal protein produced in Russia, and American dark meat flooded the country. The chicken legs became so popular that locals endearingly nicknamed them "Bush legs," after President Bush Sr.

The complication now is that Russia seems determined to put up quality-related trade barriers (spurious, to hear American exporters tell the tale), so poultry producers need either a new market abroad, or a revolution in domestic tastes.

I've always preferred dark meat, so I'm raring to go to the grocery store and pick up some discounted bone-in chicken thighs. Although I wonder if they're apples-to-apples cheaper than the whole rotisserie chickens which are currently my favorite (and stupidly cheap compared to other types of meat).

Do sugar quotas have any redeeming qualities?

Subsidies get most of the press and credit for distortionary American agricultural policies, but egregiously protectionist sugar quotas may deserve more attention. Not just because lifting them could help Haiti, but because they seem so single-mindedly rent-seeking, with no socially redeeming characteristics I can think of.

Restrictions on imports have caused American users to pay much more than the rest of the world for sugar. That gap recently blew out to its widest in a decade.

Mr. Vilsack's comments raised the prospect of increased demand for global sugar and drove prices up 2.7%, or 0.44 cent, to 16.98 cents a pound on ICE Futures U.S. Prices for U.S. domestic sugar dropped 2.1%, to 30.8 cents a pound. That narrowed the gap between the two to 13.82 cents a pound.

A nearly 100% price premium to the world market is absurd, and I'm not sure how these could possibly be defensible in, say, the WTO.

Krugman on environmental economics

Long but excellent article by Paul Krugman on Environmental Economics 101 and the economics of climate change. I also recommend Michael Roberts' addendum and heartily second his emphasis on argiculture, forests and land use which Krugman under-addresses.

One thing I found interesting was Krugman's favorable take on both the legitimacy and the feasibility of carbon tariffs:

To the objection that such a policy would be protectionist, a violation of the principles of free trade, one reply is, So? Keeping world markets open is important, but avoiding planetary catastrophe is a lot more important. In any case, however, you can argue that carbon tariffs are well within the rules of normal trade relations. As long as the tariff imposed on the carbon content of imports is comparable to the cost of domestic carbon licenses, the effect is to charge your own consumers a price that reflects the carbon emitted in what they buy, no matter where it is produced. That should be legal under international-trading rules. In fact, even the World Trade Organization, which is charged with policing trade policies, has published a study suggesting that carbon tariffs would pass muster. [emphasis mine]

These aren't pushover arguments, but my gut reaction is that even if the WTO sanctions this type of action, the reaction from countries like China wouldn't be pretty.

Volcanic ash and high-value exports

This was one of my first thoughts when I heard of the flight disruptions in Europe, and now both Tyler Cowen and Owen Barder have picked up on it - the impact on high-value agricultural exports from East Africa to Europe (especially horticulture and floriculture). Owen provides the local perspective:

This evening here in Addis Ababa I bumped into the owner of one of the big flower-exporting businesses. He was looking pensive. Unseasonal rain had damaged part of his crop, and now he is unable to get his roses into European markets. A whole container had had to be destroyed because there was nowhere for them to go. On the back of an envelope, he calculated that the blockage of rose exports is costing Ethiopia about €200k a day. This may not sound very much but it is a big chunk of the export earnings of a poor nation.

On the other hand, seems like local European producers should have been making arguments around supply chain security rather than food miles.

Scary to think that this volcano's last eruption lasted two years. If anything like that happens again, the effect on the world economy via both agricultural production and logistical disruption could be profound.


Update: FP Passport weighs in with some numerical estimates:

- In Kenya, flower growers have lost and estimated $12 million so far, or about $2 million a day. 6.5 tonnes of roses were dumped yesterday, for example. The loss is particularly devestating with Mother's Day coming up -- a big day for flower markets across the European continent.

- In Ethiopia, horticulture exports have lost an estimated $1.75 million Euros so far.

American mercantilism, redux

I was sound asleep in Ethiopia for Obama's State of the Union address, and it wasn't pleasant to wake up to this debrief:

Then there was his disappointing discussion of trade, which included a bizarre promise to double U.S. exports in five years. Does this mean he expects the dollar to drop dramatically? He also announced the launching of "a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security" (more on that topic here), and vowed to "seek new markets aggressively, just as our competitors are." Nothing here, other than a cursory, noncommittal mention of the Doha round, indicates that Obama views trade as anything other than a zero-sum game. There's a name for this approach to trade: mercantilism.

Macroeconomics has never been my forte, and I was under impression that mercantilism was essentially a discredited 18th-century pre-economic theory. According to Wikipedia, though, it is not that simple, e.g.:

Paul Samuelson, writing within a Keynesian framework, defended mercantilism, writing: "With employment less than full and Net National Product suboptimal, all the debunked mercantilist arguments turn out to be valid."

I'll have to let others who are more educated in these matters sort this out, but my feeling is not good and my populism radar is blinking.

Obama can't seem to keep anyone happy - he managed to promote the one plank of the liberal/progressive agenda that Paul Krugman doesn't agree with.

"Food miles" are stupid

This is not news, but I hadn't really appreciated it until digging into the impressive success story of Kenyan horticulture recently. Feeling threatened by Kenya's initial success, UK's organic trade organization proposed stigmatizing - or even outright banning - products flown in from far-off countries on the basis of greenhouse gas emissions.

This ignores, unfortunately, the emissions from many other phases of food production, e.g. heating greenhouses to grow tomatoes in the winter in northern Europe. Here are a few choice quotes from a good Guardian article on "How the myth of food miles hurts the planet":

But the idea that 'only local is good' has come under attack. For a start, food grown in areas where there is high use of fertilisers and tractors is likely to be anything but carbon-friendly, it is pointed out. At the same time the argument against food miles - which show how far a product has been shipped and therefore how much carbon has been emitted in its transport - has been savaged by experts. 'The concept of food miles is unhelpful and stupid. It doesn't inform about anything except the distance travelled,' Dr Adrian Williams, of the National Resources Management Centre at Cranfield University, told The Observer last week.

'Half the people who boycott air-freighted beans think they are doing some good for the environment. Then they go on a budget airline holiday to Prague the next weekend,' adds Bill Vorley, head of sustainable markets for the International Institute for Environment and Development. 'They are just making gestures.'

Carbon tariff table-turning

Speaking of carbon tariffs:

One reason for skepticism is that I’m actually skeptical that a properly implemented set of worldwide carbon border adjustments would actually achieve its intended purpose of boosting American manufacturing... The EU, Canada, and Japan are in the aggregate much more significant trade partners than China/Mexico/Brazil. And the case for them charging us carbon tariffs seems about as good as the case for us charging the Chinese.

Yet another reason the “border tax” aspect of the Kerry-Graham compromise is a terrible idea.

From Matt Yglesias, via MR.

The first tech bubble? 1720

Robin Hanson passes on this well-reasoned argument that tech bubbles preceded dot-coms by several centuries:

Although 1720 is not generally viewed as a period of technological novelty, we argue in this paper that there were at least three critical innovations that took place in a very short span of time; two of which were financial innovations, the other was a major potential shift in the configuration of global trade. The first innovation was financial engineering at a national scale. The Mississippi Company and the South Sea Company issued equity shares in exchange for government debt; in effect converting the national debt into corporate stock. …

The second innovation was an incipient shift in global trade. Both of the companies were set up to exploit trade in the Americas. … The third innovation was also financial. The first publicly traded insurance corporations were chartered in Great Britain 1720, as a result of the Act. As such, they represented a new model of capital formation for maritime insurance firms – in a nation built on maritime trade.

These do seem like indisputably valuable innovations in the long-run (like, say, ATMs, as opposed to securitization).

(or has securitization just passed through its initial collapse, preceding a long and fruitful contribution to human economic activity?)

I would be interested to see similarly far-reaching historical analysis on commodity cycles. I have the impression that real commodity prices have fallen throughout human history, but I lack the facts to back it up.

Protectionism in Kerry-Boxer

Like in Waxman-Markey, the new Kerry-Boxer bill features concerning provisions which hint at carbon tariffs.

The Boxer-Kerry bill devotes a single sentence to what has become an increasingly thorny question: Should the U.S. slap carbon tariffs on imports from countries that don’t curb their own greenhouse gases, as the House climate bill did? To wit:

"SEC. 765. INTERNATIONAL TRADE. ‘‘It is the sense of the Senate that this Act will contain a trade title that will include a border measure that is consistent with our international obligations and designed to work in conjunction with provisions that allocate allowances to energy-intensive and trade-exposed industries.’’

“Border measure” seems to mean “border adjustment,” which is how the House version of the bill labels tariffs on imports from environmentally-unfriendly countries. The House bill says those tariffs have to be “consistent with international agreements;” the Senate speaks of “international obligations.” Both appear to refer to the questionable legality of carbon tariffs under World Trade Organization rules.

This is triply concerning because the House has already passed a bill with similar provisions, and Obama hasn't exactly distinguished himself as the stalwart defender of free trade.

Where U.S. oil comes from

Green Sheet has this great graphic on where U.S. oil imports come from:

It illustrates very clearly a point I've made before: while the U.S. is highly dependent on oil imports, most of that oil comes from close to home, rather than the Persian Gulf. Note how Canada, Venezuela, and Mexico are our three biggest suppliers, and Saudi Arabia is supplying less than 5% of total U.S. oil consumption.

Ugly protectionism

Yikes - Obama has slapped tariffs on Chinese tires and China is already retaliating. Greg Mankiw is justifiably disappointed. I hope Obama isn't trying to drum up support for healthcare through protectionism. Healthcare reform is not worth the negative impact a trade war would have on living standards worldwide.

Update: Condemnation in the econoblogosphere is rapid and unanimous, cutting across ideological lines. E.g. Brad DeLong: "Barack Obama Does Something Really Stupid". The WSJ's Real Time Economics rounds up others, including this gem from Ferris Bueller's Day Off:

“In 1930, the Republican controlled House of Rep, in an effort to alleviate the effects of the… Anyone? Anyone?… the Great Depression, passed the…Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act which, anyone? anyone? Raised or lowered?… Raised tariffs, in an effort to collect more revenue for the federal gov’t. Did it work? Anyone? Anyone know the effects? It did not work, and the US sank deeper into the Great Depression.”

Commodity specialization in Latin America

Here's a striking stat from last week's Economist:

But the pattern of trade and investment so far reinforces the fear among some Latin Americans that China is causing the region to respecialise in commodities, as it did in the 19th century, to the detriment of industry. While China’s exports to the region span a wide range of manufactured goods, its imports are highly concentrated in a few commodities (see chart 2). Soyabeans and iron ore account for two-thirds of Brazil’s exports to China, and crude oil for a further 10%. (By contrast, Brazil’s exports to the United States are mainly manufactures.)

If I were an aspiring economic superpower and almost 80% of my exports to my largest trading partner were three essentially raw commodities with little value-added, I'd be a little concerned. One is hard-pressed to find any examples of nations who climbed (and stayed atop) the economic ladder through commodities alone. Maybe Norway is the best example? But I feel like Norway had a lot else going for it as well. And as the Economist article points out, while "this specialisation is not necessarily damaging in itself," Latin American countries will have to find ways to improve the competitiveness of the parts of the economy that actually make widgets, rather than pulling black or green gold from the earth.

Carbon leakage is bad, a trade war would be worse

Environmental Economics articulates the best argument I've heard for carbon tariffs:

The economics here are simple: If the U.S. prices carbon domestically (through Cap and Trade), then imports have to be priced accordingly, or the world price for similar products will be lower than the domestic price. The result will be more domestic purchases of foreign produced carbon intensive products and potentially leakage of U.S. industry to non-carbon pricing nations who potentially produce similar products with lower carbon efficiency than domestic manufacturers currently use. This has been the U.S.'s stance in international carbon negotiations all along and the primary reason the U.S. never signed onto Kyoto. Now, domestic carbon policy without border price adjustments puts domestic producers at a competitive disadvantage and will likely result in more imports of carbon intesive products and potentially higher carbon emissions globally.

All true... but it doesn't change that a global trade war would be disastrous. I continue to believe our best hope is the quaint idea that American "leadership" can inspire other countries to follow with their own climate change policies. The stick of carbon tariffs is too dangerous.

Myth-busting: How much oil does the US really import from the Persian Gulf?

I'm reading Michael Pollan's The Omnivore's Dilemma (long overdue, and overall a great book, even though I don't agree with everything). One common meme he perpetuates that I find very irritating, though, is the one that says the U.S. gets all of its oil from the Persian Gulf. Here are the real numbers. For most of the last two decades, the Persian Gulf as a whole has supplied <20% of total U.S. imports, and Canada has been the single largest source (~16%). Saudi Arabia and Venezuela are tied for second at ~13.5%, with Mexico (12.2%) and Nigeria (7.4%) not far behind.

Not to mention that in declaring that chicken feed is Joel Salatin's only outside input, he conveniently ignores electricity and fuel. But I'm sure once I've finished the book I'll have a much longer set of gripes, so until then...

Update: To give the complete picture, imports accounted for 59% of total U.S. petroleum consumption in 2007. This means the Persian Gulf and Saudi Arabia were responsible for 9.5% and 6.5% of total U.S. oil consumption in 2007, respectively.

Protectionism in Waxman-Markey

Although I'm glad Waxman-Markey passed the House, it's scary to learn from Green Sheet and MR that potentially protectionist measures were smuggled in via the late-night Thursday night addition. According to the NYT:

The House bill contains a provision, inserted in the middle of the night before the vote Friday, that requires the president, starting in 2020, to impose a “border adjustment” — or tariff — on certain goods from countries that do not act to limit their global warming emissions. The president can waive the tariffs only if he receives explicit permission from Congress.

The provision was added to secure the votes of Rust Belt lawmakers who were wavering on the bill because of fears of job losses in heavy industry.

Carbon tariffs could conceivably spark a disastrous trade war. One good sign is that Obama promptly stated his opposition to the potential sanctions.

Update: Tyler Cowen reemphasizes his skepticism.