Inside the World Trade System: Financial

Leaving Natal on the north-eastern coast of Brazil for Europe we had expected to enjoy tropical fruits at every meal, but we were to be disappointed. The chief cook, we were told, bought all fruit in that well-known fruit-growing paradise The Netherlands. The absurdity was made worse by the fact that our cargo included 140 'reefers' or refrigerated containers, many of which contained fruit bound for the European market.

We questioned the captain who told us that fruit is cheaper in Europe than in Brazil--even tropical fruit. He told us of carrying a cargo of melons across the Atlantic on his own ship only to discover that the price for the fruit was less after the voyage of some 8,000 miles. This is a clear example of the inequities of the global trading system which ensures that while the Brazilians grow the fruit the profits are made in Europe. It is also evidence of how global inequality is now the result of currency fixing, since the Brazilian real is high relative to the Euro.

The captain also told us about a voyage where he had carried grain to the port of Philadelphia, where he unloaded it into a silo and took his ship into dock. The following morning he returned to the same silo to reload the grain, which he then carried back across the Atlantic to be sold as US grain.

Maersk are the lords of the sea, with the largest fleet of the fastest ships. This Danish based company has ruled the waves since 1996 and has its own designated areas in the large ports. All shipping gives way to their monstrous vessels, which are also some of the fastest on the sea. You will know the other companies that control this vast trade in containers from reading the logos on the sides of lorries: Hamburg Sud and Hapag Lloyd (both German owned), Marfret and CMA-CGM (both French owned).

The logistics of the global trading system revolve around Rotterdam, which is where the world's container fleet stop for refitting and for purchasing supplies. It seems that the trade wars between the Dutch and the British that began in the 17th-century have been won by the Dutch although perhaps only because the British decided that to actually touch the physical aspects of trade was beneath them and focused instead on the finance and insurance. Although the purpose of containerisation was to mechanise and remove the need for (unionised) labour, the number of jobs that have been lost to the UK is vast:  the Port of Rotterdam website estimates that 87,000 people are directly employed there. the multipliers are clearly also significant. Britain is now responding by dredging a huge area of land near Tilbury for the creation of a vast container port called London Gateway.
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Inside the World Trade System: Technical

The lengthy hiatus in posts is the result of my spending two weeks aboard a cargo ship without an Internet connection. The lack of connection was an interesting experience in itself, but seeing the global trading system from the inside was even more remarkable.

Before boarding the 170m vessel that would bring us back to Europe from Brazil I had seen the extraordinary documentary 'The Box that Changed the Britain' so knew something of what to expect from the vast logistical complexity and technological sophistication of the global trading system. But seeing the huge machines lift 40-tonne containers as though they were match-boxes was truly impressive.

The first thing we learned was metaphorical rather than technological. I cannot remember now many times I have been told that things cannot be changed because it would be like 'trying to turn around a supertanker'. Well, from the vantage-point of a ship of similar size I can tell you that it can be turned around in little more than its own length, as we were when leaving our berth in Natal. Somehow this proof that the metaphor is nonsense cheered me immensely, undermining another ideological block to the rapid structural changes we need to make to the global economy.

The largest port we visited was Rotterdam, which is actually three ports in one with another one under construction and a third on the drawing-board for 2020. Altogether these ports span 50km of land, much of it reclaimed from the sea, it is only the fourth largest port in the world. Our ship, the MV Homere was 'small' at just 170m long. We saw ships three times the size, capable of carrying 12,000 TEU and there are plans to build ships nearly twice this size. Physically this is overwhelming but the energy it takes to construct and maintain such facilities is horrifying.

The reason for my cargo-ship passage was to hitch a ride on a voyage that was already committed and so reduce my carbon impact. Although this may have worked at a personal level it was reduced to absurdity by the flights taken by the 23 crew members who made my journey possible. The shipping company that employs them flies them home after each 42-day contract from wherever they are to wherever their home is. Since our crew had more Filipino crew than Romanians (the two countries that make up the majority of the world's fleets) this meant at least 15 return flights to Asia to enable my air-free passage plus a slightly smaller number of European flights.

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Strange Fruit

I think it was Arthur Scargill who said that if people start attacking you, you are obviously shaking the right tree. The interesting thing is that when you post a plan to stabilise the global financial system it is Austrians who fall out of the tree. They feel duty bound to contest the fact that politicians can have any kind of positive impact on the situation.

I have some time for the Austrians because at least they are intellectually consistent. Their position appears to be that banks should be free to make money in a money market system with no inteference from politicians. If the banks fail, those foolish enough to deposit money with them lose it. Similarly, those who in vest in duff businesses lose their investment. The market is ruthless but fair, as are the Austrian theorists themselves.

The problem with this view of the world is that it is ethically, socially and politically untenable. What Hayek learned from the financial chaos of the 20s and 30s was that politics and economics did not mix. What he failed to learn is that unmitigated market chaos generates extreme politics, of both right and left. The role of politicians in a democracy is to mediate that, and they cannot do this without involving themselves fundamentally in the economic framework within which market transactions take place.

My ten-point stabilisation plan is no doubt flawed - and I am grateful to initiate a debate to identify and remedy those flaws. For fear of being seen to be fools, politicians are singularly failing to rush in and sort out the financial crisis. At the risk of appearing a fool I have made a proposal for others to support or attack.

Lee the Austrian makes some points typical of his intellectual wordview. However, when he responds that 'Suspension of government bond trading would push lending costs through the roof, bankrupting all world governments and ending the welfare state for good' he seems to miss my point about suspending such trade in sovereign debt. Perhaps he cannot imagine a world without markets, but I see this as analogous to the situation when a company is going bankrupt and trade in its stock is suspended. So there is no market and hence no price - so there cannot be an increase in the price of lending.

Tim Worstall raises another point that is worth debate in his comment that 'If we stop trading currencies then we've got to stop trade'. This suggests that most of the trade in foreign exchange is directed to settle external trade balances, rather than for speculative reasons. I don't have the proportions to hand, but the residual quantity of exchange between, say, pounds and Ukrainian Grivnya that relates to exchange of goods could surely be suspended for the six-month period, held as an external trade debt? Alternatively, IMF special drawing rights could be used for the purposes of external commitments, until a new global reserve currency has been negotiated.

The tone of the Austrians' comments is harsh, to match their philosophy. I would invite those holding other positions to join the fray. Surely it is worth the risk of appearing a fool!
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The King's Speech

You can tell that there is a major adaptation afoot when the Governer of the central bank of the country where capitalist finance is based starts to make interesting speeches. Do not be put off by the title, Global imbalances: The perspective of the Bank of England is radical stuff - heady, the FT calls it. Like King's speech to the Buttonwood gathering in New York this new statement is steeped in nostalgia for the era before Big Bang, when there was some degree of political control over financial interests, and bankers could not destroy the livelihoods of other citizens.


King expresses concern about the 'large and persistent current account deficits' being run by the UK and US 'while emerging market economies, in particular in Asia and among oil exporters, have been running current account surpluses.' This situation of imbalance in current accounts - the very situation that the Bretton Woods system was designed to avoid - results in instability and, potentially, conflict. The graphic shows how successful the Bretton Woods system was, and the mayhem that was evident before and after.

This paper must surely have been used to inform discussions amongst G20 finance ministers in Paris last weekend. The meeting agreed a resolution but the fundamental disagreement between China and the others over the desirability of total free movement of currencies and the need to address current account imbalances was apparent.

Mervyn King appears to agree with the Chinese. As illustrated in the second graphic from his paper, he associates free currency movement and financial instability:

'financial crises have been a hallmark of the current incarnation of the international monetary and financial system (IMFS),with the reappearance of global financial instability coinciding with the rapid increase in capital mobility.'

His conclusion is that finance ministers need to use a much wider range of tools than just interest rates. They should take back a positive management role in monetary policy, controlling capital flows, and encouraging an increase in saving rather than spending, as well as considering a revision of the 'role and governance of the international financial institutions'.
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Diverting the Currency Wars

Robert Skidelsky joins the debate about the need for a neutral global trading currency, but this time in the Financial Times which is also available at his personal website. This is the Green Party's policy and was proposed by this blog for the last G20. Skidelsky, being an unreconstructed Keynsian, has not included the planetary limit in his thinking; the EBCU proposal would do this. China will be arguing for a neutral currency, issued by the World Bank, as it has been doing for some time. We should put our energies behind this call, but with the additional twist of a currency that keeps trade and production within environmental limits, as well as bringing balance and equity.


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G20: Some Achievement!

I am impressed by the results of the so-called global negotiation that took place in Washington in just one day. It is a remarkable achievement to have been able to agree solutions diametrically opposed to those that would serve people and planet and to be so spectacularly wrong on all points!

Cut taxes and increase public spending: in a world of open economies and free movement of capital this will vastly increase national government debt across the world but is not guaranteed to achieve anything for national economies. Public spending directed specifically at green objectives and politically managed would be a preferable option.

Stabilisation of national financial systems: without a negotiation between countries about reasonable exchange rates and a political agreement to reinstitute exchange controls this can provide no guarantee against future destabilising speculation in currencies.

Economic growth and more global trade: both will only increase inequality within and between nations and force a further damaging exploitation of natural and human resources.

The expansion of G8 to G20 is something to be celebrated, but not much consolation if you are in Lesotho or Papua New Guinea. Without the poorer nations of the world being included in the negotiations how can we expect to end the desperate global inequality that scars our world?

The absurdity of attempting to negotiate anything in one day and without the world's most powerful player was obvious from the start. The lengthy negotiation towards a just and sustainable financial structure should begin as soon as possible. It should begin with the loss of the dollar's role as global currency and end with the cancellation of trade and debt surpluses. Nothing less radical can provide a genuine solution to the economic and environmental crises facing us. Tweet

Time to Get Growing

There is a lot of noise these days about the importance of food security - even the government have jumped on this bandwaggon, following after Jamie Oliver and the legion TV chefs. Suddenly, everybody is growing their own. Most of the chat in the media around the importance of locally grown food focuses on the climate impact of food shipments and transshipments - of the absurd, global conveyor belt of food that ensures we can have strawberries at Christmas and rambutan with our cheesecake.

I recently had the pleasure of hearing Paul Mobbs give his Less is a Four Letter Word presentation, which makes clear that eating from our local soil could eliminate getting on for one-third of all our carbon dioxide emissions. Growing your own food can make a more significant impact on climate change than any decisions you make about personal transport, assuming you have already given up flying.

And if you're wondering what to grow, it might be best to avoid the exotic salads and weirdly coloured beets and go for the humble potato. 2008 is the year of the potato and in an era of concern for food security I can really see why. The humble tuber is the vegetable equivalent of the downtrodden housewife - year after year it can keep us alive, healthy and happy and yet is never accorded love or respect. It is also uncomplaining about soil, although we have not been wise about breeding to deter blight.

While researching FAO statistics yesterday (the UN Food and Agriculture Organisation) I realised just how serious our food deficit really is. The difference between food imports and exports in this country is around the same, in terms of magnitude, as that in China. Both France and the USA - countries that we have harangued at trade negotiations for protecting their farmers - still have healthy trade surpluses in food. The map shows that some of our fellow EU members are just as vulnerable, although few have the density of population that we do.

As the global food market grows more competitive what do we have to trade in return for the staples of our existence? Those famous 'services' that now make up 73% of our economy. I wonder how many customers we will have for our financial services over the next year or two. Will we soon be asking how many investment analysts it takes to grow a carrot, rather than to change a light bulb? Tweet

Beware the Blandishments of the Tescopolist

Capitalism is threatened by climate change and it is responding. I offer as evidence Tesco's endowment at Manchester University of a Sustainable Consumption Institute. You will have heard arguments recently that New Zealand lamb or Kenyan cut flowers are actually more sustainable than locally grown alternatives. It is in order to produce data to support claims such as this that the Institute is being funded. Its existence proves not only that our higher education system has now become the prostitute of globalised capitalism, as Thatcher long ago intended, but also that capitalism is adapting to the strictures climate change brings.

Tesco is getting extremely good value for money. They are investing a mere £5million in return for which they will divert the energies of a sizeable group of leading UK researchers to justifying their own corporate ends. They are also using this to repair their tarnished media reputation, including by claiming magnanimity in sharing the research findings with others. So you should think yourself lucky that you will be able to use Tesco's figures to justify the globalised economy without having to pay them for the privilege.

But can capitalism ever make itself sustainable? As an economic system it relies on the extraction of the surplus value of workers and the planet to pay for all the various parasites who do no work but live from ownership and investments. As such it is a system that meets the needs of the majority in an inefficient way, because the needs of the greedy minority must be satieted. As Gandhi put this so eloquently, 'the earth has enough to satisfy every man's need but not to satisfy the greed of some'. The very nature of this unfair system of distribution puts pressure on the planet as well as on those who sell their labour.

In the globalised capitalist system most work is done in the countries of the Global South, translated from de jure into de facto colonies, their resources and their labour power still stolen by the rich West, but these days through the less unsightly mechanisms of trade treaties and financial organisations, and with armies reserved for extreme situations only.

Globalisation represents the ultimate victory of the notion of 'economies of scale' that economists love so much. Now the scale is that of the planet as a whole, with corporate barons organising who shall produce what where and fixing the prices. Failing to respect Nature's scale has led to the huge imbalances of wealth and well-being we see around us, as well as creating climate change through the unncessary production of transport-related carbon dioxide emissions.

Finally, the way capitalism creates money, through debt-based bank money, requires the constant expansion of the economy without regard to natural limits. I have blogged about this elsewhere: it is really the most fundamental explanation of the link between capitalism as an economic system and planetary destruction.

I have been in this game for a while now so I have become fairly experienced at spotting a corporate scam. Hence I was intrigued by the arguments about the distribution system of globalisation being more sustainable, not to mention more supportive of our brothers and sisters in the South. I was also depressed to notice how many good people I interact with were swallowing this line.

Sadly my own resources for investigating the assumptions on which the justification for buying New Zealand apples in the UK in September are limited. And I don't suppose Terry Leahy will be offering me money to explore my proposed alternative of bioregional distribution systems any time soon.

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What is trade really for?

If we think our way back to the earliest historical example of trade we can recall, the Vikings or the Hanseatic League, perhaps, the first thing you notice is that the trade was an exchange of exotic items that were not available in the locality. The Vikings brought Baltic amber to the Dark Age Britons, who sent back tin or gold in return. If the traders had had nothing we could not find at home we would not have involved ourselves with them. How simple life was in the happy days before capitalist exchange!

The early economists also theorised trade as an exchange of goods that could not be produced locally. In Ricardo’s theory British woollen goods are exchanged for Portuguese wine. The sleight of hand that underpins the ‘Trade is Good’ mantra is his theory of comparative advantage. It is clear that if you have a British climate, you cannot have an absolute advantage in the production of wine. There are inevitably going to be countries where the sun shines for more of the year whose citizens can produce better wine more cheaply. But what of the situation facing a country that is less efficient in the production of all goods than its neighbours? According to the theory of comparative advantage it will still gain from trade if it focuses on producing the goods it can produce most efficiently with its own resources.

The reason this is a sleight of hand is that there are assumptions built into the concept of ‘efficiency’ that are not politically neutral. For one, the trade that takes place is denominated in a currency, and that currency is owned and controlled by a nation-state which can therefore use it to gain advantage in the trade. This explains why the East Asian tigers and now China are benefiting far less from their trade with the USA than are that country’s citizens. It also explains why the USA is so keen to open up trade with the poor countries and persuade them that this is their best route out of poverty, rather than self-sufficiency.

The gains from trade, whatever one’s degree of productive efficiency, are determined by the terms of trade, which are always dependent on the relative levels of political or military power. The Vikings were traders, but they were also thieves. Some of their trading was always carried out in terms of offers people found it very difficult to refuse. The sorts of negotiation conducted today at the WTO are little different. The USA and EU use their political and military influence to achieve trade settlements that suit their interests, limiting the prices paid for the sorts of goods—raw materials and textiles—which the poorer countries have to offer.

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Trading Futures

In spite of the breaking out of civil war in Lebanon and the deaths of many innocent people, the fire aboard the Cutty Sark topped the news agenda earlier this week. Can this be because we have a nostalgic yearning for the days when Britain ruled the waves? We were the original maritime globalisers with merchant ships like Cutty Sark providing the wealth to support the British Empire.


Perhaps we still long for the certainty of those days, when we sang confidently that our nation had arisen at heaven's command from out the azure main, as hundreds still do every year at the last night of the proms. The role the sailing ships played in the Slave Trade and in the stealing of resources are less prominent.

On the same day that the Cutty Sark burned the government announced the centralisation of planning and the removal of the right of local people to have a democratic say over what is constructed in their neighbourhood. The Empire spirit lives on, at least in the sense that nothing shall be allowed to stand in the way of economic growth. Although these changes are of general application it can be no coincidence that two days later we are told that nuclear energy is the response to climate change. Since nobody wants that in their backyard the link is clear.

So how we would we organise trade in our green economy of the future? The need for exchange is obvious once you move beyond the survivalist position of trying to make everything yourself. For goods that can be made with local materials the only problem is establishing a fair price. And for those that need to travel the world the Cutty Sark may have something to teach us. One local man in Stroud has a long-term plan to buy a sailing vessel and use it to trade with low carbon impact. Discussions are being had about the possibility of using sailing barges to bring goods along the canal to Stroud.

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Banking on each other

No wonder that Venezuelan president Chavez is public enemy no. 1 for the Bush administration. Not only is he smart enough to have figured out how the international financial system repeatedly stymies the poorer countries' attempts at economic progress, but he has the resources to do something about it. As news agencies and media outlets are increasingly coming under the power of corporations some reading between the lines is necessary, but the stories about the Latin American regional development bank are fairly clear to discern.



The proposed Banco del Sur is being discussed by a group of Latin American countries including Argentina, Brazil, Bolivia, Ecuador and Paraguay as well as Venezuela, a pretty comprehensive list of the countries that lost out most spectacularly as a result of their debts to the IMF. Paying interest to rich bankers in the West swallowed up the huge income they were earning from exports, preventing it from benefiting their own citizens.



The leaders of these countries, the majority now broadly on the left and including the highly colourful characters of Evo Morales of Bolivia (who meets visiting dignatories dressed in an alpaca jumper) and former union leader Lula of Brazil, as well as Chavez himself, have learned the lessons of the 1980s and 1990s. The proposed new bank will hold reserves made up of the currencies of the countries of the region and could make development loans. It could also operate as a clearing-house for regional trade, avoiding the need to use dollars and hence support the US.

The high price of petroleum enables Venezuela to step outside the exploitative international institutions that have kept the South poor since the Bretton Woods agreement. The countries of Latin America can create an internal import-export market based on parity and fair representation, rather than the one-sided system of the WTO.



I wonder if this is the little joke that Chavez was sharing with his friend and inspiration Fidel Castro in those pictures from the Havana hospital! No wonder they laughed so much! Tweet