DABERIAM XXIII

February 2006

It’s a funny old world, where the great advocate of world trade and open markets, the USA, is adding notch after notch to its gun opposing globalisation. 

Hard on the heels of Congressional opposition to CNOOC bids for Unocal, we have opposition to Toshiba’s bid for Westinghouse, a subsidiary of British Nuclear Fuels and now Congressional opposition, lead by Hilary Clinton, to Dubai’s D P World takeover of Britain’s P & O’s US container ports. 

The political motivation for the opposition to these takeovers is complicated and various but none of them really stand up to the strategic arguments being put forward. For example, D P World is one of the most efficient operators of Ports in the world, certainly compared with the inefficiencies in the US ports system where many local port authorities are run by political appointees. 

Added to this the string of lost cases in the World Trade Organisation that the US has suffered and you have growing damage to the future of world trade and its greatest promoter, the USA. 

Global Economic Indicators

World Economic Growth  (World Bank figures)	2005 (est.)	3.20%	2004	3.40%	2003
Base rates as at 31 January 2006	USD	4.50%	EUR	2.25%	GBP	4.50%
MSCI World Equity Index	31/01/2006	230.193	31/12/2005	203.143	YTD %	13.32%
Gold (PM London Fix $ per ounce)	31/01/2006	568.75	31/12/2005	513.00	YTD %	10.87%
Oil (WTI Crude $ per barrel)	31/01/2006	67.93	31/12/2005	61.04	YTD %	11.29%

Brussels, whose public avow is also freedom of movement of goods and services globally, and in particular within the European Union, is also sending out very mixed messages with its long standing divisive agricultural subsidies and its apparent lack of ability to prevent national governments in Europe stoppping the takeover of their favourite companies. The most recent being the Spanish Government’s opposition to the acquisition of its domestic gas company, ENDESA, by EON. Not long after the Spanish competition tribunal refused to allow ENDESA’s takeover by another Spanish group on the basis of hurting domestic competition. The list of politically opposed takeovers in Europe is considerable and runs from the banking industry to the steel industry.

Outside the US and Europe we have Russia, a highly directed economy consolidating its energy industry, its aircraft and its motor industries. China on the other hand, seems to be working towards opening up its markets and gradually adopting Western, professed, economic and management policies. The slowness of progress in China is largely due to the lack of infrastructure that can cope with free enterprise. 

A good example here is the measured Chinese introduction of flexibility into its foreign exchange markets. Giving the banking system which was primarily centrally directed, and as a result incredibly inefficient, freedoms in the foreign exchange market, would be guaranteed to create bureaucratic speculative disaster if it was pushed forward before the expertise and management abilities, that are assumed in the West, were in place 

The enormous benefits derived from global trade, a major contributor to the stable and even declining prices we have seen in the last few years, is driven by the private sector and no longer by Governments. The growth in world trade and the enormous benefits that it has brought to world prosperity over the last ten to twenty years could be threatened by the problems of energy supply and could be disrupted by the appearance of pandemics, however unlikely. 

However, the greatest threat today seems to be the growing acceptance of political interference by Western governments in world trade and, therefore, prosperity. Igniting a trade war would do far more damage to western economies than almost any terrorist threat or pandemic. 

In trying to assess future risks this political trend is the most worrying. If markets are allowed to work then, for example, shortage of oil resources will be overcome by commercial developments. Incidentally, the shortage of gas in the free market in Europe is probably a more dangerous risk than any of the other perceived risks today. A capricious Russia even threatening to cut off supplies to Europe could create major 
economic chaos in the world. 

In the same vein, Iran could more easily disrupt the world’s energy balance by cutting off oil supplies, with an economic impact far greater than the likelihood of it acquiring or being able to use nuclear weapons in the foreseeable future. 

On the economic front, Central Banks around the world are becoming more restrictive and there is now a general fashion to raise interest rates. While the tremendous growth rates in China and India are pushing down the prices of manufactured goods they are mopping up the surpluses of commodities that we have been used to over the last twenty years. The rise in commodity prices is not feeding through into inflation yet as the Asian manufacturers’ massive industrial investment pushes down the price of goods in our shops. There are also perverse effects in that the rise in the price of oil is making the production of ethanol an economic source of energy. Ethanol is produced from high starch agricultural products such as sugar and maize. This, plus the increase in cost of fertiliser, which is derived from oil, will push up food costs. 

The response by the World’s Central Banks is to halve the equation, the rise in commodity prices and the risk that it will feed through into the retail price indexes. But there is no indication that Western wage rates are rising faster and the Asian pressure on the prices of manufactured goods is holding retail prices down. The result of the pressure of higher commodity prices and interest rates will be an inevitable slow down in Western economies. 

However, the impact of Asian manufacture on the world economy is a phenomenon last seen over a hundred years ago when US production of manufactured goods started to have an impact on Europe. Because this phenomenon is so unusual it is likely that Central Banks will continue to raise interest rates to the point that our economies will slow more rapidly, making the picture for 2007 rather less optimistic.

Damon de Laszlo 
February 2006