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Politics, pandemics and Russian aluminum: why Canada faces fresh U.S. tariffs – CTV News

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WASHINGTON —
Why the United States chose to taint the debut of North America’s celebrated new trade deal by threatening fresh tariffs against Canadian aluminum, only President Donald Trump and trade emissary Robert Lighthizer can say for sure.

But industry insiders point to a convergence of disparate factors: COVID-19, international metals arbitrage, presidential politics and $16.3-billion worth of the stuff from Russia, the world’s second-largest producer.

Aluminum is one of the elemental components of the Canada-U.S. trade relationship, a bond forged in the blast furnace of the American war effort. Experts say smelters on both sides of the border stand to benefit from the U.S.-Mexico-Canada Agreement, which took effect Wednesday and imposes new requirements for regionally sourced metals.

Jean Simard, president and CEO of the Aluminum Association of Canada, is at a loss to understand why his industry is being targeted by the White House for the second time in two years. The U.S. has nowhere near the capacity to meet growing demand.

“It doesn’t make sense,” Simard said. “It’s like an oxymoron. It’s so contradictory to the spirit of USMCA.”

The answer may lie in how aluminum production works around the world, and how traders and marketers profit from it.

Because they traffic in white-hot liquid metal, aluminum smelters can’t simply shut down when demand for the product dries up, which is what happened to Canadian producers — who provide the bulk of the metal to U.S. markets — when the pandemic forced auto manufacturers to idle their assembly lines.

Smelters pivoted away from the specialized premium products demanded by the auto sector and instead produced the more generic primary aluminum known as P1020, shipping it to the only storage warehouses that are cost-effective, Simard said: facilities in the U.S., which is where the lion’s share of the North American aluminum market is located.

The ensuing “surge” in Canadian imports caught the attention of the U.S. trade representative’s office — or more specifically, the two U.S. producers that raised a red flag: Century Aluminum and Magnitude 7 Metals, which together comprise a Trump-friendly lobbying effort known as the American Primary Aluminum Association.

“The surge of Canadian metal has a caused the price to collapse and is endangering the future viability of the U.S. primary industry,” the association wrote to Lighthizer in May.

“Action — real action, not mere monitoring, and endless discussions in multinational fora — is needed now if the United States is to save what is left of its primary aluminum industry.”

A separate group — the Aluminum Association, which represents dozens of U.S. and international producers — disagrees, calling Canadian suppliers an integral element of the North American supply chain and a key component of the industry’s success.

Politics is undoubtedly a factor: two of Century’s four smelters are in Kentucky, while Magnitude 7 operates in Missouri, two states vital to Trump’s electoral fortunes.

“These are the states that keep campaign managers up at night,” said Gerald McDermott, an international business professor at the University of South Carolina.

A spokesman for the American Primary Aluminum Association did not immediately respond to a request for comment Friday.

Glencore Plc, a metals trader and producer based in Switzerland, holds a 47 per cent stake in Century. Magnitude 7, founded by a former Glencore aluminum trader, operates a single Missouri plant that won a new lease on life after Trump’s first round of tariffs in 2018, but which warned in February it was on the verge of shutting down.

And Glencore holds the exclusive rights to sell Russian-made aluminum in the U.S., having agreed in April to spend $16.3 billion over the next five years on up to 6.9 million tonnes of the metal from Rusal, the second-largest aluminum producer in the world.

Glencore is also a major player in the world of metals arbitrage — buying commodities at the lowest price possible, then shipping and storing them before selling on a futures contract in hopes of a higher price. The pandemic has fuelled a global collapse in the price of aluminum, Simard said, while the threat of tariffs has had the opposite effect.

“What do the traders do? They buy the metal at a very low price because the crisis is what brought you to pivot to this position, and they warehouse it when interest rates are very low because it’s a crisis,” Simard said.

“The key player over and above everybody else is Glencore.”

Rusal, once controlled by the Russian billionaire oligarch Oleg Deripaska, was subject to U.S. sanctions since Moscow’s annexation of Crimea in 2014 — sanctions that were lifted in January 2019 as part of an extensive restructuring that saw Deripaska relinquish control of the company. Glencore was involved, too, swapping shares in Rusal for a direct stake in its parent company, En+.

The USTR and the Trump administration “cannot be unaware of the corporate structure around Rusal and Glencore. I would doubt it very much,” said Simard.

A spokesman for Glencore declined to comment Friday.

The Canadian aluminum industry, the bulk of which is located in Quebec, owes its origins to soaring American demand for the metal in the months prior to the U.S. entry into the Second World War — a partnership that cemented Canada’s role in the continental military industrial base. Is the Trump administration trying to end that relationship?

“It’s worth raising the question,” Simard said.

Trump’s disdain for Canada and Prime Minister Justin Trudeau has long been an open secret — “Trudeau’s a ‘behind-your-back’ guy,” former national security adviser John Bolton’s explosive new book quotes the president saying — and with an uphill battle for re-election looming, he may be looking to score political points, McDermott said.

“Why is the Trump administration doing what it’s doing? The short answer is it’s in a free fall,” he said.

“It’s got to show that it’s doing something for these Midwestern manufacturing states, and that means getting tough with non-U.S. people. What better thing, then, to piss off the Canadians?”

This report by The Canadian Press was first published July 3, 2020.

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Global politics from the view of the political-economy trilemma | VOX, CEPR Policy Portal – voxeu.org

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Changing paradigm in global politics

In recent years, political landscape has been changing drastically in many countries. In the US, Donald Trump’s administration has pushed the ‘America-first’ agenda and prioritised the nation’s interest above all else since coming to power in 2017. Regardless of existing trade or other agreements, the administration has threatened to increase tariffs for trading partners or walk away from negotiations in case the conclusions are not favorable to the country. The administration’s anti-globalisation or isolationist stance has been observed in the ongoing COVID-19 pandemic as is evident from the country’s departure from the World’s Health Organization (WHO).

The UK has also prioritised its national interest and sovereignty by withdrawing from the EU. In many other countries, populist governments have arisen, both on the left and the right, touting similar slogans and advocating for de-globalisation to recover the economic and social benefits which they claim foreigners and immigrants have free ridden so far.

These new political forces are different from those of the recent past.

For example, after WWII, Europe pursued regional political and economic integration through democratic process, although it required each country to sacrifice its own national interest. Given this history, the rise of countries prioritising self-interest and advocating anti-globalisation means a paradigm shift in the postwar order and a challenge against long-lived European unification efforts.

Even in originally rather democratic countries, such rifts between political authorities and the people have led the former to suppress the latter through undemocratic or authoritarian measures. The example includes Hong Kong, Venezuela, and Turkey.

Rodrik’s political-economy trilemma

The current changes in political order can be comprehensively viewed through the lens of Dani Rodrik (2000)’s political-economy trilemma.

The word ‘trilemma’ may remind international economists of the open economy trilemma.

The open economy trilemma, which has become a central theorem in international finance ever since its introduction by Mundell (1960) and Fleming (1961), states that a country may simultaneously choose any two, but not all, of the three goals of monetary policy independence, exchange rate stability, and financial market openness to the full extent (Fig 1–a).1

Figure 1 Open economy trilemma and the political-economy trilemma

a) Open economy trilemma

b) Political-economy trilemma

Dani Rodrik applied this theory to political economy, asserting that among national sovereignty, democracy, and globalisation, only two of these policy goals or forms of governance can be simultaneously achieved to the full extent, but not all three.

For example, the member states of the EU each have democratic institutions of governance and are open to the globalised markets. However, each state cannot pursue its own national interest or assert its sovereignty (more fully than other member states do). In other words, the EU is a good example of a region marching toward global federalism (Fig. 1–b, bottom right corner of triangle).

Reclaiming its sovereignty in order to pursue its own national interest is exactly what the UK has been trying to accomplish by withdrawing from the EU. According to Rodrik’s political-economy trilemma, the UK could have gone further toward fuller sovereignty either by restricting democratic policymaking or by limiting openness to the global economy (i.e. going from the bottom right corner of the triangle in Fig. 1–b toward the side of ‘national sovereignty’). Considering that Boris Johnson’s administration is acting in strict accord with democratic process, sacrificing globalisation would be the only way the UK could withdraw from the EU. Greater pursuit of a nation’s national interest requires curtailing its access to international markets.

Other countries try to reap the benefit of globalisation while still fully embracing their own sovereign statehood. These countries align themselves with international rules and standards when making their own, but they do not necessarily follow a fully democratic process for policymaking. Their domestic standards and rules are not based on democratically determined policies, but rather on those of multinational corporations and international organisations, or on treaties and agreements concluded by administrative bodies (i.e. bureaucrats who were not necessarily democratically elected). Thomas Friedman (1999) calls this “the Golden Straitjacket” (Fig. 1–b; top of the triangle), which he describes as a state of affairs where “[a country’s] economy grows and its [democratic] politics shrinks.”

A country wearing the Golden Straitjacket can free itself by either pursuing a higher level of democracy or becoming less globalised.

It is also possible for a fully democratic nation to strengthen its national statehood and prioritise its national interest. However, such a country cannot reap the benefits of globalisation (Fig. 1–b; bottom left corner of the triangle). The Bretton Woods system, which existed from 1944 to 1971, allowed its member states to impose capital controls and barriers to international trade. From the perspective of the political-economy trilemma, this is a policy mix of full democracy and national sovereignty.

As these examples show, policy makers can simultaneously choose any two of the three policy goals of national sovereignty, democracy, and globalisation, but cannot achieve all three to the full extent.

Empirical validity of the political-economy trilemma

Now, a natural question arises: Can the theorem of the political-economy trilemma be empirically proven with actual data?

In our recent work (Aizenman and Ito 2020), we construct a set of the indexes, each of which measures the extent of attainment of the three political-economic factors: globalisation, national sovereignty, and democracy. The indexes are available for 139 countries between 1975 and 2016. Using these indexes, we test whether the weighted average of the three indexes is constant. If the indexes are to be found linearly correlated, it would mean that the three variables operate within a trilemma relationship, i.e. the trilemma is empirically valid.

The regression analysis shows that for industrialised countries, there is a linear negative association between globalisation and national sovereignty, while the democratisation index is statistically constant during the sample period. That means, for the industrial countries during 1975-2016, the political economy trilemma was mostly a dilemma between globalisation and national sovereignty. For developing countries, a weighted average of the three indexes adds up statistically to a constant with positive and significant weights, indicating they are in a trilemma relationship, as Rodrik claims.

Closely examining the development of the three indexes over the sample period reveals that for industrialised countries, while the level of democracy is stable and high, there is a combination of rising levels of globalisation and declining extent of national sovereignty from the 1980s through the 2000s, mainly reflecting the experience of European industrialised countries. Developing countries, in contrast, experienced convergence of declining sovereignty and rising globalisation and democratisation around the same period. Emerging market economies experienced rising globalisation and democratisation earlier than non-emerging market economies with all the three variables converging around the middle.

Figure 2 Development of political economy trilemma indexes – income groups

The possible impacts of the three policy goals on political and economic stability

Lastly, what kinds of impact could these three policy goals (national sovereignty, democracy, and globalisation) have on actual politics and economics? We perform regression analysis to examine how the three trilemma variables can affect political stability and economic stability.

Our results indicate that (a) more democratic industrialised countries tend to experience more political instability; and (b) developing countries tend to be able to stabilise their politics if they are more democratic. The lower the level of national sovereignty an industrialised country embraces, the more stable its political situation tends to be. Globalisation brings about both political and economic stability for both groups of countries.

Developed countries, particularly the US and the UK, are now asserting their national sovereignty, touting policies that prioritise their national interests and an anti-globalisation stance. If the regression analysis is correct, such policies could increase political instability and the probability of financial crisis. Furthermore, if a developing country takes an anti-democratic or an anti-globalisation stance, it could face more political or economic instability.

Let us see what will happen.

Editor’s note: The main research on which this column is based (Aizenman and Ito 2020)  first appeared as a Discussion Paper of the Research Institute of Economy, Trade and Industry (RIETI) of Japan

References

Aizenman, J and H Ito (2020), “The Political-Economy Trilemma”, Open Economies Review.

Aizenman, J, M D Chinn and H Ito (2013), “The ‘Impossible Trinity’ Hypothesis in an Era of Global Imbalances: Measurement and Testing”, Review of International Economics 21(3): 447–458.

Aizenman, J, M D Chinn and H Ito (2010), “The Emerging Global Financial Architecture: Tracing and Evaluating New Patterns of the Trilemma Configuration”, Journal of International Money and Finance 29 (2010): 615–641.

Mundell, R A (1963), “Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates”, Canadian Journal of Economic and Political Science 29 (4): 475–85.

Fleming, J M (1962), “Domestic financial policies under fixed and floating exchange rates.” IMF Staff Papers 9(3):369–379.

Friedman TL (1999), The Lexus and the olive tree: understanding globalization, Farrar, Straus and Giroux, New York

Obstfeld, M (2015), “Trilemmas and Tradeoffs: Living with Financial Globalization”, Central Banking, Analysis, and Economic Policies Book Series. In: Claudio Raddatz & Diego Saravia & Jaume Ventura (ed.), Global Liquidity, Spillovers to Emerging Markets and Policy Responses, edition 1, volume 20, chapter 2, pages 013-078 Central Bank of Chile.

Obstfeld, M, J C Shambaugh and A M Taylor (2005), “The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility”, Review of Economics and Statistics 87 (August): 423–438.

Rodrik, D (2000), “How Far Will International Economic Integration Go?”, Journal of Economic Perspective 14(1 (Winter 2000)):177–186.

Shambaugh, J C (2004), “The Effects of Fixed Exchange Rates on Monetary Policy”, Quarterly Journal of Economics 119 (1): 301-52.

Endnotes

1 See more on the open economy trilemma in Aizenman et al. (2010, 2013), Obstfeld (2015), Obstfeld et al. (2005), and Shambaugh (2004).

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Nova Scotia Premier Stephen McNeil resigns, says he is leaving politics – National Post

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HALIFAX — Nova Scotia Premier Stephen McNeil unexpectedly announced his departure from politics Thursday, saying he stayed on the job longer than planned because of the onset of the COVID-19 pandemic.

After 17 years in provincial politics it is simply time for a change, the Liberal premier said, adding he is ready for a rest.

“I’m not leaving because I don’t like the job,” McNeil told astonished reporters who thought they had gathered to cover a cabinet meeting. “I love the job as a matter of fact, and I’ve had tremendous support.”

“Many people are surprised today that I work with, and I’m sure many Nova Scotians are surprised.” A change in leadership, he said, is “the right thing for the province.”

McNeil, who headed two majority governments following his 2013 and 2017 election wins, said he will stay on until the Liberals choose a new leader. He was first elected in 2003 as the member for the riding of Annapolis.

He said he initially wanted to leave in the spring, but the pandemic postponed those plans.

“I was actually going to make this decision in April and then COVID-19 hit and I re-evaluated,” McNeil said. “Then we (Nova Scotia) flattened the curve and there was an opportunity for the party to prepare for a leadership contest and a new leader.”

The premier said the past five months had been difficult for the province because of a series of tragedies, including a mass shooting that claimed the lives of 22 people in central and northern Nova Scotia in April, and the crash later that month of a Cyclone helicopter from a Halifax-based navy vessel, which killed six service members.

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Nova Scotia Premier Stephen McNeil announces he is leaving politics – Powell River Peak

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HALIFAX — Nova Scotia Premier Stephen McNeil is leaving politics, saying he stayed on longer than he’d planned in order to lead the province through the first wave of the COVID-19 pandemic.

The Liberal premier said Thursday that after 17 years in provincial politics, he decided it’s time for a change, and he’s ready for a rest.

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“I’m not leaving because I don’t like the job. I love the job as a matter of fact, and I’ve had tremendous support,” he said during a news conference.

“Many people are surprised today that I work with, and I’m sure many Nova Scotians are surprised.” He said he concluded that a change in leadership is “the right thing for the province.”

McNeil, who was elected premier in 2013 and re-elected in 2017, said he will stay on until the Liberals choose a new leader.

He said he had initially planned to leave in the spring, but the pandemic postponed those plans.

“I was actually going to make this decision in April and then COVID-19 hit and I re-evaluated,” he said.

“Then we (Nova Scotia) flattened the curve and there was an opportunity for the party to prepare for a leadership contest and a new leader.”

The announcement caught many off guard as the premier had previously said he expected to attempt a third term, and McNeil says he only advised his caucus of the decision this morning.

He says he considers his key accomplishments to include promoting growth of the private sector and keeping a handle on the cost of public sector wages.

“There’s lots of people that still tell me we got it wrong, I think we absolutely got it right,” he said.

“People would say I’ve taken a whole lot of things away from unionized employees in the province. It couldn’t be further from the truth. I just slowed the growth (of wages) …. It allowed us to invest in other parts of our economy.”

This report by The Canadian Press was first published Aug. 6, 2020.

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