Category: Trade Policy

The Bridge Collapse Will Mean More Socialized Losses

The Daily Escape:

Ceanothus, Black Mountain Preserve, San Diego, CA – March 2024 photo by Michelle Duong

Everyone knows about the cargo ship MV Dali that struck the Francis Scott Key Bridge (FSK) in Baltimore, causing it to completely collapse into the frigid Patapsco River. Currently, we know that six people are presumed dead, while two people were recovered alive. Let’s talk about the ways capitalism figures into the FSK bridge collapse.

The BBC reports that:

“The America Pilot’s Association provided details on the ship that crashed into the Baltimore bridge. The association says the ship lost full power, with no lights, no electronics and no engine propulsion, making it essentially a “dead ship” within 20 to 30 seconds. The group says lights came back on in the ship thanks to an emergency generator, but that doesn’t give the engine power. Video shows lights flicker back on briefly before the vessel hits the bridge.”

There are backup generators on ships because power can fail at critical times. In the case of the MV Dali, it has one propeller driven by one engine. The fuel and steering systems of the ship require electricity to function.It is believed that the Dali had 3-4 backup generators, but did they function as designed?

Wrongo knows from his experience with backup generators in the commercial world that they don’t start up instantaneously. It might take them 30-60 seconds to start and longer to come up to full power to restore control of the ship. Without electric power, both the navigation and the steering systems would have been disabled in the critical minutes prior to the collision. No one on the ground in the Port of Baltimore performs testing to see if the MV Dali’s back-up generators are working properly. Why? Because it would be very costly to do.

There are several other factors unique to shipping that will make it difficult for Maryland or US taxpayers to collect enough to cover all of Maryland’s costs from the ownership of the MV Dali. From VOX:

“The Dali was a Singapore-flagged ship, with an all Indian-nationality crew, operated by the Danish company Maersk….”

This organization structure, dividing ownership and operations, is a classic method used in shipping to limit liability when bad things happen, like when your vessel knocks down a bridge in a foreign country.

Cargo ships have become exponentially bigger while US bridges have been aging. When the Francis Scott Key Bridge was being built between 1972 and 1977 the average container ship carried between 500-800 twenty-foot shipping containers (called TEUs). But they ballooned to an average of 4,000 TEUs by 1985. The MV Dali, manufactured in 2015, had a capacity of 10,000 TEUs. According to bridge experts, no bridge pylon could have survived being hit by a vessel of this size.

This continuous upsizing has pitted US ports against each other in order to attract bigger vessels. The 2016 expansion of the Panama Canal caused ports along the US East Coast to dredge their harbors and build higher bridges to accommodate the larger ships now traveling through the Canal.

Back in 2015, Wrongo wrote about the upsizing of US bridges:

“Consider NJ, where, at high tide, 151 feet of empty air lies between the waters of the Kill Van Kull and the deck of the Bayonne Bridge. The Kill, a narrow tidal strait between Staten Island, NY and Bayonne, NJ, is one of the busiest shipping channels in the country. When the Bayonne Bridge opened in 1931,151 feet easily accommodated the world’s largest vessels. But the new ships won’t fit, so, the roadway will be elevated…to 215 feet, more than enough to let these big ships pass underneath. The five-year Bayonne Bridge project costs $1.3 billion.”

This imposed costs on NJ taxpayers beyond what it should have, because then-Gov. Christie (R), signed a bill that ended the collection of any cargo facility charge by the Port Authority of New York and New Jersey. Christie was attempting to offer something to ship owners and operators that would make Bayonne more competitive vs other US ports.

So the taxpayers of NY & NJ not only paid for allowing the bigger Panamax ships under the Bayonne Bridge, but no ocean-going vessel had ANY stake in paying the costs of that bridge expansion. Instead, NJ turned to a “Public-Private Partnership” to finance this project.

The Port of Baltimore also expanded to accommodate supersized ships in 2013, but it didn’t need to raise the height of the FSK bridge. Since then, it has grown into the 9th-busiest port for receiving foreign cargo. The Port of Baltimore is the largest in the US for roll-on/roll-off (Ro-Ro) ships carrying trucks and trailers.

Meanwhile, the FSK bridge has remained largely unchanged since the 1970s. From 1960 to 2015, there were 35 major bridge collapses worldwide due to ship or barge collisions, 18 of which happened in the US.

There are now about thirty ships stranded in the Harbor. They will stay there until the damaged bridge remains are removed from the ship channel. That includes container ships, Ro-Ro ships, and bulk carriers. There are also three US Naval ships stranded there. The collapse is almost sure to create a logistical nightmare for months, if not years along the East Coast. The accident will also snarl cargo and commuter traffic.

And who will pay the costs to repair the bridge, or compensate the people who died, or cover the lost revenues for the many years it will take to rebuild the bridge? Or the tax receipts that Baltimore won’t be in a position to charge while the port is closed?

According to Business Insider, the majority of the financial fallout is likely to lay primarily with the insurance industry:

“Industry experts told the FT that insurers could pay out losses for bridge damage, port disruption, and any loss of life. The collapse could drive “one of the largest claims ever to hit the marine (re)insurance market…”

The Dali is covered by the Britannia Steam Ship Insurance Association Ltd., known as Britannia P&I Club, according to S&P Global Market Intelligence. Britannia is one of 12 mutual insurers included in the International Group of P&I Clubs, which maintains more than $3 billion of reinsurance cover. Although the ship’s owner and it’s operator have insurance, their policies will in no way cover the all-in costs of this event.

Some are saying that this is a “black Swan” event. But this is almost certainly the result of operational pressure for more containers, faster turnaround, and more profit. The ship owners have traded reliability for economy. Unless we force the container trade to transition to more reliable and more costly vessels, we’ll continue to see events like this every few years.

That’s the price of cheap goods in our stores and of the profits it generates for ship owners.

Once again, the losses will be socialized, and the US taxpayer will be gouged again, all in service to our capitalist overlords who will laugh all the way to the bank. Wrongo certainly isn’t a Marxist, but Marx was absolutely right when he said that capitalism contained the seeds of its own destruction.

Why is it that no legislator is willing to consider the costs of externalities (a cost that is caused by one party but financially incurred by another) to its taxpayers when they approve partnering with big industry?

Are the tax revenues in Baltimore going to be enough to cover the costs to all US taxpayers when the US government rebuilds the FSK bridge? They will not. You know they’ll be minuscule compared to the real costs.

And the big shipping players will sail off towards the horizon with hardly a financial scratch.

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Reshoring The Semiconductor Industry: The Chips Act

The Daily Escape:

Sunset in Yarmouth Port, Cape Cod, MA – July 2023 photo by Cynthia Maciaga

The semiconductor industry is big, complex, and important. Semiconductors are also an important test case for America’s ability to revive its domestic manufacturing base. There’s a lot riding on Biden’s Chips Act that became law one year ago. It is a $50 billion package of subsidies, tax credits and other sweeteners designed to bring advanced chipmaking back to America.

As a result, Taiwan Semiconductor Manufacturing Company (TSMC) is investing $40 billion in Arizona. Samsung is investing $17 billion in Texas. Intel, America’s biggest chipmaker, will spend $40 billion on four semiconductor fabrication plants, or “fabs” in semiconductor parlance, in Arizona and Ohio. Both Democrats and Republicans regard it as a bipartisan legislative triumph.

But, finding highly skilled labor is key to the Act’s success. While America still has world-class semiconductor researchers and designers, we no longer have the kind of skilled labor that turns silicon wafers into electronic circuits. Chief Investment Officer magazine quotes Joseph Quinlan of Bank of America (BOA):

“America’s manufacturing renaissance could either be delayed or derailed by mounting structural headwinds….The US will have graduated only 108,000 technicians (who operate, maintain and fix electronic gear) by 2030, but demand is for 130,000 by then….Similarly, the nation will have produced 42,000 engineers and 21,000 computer scientists at that point, yet will need 69,000 and 34,000, respectively.”

BOA says that the other shortfall is construction workers. Construction of US factories has climbed 80% from a year ago, yet the nation has 374,000 unfilled construction jobs. We’re already seeing the problem. From the Economist:

“…The first of TSMC‘s factories was due to start production next year. But in July it announced that the launch would be put back to 2025 because it could not find enough workers with the expertise to install equipment at such a high-tech facility.”

The problem is during the delicate final phase of installing the most high-end equipment. Mark Liu, TSMC’s chair, said in a July earnings call:

“…there is an insufficient amount of skilled workers with those specialized expertise required for equipment installation in a semiconductor-grade facility.”

As a result, TSMC is sending skilled workers from Taiwan to teach Americans how to do the job. The Commerce Department forecasts that about 100,000 workers may be needed for the construction of these new fabs in the US.

The chip market breaks down into “leading edge” chips, followed by “advanced” chips and “trailing edge” chips, sorted from the smallest chips to the largest. The Economist says that by 2025, American chip factories expect to be churning out 18% of the world’s leading-edge chips (see chart below):

This seems highly optimistic if we can’t get these new plants built or staff them. Leading-edge fabs that are built in America will take longer to build and will be smaller than those in Asia. In China and Taiwan, companies can build out a new fab in 650 days. In America, the average construction time is expected to be 900 days, or 40% longer. Construction costs, therefore, can be 40% more in America than in Asia.

Regarding size, in Arizona, TSMC plans to make 50,000 wafers a month—equivalent to two “mega-fabs”, as the company calls them. In Taiwan, TSMC operates four “giga-fabs”, each producing at least 100,000 wafers a month. Size matters: The more chips a fab makes, the lower the unit cost.

More from the Economist: (emphasis by Wrongo)

“America will produce enough cutting-edge chips to meet only about a third of domestic demand. Apple will keep sourcing high-end processors for its iPhones from Taiwan.”

Overcapacity is a possible threat. The Economist says that in 2019, China made one fifth of “trailing-edge” chips, which go into everything from washing machines to cars and aircraft. But by 2025 it will produce more than a third of them. It’s possible that excess supply from China will put downward pressure on prices. In the long run, this could hurt higher-cost American fabs.

So, while there has been substantial progress in just a year, the US isn’t going to undo 20+ years of offshoring chip manufacturing in the next 24 months. The Commerce Department says it wants companies to collaborate on building up a construction workforce, so that workers trained for one project can move on to other fabs that are being built. In this respect, TSMC’s plan to import Taiwanese trainers is less of a bug than a feature, part of the process of helping to build knowledge.

Once the fabs are built, they’ll need technicians to operate them. Such workers have historically required two years of training at a community college or a vocational school. But companies and educators are experimenting with much shorter courses. Columbus State Community College in Ohio, where Intel is building two fabs, is offering a one-year program. The aim is for students to be job ready for Intel as their fabs come online.

But, will these companies be willing to put candidates with one year’s training anywhere near the multi-million-dollar machinery inside their fabs?

The fabs also need engineers to run them. Universities near some of the fabs under construction, including Arizona State and Ohio State, have expanded their offerings of semiconductor courses as part of degrees in engineering and physical sciences. Leading the charge is Purdue University in Indiana: last year it launched a semiconductor degree program for both undergraduates and graduates.

And the flow of students seems encouraging. Intel expected 100 registrants for its quick-start courses, but 900 showed up. At Purdue enrollment has also been very strong. Handshake, a job platform for recent graduates, reported that applications for full-time jobs at semiconductor companies were up by 79% compared with last year, versus 19% in other sectors.

Returning to having a strong, vibrant high tech manufacturing industry in the US is good, both strategically and economically. But for the immediate future, it remains a gamble: We’re saying that the economic reasoning for moving manufacturing offshore in the past still exists. But it’s important enough strategically that we (and these profit-seeking corporations) will somehow underwrite the cost disadvantages.

Relearning basic skills such as cutting wafers into chips and packaging them in hard plastic casings will take time. The welcome news for these new fabs is that colleges and universities see an opportunity in helping train the new labor force.

But we will still be dependent on other countries. We do not have a secure domestic supply of lithium, nickel, graphite and other minerals needed to expand production of solar panels, wind turbines, semiconductors and electric vehicles. BOA points out that American imports of lithium-ion batteries from China more than doubled in 2022, to $9 billion.

So, while there’s lots going on that may someday be positive, China represents a potentially dangerous choke point given that US-Sino bilateral relations are at a decade’s low. We’re depending on them to continue providing much of the materials crucial to our new manufacturing capacity, while we’re in the middle of a serious rift with them.

Reshoring manufacturing, especially high value manufacturing is America’s dream. But it will take unprecedented cooperation between the government, multinational firms and our higher education system to make it happen.

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Saturday Soother – January 28, 2023

The Daily Escape:

Outside Mayfield, Utah – January 2023 photo by Robert Stevens

Wrongo read a review of two books on US agriculture in the New York Review of Books. The books are “Perilous Bounty: The Looming Collapse of American Farming and How We Can Prevent It” by Tom Philpott, and “The Farmer’s Lawyer: The North Dakota Nine and the Fight to Save the Family Farm” by Sarah Vogel.

The review is written by Ian Frazier. This gives you an idea of his writing:

“We are eating a big hole in the middle of the Midwest and sucking up California’s ancient aquifers until the land collapses like an empty juice box. The awe that new arrivals from other countries feel when they see the bounty in a US supermarket is an illusion—more like what one might experience when stepping from a cold night into a nice, warm house where they’re burning the furniture. In short, we are plundering the natural sources of our food production and can’t go on this way.”

All of this is Big Agriculture’s doing. Corporate farming controls most of our agriculture, but it’s facing the challenge that American consumers can eat only about 1,500 pounds of food per person per year and the US population is only growing at about a half percent/year. But the investors behind Big Ag want more profit than supplying food to a slowly growing US population. So their strategy is to get Americans to eat more, and to find new foreign markets.

Philpott concentrates on just two of the US’s top food-producing regions: California’s Central Valley and the Iowa-centered Corn Belt.

The CA Central Valley constitutes about half of California’s cropland. Smaller farms concentrate on fruits while the large corporate farms mostly concentrate on nuts. Nuts are a highly profitable crop with low labor costs, but they need enormous amounts of water: To grow a single almond requires about a gallon of water.

Frazier says that almond groves cover about a fifth of the San Joaquin Valley and consume four times as much water as the city of Los Angeles:

“…I eat plenty of nuts myself, including almonds. Looking in the pantry, I see I possess the almond-growing equivalent of a few dozen bathtubfuls of California water.”

Philpott points out that TIAA, a leading provider of financial services owns a 40% stake in Treehouse California Almonds. The Farmland Index, which tracks the performance of agricultural investments, has outperformed the Standard & Poor’s index 11.8% to 9.6% in recent decades.

One problem with California’s Ag dominance is that it takes an increasing share of an increasingly scarce water supply. When irrigation water from snow and rain is scarce, as it has been for decades, farmers pump more of California’s groundwater. Nobody can say when the groundwater will run out because nobody knows how much CA has.

Turning to the Midwest, Frazier points out that the Corn Belt is one and a half times the size of California’s farming acreage. The Corn Belt uses so much fertilizer that it delivers a huge amount of polluted agricultural runoff via the Mississippi down to the Gulf of Mexico. Off of Louisiana, there’s a marine dead zone the size of New Jersey.

Huge companies dominate Midwest farming, from fertilizer and seed manufacturers to large and expensive farm machinery equipment. There is concentration in the companies that buy, process and ship the grain: Three companies: Cargill, Archer Daniels Midland (ADM), and Ingredion control 87% of the US corn market. Four companies: ADM, Bunge, Cargill, and Ag Processing handle 85% of the soybeans.

It is cheaper to raise pork in the US than it is in China because our feed is cheaper. Smithfield is the world’s largest pork producer and is Chinese-owned. AND, the 23 million hogs in Iowa along with Iowa’s other livestock produce as much excrement every year as do 168 million humans.

This data are called “fecal equivalent”. Iowa produces the same amount as the world’s eleven largest cities. Shouldn’t that be on Iowa’s license plate?

But the headline is that mid-sized and small farms are dying. Frazier says that midsize farms are too small to compete with the corporate farms in volume and price. OTOH, they are too big to be supported by the farmers’ outside income. In her book, Sara Vogel says the midsize farm is in danger of going extinct:

“In today’s economy [they] wouldn’t have a prayer.”

Frazier closes by wondering who in agriculture will work to save our environment. He concludes that Big Ag won’t try. A disturbing, but important article.

Time to take a break from politics and economics. It’s also time to ignore that inflation is down and an asteroid narrowly missed the earth. Instead, let’s relax with our Saturday Soother. Readers who are into football will spend their Sunday watching the NFL’s division championship games. That will probably include Wrongo. To kick off our weekend, listen to Alexandra Whittingham and Stephanie Jones perform “Helping Hands” by Sergio Assad. Assad is a Brazilian guitarist. We have featured Whittingham here before, but Jones is new to us:

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Russia, Iran Form Energy Cartel

The Daily Escape:

Sunset, Lookout Point, Harpswell, ME – August 2022 photo by Rick Berk Photography

Good strategy is supposed to include a look at what the logical outcomes may be, once you’ve implemented your strategic plan. Was that done when the US and the EU decided to sanction Russia about its Ukraine invasion after having sanctioned Iran, well, for being Iran?

When you treat much of the world as your enemy, you should expect them to eventually find common cause and fight back. We’re speaking about the world’s supply of natural gas (NatGas). There is a new alliance between Russia and Iran on NatGas. At Oil Price, Simon Watkins says that a new energy cartel is forming: (brackets and emphasis by Wrongo)

“The US $40 billion memorandum of understanding (MoU) signed last month between [Russia’s] Gazprom and the National Iranian Oil Company (NIOC) is a steppingstone to enabling Russia and Iran to implement their long-held plan to be the core participants in a global cartel for gas suppliers in the same mold as the Organization of the Petroleum Exporting Countries (OPEC) for oil suppliers.”

The article describes how Russia and Iran are creating a NatGas OPEC. The two countries are first and second respectively in holding the world’s largest NatGas reserves. Russia has just under 48 trillion cubic meters (tcm) and Iran has nearly 34 tcm, so the two countries are in an ideal position to form a cartel.

NatGas is a vital commodity. It is widely seen as the optimal product in the transition from fossil fuels to renewable energy. And controlling the global flow of it will be the key to energy-based power over the next 10 to 20 years. This has already been demonstrated in Russia’s hold over the EU through its NatGas supplies.

From a top-down perspective, this Russia-Iran alliance might also draw other Middle East gas producers, who have tried to be neutral between the Russia-Iran-China axis or the US-EU-Japan axis.

Qatar has long been seen by Russia and Iran as a prime candidate for this kind of gas cartel because it shares its gas field with Iran. Iran has exclusive rights over 3,700 sq.km of the well-known South Pars field (containing around 14 tcm of gas), with Qatar’s North Field comprising the remaining 6,000 sq.km (and 37 tcm of gas).

If they can enlist Qatar, this new cartel would control 60% of world gas reserves, allowing them to control NatGas prices globally. It would be logical for prices to rise, given the growing demand for NatGas in the coming decades.

America can dodge this bullet for a few years because proven gas reserves in the US amount to about 13.5 tcm. So, at the current level of production we can produce sufficient NatGas for another 13-15 years.

But this means that in a decade or so, the US, Europe, and Asia will all be more dependent on imports from Russia, Iran, and Qatar, while competing with the rest of the world for our share in order to maintain our economy and lifestyle.

So, strategy can be a bitch. By creating a global political and economic environment that pushes Russia, Iran, and Qatar into a cartel, we’ve created a significant future economic vulnerability.

There are immediate NatGas cost implications in the US today. Bloomberg’s article, A ‘Tsunami of Shutoffs’: 20 Million US Homes Are Behind on Energy Bills, paints a picture:

“…about 1 in 6 American homes…have fallen behind on their utility bills. It is, according to the National Energy Assistance Directors Association (NEADA), the worst crisis the group has ever documented. Underpinning those numbers is a…surge in electricity prices, propelled by the soaring cost of natural gas.”

That’s 16% of American homes for the math challenged. Winter in the US may not be as big a disaster as in the UK and Europe, (better insulation). But plenty of people here will have to choose between food and heat.

The world is sorting itself out into blocks of countries aligned with each other. Russia, China, Iran and perhaps India, want their own commodity-based financial system to reduce their exposure to the political impacts from the West’s corporate/state “free” market system, which has used trade as a weapon for the past few decades.

There are two ways of looking at this. We could just build this energy vulnerability into our economic planning and prepare to devote a growing share of our GDP to paying the cartel for more NatGas.

Or, we could immediately start seriously building out our renewable energy capacity. There’s a model. Europe is attempting to pivot away as quickly as possible from its dependence on Russia.

We could do the same thing.

That could reduce our exposure to imported NatGas because it’s largely a bridge from coal to renewables. Massive investing in renewables would give Russia and Iran a shorter bridge than they think they’re getting.

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China’s Torpedoing the Supply Chain

The Daily Escape:

Spring snow, Mt. Princeton, CO – April 2022 photo by Haji Mahmood

For the past two years, Covid has thrown the global supply chain into a tailspin. Even though the cargo industry’s ships, trains, trucks, and planes worked full-time, we still have shortages. Now, China’s zero Covid policy is increasing both the uncertainty and costs of efficiently operating the still-choked global supply chain.

From Bloomberg:

“We expect a bigger mess than last year,” said Jacques Vandermeiren, the chief executive officer of the Port of Antwerp, Europe’s second-busiest for container volume, in an interview. “It will have a negative impact, and a big negative impact, for the whole of 2022.”

Bloomberg says that China accounts for about 12% of global trade. It’s recent Covid lockdowns have idled factories and warehouses, slowed truck deliveries and exacerbated container logjams. And since US and European ports are already swamped, this new outage will leave them vulnerable to additional shocks.

China is home to six of the world’s 10 largest container ports. It’s the global economy’s most important manufacturing hub. While most countries have decided to learn to live with the Covid, Beijing has maintained its Zero Covid policy, where even small outbreaks can shut down large population centers and slow economic activity.

It’s taking an average of 111 days for goods to reach a warehouse in the US from the moment they’re ready to leave an Asian factory. That’s similar to the record of 113 set in January 2022 and more than double the time that the same trip took in 2019, according to Flexport Inc., a freight forwarder.

Julie Gerdeman, CEO of supply-chain risk analytics firm Everstream Analytics says:

“Once product export activities resume and a large volume of vessels make their way to the US West Coast ports, we expect waiting times to increase significantly…”

You’d think that after more than two years into this pandemic, America would have realized that single-sourcing much of our industrial production to a dictatorship is a bad idea. One with enormous consequences when something goes wrong.

But we haven’t. US Treasury Secretary Janet Yellen has advocated for what she calls “friend-shoring” meaning reducing our dependence on China and Russia. Brian Ehrig, a partner at the consulting firm Kearney is co-author of a report that found 78% of CEOs are either considering reshoring or have done it already. He says that relocating supply chains:

“…might cost more, but if you can make smaller quantities that you can then sell at closer to full price, you can actually completely change the game…”

Le Monde reminds us that capitalism has created hidden dependencies in Ukraine. It is the main producer of the wiring harnesses that hold together the many electrical cables in a car. They quote Christine Lagarde, president of the European Central Bank (ECB) in a speech in Washington, DC: (brackets by Wrongo)

“Ukraine produces one fifth of Europe’s [harness] output,”

These parts are low value added, but essential in the construction of cars, a perfect outsourcing target for capitalism. Globalization isn’t going to die; but maybe it can evolve. Much of that possible shift hinges on convincing consumers to accept higher prices for the certainty of supply.

For example, once the CDC finally gave us unambiguous advice about wearing masks, there was a huge rush to open mask production facilities in the US. But now they’ve all closed, because it’s cheaper to make masks in China.

Dictatorships can ensure that labor remains cheap. That’s great for capitalists, not so good for people who needed masks in 2020 when China decided to keep most of them for their population. Or, now, when China is still willing to shut down its economy to stop a Covid outbreak.

And, despite all the good will in the world, nobody will make masks in the US if it means their five-dollar boxes of masks go unsold because everyone is buying the one-dollar boxes. Instead, they will complain about how the company asking five dollars is a bloodsucker.

We’re told that capitalism works. That it just does. That just-in-time supply cuts costs for consumers. But does it?

Art installation by Steve Lambert – 2013, Times Square, NYC

It’s proven not to work during an emergency. But what are the chances of re-shoring ever happening? Business school really only teaches one thing: Short-term profits rule and everything else is irrelevant.

After all, America is a business, not a country.

What should be readily apparent is that despite the CEO poll above, our corporate masters are certainly not thinking about systemic change to supply chains. Nor will they, as long as the focus is reducing costs as low as possible for maximum shareholder gain.

The point is that unless business is incentivized otherwise, don’t expect the supply chain to get any better. That incentive must come from the government in the form of tax policy or subsidy.

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China’s Reaction to Putin’s War

The Daily Escape:

Snow on the Fields of Wrong, March 10, 2022                 Sand on the beaches of Florida, March 2022

(This is the last column for the week. New content next week will be light and variable as Wrongo and Ms. Right make our annual pilgrimage to Florida to visit Wrongo’s sisters.)

Subsequent to the meeting between Putin and Xi Jinping in Beijing at the start of the Winter Olympics, the Chinese government’s statements and actions about Putin’s War in Ukraine have been a kind of doublespeak.

With its public statements, China’s been supportive. The foreign minister has referred to Russia as its “most important strategic partner.” China hasn’t endorsed Russian sanctions and its state media seems to repeat a lot of Russian disinformation about Ukraine.

On the actions side, the Chinese government has called for an end to violence and has promised to send humanitarian aid to Ukraine.

One thing that hasn’t been public is Chinese financial institution’s hesitancy about new deals with Russia. Chief Investment Officer magazine (CIO) quotes Yuan Jiang, a Chinese PhD candidate at Queensland University who specializes in Russia-China relations:

“Currently, the risk is simply too huge…”

Jiang said that traditionally, only state-funded institutions or large corporations would transact or directly invest in Russia, but even these institutions were wary of Russia:

“Russian markets are full of political corruption and other dangers…”

China’s financial sector has been leery of being caught up in the Western sanctions. Two major Chinese state-owned banks are now restricted from financing Russian commodities, according to Bloomberg. Reuters reports that the Bank of China in Singapore stopped financing Russian oil trades.

CIO also reports that some banks with partial Chinese state ownership have also been backing out of Russian deals. The Asian Infrastructure Investment Bank, which has many Asian governments as shareholders, suspended its business in both Russia and Belarus after the invasion. Similarly, the Shanghai-based New Development Bank, which has China as one of its founding members, also has terminated its business with Russia.

Now Russia is barred from participating in SWIFT, the global financial messaging system. In the past, China’s large banks have complied with American sanctions against Iran and North Korea because of the importance of clearing via SWIFT. The Chinese distancing from Russian transactions makes it clear that Beijing intends to continue complying with this Western sanction.

The Russians are looking to China as a lifeline in the midst of the sanctions. And the Chinese government is providing some help. China’s UnionPay card service will serve as an alternative for credit and debit card holders now that MasterCard and Visa have ended the ability of Russian citizens to use their cards abroad. UnionPay is accepted in 180 countries.

But China is shying away from a full rescue. Former US Treasury official Peter Piatetsky said in an interview with RadioFreeEurope:

“China can essentially do one thing here, which is to buy more Russian goods, but they don’t seem to be willing to do that….Russia doesn’t have that many different goods that China is willing to buy….The relationship between Russia and China is very transactional….They both dislike the US and dislike the US-led world order, but aside from that, I don’t think there’s much there.”

China could buy up Russia’s oil that’s no longer going to Europe if it wanted, but it doesn’t appear to be doing so, at least not yet. According to Jiang, ultimately the US has much more to offer China economically:

“Investing in the West is much simpler and more secure. No more unnecessary economic risk, not many political factors, and more transparent…”

And importantly, the US is China’s largest trading partner. The US buys 16.75% of all Chinese exports, creating a relationship that the Chinese government can’t afford to lose. Although ideological differences might dominate headlines, the US-China relationship is strategic for both.

It’s likely China will continue to keep Russia close and expand the relationship should relations with the West shift. And since the stated US strategy is to use Ukraine to destabilize Putin’s hold on power, China worries that it’s next.

Jiang says that Beijing is particularly afraid of “color revolutions,” a phenomenon in which popular uprisings result in regime change:

“Moscow and Beijing share almost indistinguishable views on the potential domestic and international security threats posed by color revolutions, and both nations view these revolutionary movements as being orchestrated by the US and its Western democratic partners to advance geopolitical ambitions.”

Despite the havoc that Western sanctions have brought on the financial system, China’s strong economic relationship with the West will help it keep Russia at arm’s length. If anything, the Ukraine war has shown just how much China relies on the West for its economic prosperity.

China and the US are particularly intertwined financially, and despite ideological differences, China will continue to prioritize its economic relationship with the US.

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Monday Wake Up Call – May 10, 2021

The Daily Escape:

Lone Juniper, Black Canyon, Gunnison NP, CO – 2020 photo by Mattbnet

Isn’t it time that corporations paid decent wages?

After the Labor Department released its April jobs report, the US Chamber of Commerce blamed last month’s weak employment growth on the $300 weekly supplemental jobless benefit. They then urged lawmakers to eliminate the enhanced unemployment payments that were extended through early September by Biden’s American Rescue Plan.

This, from the dudes who willingly spend $300 on a lunch.

According to the US Chamber’s analysis, the extra $300 unemployment insurance (UI) benefit results in roughly one in four recipients taking home more pay than they earned working. But, if one in four recipients are making more not working than they did working, that’s not an indictment of $300 a week in UI benefits. It’s an indictment of corporations who pay less-than-living wages.

We could blame Asia for this, or we can blame our managerial and ownership class who engineered the outsourcing deals that made it possible. They built factories in Asia as an economic-production-economic-aggression platform to disintermediate American workers by sending higher wage jobs to lower wage locations in the Far East. And in many cases, the same companies who closed the American plants owned the Asian factories.

It’s sickening to hear these big business types complain that raising wages will destroy the economy! That’s the same argument which was used in the South against ending slavery (it would hurt the economy).

The US Chamber isn’t alone. South Carolina is cutting off extended unemployment benefits starting on June 30. From the SC governor:

“South Carolina’s businesses have borne the brunt of the financial impact of the COVID-19 pandemic. Those businesses that have survived — both large and small, and including those in the hospitality, tourism, manufacturing, and healthcare sectors — now face an unprecedented labor shortage,”

South Carolina’s unemployment rate was 12.8% in April of last year. But this March, it was down to 5.1%, significantly below the 6.1% national rate. Still, these Governors (Montana has done this too) are simply acting as shills on behalf of corporations to force workers back into low wage jobs.

Many studies have shown that the employees of big box stores like Walmart and Target cannot meet their basic economic needs on the money they make at their minimum wage job. Many turn to community social services just to feed their families.

It’s not China (or other Asian countries) that are to blame. We demand ever-lower prices, so something had to give. That something was middle-class American jobs. The American public was never part of the discussion about the pros and cons of offshoring manufacturing to lower wage countries, or how that would both lower costs for goods, but also destroy American jobs.

A lot of the people who now shop at Walmart and Target lost their jobs to Mexico, China, or Bangladesh. At which point, they needed some form of welfare, and/or another part time job at Walmart-type wages. And now that they’re on Walmart wages, Walmart prices are all they can afford.

Time to wake up America! We should be asking how can it be that food banks are overwhelmed while the Dow Jones Industrial Average hits an all-time high? Simply, the stock market isn’t the whole economy. The stock market is about corporate profits, while food banks are about minimum wage jobs and unemployment.

We should be asking: Why do these corporations (the small as well as the large) persist with business models that don’t allow them to pay living wages?

We could also ask whether more red states will try to “solve” the employment problem by hurting the unemployed rather than treating the root cause: paying living wages.

To help you wake up, listen to Rag’n’Bone Man and P!nk on Rag’n’Bone Man’s new release, “Anywhere Away from Here”. We often feature music to have fun with, or to dance to. And then there are tunes like this, music for the heart and soul:

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Saturday Soother – March 27, 2021

The Daily Escape:

Stinson Beach, Marin County, CA – photo by Merrill Dodd

A single-point-of-failure in the global economy failed last week when the Ever Given, one of the world’s largest container ships, ran aground in the Suez Canal shutting down traffic in both directions. It’s now stuck sideways in the Canal.

And the Suez Canal isn’t just any waterway; it links the factories of Asia to the customers of Europe. It’s also a major conduit for crude oil. The WaPo reports that 12% of the world’s cargo travels through the Suez Canal. That this vast flow of cargo could come to a halt because a gust of wind blew a ship off course makes the brittleness of our global system of trade apparent.

That one mishap could spread chaos from Los Angeles to Rotterdam to Shanghai underscores the extent to which commerce today is tightly intertwined with the global supply chain. From the WaPo:

“By Friday, more than 160 ships were anchored in the Mediterranean and the Red seas. Egyptian officials appeared confident the canal could reopen within days, while salvage engineers cautioned that freeing the stuck ship might take weeks.”

A delay of two weeks could strand at sea one-fourth of the supply of containers that would normally be in European ports.

The NYT reports that a surge of Covid-related goods orders for items like exercise equipment has exhausted the supply of available containers at ports in China. The cost of shipping a container from Asia to North America has more than doubled since November. And on the US west coast, container unloading has been slowed as dockworkers and truck drivers were infected with Covid-19 or forced to stay home to attend to children who are out of school.

For decades, economists have lectured us about the virtues of “economic efficiency”. But, as the initially poor response of the global supply chain to the Covid-19 showed, economic resilience is also particularly important. We couldn’t get PPE for essential workers because we followed just-in-time inventory management and relied on China as our primary supplier. We’ve also seen shortages of computer chips for cars.

From the NYT: (brackets by Wrongo)

“It [just-in-time] has also yielded a bonanza for corporate executives and other shareholders: Money not spent filling warehouses with unneeded auto parts is, at least in part, money that can be given to shareholders in the form of dividends.”

Once again, we’re learning that the neo-liberal economic solution fails the people. So the economists and the CEOs have gotten it wrong. And the canal blockage, like the PPE shortages, show that they can be spectacularly wrong sometimes. More from the WaPo:

“And the grounding of the Ever Given has exposed how complex ownership structures in global shipping make it difficult to hold anyone accountable: The Ever Given is operated by Taiwan-based shipping company Evergreen Maritime. Evergreen charters the ship from a Japanese firm; a Dubai-based company acts as the agent for the ship in ports; and the ship flies the flag of Panama.”

So, accidents will happen, and they’re nobody’s fault.

The challenges presented by the Suez blockage come directly from the ‘just-in-time’ mantra. While a crisis cannot be predicted, it can be prepared for. Corporations and nations need to stop sticking their head in the sand about long-term planning, and get back to doing what the MBA’s call “resilience planning.”

Resilience planning’s been devalued by our push for short-term profits and stock market gains. If you doubt that, read about the massive cyberhack of US government agencies and major corporations, perhaps the biggest in history, that was discovered in early December by the security firm FireEye. Much of that was preventable by better management and planning.

Globalization isn’t our only problem. Add to it our short-term mindset which, when combined with greed, has endangered America.

It is unclear how long it will take for the Ever Given to be refloated and the flow of the canal traffic can resume. CNN reports that it may be freed over the weekend. But to do that, more than this level of effort will be required:

Credit: Reuters

As the clock ticks, Egypt isn’t collecting tolls for ships’ passage. And many ships, including some operated by Evergreen, have begun to re-route around the Cape of Good Hope. Multiple shipping firms have contacted the US Navy for protection against pirates on their rerouted trip, according to the Financial Times (paywalled).

Enough of the world’s problems for now. It’s time for our Saturday Soother, when we take a break and either watch the Sweet Sixteen if so inclined, or do more spring yardwork, since today is supposed to be the better of the weekend days.

Before pulling on the gloves, let’s take a few moments and listen to “Cloudburst” by George Winston, from his album, “Plains”. The video is of springtime in the northern Idaho plains. It’s a meditation on a few of our feathered friends in spring:

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Sunday Cartoon Blogging – January 19, 2020

What to make of the new trade deal with China? The deal seems to restore the US-China trade relationship to where it was before Trump launched his “easy to win” trade war. Nothing that China has agreed to departs markedly from what it agreed to during the Obama administration. In 2015, Obama and Xi Jinping announced an end to cyber-intellectual property theft and embarked on a next round of negotiations over market access.

Trump’s Phase I agreement barely restores China’s agricultural purchases to where they were before 2017, even though Trump presented it as a victory. If one of your main customers boycotts you and then agrees to start buying again, but is buying fewer goods, it’s disingenuous to announce that they had promised to buy more.

After two years of mounting tariffs hostilities, the Phase I agreement has cost the US more than $30 billion in subsidies to American farmers. It has cost American consumers tens of $ billions in tariffs. It has forced some US companies to diversify their supply chains out of China at an additional cost of $ billions.

Trump and his trade sidekick Peter Navarro, fundamentally misread the relative strengths of both the US and China. They thought that Chinese exports to the US are the key driver of the Chinese economy. If that were true, tariffs would be a potent weapon.

But a recent McKinsey study shows that China has aggressively shifted from an export-driven economy to a domestic consumer-driven one. Much of any gain in Chinese exports primarily accrues to the multinational companies like Apple that source in China, and not to the domestic Chinese economy.

At best, Trump fought China to a draw. At worst, China now understands that less economic engagement with America is in its self-interest. The trade war and its new, paper-thin truce leaves America with less leverage going forward. On to cartoons.

Was Round One a win?

Why are our sports teams held to a higher standard than our politicians?

Liz ponders:

There are Senate tools that always go unused:

What to expect from Ken Starr:

Pretty sure that’s Susan Collins:

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Trump Tries Extorting Iraq

The Daily Escape:

Kaskawulsh Glacier, Kluame NP, Yukon, CN – 2019 aerial photo by Picture Party

Last Saturday, the WSJ reported that the Trump administration had warned Iraq that it might shut down Iraq’s access to its account at the Federal Reserve Bank of New York (FRBNY), if Baghdad carries through on its threat to kick out American forces.

Iraq, like most other countries, maintains accounts at the New York Fed as an important part of managing the country’s finances. This account receives revenue earned from foreign trade, including in Iraq’s case, sales of oil. Loss of access to their accounts would restrict Iraq’s ability to use their funds to settle foreign transactions, or to repatriate funds needed in their domestic economy. AFP, citing an unnamed Iraqi official, reported that the balance stands at about $35 billion.

From the WSJ:

“The New York Fed provides banking and other financial services for around 250 central banks, governments and other foreign official institutions, such as the account owned by Bangladesh from which North Korean agents were able to steal $81 million in 2016, U.S. officials have said.”

The FRBNY has the authority to freeze accounts under US sanctions law, or if it has reasonable suspicion that use of the funds could violate US law.

This financial threat isn’t simply theoretical: Iraq’s financial system was squeezed in 2015 when the US suspended access to the central bank’s account at the FRBNY for several weeks over concerns the cash was filtering from Iraqi sources through loosely regulated Iranian banks and on to ISIS.

We’ve occasionally frozen foreign countries’ assets, in both the Federal Reserve Bank and in US commercial banks, typically when a country has engaged in illegal activity, or when a revolution has occurred. We did this after the overthrow of the Shah of Iran in 1979. Those funds were released by the Obama administration in 2017, when the US unfroze some $150 billion in Iranian blocked assets as part of the Iran nuclear deal.

Iraq is a weak nation with a fragile economy, so it has to take the US threat to freeze its central bank’s assets at the Fed very seriously. Freezing their account would also end any semblance of a friendly relationship between it and the US. It could also become a challenge for the US if Russia and China stepped in to rescue Iraq by weakening the role of the US dollar as the global reserve currency, that is, a currency used to settle foreign trade obligations.

America has become enamored with stopping the global free flow of funds for regimes it doesn’t like. Our sanctions regime is used so frequently that it is difficult to get an overall list of individuals and organizations that are under sanction. The US government maintains a sanctions search engine here.

Interrupting the flow of international settlements by the US has caused competitor countries to try to establish settlements in currencies other than the dollar. To date, there hasn’t been much success. Wolf Richter reports that the US dollar’s share of global reserve currencies has fallen from 65% in 2014 to 61.8% today, with the Euro in 2nd place and the Yen in 3rd.

Will the downward trend of the dollar as a reserve currency continue? Possibly, but if the US continues to act to restrict money flows, it will occur faster and more sharply than it might otherwise.

There is a kind of desperation in Trump’s threat. We’ve spent 18 years in Iraq and it comes to this? Critics of the threat say that it amounts to blackmail, or extortion. Wrongo believes he’s recently heard this about Trump and another country, too.

Is this desperation President Trump’s, or is it a reflection of a deeper desperation on the part of the US ruling elite? Are we seeing the beginning of the end of US omnipotence through the dollar’s role as the dominant global trading currency?

Is it wrong to bring up how Republicans attacked Obama for “abandoning” Iraq even though Iraq wanted us out in 2010? The GOP saw the US leaving Iraq as a mistake. They were glad when we were invited back to help defeat ISIS. Now, the question is: Will we leave under a Republican president?

How would Trump react if a local armed resistance against a US occupying force in Iraq used force of its own to try and get their money back?

Are we really going to punish Iraq because they have asked us to leave?

Isn’t it their country?

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