The World Trade Organization and Their New Leader
Ever looked down at the tag on your clothing and saw, “Made in China?” You may have wondered how China is able to transport all of these goods. The answer: The World Trade Organization. But what exactly is the World Trade Organization? The WTO, created in 1995, is a global international organization that deals with the rules of trade between nations and their goal is to help producers, exporters and importers conduct their business of providing goods and services. Negotiations are the birthmother of the WTO, and a large portion of their current work comes from the 1986–94 negotiations called the Uruguay Round and negotiations under the General Agreement on Tariffs and Trade (GATT). Currently, the WTO is the host to new negotiations under the Doha Development Agenda which was launched in 2001. These negotiations have helped countries who have faced unwanted trade barriers, and as a result, lowered them to open their markets for trade. However, these negotiations have also enforced preexisting trade barriers in certain cases, such as preventing the spread of a disease. A significant portion of the global economy is made up of trade, thus making the WTO’s purpose to help trade flow as freely as possible to the highest extent. The WTO’s annual report of 2019 demonstrates their support for developing countries and their goal of increasing these countries’ exports. GDP, known as gross domestic product, is the aggregate total of consumption, investments, government spending, and net exports in a country which is used as a measurement for the overall health of an economy. One of its components, net exports, is the difference between exports and imports. Once a country’s exports exceed its imports, net exports become positive, hence, increasing overall GDP and contributing to economic growth. However, in the international trade markets it is easy for smaller and underdeveloped countries to be buried by immense exporter countries such as China and the United States. The WTO hopes to provide a helping hand to these developing countries by increasing trade opportunities and providing technical assistance. Exports in underdeveloped countries grew by 12% in 2018 which subsequently led to an increase in their GDP. Along with aiming to help underdeveloped countries, the WTO shared other accomplishments in their 2019 annual report, included work spanning from reaching out to businesses, academia, and the public to inform about the WTO, and setting a record of 54 dispute settlement proceedings.
But who exactly oversees all of these operations of the WTO? Mr. Roberto Azevdo, the WTO’s Director-General, is responsible for supervising and directing administrative operations. On May 14, 2020, Mr. Roberto Azevdo informed WTO members he would be stepping down from his position one year prior to the expiry of his mandate. Azevdo’s resignation triggered the search for the next member to fill the position. Dr. Ngozi Okonjo-Iweala was one of eight candidates that were being considered for Director-General. As she is a global finance expert, an economist, and an international development professional with more than 30 years of experience working in North America, Latin America, Europe, Asia, and Africa, she appeared to be a perfect fit for the job. For the past five years, Dr. Okonjo-Iweala was the Chair of the Board of Gavi, the Vaccine Alliance. Created in 2000, Gavi has immunized 760 million children globally and saved thirteen million lives. Dr. Okonjo-Iweala is also a skilled negotiator, an effective consensus builder, and an honest broker who enjoys the trust of governments and other stakeholders. By October 2020, most countries had supported Dr. Okonjo-Iweala for the position of Director-General. However, the Trump administration showed their support towards South Korea’s trade minister, Yoo Myung-Hee, under the belief that she had more trade experience. Yet when Biden set foot in the White House in 2021, Ms. Yoo dropped her candidacy and the United States then showed support for Dr. Okonjo-Iweala.
Dr. Ngozi Okonjo-Iweala
On Monday Feb 15, 2021, Dr. Okonjo-Iweala was officially appointed to the Director-General position, therefore, making her the first woman and the first African to hold the position. Once being appointed, she had recognized the many challenges the WTO was facing, mainly due to the COVID-19 pandemic, however, she claimed they are not insurmountable “if we work together in a transparent manner that builds trust.” Her goal is to strengthen the WTO and help its recovery following the current pandemic, along with adapting the organization to the realities of today. Initial priorities include working with other international trade organizations to create lasting rules for responding to pandemics. Dr. Okonjo-Iweala also aims to make progress in negotiations over fishery subsidies – payments granted by the government to keep prices low or competitive within an industry – and digital trade. Dr. Okonjo-Iweala had also campaigned to use the WTO’s trade expertise to increase the supply of coronavirus vaccines in developing countries. Along with pandemic related obstacles, the WTO has also been hindered by trade tensions between the United States and China. Under Trump’s presidency, Washington had blocked the appointment of judges to the WTO’s top court. Thus, there were too few judges to rule on large trade disputes. Complaints from Western countries regarding unfair competition from China’s market-distorting state capitalism appeared and were unable to be alleviated by the WTO. During an interview, Dr. Okonjo-Iweala addressed present tensions between various countries, including China and the United States, but she recognized the need to resolve the issues in hopes of reestablishing trust within the international trading body. The world will just have to wait and see exactly how effective Dr. Okonjo-Iweala’s plans are for the WTO. - JK
Stress Tests: The Federal Reserve’s Method for Bank Examination under Severe Economic Downturn
Every year, the Federal Reserve conducts what it calls “stress tests” of big banks with major operations in the U.S. These annual stress tests offer an examination of the potential consequences of difficult economic conditions on big banks and allows the Fed to evaluate their preparedness for financial crises. To do so, the Fed creates hypothetical scenarios featuring instances of severe economic downturn and tests each bank based off their reaction to these situations. These scenarios often feature massive unemployment, a significant decrease in gross domestic production, and a fall in banks’ available capital and equity. By conducting these stress tests, the Federal Reserve is effectively investigating the strength and resilience of major American financial institutions to instill public confidence that the economy is not headed towards another 2008 Great Recession. Essentially, the Fed wants these stress tests to ensure to the American public that the financial system will not crumble under bank irresponsibility and unpreparedness.
Within each stress test conducted by the Fed, a specific scenario is disseminated to the banks under examination in which they must produce a capital plan in response. This capital plan is submitted to the Fed for review after completion, and it is then decided whether a bank “passed” (their capital plan was approved) or “failed” (capital plan was denied). In these capital plans, banks calculate how their present loans and investments would perform under the conditions of the scenario, which lasts for nine quarters. These plans also outline the banks’ share-buyback and dividend programs during the scenario. The final portion of the banks’ side of the tests is a description documenting and justifying their capital plan. This section of the plan is typically thousands of pages in length.
Source: https://www.bloomberg.com/news/articles/2018-06-28/fed-test-forces-jpmorgan-goldman-four-rivals-to-temper-payouts
The Fed’s evaluation of a bank’s capital plan takes both a quantitative and qualitative examination of their results. For a quantitative testing approach, the Fed completes its own independent calculations of the banks’ reaction to a stress test scenario, as well as a review of their current balance sheet. On the qualitative side, the Fed looks to the banks’ descriptions of their capital plan and legitimization of it. Here, the Fed wants to see that the bank has effective risk management programs and is cognizant of the liabilities they hold.
To determine a bank’s performance under the Fed’s given scenario, the Fed first publishes their results for the stress test based on their calculations. This is done to allow consumers to compare each bank’s performance and decide for themselves with which they feel most comfortable with their money. After these preliminary, consumer-oriented results are published, the Fed then releases the individual capital plans for each bank and their corresponding “Pass” or “Fail” status. Banks receiving a “Failure” result is uncommon, but still expected occasionally given poor capital and equity allocation.
Given the economic downturn brought on by the coronavirus pandemic in 2020, the Fed’s stress test is extremely vital to consumer confidence and investors’ animal spirits this year. In June, a stress test of the U.S. banking system proved that American banks were strong enough to withstand the financial crisis from COVID-19 and the Federal Reserve restricted share buybacks and dividend payouts to ensure they remained healthy. Additionally, in a second round of stress tests in Fall of 2020, the Fed once again determined that U.S. banks were strong enough to weather the coronavirus pandemic. Now, the Fed is looking to soon conduct another stress test and has already described the conditions of the scenario banks will react to. The scenario features a severe global recession that causes “substantial stress” in the commercial real estate and corporate debt markets. Unemployment under these conditions rises by 4% to reach nearly 11% in the third quarter of 2022, and GDP decreases drastically, with asset prices sharply falling and a 55% decline in equity prices. These conditions accurately depict many consumer and expert concerns about housing markets, debt, inflation, and other factors given the coronavirus crisis.
Source: The Federal Reserve Twitter Account
The stress tests conducted by the Federal Reserve on financial institutions operating in American markets allow the central bank to not only instill public confidence against another occurrence like the Great Recession of 2008, but to also ensure it prepares banks and investors for another economic downturn. While investors and bankers may hope that the Fed allows for a more aggressive divided-payout programs, the Federal Reserve’s primary concern is stabilizing the economy and its various factors. - CS
The Next Wave of Bitcoin Acceptance
The ever-popular, first-name in cryptocurrency has been having another moment in the spotlight over the past month with Bitcoin gaining the attention of everyone from prominent politicians, investors, CEOs, regulators, and climate activists. While Bitcoin has been circulating for a number of years and has seen no shortage of swings both in price and perception as a viable digital currency, it experienced massive progress in its quest towards mainstream acceptance over the past couple of months. The price of Bitcoin has responded to the fervor surrounding it accordingly and has risen 155 percent in the last three months alone, while notching a 400 percent increase from one year prior. The skyrocketing price recently pulled back slightly as several notable figures expressed concerns over the digital currency’s volatility and others have given greater emphasis the environmental impact of the mining of the digital currency.
The initial kickoff to the flurry of activity surrounding Bitcoin was brought on by Elon Musk’s announcement that the electric car manufacturer Tesla had purchased 1.5 billion dollars’ worth of the cryptocurrency to diversify the cash holdings in the company’s treasury. The company further stated that it had plans in place to accept Bitcoin as payment for its products in the near future, making it one of the most high-profile companies to announce designs to accept the currency. This was quickly followed by a number of statements throughout the week by other well-known companies including Visa, Mastercard, BNY Mellon, and Twitter all announcing some form of acceptance or pathway to using Bitcoin in their operations.
The wave of acceptance was not limited to the Fortune 500, however, as the city of Miami is plunging ahead with an ambitious plan in the usage of Bitcoin. Early in February, the Mayor of Miami unveiled a proposal that would allow the city to pay employees and collect taxes and fees in the cryptocurrency and also hold the currency as part of the city’s investment portfolio. The specific resolution was ultimately changed to only allow the city to study these possibilities, rather than implement the policies directly. These proposed adoptions come as part of a larger push to make the city an attractive destination for the increasingly mobile technology sector which has seen an increasing number of corporations and individuals relocate to the Southern Florida locale in recent months. This announcement is significant as it represents one of the first attempts by a major city or state government to accept a currency other than that issued by the federal government which could be interpreted as extending a greater legitimacy to a payment system that has no true asset or governmental backing.
Further, the Miami announcement perfectly illustrates the diverging uses of the currency and simultaneously highlights one of the most prominent criticisms with it. One of the principal uses of money in general, is as a measure of value allowing goods to be translated into set prices, and is particularly difficult for Bitcoin due to its highly speculative and volatile nature. Violent and severe swings in the dollar value of a Bitcoin make its use as a transactional currency challenging, yet not impossible as an increasing number of companies are beginning to accept the electronic payment. However, these violent pricing swings are also what makes Bitcoin attractive to some individuals. The large price swings allow investors to speculate into the future price of the asset with potential for substantial profits coupled with significant downside risk. The two companies of Mastercard and BNY Mellon speak to the different crowds of individuals – those who are looking to pay for an increasing number of goods with Bitcoin and those who are looking to add the cryptocurrency to their investment portfolios. While Bitcoin is continuing on its march towards more mainstream acceptance, it also faces plenty of criticisms from prominent regulators and activists.
Shortly following the trading fervor surrounding Bitcoin in early February, recently confirmed U.S. Treasury Secretary Janet Yellen came out against the digital asset, calling it “extremely inefficient.” She cited one of the major issues that lawmakers have had with the adoption of Bitcoin which is the association that it has with what Yellen calls “illicit financing.” The relative anonymity with which cryptocurrency transactions are conducted have made lawmakers hesitant as it is believed new digital assets have made terrorist and cartel funding more difficult to detect to some extent (though there remain conflicting reports on the validity of this concern). Yellen also touched on a relatively newer concern relating to the energy required to ‘mine’ Bitcoin. As the process for unearthing new Bitcoins becomes more complex, the computing power and thus energy consumed in the process have significantly grown. Currently, the amount of carbon produced by the mining of Bitcoin is equivalent to that of the entire country of New Zealand, and is likely to grow even further as the supply of the coins becomes more scarce and power-intensive to mine. Climate activist Bill Gates also weighed in recently and echoed many of the same criticisms with particular concern regarding the inefficient use of massive amounts of energy and the long-term ramifications of those decisions.
The future direction of the digital asset is clearly not without strong advocates on both sides of the issue. Strong popular sentiment has led to wider spread adoption of the currency, yet it is clear that the digital asset has a string of political and regulatory hurdles to overcome if it is to stabilize and enter into the mainstream as a viable alternative to federal currency. - JR
Economics in One Lesson by Henry Hazlitt: A Current Economics Student’s Review
There are few books I found recommended more than Economics in One Lesson by Henry Hazlitt—the late 20th century journalist turned Austrian economic thinker. While it is true that Hazlitt was no economist in the academic sense of the word, readers will be quick to note the beautiful economic thought which he employs to solve and question problems that continue to remain pertinent up until today, nearly half a century after its publication. It is the simplicity of this book that has allowed it to become the Austrian school of thought’s favorite iconoclast. In fact, it is freely printed and shipped by the Mises Institute in paper back to any that request a copy for whatever reason, which is eerily similar to the Gideons’ free Bibles found underneath hotel nightstands. That is not to compare this book to the Bible, but instead to compare its impact to a particular few inhabiting a very particular field. There is little to no fat available to trim and even fewer backs that will be patted in the entirety of this little book. All is up for criticism. Dogma is thrown away for logical interpretations of problems which have long experienced a mainstream drought of analytical thought. To boil down this already short book is a task done for me by the author himself on many occasions throughout.
“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
If I were to attempt a summary, I would only be muddling up the arguments that are thrown against twenty-three often interwoven economic fallacies which Hazlitt deftly presents chapter by chapter. Economics in One Lesson is an easy book to read and can likely be completed start to finish on a rainy afternoon or in a dedicated weekend. This is to emphasize the compactness of each argument rather than the lack of substance available in this book. To go down the rabbit hole of a single group of the fallacies here can be what many spend a lifetime’s career and thought in attempt at doing. To see these fallacies existence remaining to this day is to demonstrate their success, or rather lack thereof. To this day laws regarding the minimum wage and rent control continue to be debated for example. There are specialized labor economists and such who focus primarily on things of this sort to no avail. The debate will never die as long as there both exists the logical and statistical data against both the price ceiling and price floor which has been in existence for quite some time. This is the argument made against many of the fallacies presented in this book—that despite some knowing what ought to occur it will never happen so long as it benefits others. For the only people to utter a rallying cry over something are those that are hurt by its removal or improved by its implementation. Few remember the people that would ultimately benefit from the removal of a law or the failure to implement such and such a law. This is because they are unheard and do not answer a rallying cry. Often, they do not even know they would benefit by the removal of a law or get hurt by the implementation of a law because they live in a time where neither has occurred. Economic thought in the case of Hazlitt is used very often to speak up for this third group. To fail to see the forest in one’s minute examination of trees is the prime fallacy of the unstudied. That is to fail to grasp or attempt to grasp full understanding of a situation. For instance, why not implement a one-million-dollar minimum wage? Well, it is clear to the understanding of almost all people that something of a side-effect would result even if they do not exactly understand what that side-effect is. They understand the forest and do not look at the mere fact they would now be getting one million dollars despite the manner of employment. Very few people draw this same distinction to the less obvious situations. For often it requires the employment of deductive reasoning which is tiresome and not all that exciting if little impact is made on you regardless.
To put it simply, this concept of understanding, or recognizing what truly occurs when one sets out with the best intentions only to achieve mediocre results, this is economic analysis. Forget the numbers and the data just as this book does and instead look at economics through a lens that is applicable to a whole scope of life. Logical reasoning that anyone is capable of if given the time. You may be surprised by what you once assumed to be true only because it had been repeated endlessly rather than because of its proposition held logically sound under the stress of your own individual reasoning. - TP
Sources
The World Trade Organization and Their New Leader
https://on.wsj.com/3e1gRQO
https://nyti.ms/3sJ9mSm
https://www.wto.org/index.htm
https://bit.ly/3b4K8Ie
https://nyti.ms/3816AjF
Stress Tests: The Fed’s Method for Bank Examination under Severe Economic Downturn
https://bloom.bg/3b8tg3l
https://on.wsj.com/305A37S
https://on.wsj.com/304pQsb
The Next Wave of Bitcoin Acceptance
https://cnb.cx/3r8Uc8R
https://on.wsj.com/3sG66r7
https://bit.ly/3e1cg10