Broken Promise?

WITH the global financial crisis slowing down, countries are looking after their own interests, and moral issues have been raised on Wall Street. The G20 collaboration is staggering with protectionism gaining influence and talks over an exit strategy going nowhere. Moreover, an insider trading scandal involving a hedge fund is sending ripples through Wall Street.

Everyone seems to have gotten over the crisis and begun following their own interests. The September G-20 Summit in Pittsburg, U.S. agreed upon international collaboration regarding exit strategies and sustainable and balanced economic growth. During the previous meeting, the G-20 Summit also promised a “stand still,” vowing against protectionism.

However, the promise seems to be cracking. Some countries, including the U.S., have begun investigations into anti-dumping and allegations of price-fixing, while other countries, such as Japan, have strengthened tax investigations into foreign enterprises. Signs of protectionism are everywhere.

The U.S. and China are over-issuing antidumping measures. Lately, the U.S. imposed a 35% anti-dumping tariff on Chinese tires with China retaliating with tariffs on American chicken, car components and nylon. The U.S. has also sued Korea’s Samsung and LG over price-fixing at the San Francisco Federal Court.

China is also at odds with European countries. Protectionist European countries imposed high anti-dumping tariffs on Chinese steel sheets, shoes and many other items, with China planning to retaliate. Despite the agreement reached at the G-20 Summit, protectionism is on the rise as the global economic crisis slows down.

Tax investigations into foreign companies are also a part of protectionism. Countries have poured in a tremendous amount of money to prop up their respective economies, only to find themselves faced with tax revenue problems. Therefore, they are now looking at foreign companies as new tax revenue sources. For instance, Japan has reportedly expanded its special tax investigation to Korean companies operating in Japan. Four to five companies that have enjoyed good sales recently, including Idong Japan, a Korean raw rice wine distributor, have been put on the target list.

Moreover, there are other disputes among G-20 countries. Australia raised its base interest rate by 0.25% point on October 6 despite the G-20 agreement regarding international collaboration on exit strategies. Furthermore, Ben Bernanke, chairman of the Federal Reserve Board (FRB) recently made an indirect request for currency appreciation by those countries enjoying the current account surplus, including those in Asia, quoting domestic consumption promotion as the reason. However, things have changed.

Brazil has, on the contrary, come up with currency depreciation to defend their foreign exchange rates. The Brazilian government announced a 2% transaction tax on any foreign investors investing in bonds denominated in Real (R$). On the other hand, China is still sticking to its weak Yuan policy through its fixed exchange rate system despite consistent pressure.

Against the backdrop, Wall Street has once again come under fire for its moral issues, with news of a historic insider trading scandal at a hedge fund. Criticism is on the rise over a series of immoral issues that began with the historic multi-layered fraud by Bernard Madoff last year, followed by a bonus binge by Wall Street financial companies, and the latest insider trading scandal. In particular, the hedge fund scandal has become an issue as Raj Rajaratnam, the president of the famous hedge fund Galleon, is alledged to have tapped into his vast human network to cash in on industrial top secrets.

The shock was even more tremendous when credit rating agencies and business consulting agencies, which prioritize trust over everything else, were shown to have also played their part in the scandal. At a time when the global economic crisis is slowing down, the scandal has left the world shocked and speechless, particularly as it unfolded at the epicenter of the crisis, Wall Street. Undisputedly, selfish actions by nations and individuals are not helping the recovery from the global financial crisis.

In particular, protectionism can generate adverse influence on the world economy, particularly as it is about to recover from the recent crisis. An excessive imbalance in international trade not only causes a sag in consumption, but also a contraction in production and an increase in unemployment, harming global economic development. As learnt from the recent financial crisis, international collaboration is the most important factor in global economic development.