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T heC onsul A New Publication from the International Affairs Association of the University of Pennsylvania

Fall 2012路 Volume I 路 Issue 1

INTERNATIONAL AFFAIRS ASSOCIATION Head Layout Editor: Senior Columnist: Jing Ran Jason Littman 2012-2013 Zachary Kleinbart

Director of Publication: David Schwartz Editor-in-Chief Michael Luo

Content Editor: Henry Chang Savar Sareen

Layout Editor: Amanda Ball Wing Cheung Iana Feliciano Kohei Fujikawa Linda Li Caroline White Zach Wojtowicz Andrea Yeh

Business Staff: Sam Blumenthal Jenny Hu Mary Sun

Angela Huang Alyssa Maharani Michael Baresich Kateryna Brezitska Akshay Subramanian Karl Sjulsen

Junior Columnist: Daniel Benny Halie Craig Christine Du Avivah Hotimsky Maxwell Hummel Alexandra Ion Minsoo Kim Chloe Porter Julia Rossi

T he C onsul

Cover Story The $350 Trillion Ripple:

How the Libor Scandal Affects America

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Implications of an EU Collapse

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The UK and Euro: A Misunderstood Relationship?

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Hollande’s Treasure Hunt

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World Affairs Summer Recap 2012

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A Wolf in Sheep’s Clothing or a Misunderstood Giant? Australia’s Carbon Pricing Scheme

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Race to Immunity

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The Consul

World Affairs

Summer Recap 2012 Olympics – London 2012

This summer just about every athlete in the world visited London for the thirtieth Summer Olympiad. Jamaican runners (primarily Usain Bolt), American swimmers (Phelps and Lochte), and some young medal winners from the UK and China were the talk of the town, alongside a badminton scandal and several cases of unjust medal winning. London shone like a star, reminding the world of the city’s history despite recent economic turmoil. However, showcase of the Spice Girls and the Queen jumping from helicopter shows the developed world’s answer to the spectacular show of culture and organization of labor we saw in Beijing four years ago.

Indian Electricity Blackout Over 600 million people (almost twice the population of the USA) in northern India [including the author of this recap] were plunged into darkness for two days in July. The fallout of electricity was attributed to huge overdraws of power primarily for irrigation, due to the late monsoon. The states of Haryana and Uttar Pradesh, some of the largest agricultural producers in the country, consumed collectively almost 50% more power than they were allocated. Blame was immediately thrown at the central and state governments, adding to the political woes of corruption and weakness the current coalition government faces.


Greek Election This June the Greek populace made the decision to stay in the Eurozone and retain the Euro as their currency by electing the probailout New Democracy party andbeating out the anti-bailout opposition. At many times in the past six months it has seemed as if the fate of the Euro hung in the balance over a decision of a few leaders or by the ECB, but this was one of the few where the power lay fully with the people. It seems that fears of the effects of a Greek exit on the nation, the continent and on the world were realized, such as the potential collapse of many lending institutions, a jump in bond yields and an unprecedented effect on the currency. However, Mr. Samaras in Athens still has to convince lenders to continue the flow of bailout money to Athens, which has been suspended since the caretaker coalition government was set up in May.

Egyptian Election The Egyptian people elected the Muslim Brotherhood’s candidate Mohammed Morsi this May to lead the post-Mubarak nation. The victory denotes the first elected victory of an Islamist as an Arab head of state in the Arab World. Whether he can set a precedent for the rest of these countries is under debate, although there is some worry about having a member of the Muslim Brotherhood as the chief executive. However, what is often overlooked is that the only realistic alternative for the Egyptian people was a former Prime Minister of Mubarak’s regime, and military rule.

Syria With the end of Gaddafi and Mubarak’s reigns, the Arab Spring has come to center around Syria, with the situation now being regarded more as a Civil War than uprising. Two major players are involved in the conflict: the Syrian government forces, backed by Iran and Hezbollah; and the forces spearheaded by the Free Syrian Army coalition force, backed by Turkey, Saudi Arabia, the US, UK, and France.. There have been sieges laid by the Syrian army on numerous cities, and violence culminating with the battle over Aleppo, the country’s largest city. However, the Free Syrian Army has struggled to unify throughout the conflict, which is exacerbated by the decentralized geography of the country. Former UN Secretary General, Kofi Annan, acted as an UN-Arab League envoy in an effort to implement a peace plan, which ultimately failed due to resistance from Assad’s government. The violence continues with Bashar al-Assad still ruthlessly asserting his power.

Mars Rover

by Savar Sareen

Facebook IPO

NASA dropped what is essentially an SUV on Mars as their latest attempt at exploring the red planet for signs of organic compounds. The $2.5 billion rover dubbed ‘Curiosity’ was landed on the planet in early August, capturing the world’s attention. The rover used a new landing technique, a powered descent, and the use of a new landing feature called the ‘sky crane,’ which lowers the rover while it hovered 25ft over the surface, for which it has garnered much attention. Curiosity stands out against past missions as not only being looking like a tank against the previous rovers, but by having the most sophisticated array of sensors and cameras that have been sent to the planet.

As of May 18th, Facebook, the social networking behemoth, became a publicly traded company. The Initial Public Offering (IPO) of its shares was one of the most awaited in history. However this set it up for disappointment as the price of FB plummeted from its $38 opening price, now hovering around $20. The underwriters of the IPO, Morgan Stanley, JP Morgan and Goldman Sachs namely, were quickly blamed for valuing the stock too high, and over optimism for the stock. However, the company still benefited by going public by raising over $10 billion, as the primary goal of the IPO was to fundraise.

The Consul

Cover story

The $350 Trillion Ripple:

How the Libor Scandal Affects America By Michael Luo The big summer story of the financial world was the Libor scandal. Though it sent shockwaves through the banking community, the public reaction has been muted, particularly for an election year. But why exactly should American voters care about a British banking scandal, and what will be the repercussions for us? The Libor, or the London Interbank Offered Rate, is a measure of the interest rate at which banks borrow money from each other . A panel of six to eigh-

teen institutions is gathered and asked the following question: “At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?” The extreme responses are cut and the rest averaged to calculate rates for each combination of ten currencies and fifteen maturity periods. These rates are used as the basis for hundreds of trillions of dollars in derivatives as well as about half of the

mortgages and student loans in the United States market.

“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?” The extreme responses are cut and the rest averaged to calculate rates for each combination of ten currencies and fifteen maturity periods.

The immediate and striking observation is that the calculation of such an essential variable is not based on a set formula applied to solid economic data, but instead on the subjective contributions of the very institutions whose profits depend on the rate! The group which selects and oversees the panels, the Foreign Exchange and Money Markets committee, is nominally independent but is still composed of officials from the contributing banks. This would be like handing over the drug approval process from the FDA to the pharmaceutical companies themselves. 6

Government regulatory structures for other industries were set up a century ago, but regulation of the financial industry – which supports the entire rest of the world economy – is still in the hands of those with the greatest incentive to abuse it. The specific accusation against Barclays this summer was that it artificially lowered its Libor estimates. Ironically, this means that the scandal could have the effect of lowering the interest rate that homeowners with adjustable rate mortgages pay. But the main damage caused by the scandal will be to the credibility of the financial system. The average consumer already mistrusted the banks so much so that the scandal could hardly make things worse. However, smaller banks and credit unions, investors, pension funds, manufactur

ers, and small businesses – the people and organizations that make daily decisions based on their cost of borrowing – they are the ones affected most by the scandal. This will inevitably lead to increased costs being passed down to the consumer. If there is no trusted bench-

mark interest rate, how will banks calculate the correct rates to lend at? How will borrowers know whether they are being charged a fair price? Uncertainty always increases costs, and since nearly everyone is a consumer of financial products, the effects are multiplied enormously.

Government regulatory structures for other industries were set up a century ago, but regulation of the financial industry – which supports the entire rest of the world economy – is still in the hands of those with the greatest incentive to abuse it.

One would hope that the scandal would have generated renewed political and popular support for increased banking regulation, given such a blatant example of the behavior of banks with self-regulatory power, particularly in an election year where so much of the focus is on economic issues. But three months on, the scandal has disappeared from the public discourse. The past four years have been one huge advertisement for increased

banking regulations. Even Sandy Weill, the former Citigroup CEO largely responsible for the 1999 repeal of the Glass-Steagall Act which paved the way

for the giant mergers of commercial and investment banks, called for the return of Glass-Steagall and the breakup of today’s huge conglomerates . Perhaps the problem is that the banking world is so distant from the average voter that it’s hard to understand the effects of the manipulation of some strange acronym that most people had never heard of. The attention throughout the campaign has been fixed solely on jobs, with fleeting references to “failed policies which got us in this situation” – but with no mention of what those policies were or how they led to


the recession. But it’s easy enough to understand the problem if banks are al-

The attention throughout the campaign has been fixed solely on jobs, with fleeting references to “failed policies which got us in this situation” – but with no mention of what those policies were or how they led to the recession. lowed to manipulate a rate that leads to increased mortgage payments, or increased student loan costs, or increased risk in a senior’s pension plan. These are direct effects of the Libor manipulation that can be felt directly by millions of Americans. It is rare that events in the worldwill conspire to give such a direct incentive for a political agenda. Just as the lessons of the financial crisis have not been fully learned, another opportunity for reform seems to have been missed in the aftermath of the Libor scandal. C

The Consul

Cover Story

Implications of ARTICLE TITLE an EU collapse What the Fall of the European Union would mean for the United States by Zack Kleinbart The so-called “sovereign debt crisis” has left the European Union reeling since news of Greece’s massive debt was released in late 2009. By mid 2010, three other countries-Portugal, Ireland, and Spain- joined Greece in the list of “highly indebted (European) countries.” The European Union elected to dole out massive bailouts to these nations, with primary focus on Greece. The price of receiving hundreds of billions of euros was a mandatory implementation of austerity measures which have debilitated Greece’s economy. Debt holdersprimarily European banks- now grew fearful of the very real possibility that Greece would default on its debt. To make matters worse, debt crises arose in both Spain and Italy, which also required bailouts from the EU in exchange for implementing huge spending cuts and increased tax rates. Fears were so high that Spain and Italy would also be in danger of defaulting that potential debt-buyers demanded all-time high in-

terest rates in order to justify purchasing bonds from those nations. With three nations taking such strong fiscal measures, economic growth within the Eurozone is likely to come to a standstill, making it even harder for highly indebted nations to balance their budgets and temper the cycle of accruing massive amounts of debt. There is a significant possibility now that one or more nations- Greece and Spain most likely- may leave the euro and adopt their former currencies. If not regulated, this could lead to severe depreciation of the returns investors receive on bonds they purchased from the defecting country. This in turn could lead to greater budgetary, and hence, debt, crises within the Eurozone. Some analysts project a steady domino effect, in which one country’s defection could lead to the fracture of the European Union. Admittedly, this is a very pessimistic view of things. But, if this were to happen, how would it affect the United States? In the event of the collapse of the European Union, there would be drastic effects on the value of the dollar, and economic growth and employment in the United States. These effects would stem predominantly from the fact that upon a hypothetical dissolution of the EU, the euro would be replaced by reincarnations of the previous currencies used by each of the EU’s twenty seven member states. ·8·

First and foremost, the most obvious consequence of the fall of the euro would be the relative appreciation of the dollar. The dollar is the predominant reserve currency in the world.

Some analysts project a steady domino effect, in which one country’s defection could lead to the fracture of the European Union. That said, in the current international paradigm the euro is widely held by central banks around the world. As important investors, including European ones, fear the devaluation of the euro, demand for dollars has shot up since the onset of the sovereign debt crisis. This demand has been so strong that the Federal Reserve Bank, despite great efforts to lower the value of the dollar, has been thwarted by foreign demand. If the euro were to disappear entirely as a currency, the situation would become even more drastic. At that point, there would be no significant competitors to the dollar as the international reserve currency. Despite a debt situation worse than that of most European

countries, the United States would draw a flood in demand for dollardenominated investments, especially Treasury bonds. This would also correspond with a withdrawal of investment in European assets. As a result of the switch in demand, the dollar would appreciate, especially in relation to the new European currencies.

With an unemployment rate above 8%, the fall of the euro may prove catastrophic for the employment situation in the United States.

A strong dollar has several implications for the American economy. On the one hand, this makes imported goods, especially oil, significantly cheaper. So Americans would be paying less at the pump. This would also increase the Purchasing Power Parity of the average American citizen. The trouble with a strong dollar is that American goods will become relatively more expensive elsewhere. Combine that with a European transition to multiple new, national currencies- which will likely lead to consumer fears and tepid consumer demand across Europe- and American exports will be set to tank. Based on the conclusion that imports will become cheaper and exports will become more expensive to foreigners, we can expect a strong dollar to have an adverse effect on net exports in the United States. Such a decrease in net exports would negatively affect the growth rate of the American economy. It is common to associate job growth with general economic growth, and in regards to net exports, this may very

well be true. Remember, a strong dollar means that other currencies,

especially the hypothesized ones in Europe, would devalue. Which means that foreign workers will become cheaper to employ for American companies whose main source of income is in dollars. While outsourcing has been a problem for American job numbers in recent years, the problem may be exacerbated when a new generation of well-educated Europeans constitutes cheaper labor than their American counterparts. In addition, the devaluation of currencies abroad will make American goods less desirable abroad, resulting in a lower demand for American manufactured goods and hence a lower demand for manufacturing labor within the United States. With an unemployment rate above 8%, the fall of the euro may prove catastrophic for the employment situation in the United States. These are just a few of the problems that would ensue should the Eurozone cease to exist. There will be other issues, such as a decreased access to foreign credit and a decreased access to credit from those American institutions which hold investments based on the euro and on asset-backed securities from Europe. In an economy which is still recovering from a horrible credit crunch, these scenarios could push back the timetable for American economic recovery.

As you can see, the possibility of the Eurozone breaking up spells bad economic and financial times for America. Although we may not think that the euro crisis affects us, it does; and for

In an economy which is still recovering from a horrible credit crunch, these scenarios could push back the timetable for American economic recovery.

that we must hope that the Eurozone can salvage itself. Recently, European Central Bank has pledged to take all necessary measures to ensure the integrity of the European Union. The ECB has even produced two rounds of quantitative easing in hopes of stabilizing the euro, boosting the banking industry, and staving off a credit crunch by injecting hundreds of billions of “easy money” euros into the Eurozone market. We can only hope that this works, or if it doesn’t that the European Central Bank makes good on its promise and stops at nothing to make sure that the Eurozone stays intact. C

A strong dollar means that other currencies, especially the hypothesized ones in Europe, would devalue. The the


the Consul

Cover Story

The UK and the Eurozone:

Another Crisis Blown Out of Proportion

By Henry Chang In the autumn months of 2009, as Greece was beginning to spiral out of financial control, the United Kingdom’s economy had just started to recover from the most devastating 6 quarter period on historical record. As soon as news hit British shores of more problems from the continent, the media and markets immediately went into speculation overdrive. Tabloids began running pieces framing Greece as a burning wreck that would inevitably drag the rest of the Euro-zone down. Markets began gaining and dropping hundreds of points by the hour and an overall sense of cacophonous disorder reigned. Amongst all of this fear and chaos, the public began asking the questions: Was the U.K. Opt out of the Euro the correct decision? And what would happen to the British economy in the event of a euro-zone collapse? The conventional wisdom was that the only reason Britain still had any economy to speak of was that it had retained the Pound Sterling. There was an equally extreme assumption that a Euro-zone collapse would lead to a great-depression esque period of economic stagnancy. It is thus interesting to note that when a more indepth analysis is done, that both these conclusions turn out to be overtly hyperbolic and completely inaccurate de-

terminations of the British economy. In reality, the United Kingdom’s decision to adopt the euro was one with minimal overall economic impact and that in the event of a Euro-zone collapse, the British economy would certainly take a heavy hit but be able to survive relatively intact nonetheless. In order to better understand how not joining the Euro-Zone has impacted the British economy, one must first look at the original reasons the U.K. opposed joining. In 1997, then chancellor of the exchequer (finance

As the new labor leader of a party stagnating in the national polls, Gordon Brown was effectively forced due to political reasons to publicly abandon

minister), Gordan Brown, designed the “five economic tests” to determine what would be the result of Britain joining the Economic and Monetary Union of the European Union (EMU). The five tests were a set of apolitical considerations designed to determine how the euro would impact economic stability, growth, and job prospects for the nation as a whole. The conclusion in 1997 was that while integration might bring about long term benefits, the British economy was neither flexible nor convergent enough with the rest of Europe · 10 ·

to warrant the risks of membership at that particular time. In 2003, the British treasury again conducted the five tests and found that while there was significant progress on European economic convergence, specific structural issues in the housing market posed an ominous threat to any attempts at monetary integration. Treasury did however once again affirm that it would be in British long term economic interests to become a member of the Euro-zone. By the time the next “test” period came along however, a number of non-economic concerns had started to permeate the Euro-zone question. While the process of Euro consideration had begun as a non-political one, by the end of 2008 public opinion had taken a drastic turn against the continent as a result of simmering fears over Greece. Public opinion on the popularity of integration began polling at less than 25%. As the new labor leader of a party stagnating in the national polls, Gordon Brown was effectively forced due to political reasons to publicly abandon any plans for Euro-zone integration in the near future. As the opposition conservative-liberal democrat coalition swept to power in 2010, this public dissent against the continent only reached new heights with opposition surpassing 80%. This effectively ended any possibility of European convergence for the next 5 years and the coalition confirmed as much in a public declaration that the U.K. would retain the pound for the duration of this government. In essence, the media’s

manipulation has created a storyline that plays on general British suspicion of the continent. For much of the last 15 years, eventual entry into the Euro-

In essence, the media’s manipulation has created a storyline that plays on general British suspicion of the continent.

zone has been taken as a positive goal to be actively sought. The primary reasons the U.K. chose not to were first that of a safety-first approach and secondly in response to immediate political realities. Beyond the hyperbolic reasoning given for British refusal to adopt the Euro, the media also painted a deathly picture of economic failure in the event of a Euro-zone collapse. While a Euro collapse would indeed shock and affect economies all around the world, the idea that it would cause a complete failure in the U.K. is an inaccurate and overtly extreme assumption. In the event of a collapse, the part of the U.K. Economy that would be most affected would be its exports. Exports account for about 26% of the U.K. GDP. However, only half of British exports are destined for nations across the channel. As a result, 13% of the GDP in exports would be at risk of fluctuation in response to a Euro collapse. It is important to note that a collapse certainly does not mean that trade

with the continent would suddenly cease to exist. One must also consider that the U.K. imports a significant number of goods and services from the rest of Europe. A collapse of the Euro would affect this as well but it is arguable that by and large the trade balance will not be tipped too far in either direction. Considering the wealth of trade opportunities in Asia, Africa, and South America, the capital once invested in European trade would likely find a home elsewhere in the world. The collapse of the Euro would have a recognizable affect on U.K. trade as a function of GDP, however the assertion that it would destroy the British economy is very much a far fetched one. The other major economic fear that the tabloids in the U.K. love to harp on about is the possibility of a massive influx of economic refugees. If this were to occur, there would admittedly be a significant expansion of the workforce and a likely increase in unemployment. The arguments regarding government having to spend more on welfare are also equally true. However, Prime Minister David Cameron has come out and officially stated to both the house of commons and the general public that he would move to close U.K. borders if the economic or social strains ever became too strong. Seeing as Cameron also emphasized how there are legal precedents backing his position, it is hard to see how anyone would stop the British government from refusing access to continental migrants. While this might indeed result in a number of humanitarian refugee issues, it would also safeguard the U.K. from any additional economic pressures. Thus, while the Euro collapse would produce a drastic · 11 ·

change in U.K. economic policy, it would not fundamentally undermine or de-

The United Kingdom is a nation with a strange place in the EU. One one hand, Britain is considered a leading European power; on the other, it is one that has often seen fit to distance itself from the rest of the continent.

stroy the economy itself. The United Kingdom is a nation with a strange place in the EU. One one hand, Britain is considered a leading European power; on the other, it is one that has often seen fit to distance itself from the rest of the continent. The British decision to opt-out from the Euro-zone was one driven by caution and prudence. Given time, the U.K. might very well join the zone if it can ensure long term stability and growth. Quite frankly, it is ridiculous to tie the choice to the rabid anti-continental fear mongering exemplified by the British tabloids. Similarly, a collapse of the Euro is something the U.K. can deal with. More than 70 monetary unions have risen and fallen since the end of World War Two. Any Euro-zone disintegration would be fraught with chaos but in the end it would just be another chapter of what has become a globalized economic story. C

The Consul

Cover Story

Hollande’s Treasure Hunt by Michael Baresich

Francois Hollande has it tough. Barely five months after beating out incumbent Nicolas Sarkozy, his approval rating has dropped to 43% from 54%--one of the worst drops in modern French history. France’s unemployment rate has held steady around 10.2% since his election, and issues in the Eurozone continue to worry the country. Prior to Hollande’s election, Nicolas Sarkozy, the former President, had teamed up with German Chancellor Angela Merkel to form a Franco-German power bloc, trying to add some sense of leadership to the European political mess. However, much of this teamwork was focused on asking other countries to take more austerity measures and become fiscally responsible. Hollande, for whom “austerity” is a dirty word, has been distancing himself from Merkel’s calls for spending cuts and greater political integration within the EU. Rather than cutting spending, Hollande’s response, led by his Prime Minister Jean-Marc Ayrault, has been to raise taxes on wealthy individuals and businesses. An additional gapfilling €7.2bn was expected to be generated from “extra levies on those who pay the wealth tax, higher inheritance tax, an extra 3% tax on dividends, heavier charges on stock options, higher taxes on financial transactions, banks and oil firms, and an extra 5% tax on big compa-

Rather than cutting spending, Hollande’s response, led by his Prime Minister Jean-March Ayrault, has been to raise taxes on wealthy individuals and businesses nies,” partially offset by not raising the VAT. At the same time, public spending is not expected to go down. Government expenditures in France were at 55.9% of GDP, the second highest in the EU, and should be expected to continuously rise if GDP growth does not accelerate. While Hollande’s proposed tax increases on businesses leave much to be desired, his main political weap· 12 ·

on is increasing taxes on the wealthy. A 75% marginal tax rate for incomes over €1mm per year was guaranteed to gain him some political goodwill among his constituency. However, it seems that Hollande has forgotten a very interesting fact of geography: France is surrounded by tax havens. Andorra, Liechtenstein, Luxembourg, Monaco, San Marino, and Switzerland are all easily accessed from France, and levy little to no tax on capital gains and individual income. While certain steps have been taken by organizations such as the OECD to limit the use of tax havens , they will still most likely be very attractive places to hold large sums of money and financial assets. For the wealthy of France, moving—financially, at least—to

these countries seems like a no-brainer, even with taxes on assets moved out of France in full effect. At this point, even the UK would be an appealing place to move assets, if accidentally jogging out of your country is too much of a burden to deal with. Furthermore, all of these countries are culturally similar enough to France that cultural shock would be minimal or nonexistent for any wealthy French who physically move there. These countries have similar languages, climates, food, and time zones, and the wealthy who move there have easy access to any services or luxuries which they were used to in the past, such as schooling for their children or close proximity to vacation destinations. Compare this to the case of the wealthy in the United States. Eduardo Saverin, who made his billions from Facebook, renounced his American citizenship to reside in Singapore. Overall, the number of wealthy Americans expatriating has doubled since 2009. If we consider Saverin to be somewhat representative, that means that there are many wealthy Americans who are willing to endure some culture shock in order to relocate their money. Hollande’s plan is even stricter than the plan Americans are running from, and far easier to avoid. After all, if ever

However, it seems that Hollande has forgotten a very interesting fact of geography... more wealthy Americans are willing to brave the hot and sticky climate, foreign language, and new cultural experience of moving to Singapore, it should be expected that the wealthy of France would be thinking along similar lines. Given that it is even easier for the French to flee these taxes than it is for the Americans, a fairly large expatriation should be expected. As such, Hollande’s plan may have far less money available to tax, and thus he should not expect to gather nearly as much tax from the wealthy as previously projected. These new income taxes, combined with further taxes on basic transactions, will likely hamstring France further. If dividends and stock options are being taxed further, kiss start ups goodbye. An extra 5% tax on “big”

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These new income taxes, combined with further taxes on basic transactions, will likely hamstring France further. If dividents and stock options are being taxed further, kiss start ups goodbye. companies will give large multinationals pause when they think about further French expansion. Hollande has made the same mistake that countless politicians have made in the past: thinking of pools of capital and financial transactions as a bundle of goodies from which money can be extracted like oil from a well, rather than instruments for businesses to use like any other tool.

Beyond a misplaced desire for economic catharsis via taxation, Hollande’s policies fail to address a major, constant problem with the French economy: labor. France is well known for its frequent strikes and protests over employment and retirement policies. It is incredibly hard to fire a worker once hired. Firms, rather than just not firing people, have adapted, and simply stopped hiring. This has hit young workers the hardest, making it very hard to break in to the work force. Youth unemployment in France is more than double the overall unemployment rate, and unless labor restrictions are liberalized, we should expect it to stay that way. In times of uncertainty, firms try to reduce risk, particularly in hiring. If firms could hire and fire as they pleased, unemployed individuals would be more likely to be given a shot at employment. If the new worker is not pulling his share, he is gone. If the new worker is indispensable, the firm has just gained a valuable asset. At the same time, things are better for the workers themselves; they are off the public dole while employed, and they gain experience rather than stagnating. Under the current rules, France’s high unemployment rate is causing a self-reinforcing cycle of competitive impediment, with labor costs growing 28% since 2000 compared to 8% in Germany, the country’s biggest trading partner. C

The Consul

World Affairs


A Wolf in Sheep’s Clothing or a Misunderstood Giant?


by Akshay Subramanian Ubiquitous influence of China and Chinese companies in the global economy has been a phenomenon that has swept the world for much of the 21st century. One industry that offers a stark exhibition of the might and dominance of Chinese multinationals is the telecommunications equipment industry. Huawei, the Chinese telecom behemoth founded in 1987, has grown leaps and bounds over more than two decades. With over $32 billion in revenue in 2011, a footprint in more than 140 countries and more than 140,000 employees, Huawei recently eclipsed Sweden’s Ericsson as the world’s largest telecom-equipment manufacturer. As an indication of its global reach, the firm is involved in more than 50% of the 4G telecom networks that have been announced in Europe and has been a major catalyst in Africa’s cell phone revolution. It has managed to portray itself to the rest of the world as the face of Chinese technology and wants to be seen as an embodiment of innovation, exhibited by the fact that it has filed for around 47,000 patents. Huawei’s path so far, however, has not been devoid of obstacles. Its tremendous growth and global expansion over the years has been accompanied by fears associated with national security. The company’s stronghold on a sector tied strongly to security has sparked apprehensions that global networks can be used by the

Chinese government and cyber-spies to gain access to sensitive information. While the company has long claimed the high quality of its equipment and has vehemently denied any links to the Chinese government and the People’s Liberation Army, suspicions abound. Governments of the United States, Australia, India and the United Kingdom have openly voiced concerns regarding Huawei’s technology being used for nefarious purposes. In March 2012, Australia prohibited Huawei from participating in the bidding process for its multi-billion dollar National Broadband Network citing security concerns and the threat of cyber-espionage. Similarly, India has also taken harsh measures to curb Huawei’s presence in the country in response to the perceived threat posed by cyber-hackers. The government has opposed certain telecom carriers’ proposals to purchase equipment from the firm and has delayed the approval of a multi-million dollar investment in Research & Development facilities in the country. In the UK, public concerns were raised after Huawei won the contract to help overhaul and upgrade British Telecom’s equipment. The company, however, has unsurprisingly faced its greatest obstacle in the US. The US government has thwarted Huawei’s attempts to expand in the country on multiple occasions. Official opposition has prevented the Chinese giant from making strategic acquisitions in the country. In 2010, the Committee of Foreign Investment, chaired by Treasury Secretary, Tim Geithner, blocked · 14 ·

Huawei’s proposed purchase of 3Leaf Systems, a server maker citing certain unspecified security concerns. The US government has even taken the step of ordering US telecom carriers such as Verizon and AT&T to divulge information regarding the procurement of hardware and software manufactured abroad, a move similar to the ones enacted periodically during the Cold War.

With over $32 billion in revenue in 2011, a footprint in more than 140 countries and more than 140,000 employees, Huawei recently eclipsed Sweden’s Ericsson as the world’s largest telecom-equipment manufacturer.

The international mistrust regarding Huawei stems from multiple sources. Nations are apprehensive that Huawei’s equipment may contain “backdoors” which could be used to intercept data and are very difficult to detect. Huawei’s control over a significant portion of the world’s communication systems implies that either the company or even the Chinese government could use the access to foreign networks to eavesdrop on sensitive communication and shut down communication systems in the event of a conflict thus forming the

equivalent of a nuclear weapon in the country’s cyber arsenal. Qualms have also been raised by the alleged assistance the company receives from the Chinese government in the form of subsidies, export credits and cheap loans that allows it to significantly undercut its European and American rivals and thus offer similar quality equipment to its customers at a far lower cost. The mysterious relationship between the private company and the government has fueled fears that the Chinese government may be assisting the firm to expand globally so it can spy on electronic data sent from across the globe. Huawei also has a significant presence in Iran’s largely government controlled telecom industry. Equipment provided by the firm can be used by the Iranian government to monitor its citizens even more closely and support its spying network. The suspicions are further compounded by the rather secretive operations of the company. The company’s founder, Ren Zhengfei, was a former engineer in the People’s Liberation Army (PLA) and rarely interacts with the media. This has sparked apprehensions of the company’s possible ties with the PLA and is the most important concern of all countries dealing with Huawei. Any ties with the army would undoubtedly amplify the anxiety regarding national security. Huawei, on the other hand, has made concrete efforts to dispel fears and improve its image. For instance,

it has set up the Cyber Security Evaluation Center in the UK which is operated in tandem with Britain’s signals-intelligence agency, GCHQ. The organization is responsible for ensuring the quality, and reliability of the equipment sold to telecom firms in Britain and is an attempt by Huawei to persuade its customers about the secure nature of its equipment. The company has aggressively denied all allegations in the past and has stated that it is open to being investigated by the relevant authorities.

The company’s founder, Ren Zhengfei, was a former engineer in the People’s Liberation Army (PLA) and rarely interacts with the media.

While it may seem that the most obvious option for any government to guard itself from cyber-attacks and espionage would be to ban Huawei from operating in its country, there are significant risks associated with expelling Huawei. Huawei offers fairly high quality equipment rather cheaply compared to its competitors such as Ericsson and Alcatel-Lucent. Removing Huawei from the market would reduce competition in the bidding process for contracts, making the equipment more expensive to telecom carriers which would eventually result in higher prices for the general public. Furthermore, banning Huawei from operating in the country does not guarantee security against

cyber-espionage. Telecom equipment supplied by most manufacturers including Ericsson, Alcatel-Lucent and Nokia are produced in China. This implies that equipment provided by European and American companies are also likely to pose the same risks. National governments and Huawei are entangled in an intricate relationship. While concerns regarding Huawei’s rapid expansion across the globe cannot be derided as baseless, banning the company from operating will have detrimental effects. Governments should have clear cut conditions that all telecom equipment manufacturers must meet, regardless of their country of origin, in order to operate in their countries. All manufacturers must be open to disclosing information to the government regarding their purchases of hardware and software. Huawei can also do its part by considering going public. By getting listed on an exchange and opening itself to scrutiny, the company can partly dispel the perception of it being highly secretive and the resulting suspicions. At this juncture, the Chinese behemoth appears to be embroiled in a trust deficit. It does not face much of a challenge from competition but rather from geopolitical and regulatory issues. Whether it can continue to grow unimpeded would rest largely on how it bridges the trust deficit with the rest of the world and convinces governments worldwide that its technology will not and cannot be used for clandestine purposes. C

The Consul

World Affairs

Australia’s Carbon Pricing Scheme

Photo by Georgie Sharp

One step forward for the Green, three steps backward for Labor by Christine Du Australia introduced its new carbon pricing scheme on 1 July. Under this new law, Australian businesses that annually produce over 25.000 tons of carbon emissions will now need to pay for emission permits. This translates into an AUS$23 charge per every ton of greenhouse gas emitted for about 300 Australian businesses. The country’s mining firms, airline companies, steel makers and energy firms are expected to be hit the hardest by carbon taxes. The actual long-term effects of this new tax are yet to be seen, but judging from the contention and debate it has ignited, the Labor Party has taken a monumental risk at arguably the wrong time. According to Prime Minister Julia Gillard, leader of the Labor Party, the carbon pricing scheme is the only realistic way to meet Australia’s climate-change obligations since it is the leading emitter of carbon gases per capita (at 20.58 tons for each Australian) in the developed world. As part of the more extensive Clean Energy Plan, the government intends for these “carbon taxes” to force the nations largest carbon emitters to cut carbon emissions and invest in sustainable energy. This may not necessarily be the case, since affected companies can easily transpose these carbon taxes onto consumers, thereby raising prices

and increasing the cost of living for the average household. Should this happen, the carbon tax will ostensibly have little effect in decreasing Australia’s carbon emission but instead become an economic burden on the Australian people. Labor’s main contenders have fiercely defended this point. Tony Abbott, leader of the Liberal Party, has dubbed the carbon tax “toxic” tax. He says that it is an expensive and unnecessary policy, and promises to repeal the policy if his party were elected in the 2013 elections. On the other hand, the policy was broadly embraced by environmentalists, who see it as a long-awaited firm step towards clean energy. Australia has always been heavily reliant on carbon fuels as a main energy source, and its largest industrial firms have been generally reluctant to invest in more expensive sustainable energy sources. The new tax policy is apparently targeted at the nation’s largest emissionproducing businesses and firms. Yet this fulfills only one side of the equation. To fully foster development of green energy in the nation, Australia needs also to reform its policy on green energy development, which at the moment discourages foreign companies, typically leaders in sustainable energy, to establish operations in Australia. It seems that the economic impetus for Australian firms to invest in their own sustainable energy projects comes at too high a cost, and putting a price on carbon is likely not enough to stimulate increased development in green energy. Though a discussion on the specifics of · 16 ·

the green industry will be a diversion to this article, it is still worth noting that carbon tax can only be effective in combating climate change if it is accompanied by reforms in other fields. That being said, it is clear that the economic aspect of the carbon tax has garnered much more public attention than the environmental. Several largescale protests against the carbon tax took place promptly after it came into effect, as Australians grew fearful of its impact on the nation’s economy. In reality, however, the economic impact of these taxes on the average household is surprisingly low. The government has allocated billions of dollars to compensation plans to minimize the impact of carbon pricing on households and businesses. These funds will be actualized in the form of tax cuts, welfare and increased pension. As a result, the increase in household costs due to the new tax is estimated at only 0.7%. Thus Abbott’s accusations are clearly overexaggerated and lack solid support. If the economic reality of the carbon tax is not an ugly one, why is this policy so unpopular among the Australian population? From a political standpoint, the new legislation seems to have come at a very bad time and has consequently proved a political disaster for the Labor Party. It came at a time when concern for the environment is grossly undermined by the fear for economic instability. With the economic collapse in American and Europe, Australians are unprepared for any policy that poses even a minute threat to their economy. Furthermore,

Australia’s price on carbon is significantly higher than those in other developed countries (the European Union charges only about 8 Euros per ton, which is less than half of the Australian carbon price). It seems that Australia’s harsh carbon-pricing laws have come at a time of low global commitment to climate change, isolating the Labor Party from its cause. To the Australian, carbon taxes have become an economic issue instead of an environmental one,

and the Labor Party has thus ostracized itself from the population. This can explain the dip in support for the carbon policies from roughly even two years ago, roughly 2/3s opposition when the policy actually came into effect. The passing of the Clean Energy Plan is a pivotal moment for Australia’s commitment to environmental protection, but it came at a bad time. Not only has it endangered the Labor Party and probably squandered its chances of winning

the 2013 Elections, it has jeopardized the impetus for action towards clean energy. If carbon pricing is seen to have tried and failed, the instigation of any radical clean energy plan in the future will become exponentially harder. Nevertheless, it is still too early to draw a decisive claim regarding the effectiveness of the carbon tax law. Hopefully it will survive long enough to make an observable impact on climate change and justify its own existence. C

Race to Immunity by Jason Littman

Do you remember the good old days when smallpox vaccines were tested on milkmaids in rural England? Maybe this rings a bell from high school biology. Lucky (or maybe unlucky) for us, the period of time between vaccine research and dispersion to large populations has become very well regulated, in the United States. It takes years and tons of money for vaccines to go from paper to hospitals around the country due to the bureaucracy and nature of the experiments required to obtain FDA approval. While this process weeds out faulty vaccines, it is also a disincentive for companies to conduct research on vaccines. Currently, the Chinese vaccine market is increasing at rapid pace and may overcome the U.S. market, due to the shorter time period it takes to develop a vaccine. One may ask, why are vaccines so important and why should we worry about the future of the vaccine market? I would then to proceed to ask that individual, how many non-elderly people have you seen in the U.S. who have contracted polio, diphtheria, tetanus, pertussis, hepatitis b, measles, mumps, or rubella? The answer to this question is most likely zero and is due to the development of vaccines over the years. The last pandemic in the

United States was the Hong Kong Flu pandemic of 1969, which took the lives of about 34,000 Americans. The continuous development of vaccines for these diseases and others is vital for protecting against disease epidemics and pandemics. Due to the high mutation rate of bacteria and some viruses, and the overuse of antibiotics, new drug-resistant pathogens are constantly growing, creating the need for vaccine research to keep up with the pace of resistance. Without continuous vaccine development, another epidemic or pandemic will likely occur in the future. According to a study performed by the American Academy of Microbiology, the cost to develop a new vaccine is approximately $600 million to $1 billion. Additionally, it can take many years, in the United States, to take a vaccine from lab to doctors’ offices. This expensive and timely process can disincentivize the pharmaceutical industry and academia to even consider planning the development of a new vaccine. Comparatively, in China, approval to start a clinical trial can be gained in less than a year. While there hasn’t been a report that gives an estimate for the cost of developing a vaccine in China, I would assume that it is lower than in the United States, taking into consideration the · 17 ·

average income in China and the timeline of development. With lower costs and time, and a larger market than the United States, it seems as though China may become a center of vaccine development in the future. Companies, such as Sinovac (China-based pharmaceutical company that is also publicly traded in the U.S.), have already made progress in vaccine development for diseases like Hepatitis A and the flu. Without vaccine development, the world may resort back to disease epidemics and pandemics. This is why continuous development is so vital for our survival. The current system in the United States for developing a vaccine is so lengthy and costly that it’s not even worth doing for many companies. Whereas, in China, the development can lead to more profit, faster profit, and more lives. Considering the need for updates to current vaccines and the demand for vaccines for common diseases around the world, like HIV, Herpes, Chlamydia, Gonorrhea, Meningitis B, Hepatitis C, and Dengue Fever, it would be wise for the United States and other countries to adopt policy changes that incentivize the pharmaceutical industry and academia to develop safe and effective vaccines. C

The Consul

Dear readers of The Consul,

It was a summer packed with momentous events, the coming months promise even more, and we here at The Consul look forward to bringing you high-quality coverage of international affairs over the course of the year. The next month will see a leadership change in China as well as elections right here in the United States, both sure to have profound global effects.

This is an ambitious year for the Consul as well, and you will be seeing many changes in the publication from issue to issue. We seek to both expand the scope and the variety of our content, incorporating research pieces, original reporting, and shorter graphics-based content alongside editorials and analysis. It is also our goal to bring attention to some of the less glamorous issues in the world. Everyone’s attention this summer was focused on the rebellion in Syria, but what about the May military coup against the government of Mali, or the progress made by the African Union against AlShabab militants in Somalia? Or stories on the environment or health-care, often pushed off the front pages by violent conflicts?

Look for an expanded online presence as well, utilizing the website we introduced last spring, As always, the monthly print magazine can be found online, as well as a constant stream of blog pieces from our talented staff of writers. We also will be expanding our social media presence via Facebook and Twitter, which we will soon be using to publish more content. Finally, a word of thanks to our readership – both new and returning, at Penn as well as online. We hope to improve the reader’s experience with each and every issue. Your patronage will be the key to our successful expansion over the course of the year, as well as the motivation for our writers to continue delivering high-quality material. Michael Luo

The International Affairs Association University of Pennsylvania

the Consul Oct 2012  

the Consul Oct 2012

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