Credit markets seize... trade slows down?

As I noted the other day off-handedly, when we think of economic globalization, we tend to think of the two pillars of international finance and international trade. At LSE, we generally studied them as related, but distinct phenomena. Let’s put it this way: you know how you can get through English 101 by chanting “four legs good, two legs bad?” You can get through grad school by repeating ad nauseam the mantra “trade flows good, portfolio capital flows bad.”

I keed, I keed. But seriously, most academic economists acknowledge that trade is an all-around beneficial economic driver, whereas the record of finance (capital flows) is a bit more mixed.

Which is why I was so surprised to read about an unexpected knock-on effect of frozen global credit markets: the cost of financing international shipments has skyrocketed. In a nutshell: nobody wants to lend money to exporters to cover up-front shipping costs, even though the ships and cargo are put up as collateral (maybe lenders are afraid of pirates?) Unfortunately, in the real world, trade and finance are not quite the neat, separate spheres we study in the classroom.

This is a sobering development, one which has flown under the radar given the other enormous, paradigm-shifting developments that have occurred in these strange times. (Partial nationalization?!? Really??) But it is an indicator of just how bad things have gotten, and it gives a glimpse of how difficult it might become for the world economy to function, should these government-led rescue initiatives fail. A world where finance problems strangles trade is enough to send shivers down my spine.

(Photo by akpt)

An-arrrr-chy

There was news today that Somali pirates hijacked a French yacht and kidnapped two French citizens in the Gulf of Aden. (Look at the header, between the 'i' and the 's' of the word 'Zeitgeist'.) It is perhaps a lesser-known fact of the global economy that maritime piracy isn’t confined to Disney Movies and the Days of Yore. Piracy is one of the world’s oldest professions, and it’s still a serious problem: this is the 30th such attack this year in one of the world’s busiest shipping lanes. There’s also very little romantic about it: think less Jack Sparrow and more heavily-armed, ruthless thugs. Modern tactics include kidnapping, extortion, and bribery.

Piracy is a symptom of lawlessness and weak maritime power. It’s no coincidence that the Gulf of Aden is located in the territorial waters of Somalia, which hasn’t had a functioning government since the early 90s. Piracy also flourishes in the waters of Southeast Asia, where local law enforcement will sometimes turn a blind eye for a cut of the profits. And what a profit it can be: in 2006, piracy costs the global shipping industry around $16 billion.

The US Navy announced in August that it would begin patrolling the Gulf of Aden again in an effort to disrupt piracy there. How much difference this will make is unclear: the US Navy has intervened against pirates in the past. But the attacks continue and have even spiked in recent years. As mentioned, there’s a lot of money to be made, and world geography has created natural shipping lanes. Sometimes it is difficult or costly to avoid the chokepoints where pirates operate.

Perhaps the global community should consider re-legalizing privateering?

UPDATE: Looks like Blackwater is one step ahead of us yet again. Curse those wily mercenaries! (Hat tip: John Thorne... word on the street is he may resurrect his amazing blog, Whiskey Tango Farley)

(Image: Blackbeard’s flag, linked via Lighthouse Patriot Journal)