Hatoyama Reassures U.S. on Ties

ALISON TUDOR YUKA HAYASHI

TOKYO -- Incoming Japanese Prime Minister Yukio Hatoyama moved to assure the U.S. that the relationship between the two nations remains a strong one, an apparent attempt to calm nervousness among some foreign policy experts in Washington over a possible policy shift.

Mr. Hatoyama and U.S. President Barack Obama spoke via phone on Wednesday U.S. time, agreeing to build an "even more effective relationship," the White House said in a statement.

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US ambassador to Japan John Roos, left, and Democratic Party of Japan leader Yukio Hatoyama hold a meeting at the DPJ headquarters in Tokyo.

On Thursday, he met with John Roos, the new U.S. ambassador to Japan, for the first time since his Democratic Party of Japan swept into office in a landslide election Sunday. In both conversations, he stressed the importance of the U.S.-Japanese alliance.

"The Japan-U.S. alliance is the axis of Japan's foreign policies," Mr. Hatoyama told Mr. Roos during the meeting, according to a statement from the Japanese leader's office. "We would like to further enhance the Japan-U.S. relationship."

Many observers of U.S.-Japan relations don't expect major changes but see the potential for subtle shifts. "We've got an unparalleled opportunity here for the US and Japan to sit down and freshen up their alliance within the framework of the old," said Walter Mondale, the former U.S. vice president and Democratic presidential candidate, who was an ambassador to Japan during the Clinton administration.

He added, "This would be a good time to look at the relationship with fresh eyes."

As Mr. Hatoyama prepares to take office on Sep. 16, Washington faces the challenge of cultivating fresh ties with the untested DPJ after over five decades of dealing with the Liberal Democratic Party, a staunch ally with conservative policies.

The DPJ has kept U.S. policy experts on alert with its proposals to renegotiate the terms of the U.S. military presence in Japan and to discontinue Japan's refueling of U.S. warships in the Indian Ocean to support the war in Afghanistan. In its campaign policy pledge, the party said it would seek a "close and equal" relationship with the U.S., a statement largely interpreted as its desire to reduce Japan's reliance on their bilateral national security alliance.

Speaking to reporters after his call with Mr. Obama, Mr. Hatoyama said he assured the president the U.S.-Japan alliance is the "foundation" of Japan's foreign policy.

The White House said the two leaders also agreed to work together on various areas including strengthen global economic recovery, combat climate change, ensure the denuclearization of the Korean Peninsula and defeat al Qaeda.

Mr. Mondale said the dialogue between the two new administrations could make progress in resolving some lingering issues between the two.

For example, it could lead to a resolution to a 1995 agreement between the two to move a U.S. military base on Okinawa to another part of the island. The move has been delayed for years, some Japanese residents there want the base moved altogether. "It's now 14 years later and I believe it's time for the sides to sit down and resolve this issue," said Mr. Mondale, who was involved in the original negotiations.

Mr. Hatoyama made a rocky debut in the eyes of some foreign policy experts in the U.S. Some pointed to an essay he wrote that appeared in a Japanese journal last month, in which he described Japan at one point as a victim of U.S.-led market fundamentalism. The essay was later translated and printed in U.S. publications.

"That was a huge mistake to publish that piece," said Gerald Curtis, professor of Japanese politics at Columbia University. "I hope he will learn his lesson and that we'll see a much more sensible position."

Mr. Hatoyama's camp has said excerpts were taken out of context, and a DPJ spokeswoman said Thursday that the matter hadn't hurt relations and had been blown out of proportion.

Mr. Mondale said the dialogue between the two new administrations may lead to changes that strengthen their relationship.

"The tone of the relationship needs to be carefully tended to," he said. "I think sometimes when there are tensions in the world, we're not too careful about how abrupt we are in this alliance. It would be good at this time to refresh the relationship and make it clear that the Japanese will get the elbow room they desire."

China’s Exports, Not Altruism, Fund U.S. Deficit: Caroline Baum

Commentary by Caroline Baum

Sept. 2 (Bloomberg) -- Any reference to the exploding U.S. fiscal deficit is almost certain to include a mention of China in the very next sentence.

It goes something like this: The U.S. budget deficit is projected to hit a record $1.6 trillion this year and something close to that in 2010. What happens if China is unwilling to finance that deficit?

China, of course, is the largest foreign holder of U.S. Treasuries, with $776.4 billion as of June. That represents a 41 percent increase from June 2008.

These statistics don’t tell the whole story. The two countries actually have a symbiotic relationship, even though it’s portrayed more often than not as parasitic, with the U.S. dependent on China to buy its bonds.

Because the U.S. government spends more than it collects in taxes, it has to borrow -- from you and me, from domestic money managers, from foreign central banks -- to make up the difference.

The idea that China may decide not to finance our deficit makes no sense.

“It’s the equivalent of believing the sun travels around the earth,” says Jim Glassman, senior U.S. economist at JPMorgan Chase & Co.

China is a developing nation that manages its currency, the yuan, to maintain its comparative advantage in producing cheap goods for export. China’s exports to the U.S. rose to a record $337 billion in 2008.

For about three years, from mid-2005 to mid-2008, China let the yuan appreciate from 8.2 yuan per dollar to about 6.82. It’s probably no coincidence that China froze the yuan at 6.83 a year ago as the world economy, and global trade, went into freefall, Glassman says.

Giant Humming Sound

“They’re definitely attuned to the danger of getting less competitive,” he says.

U.S. consumers are happy to buy cheap Chinese goods, paying for them in dollars. China’s exporters turn the dollars they don’t want or need over to the People’s Bank of China, the country’s central bank, in exchange for yuan.

The PBOC, which had dollar reserves of $2.1 trillion at the end of the second quarter, can invest in safe, dollar- denominated instruments, such as U.S. Treasury securities. Or it can sell the dollars in exchange for euros, let’s say, which would depress the value of the dollar.

So unless China wants those factories to stop humming, the PBOC will invest those dollars in the U.S., recent protestations by policy makers notwithstanding.

Job Dependency

There are some 500,000 to 600,000 jobs in the U.S. that are reliant on a product or service they sell in China, according to Jim Bianco, president of Bianco Research in Chicago. In China, the number of jobs dependent on a product or service sold to the U.S. is 50 million to 60 million.

These numbers, which come from China Online, a Chicago think tank, go to the heart of the matter: If the Chinese don’t want to buy U.S. Treasuries or other dollar-denominated assets, they have to stop selling us stuff.

“China needs those jobs,” Bianco says. “It keeps people too busy to organize revolution.”

Historian Niall Ferguson calls the partnership between big saver and big spender “Chimerica.” He fears the two interconnected economies are headed for divorce as U.S. consumers rebuild their savings and China strives to become less export-dependent.

Chinese leaders have been voicing concerns publicly about soaring U.S. spending, huge budget deficits and the potential for higher inflation down the road. They have talked about moving away from an export-dependent economy to one that relies more on domestic demand.

Foreign Exchange

That’s what developing nations typically do when they emerge. It goes hand in hand with an appreciating currency.

As long as China keeps a tight rein on its currency -- selling yuan and buying dollars to keep it from strengthening -- the decision to finance the U.S. budget deficit is secondary.

In buying U.S. Treasuries, China isn’t being altruistic. It’s acting in its self-interest.

China sells the U.S. goods.

China gets U.S. dollars in return.

China invests the dollars in the U.S.

Why this is made out to be anything more than a mechanical transaction is a mystery. (Go back 20 years, substitute Japan for China, and the storyline is the same.)

Reserve Status

Even the discussion about moving away from the dollar as the world’s reserve currency leaves me scratching my head. Reserve currencies aren’t selected by a poll of countries or anointed by a committee of experts at the International Monetary Fund. The dollar is the world’s reserve currency because other countries are willing to hold it in order to trade with or invest in the U.S.

This isn’t to say deficits don’t matter or the U.S. can be cavalier about funding them. Private investors may see no value in a 10-year Treasury yielding 3.4 percent if they anticipate higher inflation.

China’s central bank doesn’t have the same investment parameters. Nurturing growth is a higher priority than enhancing returns.

U.S. Economy: Companies Cut More Jobs Than Forecast in August

By Timothy R. Homan and Shobhana Chandra

Sept. 2 (Bloomberg) -- U.S. companies cut more jobs than forecast in August and boosted their workers’ productivity the most since 2003 in the second quarter, signaling employers are seeking to cut costs further even as the economy stabilizes.

A survey by ADP Employer Services showed businesses reduced payrolls by 298,000 after a 360,000 decline in July. The Labor Department in Washington said productivity, a measure of employee output per hour, rose at a 6.6 percent annual rate in the three months through June.

With labor costs declining and employment continuing to deteriorate, today’s reports buttress the case for the Federal Reserve to complete its plans to buy $1.75 billion of bonds and forego raising interest rates until next year. Slack in the job market helps reduce any inflationary pressures stemming from the central bank’s record liquidity injections.

“Inflation risks are minimal and the key issue they should focus on is spurring growth,” said Michael Moran, chief economist at Daiwa Securities America Inc. in New York, who accurately forecast the gain in productivity. “There’s a turn under way in the labor market, though it’s a very slow turn.”

Stock-index futures dropped after the ADP report’s release, and the Standard & Poor’s 500 Index opened lower; it was up 0.2 percent to 999.66 at 11:33 a.m. in New York. Treasuries erased losses, leaving yields on benchmark 10-year notes little changed from late yesterday at 3.35 percent.

Factory Orders

A separate report today showed factory orders advanced in July by the most in a year as companies sought to rebuild inventories after a record draw-down in the first part of 2009. The Commerce Department said orders increased 1.3 percent after a 0.9 percent gain in June.

The Fed later today is scheduled to release minutes of its August policy meeting, when the Federal Open Market Committee decided to complete its planned $300 billion of Treasuries purchases by the end of October. Officials in recent days have differed in their outlook for the larger $1.25 trillion program to buy mortgage-backed securities.

Following the last two recessions, the central bank waited for at least a year after the unemployment rate peaked before raising rates. The Labor Department in two days is forecast to report the jobless rate rose to 9.5 percent in August from 9.4 percent in July; economists project it will reach 10 percent in early 2010.

The ADP report, forecast to show a decline of 250,000 jobs, underscores the danger that the consumer spending that accounts for 70 percent of the economy may be slow to gain traction in coming months.

ADP Details

The report showed a drop of 152,000 workers in goods- producing industries including manufacturing and construction, while service providers cut 146,000 workers. Financial firms trimmed jobs by 19,000, ADP said, the 21st consecutive monthly drop for the industry.

Whirlpool Corp., the world’s largest appliance maker, said Aug. 28 that it will close its Evansville, Indiana, manufacturing plant, resulting in the elimination of 1,100 jobs, or 1.6 percent of the company’s workforce.

“Considering the severity of the recession and uncertainty over the strength and sustainability of the recovery, the labor market’s recuperation will be slow and painful,” said Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania, which forecast a drop of 290,000.

Worker Productivity

Productivity of U.S. workers rose in the second quarter at the fastest pace in almost six years, the Labor Department’s data showed, as companies squeezed more out of remaining staff to boost profits. Labor costs, adjusted for the gain in efficiency, fell by a revised 5.9 percent annual pace, the most in nine years.

Lower expenses helped boost profits last quarter by the most in four years, a necessary first step in slowing firings. Productivity gains also help curb inflation.

Makers of durable goods from Intel Corp. to Rockwell Collins Inc. are among those seeing demand stabilizing as customers here and abroad, buoyed by growing profits and more accessible credit, begin to invest in new equipment.

The gain in factory orders was restrained by a decline in non-durable goods such as oil and food that masked a jump in demand for new equipment.

A rebound at automakers resulting from the government’s “cash-for-clunkers” plan may give orders an added boost in coming months as dealers restock.

‘Very Lean’

“Inventories are very lean and businesses are now going to have to increase production given the gain in orders,” said Michelle Meyer, an economist at Barclays Capital Inc. in New York.

Leaner workforces allowed companies to protect earnings while the economy shrank at a 1 percent annual rate last quarter. Corporate profits rose 5.7 percent from the prior three months, the biggest gain since the first quarter of 2005, Commerce Department data showed last week.

Dell Inc., the world’s second-biggest maker of personal computers, topped second-quarter profit and revenue estimates after slashing costs. Chief Executive Officer Michael Dell, on a quest to save $4 billion a year, has farmed out 40 percent of the Round Rock, Texas-based company’s manufacturing.

U.S. Incomes Fall 1.3%, Biggest Drop in Four Years (Update3)

By Shobhana Chandra

Aug. 4 (Bloomberg) -- U.S. personal incomes tumbled 1.3 percent in June, more than forecast and the biggest drop in four years, signaling that consumer spending will take time to recover.

The decline partly reflected the unwinding of one-time transfer payments from the Obama administration’s stimulus plan, which boosted incomes 1.3 percent in May, figures from the Commerce Department showed today in Washington. Spending rose 0.4 percent in June as prices climbed. Adjusted for inflation, purchases fell 0.1 percent, the report showed.

The worst economic slump in seven decades eased last quarter as government spending programs started to take hold, underscoring forecasts the recession will end by the end of the year. The recovery is likely to be muted as job losses and falling home values cause Americans to boost savings and limit spending, which accounts for about 70 percent of the economy.

“We’ll see a weak economic recovery by past standards,” said James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. “For a sustained pickup in consumer spending, we need a clear-cut improvement in the labor market.”

Also today, the National Association of Realtors said the number of contracts to buy previously owned homes in the U.S. rose in June for a fifth straight month and beat economists’ forecasts, as lower prices attracted buyers. The 3.6 percent gain in the index of signed purchase agreements, or pending home resales, followed a 0.8 percent gain the prior month that was larger than previously estimated.

Stocks, Treasuries

Stocks and Treasuries were little changed after the reports. The Standard & Poor’s 500 Stock Index dropped 0.2 percent to 1,001.04 at 10:16 a.m. in New York. Yields on benchmark 10-year notes rose to 3.66 percent from 3.64 percent late yesterday.

Economists forecast personal income would fall 1 percent after a previously reported 1.4 percent gain in May, according to the median of 75 estimates in a Bloomberg News survey. Projections ranged from an increase of 1 percent to a drop of 1.6 percent. June’s decrease was the biggest since January 2005, the month after Microsoft Corp. sent out a special dividend.

Spending was projected to rise 0.3 percent for a second month, according to the Bloomberg survey.

Price Increases

Excluding the effects of the stimulus plan, incomes would have dropped 0.1 percent in June after no change the prior month, according to Commerce. Wages and salaries decreased 0.4 percent in June, the ninth drop in 10 months.

Today’s report showed price increases in June were smaller than in the same period last year. The inflation gauge tied to spending patterns dropped 0.4 percent from June 2008, the biggest decrease since records began in 1960.

The Federal Reserve’s preferred gauge of prices, which excludes food and fuel, increased 1.5 percent from a year earlier, the smallest gain since December 2003.

The drop in incomes caused the savings rate to fall to 4.6 percent from a 14-year high of 6.2 percent in May.

Adjusted for inflation, spending dropped 0.1 percent following little change in May.

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, dropped 0.2 percent in June after rising 1.2 percent in the prior month.

Car Sales

Car sales may get a boost this quarter from the government’s “cash-for-clunkers” program, which offers as much as $4,500 for trading in older, less fuel-efficient vehicles. Ford Motor Co.’s sales rose in July for the first month since 2007. Purchases for the industry jumped to an 11.3 million annual pace last month, the highest level since September.

Price-adjusted purchases of non-durable goods decreased 0.4 percent after falling 0.1 percent, today’s report showed.

Spending on services, which account for almost 60 percent of all outlays, was little changed.

Consumer spending fell last quarter at a 1.2 percent pace, and the gain in the first quarter was revised to 0.6 percent, smaller than previously estimated, Commerce figures showed last week. Spending has fallen 2 percent since its peak at the end of 2007, the deepest retrenchment by consumers since 1980.

The job market continues to cloud the outlook for spending. The unemployment rate is projected to surpass 10 percent by early 2010, according to a Bloomberg survey. A report from the Labor Department in three days is forecast to show payrolls fell by 325,000 in July following a drop of 467,000 the prior month.

Consumers are reluctant to spend on much beyond necessities. MGM Mirage, the biggest casino owner on the Las Vegas Strip, reported a second-quarter loss as gambling revenue dropped. Las Vegas-based MGM slashed hotel room rates to attract tourists after companies canceled conferences.

“The operating environment remains challenging,” Chairman and Chief Executive Officer Jim Murren said on a conference call yesterday. Even so, “we see extremely positive signs, especially as we go into 2010.”

Pending Sales of Existing Homes in U.S. Surge 3.6% (Update1)

By Courtney Schlisserman

Aug. 4 (Bloomberg) -- The number of contracts to buy previously owned homes in the U.S. rose in June for a fifth straight month and exceeded economists’ forecasts, as lower prices and mortgage rates attracted buyers.

The 3.6 percent gain in the index of signed purchase agreements, or pending home resales, followed a 0.8 percent gain the prior month that was larger than previously estimated, the National Association of Realtors said today in Washington.

Foreclosure-driven declines in home values and tax incentives are putting houses within reach of first-time buyers, helping to stabilize the real-estate market, which has been the biggest drag on economic growth. At the same time, with mortgage rates no longer dropping and unemployment still rising, it may be months before a sustained recovery in housing takes hold.

“It’s a modest recovery, however these numbers are exceeding people’s expectations,” said David Sloan, senior economist at 4Cast Inc. in New York, one of three forecasters who shared the highest projection in a Bloomberg News survey. Nonetheless, he said, while there are “genuine signs” of recovery in housing and manufacturing, “the consumer is still the big sort of worry.”

Economists forecast the index would increase 0.7 percent, after an originally reported 0.1 percent gain in May, according to the median of 35 projections in the Bloomberg survey. Estimates ranged from a 1.2 percent drop to a 3 percent gain.

Incomes, Spending

A report from the Commerce Department today showed personal incomes tumbled 1.3 percent in June, more than forecast and the biggest drop in four years. The report showed spending rose 0.4 percent as prices climbed. Adjusted for inflation, purchases fell 0.1 percent, the report showed.

Incomes had jumped in May by the most in a year as tax cuts and the Obama administration’s stimulus package pushed the U.S. savings rate to a 15-year high.

Pending resales are considered a leading indicator because they track contract signings. NAR’s existing-home sales report tallies closings, which typically occur a month or two later. The group, whose pending data goes back to January 2001, started publishing the index in March 2005.

All four regions in the U.S. saw an increase in pending sales, today’s report showed, led by a 7.1 percent gain in the South and a 2.9 percent increase in the West.

“Activity has been consistently much stronger for lower priced homes,” NAR chief economist Lawrence Yun said in a statement, noting that first-time buyers must see their contracts close by Nov. 30 to get an $8,000 tax credit.

Affordability Index

The agents’ association said July 23 that home resales in June rose for a third straight month, supporting the case that the industry’s downturn, now in its fourth year, will end in 2009. The median price dropped 15 percent from a year earlier.

Sales of new homes soared 11 percent in June, the most since 2000, according to Commerce data released July 27.

The Realtors’ group’s affordability index, which takes into account home values, household incomes and mortgage rates, reached a record high of 178.8 in April. The index was at 159.2 in June. Readings greater than 100 indicate a family earning the median income can afford a median-priced home at current borrowing costs.

M.D.C. Holdings Inc., the Denver-based builder of Richmond America Homes, said July 31 that its orders had increased on a quarterly basis for the first time in four years.

“Building and sales activity for the industry overall improved from historic lows recorded earlier this year,” M.D.C. Chief Executive Officer Larry Mizel said in a statement.

Mortgage Rates

While mortgage rates have crept higher as the economy improves, they are still below year-earlier levels and near record lows. The average rate on a 30-year fixed mortgage was 5.25 percent in the week ended July 30, according to Freddie Mac, compared with 6.52 percent in the same week a year earlier. Rates reached an all-time low of 4.78 percent in late April.

A weak labor market is one reason economists say a rebound in housing will be slow to develop. The unemployment rate, which reached a 25-year high of 9.5 percent in June, may exceed 10 percent by early 2010, according to the median forecast of economists surveyed by Bloomberg last month.

The Labor Department is scheduled to release July payrolls data on Aug. 7.

Rising defaults and foreclosures may depress property values for months, making buying a home risky even though such purchases become more affordable and perpetuating a difficult climate for homebuilders.

Foreclosure filings reached a record 1.5 million in the first half of the year, according to data from RealtyTrac Inc., an Irvine, California-based seller of default data.

Ryland Group Inc., a California homebuilder that focuses on first-time buyers, reported a second-quarter loss on July 30 that was greater than analysts estimated. New orders fell 16 percent to 1,716 in the period, the company said.

U.S., India Announce Defense, Power Deals

MATTHEW ROSENBERG

Associated Press

Hillary Rodham Clinton shares a light moment with Indian Foreign Minister S.M. Krishna after signing an agreement on an endowment fund for science and technology.

NEW DELHI -- The U.S. and India announced deals Monday that could bring American defense contractors and power companies billions of dollars in business, as Hillary Clinton wrapped up her first visit as secretary of state to the South Asian nation.

A long-running dispute over how to combat climate change threatened a day earlier to the sour the trip, which has been touted as an effort to strengthen ties between world's two largest democracies after decades of estrangement during the Cold War, when New Delhi often leaned toward the Soviet Union.

Monday's announcements ensured Mrs. Clinton's three-day visit brought tangible gains for both sides, setting the stage for further expanding military cooperation and two-way trade, currently valued at about $45 billion and growing.

"I don't think you can understate the significance of our relationship as two democracies," Mrs. Clinton said at a joint news conference with her Indian counterpart, External Affairs Minister S.M. Krishna. "We understand the difficulties of decision-making in democracies, and we respect the vibrancy of each other's democracy. That is a much stronger base for a relationship than any other in the world."

Mrs. Clinton said she had been told by Prime Minister Manmohan Singh, whom she met earlier in the day, that India had set aside two sites where U.S. firms will have exclusive rights to build nuclear power plants.

The sites will "facilitate billions of dollars in U.S. reactor exports and create jobs in both countries as well as generate much-needed energy" in India, which faces chronic power shortages, Mrs. Clinton said.

She didn't say where the sites would be. But the widely expected announcement is a major step toward implementing a landmark pact sealed last year between Washington and New Delhi that ended a 34-year ban on trading nuclear fuel and technology with India, which had developed atomic weapons outside the Nuclear Non-Proliferation Treaty.

Already, India has set aside sites exclusively for French and Russian companies. The U.S. sites announced Monday guarantee American access to a market for power plants valued at tens of billions of dollars.

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Reuters

U.S. Secretary of State Hillary Clinton gestures as she addresses Indian students and university officials during a function at a university campus in New Delhi July 20, 2009.

Europe Thumps U.S., Again

First lower taxes, now freer trade.

On present trends, most of Europe will soon have lower income tax rates than most of America. And now the European Union is stealing another competitive march on Washington, this time on a free trade deal with the world's 13th largest economy, fast-growing South Korea.

Last week Brussels and Seoul finished the outline of a new trade agreement, and the two sides will now write up the technical language to codify it. As for the pending U.S.-Korea trade agreement, Congress has done . . . nothing.

South Korea has made negotiating trade deals a centerpiece of its foreign and economic policy. The U.S. FTA, signed in 2007 but still not ratified, is one example. Negotiations are planned or under way with a long list of countries, including India, Canada and Australia. On the EU side, the Commission is vigorously defending the pact against domestic critics, including the European auto industry. EU approval isn't a sure thing, but Swedish Prime Minister Fredrik Reinfeldt is aiming to finish it by December.

Compare that to the U.S., where the FTA with Korea is bogged down in Big Labor politics. Bashing the deal became de rigueur in the Democratic Party primary before last year's Presidential election. Candidates Barack Obama and Hillary Clinton both claimed the deal wouldn't open Korea's auto market to U.S. imports, all evidence to the contrary. Now, with Democrats running both the White House and Congress, prospects are bleak for any trade deal. Colombia has also been left hanging, even though its goods already enter the U.S. duty free under the Andean preferences program.

Don't count on progress any time soon. President Obama's trade representative, Ron Kirk, rose from his slumbers last week to give his first big speech but he failed to mention either South Korea or Colombia. Instead, he focused on "trade enforcement," by which he seems to mean picking fights with U.S. trading partners. This will include, Mr. Kirk said, investigating "labor violations" inside other countries. "And if they don't fix their labor problems, we will exercise our legal options," he said. Just what our friends want to see when global trade is contracting: Another U.S. excuse for protectionism.

Korea's progress with the EU shows how risky U.S. delays are. The European Commission says the EU-Korea deal will eliminate $2.2 billion in duties Korea currently imposes each year on European goods -- and cut duties and eliminate nontariff barriers on imports of European cars. American companies could gain similar benefits if only Congress would approve the U.S.-Korea pact.

Across the globe, countries are moving ahead with similar bilateral trade deals, often giving their own national companies an edge over U.S. competitors. In a perfect world, all countries would be able to benefit from multilateral trade opening under the Doha Round. But for now bilateral deals are better than nothing, and America is leaving itself behind.

China New Latin Bad Boy Replacing the U.S.: Alexandre Marinis

Commentary by Alexandre Marinis

June 30 (Bloomberg) -- For the past 50 years, Latin Americans had a love-hate relationship with the U.S. They loved American entertainment and hated U.S. foreign policies. They had particular disdain for Washington’s support for Latin dictators in the 1960s and 1970s, its campaign against Cuba and, more recently, just about everything associated with George W. Bush.

Fortunately, anti-U.S. feelings in the region are about to subside due to momentous changes now occurring. Think of them as C-3PO. I’m not referring to the android from “Star Wars.” This is an acronym for crisis, Cuba, China, protectionism, and Obama. Let’s take them in order.

-- The global economic crisis, born on Wall Street and exported to the rest of the world, has taught everyone a few things about the U.S. Namely, American economic policies and financial products aren’t risk-free and shouldn’t blindly be embraced by other nations.

Paradoxically, the worldwide recession will help improve relations between the U.S. and Latin America. Chastened by the economic crisis and Iraq War, the U.S. now is less arrogant. This resonates with Latin Americans in particular, following decades of being bullied by the superpower.

The world’s economic woes have made Latin Americans feel more pride and confidence in their ability to solve domestic problems. After all, for the first time in many years, a global monetary crisis wasn’t caused by the region’s debt default, currency devaluation or hyperinflation.

Rethinking Cuba

-- Though irrelevant in terms of the global economy, Cuba has been a powerful political symbol. Consider how much has changed. Fidel Castro retired. The Organization of American States agreed to readmit the communist nation after 47 years of banishment.

Also, the U.S. is likely to lift its trade embargo against Cuba in the near future. Once that happens Cuba won’t be able to blame the U.S. for its economic backwardness.

Over time, these developments will bring closure and psychological comfort to leftist Latin leaders who built their political careers in the 1960s and 1970s believing that communism represented a viable alternative to the U.S.

It’s getting more difficult for Latin leaders to blame U.S.-backed policies for their own misfortunes. Case in point: The demise of the so-called Washington Consensus, a package of economic policies the U.S. foisted on developing nations starting in late 1980s. American politicians argued the measures promoted the benefits of the free market. Their Latin counterparts said the measures worsened economic instability.

Here Comes China

-- Latin Americans share this deep-seated belief: their region’s social inequality and economic underdevelopment have been largely due to the exploitation of its vast natural resources by the developed world, first Europe and then, after World War II, the U.S.

This explains why Venezuela’s President Hugo Chavez gave Barack Obama a copy of Eduardo Galeano’s “Open Veins of Latin America: Five Centuries of the Pillage of a Continent” during the annual Summit of the Americas in April. The well-publicized gesture boosted the 1971 classic to No. 2 on Amazon.com’s bestseller list, up from No. 54,295.

Too bad Chavez presented it to the wrong president. China, not the U.S., looms as the region’s largest and most feared investor and trade partner.

China has already surpassed the U.S. as the largest buyer of Brazilian exports. It’s taking advantage of the world credit crunch to buy Latin American companies and provide loans to the continent’s nations in exchange for the guaranteed supply of raw materials -- oil, iron ore, soy beans -- the Chinese need to sustain economic growth.

Protectionism Increases

-- Latin Americans are already wondering when China will replace the U.S. as the latest economic powerhouse to plunder the region’s natural resources. Brazil’s Vale SA, the world’s largest iron-ore exporter, already sells 70 percent of its production to China and was pressured by Chinese clients to lower prices.

While China becomes the largest buyer of raw materials and commodities produced in Latin America, low-priced Chinese goods flood the region. Local makers of shoes, textiles and toys have been forced out of the market by Chinese competitors and are pressuring government officials to file antidumping cases against China.

Although only 13 percent of Brazil’s imports come from China, the Asian country is the target of 35 percent of the 123 antidumping investigations opened by the Brazilian government as of late March, according to the National Confederation of Industry.

The Obama Effect

-- Don’t be surprised if some Latin leaders who now oppose the U.S. -- including Venezuela’s Chavez, Evo Morales in Bolivia, Rafael Correa in Ecuador and even Cristina Fernandez Kirchner in Argentina -- suddenly soften their stance. You may even hear them parrot Obama’s rhetoric encouraging developing nations to adopt better environmental and labor practices.

Obama already appeals to many Latin American presidents as a completely different kind of U.S. leader. “Obama is the first U.S. president in many decades who looks like us,” said Brazilian President Luiz Inacio Lula da Silva.

The sooner Obama lifts the U.S. embargo on Cuba and reinforces trade ties with Latin America to prevent China from becoming the region’s new looter, the sooner leftist Latin leaders will see him as an ally rather than an enemy

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U.S. Doesn't Need the Ultra-Liberal Public Option

U.S. Doesn't Need the Ultra-Liberal Public Option

By Larry Kudlow

Why do we need President Obama's big-bang health-care reform at all? What's the real agenda here? If it's really to cover the truly uninsured, a much cheaper, targeted, small-ball approach would do the trick. But on the other hand, maybe the real goal is a larger, ultra-liberal plan aimed at a government takeover of the U.S. health system.

In a recent column, Larry Elder points to an ABC News/USA Today/Kaiser Family Foundation survey that shows 89 percent of Americans are satisfied with their health care. That means up to 250 million people could be happy with their plans. So why is it that we need Obama's big-bang health-care overhaul in the first place?

In a new Pew Research Center poll, only 41 percent of those surveyed believe the U.S. health-care system needs to be completely rebuilt. In early 1993, when Mr. and Mrs. Clinton started on health-care reform, 55 percent said the system needs a complete overhaul. So something has changed.

In a new CBS/New York Times poll, 38 percent say the economy is the most important problem facing the country, 19 percent say jobs, and only 7 percent say health care. In an NBC/Wall Street Journal poll on the same question, 24 percent say the budget deficit is today's most worrisome problem while only 11 percent say health care.

There's more. According to the U.S. Census Bureau we don't have 47 million folks who are truly uninsured. When you take college kids plus those earning $75,000 or more who choose not to sign up for a health-care plan, roughly 20 million people are removed from the list of uninsured. After that you can remove the 10 million who are not U.S. citizens and the 11 million who are eligible for SCHIP and Medicaid but for some reason have not signed up for those programs.

So that leaves only 10 million to 15 million people among the long-term uninsured.

Yes, they need help. And yes, they should get it. But not with mandatory universal coverage, or new government-backed insurance plans, or massive tax increases. And certainly not with the Canadian-European-style nationalization that has always been the true goal of the Obama administration and congressional Democrats.

Instead, we can give the truly uninsured vouchers or debit cards that will allow for choice and coverage, and even health savings accounts for retirement wealth. According to expert Betsy McCaughey, rather than several trillion dollars and socialized medicine, this voucher approach would cost only $25 billion a year -- with no socialized medicine.

Columnist Peter Robinson, writing for Forbes.com, relates an interview with the late free-market Nobelist Milton Friedman about the inefficiencies of health care. Friedman stated simply and clearly that the cost problems in our system can be traced to the fact that most payments for medical care are made not by the patients who receive the care, but by third parties -- typically employers or government.

"Nobody spends somebody else's money as wisely as he spends his own," said Friedman. He also fingered the tax code, which allows for an exemption from the income tax only if health care is employer-provided. This is a free-lunch syndrome, one that removes incentives for competition and cost-control because we're all playing with somebody else's money. And in the case of Medicare and Medicaid, caregivers have become employees of insurance companies and the government.

A new government-backed insurance system will intensify this free-lunch syndrome. It also will surely lead to a government takeover of what's left of our private-enterprise system.

But the Democratic agenda has never really been just about the uninsured, has it? And according to the Congressional Budget Office, with a price tag of $1.6 trillion in new spending, it certainly hasn't been about real cost-cutting or budget restraint. Nor has it been even remotely about true market choice and competition. Nor has it been about tort/trial-lawyer reform, which itself would be a major cost cap.

And let's not forget a spate of new tax-hike proposals that would sink economic recovery: employer benefit taxes, higher payroll taxes, taxes on soft drinks and alcohol, a VAT tax, or another income-tax hike for successful earners. And remember, existing health-care entitlements are estimated to be roughly $80 trillion in the hole over the decades to come. Wouldn't it make sense to solve these bankrupt entitlements before we layer on new ones?

So there is a strong suspicion that the Democratic agenda has always been a class-warfare, anti-business attack on private-sector doctors, hospitals, insurance firms, and drug companies. In the name of cost cutting, what's really going on is a major knockdown of profits. Liberals have always railed against the "excess profits" of insurance firms, drug companies, and physicians.

Knocking down profits and telling people what to do because government planners know best, right? Wrong. Absolutely wrong.

Lawrence Kudlow is host of CNBC's The Kudlow Report and co-host of The Call. He is also a former Reagan economic advisor and a syndicated columnist. Visit his blog, Kudlow's Money Politics.

More volatility ahead for U.S. markets

U.S. Markets Wrap: Stocks Gain, Bond Fall as Economy Rebounds

June 18 (Bloomberg) -- U.S. stocks snapped a three-day losing streak and Treasuries fell as reports on jobless claims and manufacturing added to evidence the recession may be near a bottom. The dollar and oil rose.

Bank of America Corp. and JPMorgan Chase & Co. climbed at least 4.4 percent as the number of people collecting unemployment insurance fell by the most in almost eight years. Alcoa Inc. and DuPont Co. added more than 1.7 percent as gauges of leading economic indicators and Philadelphia’s economy topped economists’ estimates. Discover Financial Services rallied as the credit-card company’s loan losses grew less than forecast.

“The market has run out of fantastic reasons to sell,” said Stephen Wood, who helps manage $136 billion as chief market strategist for North America at Russell Investments in New York. “Those Armageddon, Great Depression, worst-case scenarios being priced in a few months ago are now a low probability, and the recovery reflects that.”

The Standard & Poor’s 500 Index rallied 0.8 percent to 918.34 at 4 p.m. in New York. The Dow Jones Industrial Average advanced 57.59 points, or 0.7 percent, to 8,554.77. The Nasdaq Composite lagged other indexes, slipping less than 0.1 percent as SanDisk Corp. tumbled on an analyst downgrade.

Treasuries fell for a second day as the reports showed the deepest recession in 50 years may be ending and the U.S. said note sales will increase to a record $104 billion next week. The dollar gained 0.4 percent against the euro and oil rose 0.3 percent to $71.37 a barrel.

Ten-Year Yields

Ten-year yields touched the highest in almost a week amid concern President Barack Obama’s record borrowing will overwhelm demand. The difference in yield between 2- and 10-year notes widened to 2.56 percentage points, the most in over a week.

“There’s so much focus on the borrowing amounts Treasury will face over the next couple of years,” said Carl Riccadonna, a senior economist at Deutsche Bank Securities Inc., in New York. Deutsche is one of 17 primary dealers that trade with the Federal Reserve. “There’s evidence that the economy may be turning the corner. That’s pushing yields up.”

The 10-year note yield rose 13 basis points, or 0.13 percentage point, to 3.82 percent, according to BGCantor Market Data. It touched 3.84 percent, the highest since June 12. The 3.125 percent security maturing in May 2019 fell 1, or $10 per $1,000 face amount, to 94 9/32.

The U.S. Dollar Index, a six-currency gauge of the greenback’s value, gained 0.5 percent to 80.590.

Auctions

Stocks opened higher as the Labor Department said continuing jobless claims decreased by 148,000 to 6.69 million, the first drop since January, even after weekly initial claims increased 3,000 to 608,000. Gains accelerated after the Conference Board’s index of leading economic indicators climbed 1.2 percent and a Federal Reserve report showed Philadelphia- area manufacturing shrank at the slowest pace in nine months.

The Treasury said it will auction $40 billion in two-year notes on June 23, $37 billion of five-year debt the following day, and $27 billion of seven-year securities on June 25. The total is $3 billion more than when the government last sold notes of similar maturities and the most since the U.S. began sales of this combination of maturities in February.

Daniel Fuss, the Loomis Sayles bond fund manager who has matched the returns of Pacific Investment Management Co.’s Bill Gross for the past decade, isn’t tempted by Treasuries even after yields on the 10-year note have climbed more than 64 percent this year.

The Greenback

The dollar strengthened against the euro for the first time in three days on speculation changes in how the London interbank offered rate is set may increase the borrowing costs for the greenback outside the U.S.

Investors also abandoned bets that the euro would appreciate further after the common European currency failed to strengthen beyond $1.40. The British Bankers’ Association said it may allow more institutions to take part in the daily survey that sets Libor, the benchmark for more than $360 trillion of financial products around the world.

The dollar gained 0.4 percent to $1.3890 per euro at 3:34 p.m. in New York, from $1.3942 yesterday. It touched $1.4001. The dollar rose 1 percent to 96.66 yen.

Gold fell on speculation that a stronger dollar and an improving U.S. economy will reduce the metal’s investment appeal. Silver also declined.

Crude oil rose after the reports signaled that the U.S. economy will rebound later this year, prompting an increase in energy demand.

“The market is stubbornly holding up,” said Peter Beutel, president of Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. “Prices are up on expectations that the economy is recovering and demand will strengthen.”

Crude oil for July delivery rose 27 cents, or 0.4 percent, to $71.30 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Futures dropped as much as 81 cents, or 1.1 percent, earlier today. Prices are up 60 percent this year and reached a seven-month high of $73.23 on June 11.

Russians Outfox U.S. in Latest Great Game

ALAN CULLISON

BISHKEK, Kyrgyzstan -- One at a time the government's top critics seemed to go to jail, or simply disappear.

Syrgak Abdyldayev, a local journalist, began to investigate whether the attacks had anything to do with a team of Russian-speaking specialists who arrived last year to advise the Kyrgyz government. He published several scathing articles accusing the government of shunting aside its opponents and turning to Moscow for financial support, including one in February that likened Russian aid to "oxygen for a sinking submarine."

Then Mr. Abdyldayev became a victim. Three men attacked him with metal pipes as he left his newspaper one evening in March, broke both his arms, his ribs and a leg, and stabbed him 26 times in the buttocks.

Times are changing in Kyrgyzstan, a mountainous Central Asian republic that not long ago was a hoped-for springboard for Western-style democracy in the former Soviet Union.

The president, Murtanbek Bakiyev, has steered Kyrgyzstan sharply back into the orbit of Moscow. In January, Mr. Bakiyev jolted Washington by announcing he was evicting the U.S. from an air base that has been crucial to the supply of troops fighting in Afghanistan. And political freedom here, as in Russia, is in decline. The Kyrgyz and Russian governments deny any link to the attacks on Kyrgyz critics.

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Associated Press

Russian Prime Minister Vladimir Putin in Moscow on May 25.

In the West, hopes were high that the global financial crisis would rein in Vladimir Putin's assertive foreign policy. But here, as in other parts of the former Soviet Union, hard times have had the opposite effect: The Russians are coming back.

Russia has been hit by the crisis, but remains far richer than its former satellites, and it has used its largess to regain clout near its borders, in what President Dmitry Medvedev calls the "zone of privileged interests."

"Basically Russia sees the crisis as an opportunity to increase its influence in the post-Soviet space," said Nikolai Zlobin, analyst for the Center for Strategic Studies in Washington, D.C., who meets regularly with Russian officials. "They think this is the right time to act."

Moscow has already delivered more than $300 million of a $2.1 billion aid package to Kyrgyzstan it promised Mr. Bakiyev when he announced he was evicting U.S. troops from the base. That has helped the Kyrgyz government pay wages and pensions as Mr. Bakiyev competes in hastily called presidential elections in July.

Moscow lately considered extending a $5 billion loan to the cash-starved government in Ukraine, and has held talks on credits for Belarus and Armenia.

This week Mr. Putin stunned Western officials by announcing that Russia would pull its long-standing application to join the World Trade Organization, and instead form a trade block with neighboring Kazakstan and Belarus. Western officials say the move appears to be a pressure tactic by the Kremlin, which has been frustrated by the lengthy WTO application process.

Moscow's assertiveness poses a challenge to President Barack Obama as he vows to "reset" relations with Russia in the run-up to his first presidential visit to Moscow in July. Both the U.S. and Russia are praising a new level of cooperation on arms control and other issues. But they remain at odds over how much influence the other should exert in Russia's traditional backyard.

Lately the Kyrgyz government has said it is open to talks on keeping the U.S. base on its soil. But even the threat of closure sends a clear message to Washington, analysts say, that the U.S. must show greater respect to Moscow in the region.

In Kyrgyzstan, opposition politicians fear the reset could mean a new era of American accommodation to the Kremlin. As the U.S. has grown preoccupied with its wars in Iraq and Afghanistan and its economic crisis at home, it has dialed back its support of Western-style democracy, they say.

"The American ambassadors used to be very outspoken about their opinions," said Medet Sadyrkulov, a former head of Mr. Bakiyev's administration. "Now they have gone quiet."

The U.S. ambassador, Tatiana C. Gfoeller, declined to be interviewed for this article. State Department officials in Washington likewise declined to comment.

In the fall, the Kyrgyz government cut off broadcasts of U.S-funded Radio Free Europe and Radio Liberty, which had hosted a talk show critical of regional elections that were swept by mostly pro-government parties. The U.S. issued a statement of protest, but the programming has remained off the air.

Russian state television, which is broadcast throughout the country, has beamed in a steady stream of reports critical of the U.S. presence, alleging the U.S. base here was a center of high-tech surveillance and drug dealing. The U.S. denies that.

The political climate in Kyrgyzstan chilled, too.

Days after Mr. Sadyrkulov shared his views in an interview with The Wall Street Journal in March, his body was found in his burned-out car outside Bishkek. Colleagues call his death a political killing. The government says he died in a car accident.

In the interview, he said he quit his job in the presidential administration largely because he worried that Mr. Bakiyev was taking the country too close to the Kremlin.

The history of the air base in Kyrgyzstan mirrors the trajectory of U.S. relations with Russia, from an era of burgeoning friendship to distrust.

After the 2001 attacks on New York and Washington, Mr. Putin called the then-president of Kyrgyzstan, Askar Akayev, and told him that "the U.S. is our ally in the war on terror and that we should let them in," one former senior Kremlin official recalled. Mr. Putin also lobbied the president of Uzbekistan, who allowed the U.S. to set up on another Soviet-era base, Khanabad.

The U.S. needed the bases to funnel soldiers and supplies to Afghanistan. At the time, the former Kremlin official said, the U.S. told the Russians they would only stay on the bases during the "active phase" of the war, for 12 to 18 months.

By 2003, the Kremlin was anxious about the prolonged U.S. presence. Late that year, Mr. Putin flew to Bishkek to mark the opening of Russia's own nearby airfield. He was angered by the U.S. invasion of Iraq, which he staunchly opposed. Then the Americans began to say the bases were "strategic" and that they were staying, the former Kremlin official said.

"The existence of these bases was viewed as a trick," the former Kremlin official said. "So we felt no moral obligation to keep them open."

U.S. officials deny they gave any timetable for withdrawing from the bases.

Moscow's suspicions were heightened by a wave of so-called color revolutions that swept the former USSR, beginning with Georgia in November 2003, followed by Ukraine in 2004 and Kyrgyzstan in 2005.

President George W. Bush praised the revolts, promising to spread democracy to the far corners of the world. Kremlin officials feared the U.S. was fomenting rebellion in Russia itself, and accused the U.S. of organizing the revolts through nongovernment organizations, something the U.S. denies.

The wave of unrest halted in repressive Uzbekistan, where in May 2005 troops fired on protesters, killing hundreds. Russia backed the crackdown; the U.S. called for an investigation.

Encouraged by Moscow and China, Uzbekistan kicked U.S. troops out. The U.S. was forced to shift resupply operations to the air base in Kyrgyzstan.

Relations with Mr. Bakiyev's government were cool from the outset. The Kyrgyz leader swept to power after chaotic protests over rigged parliamentary elections in 2005. He set about shuttering independent media outlets and founding a progovernment party that sidelined rivals.

Mr. Bakiyev soon began pressuring the U.S. to raise the rent it paid for the base. Talks nearly derailed in July 2006, when his government expelled two U.S. diplomats for allegedly spying. Mr. Bakiyev suspected they were funding the political opposition, says former Kyrgyz Foreign Minister Alikbek Dzhekshenkulov. "The Russians wound him up," he says. Other Kyrgyz officials say the expulsions were Mr. Dzhekshenkulov's idea.

In the end, Washington agreed to an eightfold rent increase, to $20 million a year.

In September 2006, a U.S. air tanker collided with Mr. Bakiyev's official plane on the runway of the airport, putting the Kyrgyz craft out of commission.

The U.S. paid to repair the plane, though an American probe blamed a Kyrgyz air traffic controller for the wreck. Before the investigation was even complete, though, Russia gave Mr. Bakiyev a new Tupolev airliner as a gift, said Mr. Sadyrkulov, the former head of administration, before his death.

Mr. Bakiyev "was very offended" with the U.S. over the incident, Mr. Sadyrkulov said. It was another case where "the Russians showed they were much easier to deal with," he said.

In December 2006, a U.S. guard at the base shot a Kyrgyz truck driver to death, after he said the driver brandished a knife at a base gate. Kyrgyz officials wanted to try him for murder inside the country, but the U.S. flew him back to the U.S.

Mr. Bakiyev "wanted some kind of meaningful support... signs of cooperation, partnership," said Sergei Masaulov, spokesman for the Kyrgyz presidential administration. Instead he got "signs of disdain," he said.

Mr. Masaulov said the Americans never engaged his government on a long-term plan for economic prosperity. A landlocked nation of five million, Kyrgyzstan lacks the vast natural resources of its neighbors, and officials had long hoped that its glacial lakes and snowcapped mountains could turn it into a hydroelectric supplier. But neither the Russians nor the Americans ever came up with the money to fund such a project.

Last summer, Russia began high-level talks about an aid package to Kyrgyzstan, including construction of a $1.7 billion hydroelectric power project that would employ thousands and turn the country into a major exporter for the region, Mr. Sadyrkulov said.

The two sides agreed in principle in December, Mr. Sadyrkulov, the former head of presidential administration said, when Mr. Medvedev and the Kyrgyz president met again, one on one, in the Kazakh capital of Astana. The Russians applied "very bad pressure" at the meeting, Mr. Sadyrkulov said. The Kremlin denies putting any pressure on the Kyrgyz over the U.S. base.

Mr. Masaulov, the presidential spokesman denied any "direct connection" between aid and the base closure. "But its obvious that when people meet on the diplomatic level, they talk about their interests, and what they want," he said.

In January, U.S. Central Command Chief Gen. David Petraeus visited Bishkek, but Mr. Bakiyev declined to meet him. Still, Mr. Petraeus called a news conference to report that other top Kyrgyz officials told him there were no plans to shut the base.

Shortly after he left town, a longtime ally of Mr. Putin, Russian Deputy Prime Minister Igor Sechin, flew into town and hammered out the details of an aid package to Kyrgyzstan.

Mr. Bakiyev then flew to Moscow, where the deal was signed, and the Kyrgyz president announced at a Kremlin press conference that he was kicking the American forces out of the country. U.S. officials were stunned. "Frankly, we thought it was a negotiating tactic, and we were ready to call their bluff," said a military official. "But it's becoming clearer that, no kidding, they want us out."

Mr. Sadyrkulov, who quit his job with the president in January, tried to rally Kyrgyzstan's fragmented opposition. He began traveling to neighboring Kazakhstan to meet U.S. officials, as they were afraid to meet with him inside the country, he said.

He drove to Almaty for meetings March 12, and shortly after midnight called his wife to say that he was driving back. He was held up at a border post for questioning, he told her, and would be home in a few hours.

Police say they found his body hours later, along with his driver and another passenger in the burned-out carcass of his car.

Obama and Dresden

The president may now add the WWII bombings of German cities to the revisionist charges against the U.S.

DANIEL SCHWAMMENTHAL

On his way to the 65th D-Day commemorations in France, President Obama plans a curious stop-over in Germany, my home country. He will travel to Buchenwald, the concentration camp his great uncle helped liberate, a visit that makes personal and historical sense. It is his other German destination, Dresden, that seems out of place. Will the president, who likes to apologize for America's alleged sins, now also apologize for World War II?

For many Germans, the destruction of Dresden in February 1945 has become a symbol of Allied "bombing terror." Many still believe the true number of deaths is closer to the Nazi propaganda of 200,000 than the 20,000 to 35,000 historians believe is correct.

Google "Dresden" and "Kriegsverbrechen," the German word for "war crimes," and you'll get almost 26,000 results. Neo-Nazis marched through the streets of Dresden this February commemorating the "Bombing Holocaust." A flood of recent books, articles and documentaries has shifted Germany's historical debate from its war crimes to its own war victims. As part of this trend, in 2006 public TV station ZDF broadcast "Dresden: The Inferno," the most expensive German television production at the time. Its graphic display of carnage and burning people is at odds with German movie tradition. Films about the Holocaust tend to be more subtle and less emotional.

Mr. Obama's visit to Dresden is an unfortunate gesture. Even if the president were not to make an outright apology for the allied bombings, he could hardly not mention them in this city so preoccupied with its wartime history. And even if he were not to give any speech at all and just toured the city, he'd inevitably be led to the many landmarks that were once reduced to rubble.

His mere presence in Dresden -- on the heels of a visit to Buchenwald and just before attending the Normandy commemorations -- would boost the revisionist cause. It would suggest a sort of moral equivalence between industrialized genocide and the bombings of German cities -- bombings, remember, that were designed to bring an end to the genocidal regime.

Mr. Obama's encounter with the reality of governing does not seem to have tempered his appetite for second-guessing past U.S. presidents. Having already come close to a mea culpa for America's use of atomic bombs against Japan, he may now add Dresden to the revisionist charges against the U.S. Even if the president doesn't say that America lost its moral bearings by bombing Dresden, people will read between the lines of his visit.

Mr. Schwammenthal is an editorial writer for The Wall Street Journal Europe

U.S. Week Ahead: GM Bankruptcy Looms

The U.S. Can't Be the World's Court

New York isn't the right venue to sue for apartheid abuses.

JOHN B. BELLINGER III

A federal judge in New York recently allowed a lawsuit to proceed against General Motors, Ford and IBM for aiding and abetting crimes against humanity committed by the apartheid government in South Africa. And a lawsuit against Royal Dutch Shell for alleged human-rights abuses in Nigeria is scheduled to begin today in Manhattan. We may be on the verge of a new wave of legal actions against U.S. and foreign corporations in American courts.

The U.S. government can and should be a strong voice for redress of human-rights abuses around the world. But these lawsuits, which are being brought under the 200-year-old Alien Tort Statute, are likely to cause friction between foreign governments and the Obama administration. Congress should step in and clarify the types of human-rights cases that may be heard.

The Alien Tort Statute was part of the first Judiciary Act of 1789, and it gives federal courts jurisdiction to hear suits brought by non-U.S. nationals for offenses "committed in violation of the law of nations or a treaty of the United States." It was intended to promote diplomacy and international commerce by allowing foreigners to bring suit in federal courts for offenses not recognized by state law in the 18th century.

The statute was virtually unused until 1980, when the Second Circuit permitted a suit by two Paraguayans against a former Paraguayan government official for the torture and murder of a family member in Paraguay. That landmark decision opened the door for international human-rights litigation, and the number of suits under the Alien Tort Statute has grown substantially in the last three decades.

In the 1980s, most of the cases involved suits by foreign nationals against officials of their own government for conduct that occurred in a foreign nation. By the 1990s, however, the focus had shifted, with plaintiffs bringing more suits against U.S. and foreign corporations -- not for direct abuses but primarily for aiding and abetting human-rights abuses by foreign governments.

In recent years, the majority of suits under the statute have been brought against petroleum companies and miners operating in countries with poor human-rights records. These include ExxonMobil in Indonesia, Unocal in Burma, Talisman Energy in Sudan, and Rio Tinto in Papua New Guinea.

In 2004, the Supreme Court attempted to narrow the types of cases that may be brought under the Alien Tort Statute. In Sosa v. Alvarez-Machain, Justice David Souter wrote that the law allows federal courts to hear a "modest" class of suits alleging violations of the traditional law of nations -- this would include assaults against ambassadors, violations of safe conduct, and piracy -- or other offenses "on a norm of international character accepted by the civilized world" and defined with a similar "specificity." But the ruling admonished lower courts that recognition of new causes of action based on violations of international law norms "should be undertaken, if at all, with great caution." In Justice Souter's words, the door for further litigation was "still ajar subject to vigilant doorkeeping" by the federal courts.

Nevertheless, plaintiffs have continued to urge federal courts to recognize new causes of action. In recent years, for example, Caterpillar Inc. was sued for selling bulldozers to Israel that were eventually used to demolish Palestinian homes. Dow Chemical Co. was sued for manufacturing the Agent Orange defoliant used during the Vietnam War. And Yahoo Inc. has been sued for sharing user information with the Chinese government, which resulted in the arrest of Chinese dissidents.

In the future, human-rights and environmental groups who have been unable to secure greater protections in free-trade agreements are likely to expand their litigation targets to new industries such as offshore textile manufacturers for denial of labor rights and environmental damage.

Litigation under the Alien Tort Statute may force companies to modify their international activities in some cases, although it rarely produces monetary awards for plaintiffs. But it does give rise to diplomatic friction in U.S. relations with foreign governments. Governments often object to their officials and corporations being subject to U.S. jurisdiction for activities taking place in their countries and having nothing to do with the U.S.

The South African government, for example, has asked that the apartheid case against GM, Ford and IBM be dismissed. It argues that the suit punishes global investment in their country and interferes with South Africa's own resolution of the legacy of apartheid. The State Department in 2003 opposed the apartheid suit, citing "serious adverse consequences" for U.S. interests and relations with South Africa. And the Supreme Court said a year later in Sosa that "serious weight" should be given to the executive's assessment of a case's foreign-policy impact. The federal court of the Southern District of New York let the case go ahead anyway.

Suits under the Alien Tort Statute are arguably inconsistent with international legal rules governing extraterritorial jurisdiction. For all their complaints about U.S. attitudes toward international law, foreign governments and international lawyers do not see this litigation as constructive engagement. Instead, they consider the U.S. a rogue actor that has unilaterally established an international civil court with universal jurisdiction.

Human-rights and labor groups are likely to press the Obama administration to support litigation under the Alien Tort Statute and even to reverse the Bush administration's opposition to the apartheid case. Mr. Obama is right to place greater emphasis on the U.S. commitment to international human rights, and the State Department should be at the forefront of these efforts. Rather than continue to leave it solely to the federal judiciary to determine what violations of international law may be heard in U.S. courts, the Obama administration should ask Congress to revise the Alien Tort Statute to provide greater specificity regarding what actions it covers.

Human rights should be promoted in most cases through direct diplomatic engagement and corporate responsibility, not through litigation that causes diplomatic friction and that may be inconsistent with international law.

Mr. Bellinger, an attorney in Washington, was legal adviser for the U.S. Department of State from April 2005 to January 2009.

U.S. Week Ahead

U.S. currency bill tempts protectionism

China says U.S. currency bill tempts protectionism

BEIJING (Reuters) - China rejected claims it has manipulated yuan exchange rate policies to tilt trade flows against the United States, saying on Thursday that proposed legislation before the U.S. Congress could stoke protectionism.

Chinese Foreign Ministry spokesman Ma Zhaoxu made the statement in response to Congressional moves to curb China's exports unless Beijing realigns its exchange rate to make those exports more costly, which would help narrow the two countries' trade gap.

The legislation would require the government to impose anti-dumping and countervailing duties on imports from a country whose currency has been "misaligned" for a long time.

The Chinese Foreign Ministry has no direct say in trade and currency policy, and usually confines itself to general statements. Spokesman Ma stayed to that course.

"The Chinese government has never engaged in so-called manipulation of currency exchange rates to obtain international trade benefits," Ma told a regular news conference.

"Making groundless accusations over exchange rates will only encourage U.S. trade protectionism, and this would be of no help in really resolving the problems."

The bill appears to have slim chance of becoming law anytime soon.

Sen. Debbie Stabenow, one of the legislators who introduced the bill on Wednesday, said it was uncertain when or how the legislation would advance since she had no commitments from Senate leaders to move it forward.

U.S. lawmakers have complained that China has manipulated its currency, but President Barack Obama's Treasury Department declined to formally label China as a currency manipulator.

Previous efforts to pass similar legislation have failed.

The U.S. trade deficit with China widened to a record $266.3 billion in 2008. But the gap has narrowed slightly in the first three months of 2009, as weaker demand amid a recession has cut China's exports to the United States by nearly 11 percent.

U.S. Treasury Secretary Timothy Geithner will visit Beijing early next month for two days of meetings with top Chinese officials.