Topic: International Economics and Development

Towards a Cuba Libre

Today an important step has been taken towards a democratic transition in Cuba. The decision of the dictator Fidel Castro to retreat from aspiring to a new presidential period in the island indicates that his poor health has worsen to a point where probably Castro won’t make it to end of this year.

Soon he will become another page in history; a very sad one, characterized by repression, tortures, political prisoners, massive impoverishment, hunger, scarcity, and murders.

His statement of giving an opportunity to the new generations is nothing less than a bad joke, after almost 50 years in power. Even worse, he delegates power to his brother Raul, who at 76 years old can hardly be considered fresh blood.

Nevertheless, as long as Castro remains alive, we can’t expect dramatic changes in Cuba. His presence behind the scenes will be intimidating for any successor, who will think twice before proposing reforms that could anger the declining tyrant. Even so, in the last months, some timid but positive signs of political openness, or at least certain degree of tolerance towards the opposition, have been perceived.

We libertarians in Latin America must be prepared for what is about to come. Probably the transition will last for years, but it is important that the people who will lead a democratic Cuba are firm believers of classical liberal ideals. Because that is exactly what Cuba needs, not only democracy, but also liberty.

Meet the New Boss, Same as the Old Boss

In his final press conference as Russian president, Vladimir Putin made clear yesterday that as prime minister he has no intention of playing second fiddle to his chosen successor, Dmitry Medvedev. “I have been president for eight years and worked pretty well. I won’t need to hang his portrait,” he remarked.

Putin added: “The highest executive power in the country is the Russian government, led by the premier.” One can’t imagine any of his prime ministers saying that and getting away with it during his presidency. He also made it clear he will remain prime minister throughout Medvedev’s turn in office, or for as long as “I am meeting goals that I myself have fixed.”

As if to emphasize that Putin will remain the real boss in the Kremlin, Russia’s new ambassador to NATO, Dmitry Rogozin, told the Financial Times, “Putin’s role will be as strong as ever.” Closely linked with Putin, Rogozin, a well-known nationalist politician, can even sound like the bullish outgoing president. Asked in the interview about Japan’s protest this week over a Russian bomber violating the country’s airspace, Rogozin joked: “It’s been a long time since the Japanese have seen the Russians in the air. They got quite a surprise.”

Putin’s marathon press conference yesterday was vintage stuff: he was full of his usual bluster. It was all in marked contrast and tone to Medvedev, who in a speech today in Siberia talked about how he wanted to improve relations with Russia’s neighbors. So it looks like we are going to see a routine of good cop, bad cop. Some analysts wonder if Medvedev will be prepared to play a secondary role to Putin. Will a divided power system emerge? My money is on Putin and his KGB friends to retain the upper hand.

The Free Market Produces Incoherent Headlines

Today’s Washington Post has a story on economic espionage by Chinese interests, most of which have connections to the Chinese government and military. Inexplicably, the headline of the story is “Even Spies Embrace China’s Free Market.”

Government-sponsored economic espionage has little to do with free markets. These are crimes (or at least civil wrongs) sponsored directly or indirectly by over-large governments. Crime and over-large governments are antithetical to free markets, not a part of them.

Evidently, there’s some kind of market failure at the Post. (Note to the economic illiterates at the Post: That’s a joke.)

Who Are the Real Free Traders in Congress?

Which members of Congress most consistently support the freedom of Americans to trade and invest in the global economy – free of market-distorting subsidies and barriers? A dynamic new Cato web feature, “Free Trade, Free Markets,” allows users to search more than a decade of votes to answer that and other questions about how members have voted on trade.

Organ Shortage Update

The United Network for Organ Sharing on its website provides a running total of the number of people waiting for an organ transplant. Today that number is at 98,059. Next Thursday, Cato is holding a policy forum “Human Organs for Sale?” where solutions for solving the U.S. organ shortage will be discussed by well known advocates both for and against the sale of organs. Also under discussion will be Iran’s organ vending system which some say is so successful that Iran has been without an organ waiting list for almost a decade. To join us, please register at events [at]

More Refutation of Protectionist Doctrine

The backlash against trade in the 110th Congress is fueled by three emotive but purely fictional assertions: (1) trade agreements have caused the trade deficit to rise, and an increasing trade deficit means we are losing at trade; (2) rising imports explain the decline in the U.S. manufacturing sector, including the loss of jobs; (3) the United States is losing at trade because the Bush administration doesn’t enforce our trade agreements and instead turns a blind eye toward the rampant cheating of our trade partners.

The Center for Trade Policy Studies  has produced numerous refutations of the first two fallacies (1, 2, 3, 4, 5, ), while a ruling yesterday from a World Trade Organization dispute panel adds to the growing list of refutations of the third. 

Mostly affirming the complaints lodged by the United States, Europe, and Canada in 2006, the panel ruled that Chinese tariffs on imported auto parts violate China’s WTO obligations.

China must now act to bring its practices into conformity with its WTO commitments (i.e., change the offending laws or regulations) or it can challenge the ruling before the WTO’s Appellate Body.  Yesterday’s decision constitutes the first ever WTO panel ruling against Chinese trade practices, but it doesn’t represent the first U.S. enforcement action taken against China.

The Auto Parts case is the second of five formal U.S. complaints against China in the WTO.  The first case was brought in 2004 and involved a Chinese value-added tax on integrated circuits for which domestic firms could get partial rebates—putting foreign suppliers at a disadvantage.  That dispute was resolved 19 months later during the consultation phase—without need of a dispute panel—when the Chinese agreed to change the tax rule.

The third case was filed in February 2007 and concerns other Chinese tax policies that grant refunds, reductions or exemptions from taxes to domestic firms only.  A memorandum of understanding to resolve and terminate the dispute was reached 10 months later, with China agreeing to change the discriminatory nature of the law.

Two other cases—both initiated in Spring 2007—are pending.  One concerns the alleged failure of China to protect and enforce intellectual property rights and the other concerns alleged barriers facing foreign traders and distributors of copyrighted materials, like books, videos, and DVDs.  A dispute panel was recently composed for the IP case, and the distribution barriers case is still in the consultations phase.

The administration has demonstrated its commitment to enforcement, not only by bringing WTO cases, but in myriad other ways that fly under the radar.  Dialogue is always ongoing between the United States and China, and the United States and other trade partners.  Contrary to the implications of the rhetoric that trade enforcement requires a bludgeon, the most effective enforcement entails quiet diplomacy, where problems are discussed and resolved outside of the shine of the spotlight.

When the foundations of the protectionist backlash are revealed to be made of silly puddy, you’ve got to wonder how long the backlash will endure.

Don’t Go Scaring the Geese Who Lay the Golden Eggs

Britain’s Labor leaders Tony Blair and Gordon Brown have long boasted how successful and sure-footed they have been in making London one of the World’s preeminent financial centers. Brown, who served as the Chancellor of the Exchequer until he succeeded Blair as Prime Minister, was more responsible than any politician in helping London leapfrog up the league tables in the financial market to challenge New York.

Financial regulation has been lighter in the UK than the US, especially since the post-Enron Sarbanes-Oxley reform, and the tax authorities have been welcoming of rich foreigners, helping to attract many of the world’s wealthiest entrepreneurs and investors to the UK, including Greek shipping magnates, American hedge-fund traders and Russian oligarchs.

But in a bid to outdo the British Conservatives, who have joined the bandwagon of economic populism, Brown has threatened London’s role as a global finance center with talk of a tax crackdown on rich foreigners.

He has provided – also inadvertently – a major object lesson on the importance of tax competition.

Unnerved by the Conservatives, who promised that in government they would impose a levy on rich foreigners, Brown and his Chancellor, Alistair Darling, announced just before Christmas that come spring, tax rules on foreigners resident in the UK would change. Under the previous regime, foreign residents could claim “non-domiciled” status and avoid paying tax on overseas earnings and offshore assets. Only money brought into the UK or generated there was liable to income tax or capital gains tax.

Brown’s new proposal would have all non-domiciled foreigners resident in the UK for more than 7 years paying an annual tax charge of 30,000 pounds ($60,000).

According to the government’s theory, hugely wealthy foreigners wouldn’t up and leave just because of a mere $60,000, although, of course, for families it could be a lot more than $60,000, if spouse and adult children are taken into account.

To make matters much worse, the British government also started to talk about introducing new residency rules and rules on taxing offshore trusts.

Government spokesmen, along with supporters of the tax crackdown, including rather strangely the editorial writers at the Financial Times, pooh-poohed the notion there would be an exodus of the wealthy and entrepreneurial just because of the tax changes. They have been arguing that London is too important, what with its deep pool of financial and international legal expertise. Low-tax cantons in Switzerland or non-tax Monaco or offers of generous tax treatment in, say Greece, would hardly compensate for what London has to offer.

Foreigners apparently have been thinking otherwise. Many of the country’s richest foreigners have already started to relocate to Geneva, Zurich, Barbados or Ireland. This week, Irish paper king Dermot Smurfit announced he was planning to move to Switzerland and there were reports that dozens of Greek shipping magnates were exploring the possibility of moving back to Athens – a transfer that would cost the British economy annually $10 billion alone, and in the long term maybe two or three times more. The $60,000 annual levy per non-domiciled foreigner would bring in annually $1.6 billion.

Belatedly, the alarm bells have started to ring. The British government is poised to announce, possibly tomorrow, an embarrassing back-down. Taxing offshore trusts is now likely not to happen, although the $60,000 levy per non-domiciled foreigner will remain.

The reversal highlights the importance of tax competition. But there still might be long-term consequences from Brown’s botched handling of the affair. Non-doms who have already moved overseas are unlikely to return and the London-based Greek shipping magnates, who control a quarter of the Greek shipping industry, are now being courted energetically by Athens, with offers of generous tax treatment and subsidies.