Topic: International Economics and Development

Why Can’t Republicans Embrace Corporate Tax Cuts Like Canadian Liberals?

When they were in power, Canada’s left-wing party reduced the corporate tax rate from 28 percent to 19 percent. Now they are proposing to reduce the rate even more (and by more than the trivial 0.5 percentage point reduction proposed by the incumbent Conservative Party). As reported by Tax-news.com, the leader of the Liberal Party makes a very strong supply-side/tax competition argument for the lower rate:

Liberal Leader Stephane Dion has pledged to further reduce the Canadian federal corporate tax rate to better compete with other countries and strengthen Canada’s economic sovereignty. …Dion told the Economic Club of Toronto…“A lower corporate tax rate is a powerful weapon in the federal government’s arsenal to generate more investment, higher living standards and better jobs.” …The previous Liberal government reduced the federal corporate tax rate to 19% from 28%. Dion said he would go deeper than the Conservatives have done with their reduction to 18.5% in 2011. …“If you lower the corporate tax rate, you lower the cost of capital for Canadian companies. Therefore, these companies are induced to spend more on capital equipment. As for foreign investment, we need a big hook to snare investment, including Canadian investment, that might otherwise go south of the border. Finally, it would strengthen Canadian companies against foreign takeover,” Dion concluded.

Securing Land Rights for Chinese Farmers

A critical determinant of China’s long-term economic growth and social stability will be whether the wealth of its economic boom can reach the majority of its 700 million farmers, who make up approximately 56 percent of the total population. In the new Cato study, “Securing Land Rights for Chinese Farmers: A Leap Forward for Stability and Growth,” authors Zhu Keliang and Roy Prosterman confirm one fundamental cause of the widening rural-urban income gap: most Chinese farmers still lack secure and marketable land rights that would allow them to make long-term investments in land, decisively improve productivity, and accumulate wealth.

Cut Taxes to Keep Those Assets Here

The Wall Street Journal had a tiny “In Brief” story on October 10 with the headline “To Help Reduce Tax Load, 3M to Move Plants Abroad.”

Here’s the story:

Manufacturing conglomerate 3M Co. plans to move more of its operations to low-tax locations overseas in coming years as it attempts to reduce its overall tax rate. Chief Financial Officer Pat Campbell said the move is designed to help the St. Paul, Minn., maker of products ranging from transparent tape to stethoscopes achieve a tax rate of 30.5% by 2012, a reduction of about 2.5 percentage points. That would mean a $150 million to $200 million increase in 3M earnings.

If 3M had said that it was moving plants abroad in search of lower wages, the story would have been on the front page, rather than buried in the back as a small notice. The lack of news coverage on international tax competition is odd, given the general concern about the health of the U.S. manufacturing industry.  

Here is a presentation regarding 3M’s strategy by the firm’s CFO. Check out:

Page 35: “Moving Assets to Low Tax Growth Markets.” Observation: Corporate investment flows to countries that have both strong growth potential and low taxes.

Page 38: The chart shows that 3M has a higher effective tax rate at 33% than the average of its peers at 27%. Observation: U.S. corporations pay high tax rates.

Page 39: “Locate capacity in low-tax locations with common shipping locations to growth markets.” Observation: Taxes are not the only locational factor, but are part of a strategy that also requires optimizing logistics and market locations.

Message to U.S. policymakers: cut the corporate tax rate to allow 3M to keep more of its $1.5 billion in annual capital investments here.

Globalization and Food Safety

The Washington Post has an interesting story today about E. coli on lettuce. A batch of lettuce produced in California last month passed through numerous screenings and was sent to U.S. grocery stores. Some of it was also sent to Canada, and the government there found E. coli, which led to a major recall across both countries.

Here are some speculations:

  • Globalization increases the safety of American-produced goods because those goods must often pass muster in foreign markets where consumers and governments have different standards and safety procedures.
     
  • I don’t know whether American or Canadian food safety procedures are better, but a diversity of systems generates greater information, which allows producers and governments everywhere to improve quality.
     
  • Globalization doesn’t lead to a “race to the bottom” on environmental standards as critics often claim. Some countries, such as Japan, apparently have very high standards on food, and that tends to push up standards elsewhere. When Japanese importers demand strict standards from Chinese food producers, Americans consuming Chinese products also benefit.

Hong Kong’s Flat Tax Rate Dropping to 15 Percent

Unlike American politicians, Hong Kong lawmakers understand that lower tax rates are a key to staying ahead in a competitive global economy. The Chinese Territory’s chief executive has just announced that the flat tax will drop by one percentage point, from 16 percent to 15 percent. As BBC news reports, the corporate rate also will drop, with further reductions likely:

Hong Kong has said it will cut taxes, in a move to promote further growth and lure foreign investment. Leader Donald Tsang said taxes would be cut by 1 percentage point, to 16.5% for firms and 15% for individuals, in the first policy speech of his new term. …In announcing the tax cuts, Mr Tsang said: “We will consider further profits tax relief if our economy remains robust and our public finances stay sound.”

Paul Craig Roberts Misses the Mark

In an opinion piece published this week, Paul Craig Roberts takes exception to a conclusion in my recent Cato paper about the state of U.S. manufacturing.  I usually welcome disagreement as an opportunity to elaborate or persuade.  But it’s quite evident that Roberts is not interested in elaboration and is beyond persuasion.  The purpose of his dissent was to construct a straw man against which he could present his skeptical, and empirically refutable, views about trade.  

In my paper, Roberts identifies what he believes is an “extraordinary mistake [which] results in an incorrect conclusion.”  He argues that my failure to distinguish imports produced by U.S. companies abroad (offshored production) from imports produced by foreign firms abroad (import competition) leads me to the erroneous conclusion that “the health of U.S. manufacturing [is attributable] to import competition.”  

First of all, nowhere in my paper do I attribute the health of U.S. manufacturing to import competition.  The only passage from which such an interpretation might be drawn (by a careless reader, I would add) is this one: “Revenues, profits, output, value added, and even compensation rose the most for industries most exposed to import competition, and they rose the least for those industries experiencing the smallest increases in imports.”  That is just a statement of fact, as gleaned from the data.  It assigns no causation to import competition.   

I also write: “Exposure to trade, as evidenced by the relationship between imports and exports and operating performance, has been an important component of the success of U.S. manufacturing industries.”  This statement at least implies some degree of causation, which is supported by the fact that profit growth (operating performance) is a function of revenue growth (expanding exports) and cost reduction (increasing imports of production inputs). 

Second, my failure to distinguish between sources of imports in no way undermines the central points of my paper.  The purpose of my paper (“Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade”) was simply to evaluate the health of the U.S. manufacturing sector.  The conventional wisdom holds that U.S. manufacturing is eroding, the country is de-industrializing, and that import competition is the driving force behind this trend.  We hear this all the time.  Politicians tell us.  Op-ed page writers remind us.  Lou Dobbs warns us.  And members of Congress have proposed all sorts of punitive trade legislation under the banner of arresting and reversing manufacturing decline. 

I set out simply to assess the credibility of the premise.  My approach was straightforward, honest, and devoid of ideology.  There was no shell game or sleight of hand.  I found the most relevant, comprehensible, comprehensive, objective statistics that speak to the health of the sector, presented those data, and offered conclusions that are easily verifiable (i.e., not confused by economic modeling or econometrics or the debatable assumptions upon which such approaches often rely). 

What the data show very clearly is that U.S. manufacturing is far from declining; it is, in fact, thriving.  Output, revenue, profits, profit rates, return on investment, and exports have all been trending upward since the nadir of the manufacturing recession in 2002 and all reached record highs in 2006.  If that doesn’t constitute “thriving,” I’d be interested to learn what does. 

Since data and trends pertaining to the sector as a whole might mask different conditions in particular industries, I drilled down to explore the health of individual U.S. manufacturing industries (broadly defined at the 3-digit NAICS level).  Out of 18 broadly-defined industries, I found that 12 are doing very well and that 6 are struggling, according to the same metrics used to assess the sector as a whole.  With the exception of the auto industry, those industries that are faring poorly are generally low-technology, low-wage, and labor-intensive. 

With the manufacturing sector and the majority of its component industries found to be doing very well, the purpose of the paper was fulfilled.  The conventional wisdom was refuted.  If manufacturing is thriving – and not declining – then it is moot to demonstrate that trade has not been an important cause of manufacturing decline.  But since trade is so demonized, and the data so exonerating, it was pertinent to describe the relationship observed between trade and the various performance metrics. 

Here are some of my observations:  

  • “the rising level of U.S. imports and exports has been associated with positive developments in key manufacturing performance indicia”;
  • “As manufactured imports declined in 2001 and 2002, manufacturing output, exports, and revenues declined as well.  When imports began to pick up again as the manufacturing recession was ending, all of those real variables tracked upwards, adding more data points to the line that confirms a strong positive correlation”;
  • “As manufacturing imports have achieved new heights, manufacturing output, revenues, exports, and profits have all set records, too.”
  • “The premise that U.S. manufacturing is under duress from imports is not supported by the data”;

It is noted in the paper that industries that experienced higher levels of import growth fared better than industries that experienced lower levels of import growth.  I suggest that access to imported raw materials, components, and capital equipment helps keep the lid on costs of production for U.S. producers.  I mention that 55 percent of all 2006 import value was of intermediate products – precisely those products consumed by industry in its own production processes.  I mention that manufacturing export growth has been strong in recent years and that foreign markets are likely to be even more important to U.S. manufacturers in the year’s ahead since that’s where the dynamic growth is.  All of those conclusions (implications, if you prefer) counsel in favor of treading lightly on the trade protection front. 

The fact that some proportion of U.S. imports might have been offshored U.S. production making its way back to the United States in no way undermines any of the key points in my paper.  Even if all imports were of U.S. offshored production, the fact remains that trade has been an important part of that success story.  To the extent that the import figures reflect offshored U.S. production, rising profitability affirms the wisdom of that decision.  But the proportion of imports attributable to offshored production is likely quite small, and not “substantial,” as Roberts suggests. 

Third, my failure to distinguish between offshored U.S. production and foreign production in the import data is insignificant because other data presented affirm the limited importance of offshored production.  Roberts asserts that offshoring simply substitutes imports for domestic production.  If that were the case and if offshoring constitutes more than an insignificant portion of U.S. imports, then we should see that in the data.  But we don’t.   

Instead, we see that U.S. factory output and U.S. value added increased the most for industries that also experienced the largest increases in imports.  In other words, if those imports are offshored U.S. production, they aren’t having a discernible substitution effect, as U.S. output, value added, and profits are rising too.  We also see that U.S. factories accounted for 21.1 percent of the world’s manufacturing output in 2005 (2.5 times greater than Chinese factories), which is virtually unchanged from the 1993 figure of 21.4 percent.  In absolute terms U.S. manufacturing output and value added have been rising virtually year-after-year, as has world manufacturing output.  Yet, the United States has somehow managed to preserve its share of world manufacturing output for at least 13 years.  If Roberts’ concerns about my data presentation had any merit, we would not observe the correlation between imports and output, nor would we see U.S. share of world output that has been remarkably stable. 

I usually don’t mind disagreement with my point of view.  It happens frequently.  But I find it offensive when someone disparages and dismisses my work without a coherent basis for doing so.

Debating the Law of the Sea Treaty

The Law of the Sea Treaty (dubbed LOST by opponents, and LOS by supporters), represents the culmination of a decades-long project to clarify the rules governing the oceans, from the seabed to the waves. The treaty, first rejected by President Reagan in 1982, has been revised over the years; now prominent Republicans, including Indiana Senator Richard Lugar, are urging passage. The Bush Administration has quietly endorsed the process.

Doug Bandow, who wrote a paper for Cato on the subject two years ago, makes a strong case for why the Senate should reject the treaty and continue with the status quo. He squares off this week against Raj Purohit of Citizens for Global Solutions in an online debate at the Partnership for a Secure America.

If you haven’t followed the issue closely, Doug and Raj do a good job of spelling out the relevant arguments for and against.