Topic: International Economics and Development

The Right Way to Engage China

The United States and China reached an agreement yesterday on a dispute over alleged Chinese export subsidies. In exchange for the U.S. government dropping a case it was pursuing through the World Trade Organization, China agreed to end subsidies that the U.S. claimed were promoting exports and hindering imports of steel, wood, IT products, and other manufactured goods.

Details of the case aside, the announcement shows how trade disputes with China can be resolved without resort to threats of retaliatory tariffs. This is not the first time China has changed its trade laws in response to pressure from the United States through the WTO. In 2004, China dropped a discriminatory tax refund on domestically produced semiconductors after the U.S. government filed a complaint.

Today’s announcement is another vindication of resolving trade disputes with China through a rules-based system rather than through threats of unilateral retaliation. China’s accession to the WTO in 2001 not only committed China to lowering trade barriers on a broad range of goods and services; it also brought China into the generally effective WTO dispute settlement mechanism.

In two weeks, Treasury Secretary Paulson, U.S. Trade Representative Susan Schwab and other cabinet members will meet with their Chinese counterparts in Beijing as part of the ongoing Strategic Economic Dialogue. As today’s announcement verifies, the SED represents the right approach to encouraging China to continue its evolution toward a more free and open economy.

Constitutional Reform in Latin America?

Yesterday I went over to the Organization of American States (OAS) for a roundtable on “Constitutional Reform in the Americas.” The event featured opening remarks by the OAS Secretary General, followed by country-specific presentations by experts on Bolivia, the Dominican Republic, Ecuador, and Venezuela.

I won’t bore you with the details, but three themes emerged:

1) The ever-expanding constitutions of many Latin American countries, both to strengthen strongmen (Chavez) and to add to the copious list of positive rights (Brazil). This is not good for either constitutionalism or rule of law because on the one hand you have the country’s founding document being changed at the whim of a single man and on the other a constitution bloated with such things as the fundamental right to, e.g., four weeks’ paid annual vacation decreases in legitimacy. To paraphrase an old Argentine lawyer who advised that country’s last significant amendment process in 1993-94, “constitutional inflation leads to rule of law devaluation.” Alternatively, the Latin American counterpart to the old saw about French constitutions being filed in libraries’ periodicals section is that Latin ones are filed as encyclopedias.

2) The desire to constitutionalize (or rebalance constitutional structures relating to) the “special rights” of indigenous peoples. There is nothing wrong per se with wanting to recognize that certain native peoples preceded the arrival of European colonists/conquerors (British-American in the U.S., Spanish and Portuguese in Latin America) and that these people should not be exploited as a result of their having been vulnerable to colonization. But to enact wholesale nationalizations and special privileges on the basis of race, or caste, or tribe – let alone raise these perversities to the constitutional level as is being proposed in Bolivia – is a political and legal travesty.

3) The battle over political reform is no longer, if it ever was, between left and right or socialism and neoliberalism (the common Latin American term for pro-market policies and the Washington Consensus), but rather between democracy and authoritarianism. This may not represent that much of a change from the past – the populist governments that plagued the region in the 20th century could be alternately left or right wing – but it does confirm that the “consolidating democracy” project of the ’80s and ’90s has stalled if not taken a reverse. That is, the narrative that those of us studying Latin America in college and grad school in the late ’90s to early 2000s learned – the Third Wave of democratization, Latin America finally being on the right path but just needing time to grow economically –  underestimated some nasty undercurrents of resistance.

In short, the roundtable was equal parts fascinating and frustrating. You can watch it (in Spanish) here.

More on Bulgaria Flat Tax

Adding to Dan’s note, here is today’s story from Tax Notes International (no link):

The Bulgarian parliament passed a new flat tax on income on November 16, making Bulgaria the seventh EU member state to adopt a flat tax regime …

The new flat tax will replace Bulgaria’s progressive, three-bracket income tax, with a flat 10 percent tax on income starting in 2008. Bulgaria had already slashed the corporate tax from 15 percent to 10 percent in 2006 … 

Bulgaria is the latest in a number of Central and Eastern European countries that have replaced progressive systems with flat tax regimes. The flat tax revolution was pioneered by Estonia in 1994, and since then about 20 countries in Central and Eastern Europe have followed suit.

In this country, many pundits and presidential candidates would reverse President Bush’s modest reduction in the top income tax rate from 40% to 35%. Those rates are more than three times higher than the new flat tax rate in Bulgaria, a former communist country.  

Bulgaria Takes Big Step to Flat Tax

In the first test vote, the 10 percent flat tax was approved in Bulgaria by an overwhelming margin. If the Bulgarian experience matches what happened in other nations, the low-rate flat tax will be adopted, the economy will grow faster, and the government will collect more revenue. But just to show that there are some things that remain constant, the bureaucrats at the International Monetary Fund will continue to urge countries not to adopt this simple and fair tax system. The Sofia Echo reports:

Parliament approved on November 23, in first reading, amendments to the Income Tax for Natural Persons Act, which will introduce a 10 per cent flat tax rate starting from January 2008. The amendments were supported with 152 against 36 votes, with four abstentions, Bulgarian news agency (BTA) said. The flat tax rate will replace the current progressive tax system.

England’s Free-Market Future?

No, the title does not refer to possible policy changes if Tories win the next election (after all, that would require a smaller-government agenda). Instead, it is a somewhat tongue-in-cheek reaction to a story in England’s Daily Mail about couples who choose sterilization because they think children cause an unacceptable carbon footprint.

It is probably reasonable to assume that these people have a statist orientation. Since voting patterns and ideological orientation tend to be passed from one generation to the next, the electorate presumably will shift over time in a more market-friendly direction (or at least won’t shift as quickly in the wrong direction).

From the article:

Had Toni Vernelli gone ahead with her pregnancy ten years ago, she would know at first hand what it is like to cradle her own baby, to have a pair of innocent eyes gazing up at her with unconditional love, to feel a little hand slipping into hers — and a voice calling her Mummy. But the very thought makes her shudder with horror. Because when Toni terminated her pregnancy, she did so in the firm belief she was helping to save the planet.

…At the age of 27 this young woman at the height of her reproductive years was sterilised to “protect the planet”. Incredibly, instead of mourning the loss of a family that never was, her boyfriend (now husband) presented her with a congratulations card. …”Every person who is born uses more food, more water, more land, more fossil fuels, more trees and produces more rubbish, more pollution, more greenhouse gases, and adds to the problem of over-population.” While most parents view their children as the ultimate miracle of nature, Toni seems to see them as a sinister threat to the future.

…Toni is far from alone. When Sarah Irving, 31, was a teenager she sat down and wrote a wish-list for the future. …Sarah dreamed of helping the environment — and as she agonised over the perils of climate change, the loss of animal species and destruction of wilderness, she came to the extraordinary decision never to have a child. “I realised then that a baby would pollute the planet — and that never having a child was the most environmentally friendly thing I could do.” …[Her husband] Mark adds: “Sarah and I live as green a life a possible. We don’t have a car, cycle everywhere instead, and we never fly. We recycle, use low-energy light bulbs and eat only organic, locally produced food. In short, we do everything we can to reduce our carbon footprint. But all this would be undone if we had a child. That’s why I had a vasectomy. It would be morally wrong for me to add to climate change and the destruction of Earth.”

New Data Show Lagging Living Standards for Welfare States

The Paris-based Organization for Economic Cooperation and Development is hardly a hotbed of free-market thought. So it is particularly remarkable that the OECD has just released new figures on per capita gross dometic product and per capita consumption.

The latter data, for AIC (“actual individual consumption”), are especially interesting since they allow comparisons of living standards across nations. For the 30 member nations of the OECD, the United States is second, with per capita consumption that is 152 percent of the OECD average, trailing only the small tax haven of Luxembourg.

Europe’s major welfare states, by contrast, do not fare so well. France is at 106, Sweden at 104, and Germany at 103, meaning that their living standards are only about 70 percent of U.S. levels.

The report also has data for both 2002 and 2005. During that period, Iceland enjoyed the biggest increase in living standards, climbing from 113 percent of the OECD average to 128 percent of the average. Not coincidentally, Iceland has been lowering tax rates and reducing the burden of government.

European Politicians, Global Warming, and Moral Preening

European leaders (and their doubtlessly bloated staffs) plan to fly to Lisbon to sign a treaty and then fly to Brussels for a summit the following day.

This has caused a bit of griping, but not because taxpayer funds are being wasted, but rather because all those private jets will cause a large carbon footprint. So in a hollow gesture, the political heads of three countries are going to share a jet.

Gee, how thoughtful.

The EU Observer reports on the farce:

At the insistence of the Portuguese EU presidency, all 27 EU leaders and their delegations will fly to Lisbon on 13 December for a special signing ceremony of the bloc’s new treaty — and then jet on to Brussels for a regular EU summit meeting the next day. The cumbersome travel arrangements allow Portugal to call the new treaty the ‘Lisbon Treaty’ — but they have also led to criticism that EU leaders are setting a bad example by preaching about green values but then unnecessarily contributing to global warming through the short round trip. To reduce at least part of the summit’s carbon footprint, the Benelux leaders will board a Dutch government airplane when flying to and from Lisbon — something suggested by Mr Balkenende.