Topic: International Economics and Development

Tax Cuts North of the Border

America traditionally has enjoyed a competitive advantage over Canada, but the Conservative government in Ottawa has announced addtional tax cuts, including reductions in the corporate rate. The rest of the world is responding to tax competition, and the high corporate tax rate in the US is becoming an ever-larger problem for American companies in the global marketplace. Unfortunately, there is no groundswell – or even idle gossip – for a reduction in America’s punitive corporate tax. Tax-news.com reports on the new tax cuts in Canada: 

Jim Flaherty, Canadian Minister of Finance, has announced that he will table the second budget of Canada’s Conservative administration under Prime Minister Stephen Harper on March 19, 2007. …Key tax measures contained in the 2006 budget included the long-promised 1% cut in Goods and Services Tax to 6%, a 2% cut in the general corporate tax rate by 2010, eliminating the corporate surtax on all corporations by 2008, axing the federal capital tax, and increasing the amount of income eligible for the lowest rate of corporate tax for small businesses. In addition, this bottom rate will be reduced by 1% to 11% by 2009.

Mugabe Eats Cake, Zimbabweans Eat…

My Cato colleague Marian Tupy is currently traveling in Africa and unable to blog, so I thought I’d post this snippet from from a New York Times story that would be dear to Marian’s heart:

JOHANNESBURG, Feb. 21 — President Robert G. Mugabe of Zimbabwe turned 83 on Wednesday to the strains of the song “God Bless President Mugabe” on state-controlled radio, along with an interview on state television, a 16-page paean to his rule in Harare’s daily newspaper and the prospect of a grand birthday party — costly enough to feed thousands of people for months, his critics argued — on Saturday.

Zimbabwe’s economy is so dire that bread vanished from store shelves across the country on Wednesday after bakeries shut down, saying government price controls were requiring them to sell loaves at a loss. The price controls are supposed to shield consumers from the nation’s rampant inflation, which now averages nearly 1,600 percent annually.

Mugabe is a piece of work: Not only has his thugocracy destroyed the civil society necessary for a healthy nation and economy, not only has his monetary policy imploded the Zimbabwean currency, not only will history remember him as (in the words of Nobel laureate Archbishop Desmond Tutu) a “caricature of an African dictator,” but he has the audacity to stage a phony national celebration of his birthday.

Hat tip to the NYT for the great headline, photo, and endquote.

Fine-Tuning Competition

The Washington Post reports today that the Justice Department has ordered Arcelor Mittal (the world’s biggest steel company) to sell off its Sparrows Point mill in Baltimore “to preserve competition in the eastern U.S. tin mill market.” 

Prior to the Arcelor-Mittal merger last year, three firms supplied most of the tin mill products (steel used for food, paint, and aerosol cans, etc.) consumed in the eastern United States: U.S. Steel, Mittal, and a Canadian subsidiary of Arcelor.  Post-merger, only two firms supply most of the tin to that market and the Justice Department deems that to be a threat to competition. 

Interestingly, just eight months ago, the U.S. International Trade Commission voted to continue antidumping restraints against tin mill products from Japan, citing a domestic industry that was vulnerable to a recurrence of injury from imports in the foreseeable future. 

So, while the Justice Department forces companies to break up to promote competition, the ITC sanctions duties to quell it.  If both agencies took long sabbaticals, I suspect the competition thing would resolve itself.

Swiss People and Swiss Cantons Reject Fiscal Interference from Brussels

The Neue Zuricher Zeitung reports that an overwhelming majority of Swiss voters are opposed to attacks on their nation’s fiscal sovereignty. The story also quotes Switzerland’s Finance Minister, who notes that the European Union would have a hard time getting unanimous agreement in order to impose sanctions: 

A new survey shows that…[t]hree-quarters said they opposed any interference from Brussels… The poll of more than 1,000 people was commissioned by the SonntagsZeitung newspaper. …Many EU countries are angry that tax revenues are being lost as companies relocate to Switzerland - mainly to small cantons which offer low levies. …The survey results also hinted that the latest dispute has put the EU in a worse light among the Swiss. Only 41 per cent said they favoured providing financial aid for the latest EU member states, Romania and Bulgaria, as requested by the EU earlier this year. …[Swiss Finance Minister Merz] said Brussels would need unanimity from its member states to succeed with its attack on Switzerland’s tax regime, but that, he said, was unlikely since some EU countries also offer similar tax breaks. Merz said Switzerland did not want to set a dangerous precedent. “It could reach the point where the EU demands that we double the rate of our Value Added Tax so it’s in line with the EU average,” he warned.

Equally important, Swissinfo.org reports that cantonal governments also reject meddling by the European Commission. And since any change to Swiss policy would require approval from a majority of voters and a majority of cantons, the Euro-crats face an uphill battle in their campaign to hinder tax competition:

Swiss cantons say the latest European Commission attack on Swiss corporate tax breaks will fail without a referendum to end the cantons’ financial independence. …The report was presented to the Swiss federal authorities, but central government would be powerless to make the cantons cooperate even if ministers changed their position of defending the system. “The Commission clearly does not understand our political system. The federal authorities have no say in this matter,” Kurt Stalder, secretary of the Conference of Cantonal Finance Directors, told swissinfo ahead of the EC report. “It is written into our laws that cantons set their own taxes and there must be a national referendum to change this. The people have had numerous invitations to make a change in the last few years but they have always voted to accept the system.” Stalder added that the 26 cantonal finance heads had voiced a unanimous resolution to resist pressure from Europe during a recent meeting of the Commission.

Putin’s New Deal

According to David Ignatius of the Washington Post,

To explain the Putin phenomenon, the Kremlin’s chief ideologue, Vladislav Surkov, recently compared him to Franklin Delano Roosevelt, another president who brought his country back from economic disaster and restored its pride. Like FDR, Putin is using “presidential power to the maximum degree for the sake of overcoming the crisis,” Surkov said.

Inasmuch as FDR’s economic policies were a failure until after World War II, let’s hope that Putin and Surkov aren’t planning to emulate him too closely.

U.S. to Comply with WTO Ruling on Zeroing

I have been warning on this blog that U.S. failure to comply with the latest WTO ruling against the antidumping calculation technique known as zeroing could open a Pandora’s box that could undermine and eventually destroy the rules-based trading system.  Well, in the words of the old Gilda Radner character from SNL, Emily Litella, “Nevermind!”

The U.S. mission in Geneva announced yesterday that, despite its view that the Appellate Body’s decision was intrusive and wrongheaded, the United States intends to comply.  That is very good news, for at least two reasons. 

First, zeroing severely and unjustly inflates antidumping duty assessments and collections, creating bigger trade barriers.  Depriving the Commerce Department of that methodological trick will undoubtedly lead to lower dumping margins overall.

Second, it is important that the United States show some respect for the outcomes of dispute settlement.  Berating and disregarding those outcomes only serves to erode support for the system.  And if the United States expects to get some mileage as a complainant out of its likely string of cases before the WTO (a subsidy case against China was filed two weeks ago, and the Democratic congress is at least rhetorically fixated on enforcement, enforcement, enforcement), it should show some deference to the rules.

Compliance with the zeroing ruling will likely take at least one year (and probably more), so it’s not entirely out of the question that sentiments could change in Congress or the administration before then. 

On the broader question of whether the WTO dispute settlement system is fair, please check out the online debate between Robert Lighthizer and myself, hosted by the Council on Foreign Relations.

European Union Wants One-Size-Fits-All Regulation

European bureaucracies such as the Organization for Economic Cooperation and Development and the European Commission are infamous for their anti-tax competition campaigns, but the zeal to harmonize is not limited to fiscal policy. The European Commission has set an explicit goal of exporting EU regulation to the rest of the world. If successful, this would be an unfortunate development. Competition among regulatory regimes helps control excessive government. But if an international bureaucracy succeeds in becoming a global “standard setter,” then politicians will exploit that monopoly position to impose more onerous regulatory burdens. That certainly will be the case if the bureaucrats in Brussels succeed in this latest push for regulatory harmonization. As the Financial Times indirectly notes, the Euro-crats are not very sympathetic to markets:

Brussels wants the rest of the world to adopt the European Union’s regulations, the European Commission will say this week. A Commission policy paper that examines the future of the Union’s single market says European single market rules have inspired global standard-setting in areas such as product safety, the environment, securities and corporate governance. …The paper calls on the EU to encourage other jurisdictions to follow suit – for example by “promoting European standards internationally through international organisation and bilateral agreements”. …The EU’s drive to establish itself as the pacesetter for worldwide business regulation could well lead the bloc into conflict with the US and other trading partners. US officials have often voiced concern about the Union’s growing clout as a global standard-setter, and the two sides have clashed over issues such as rules for the chemicals industry and the EU’s stance on genetically modified foods. …The two sides have very different regulatory philosophies, with the EU placing a heavy emphasis on consumer protection and environmental legislation while the US tends to promote a more market-based approach. Some critics of the European approach argue that the Union’s stance on issues such as GM foods may also reflect a desire to protect the region’s commercial interests.