Topic: International Economics and Development

Fred Thompson’s Questionable Views on U.S.-China Trade

Fred Thompson’s relatively late entry into the presidential race has left people scrambling to discern his views on a range of topics from social issues to trade with China. I’ll leave it to others of probe his position on the former, but I came across something this week on the latter that is not encouraging for those of us who support free trade.

Two years ago, the former Tennessee senator was one of 11 commissioners to approve and sign the “2005 Report to Congress of the U.S.-China Economic and Security Review Commission.” The commission was established by Congress in 2000 to hold hearings and write reports on the implications of America’s growing trade with China.

Americans are right to cast a sober eye toward China’s foreign policy intentions and human rights record, but the commission also dabbles in the worst sort of economic populism toward U.S.-China trade. Among the questionable assertions in its 2005 report:

China’s “active participation in the global economy … is resulting in the movement of jobs, especially manufacturing jobs but increasingly service jobs as well, from the United States to China and other countries offering higher rates of return on capital” (p.3).

“U.S. producers of advanced technology products are also subject to the growing pressures posed by China. In 2004, the U.S. trade deficit in advanced technology products with China grew to $36.3 billion” (p. 4).

“The opening of the Chinese, Indian, and former Soviet bloc economies has led to more than a doubling of the global market’s work force and likely will put downward pressure on U.S. wages for workers at all levels, including higher levels of the wage scale. Mobile capital and technology flows accelerate this trend” (p. 5).

“Congress should consider imposing an immediate, across-the-board tariff on China’s imports at the level determined necessary to gain prompt action by China to strengthen significantly the value of the RMB [its currency]. The United States can justify such an action under WTO Article XXI, which allows members to take necessary actions to protect their national security. China’s undervalued currency has contributed to a loss of U.S. manufacturing, which is a national security concern for the United States” (p. 14).

Cato’s Center for Trade Policy Studies has systematically addressed economic concerns about U.S.-China trade at our web site, but here’s the crib sheet:

U.S. job losses from trade with China have been small and have been more than offset by jobs created in sectors that do not compete directly with China. The U.S. economy has added a net 16.5 million jobs in the past decade of expanding trade and the national unemployment rate is a low 4.6 percent.

Trade with China and other emerging economies has helped to boost living standards in the United States by reducing prices for consumer goods that make our lives better everyday. Average real hourly compensation (wages and benefits) paid to American workers is up 22 percent in the past decade. Tariffs on imports from China would reduce the well being of tens of millions of American households.

Real manufacturing output in the United States is up 31 percent compared to a decade ago. As my colleague Dan Ikenson shows in a new study for Cato, U.S. manufacturers enjoyed record output, sales, profits, and returns on investment in 2006. The “advanced technology products” that the commission worries about are overwhelmingly laptop computers and other consumer electronics. A WTO panel would rightly laugh at the claim that imports from China have somehow endangered America’s “national security.”

Which brings us back to Fred Thompson. Does he really believe the many questionable assertions in the 2005 report of the U.S.-China Economic and Security Review Commission that he approved? Or was he not really paying much attention? Or has he revised his views since 2005? An enterprising economics and business reporter should ask him.

If You Want To Be Loved, Try Being a Swede

No matter what we do, it seems like the world wants to hug us. We build a welfare state and the world loves it.  Try to reduce it, like the present government, and Roger Cohen in the New York Times says it’s funky.

But, ok, it is funky, moderately funky. The four center-right parties that make up the Swedish government since a year ago are influenced by market-liberal ideas from authors and think tanks, and some of the ministers wrote those books themselves. Three of the parties have fairly influential libertarian factions, and the leader of the fourth has said that he has Ayn Rand’s Atlas Shrugged on his bedside table. So expect more tax cuts, privatisation of state companies, an entrenched school voucher system, more private providers and competition in health care and a strong emphasis on deregulation and free trade.

But don’t expect labor market deregulation. When the trade unions organize 80 percent of the workers you don’t pick a fight. And don’t expect a real reduction in public spending. When everybody lives on everybody else’s expense, no one wants to be the first to try to quit. 

Above all, the government will act moderately. The biggest coalition party is actually called “the moderates”, and its ideology is called liberal-conservative – where liberal means liberal (it always confuses Americans), but conservative means that you shouldn’t be too serious, rapid or radical about your liberal ideals.

So in the end, the government will just tip the balance in an intact Swedish middle way between Anglo-Saxon and Continental. Open up and deregulate (after all, this is the country where the social democrats praise free trade) but also tax and spend (after all, this is the country where the new center-right prime minister says that “We don’t want to take away anything, we just want to add.”)

Insurer Plans to Escape Germany’s High Taxes reports on the likely shift to Ireland of a major German insurance company, Hannover Re. This is part of a trend as companies of all types are moving out of high-tax nations, with Ireland and Bermuda being major beneficiaries. (Interestingly, the article notes that the U.S. states of Vermont and South Carolina are havens for captive insurance companies.)

Hannover Re, one of the world’s largest reinsurance companies, is considering switching its operations to Ireland or another low tax jurisdiction, the company’s chief executive told a conference recently. According to Bermuda’s Royal Gazette, Wilhelm Zeller, CEO of Hannover Re, told a press conference at the annual reinsurance gathering, Le Rendez-Vous in Monte Carlo, that the $5.5 billion firm is considering moving from its present base in Germany…. “For us, the ideal location, from a fiscal point of view, would be Ireland,” Zeller stated, although he added that setting up headquarters in Dublin could be costly.

While Ireland’s low 12.5% corporate tax and location within the European Union is a big draw for reinsurance and other companies, Bermuda’s 0% rate of tax has lured many insurance companies to incorporate in the jurisdiction from high-tax countries like the UK. Last year, Lloyds of London underwriting firms Hiscox and Omega set up companies in Bermuda, citing the UK’s 30% income tax and its burdensome regulation. They were swiftly followed in January 2007 by another Lloyds firm, Hardy Underwriting plc.

…The 82 new Bermuda incorporations for 2006 compare very favourably with figures recorded by other jurisdictions such as Vermont, which had 37, South Carolina with 29, and the Cayman Islands with 50.

Growing Trade, Shrinking Deficit

The Commerce Department reported this morning that America’s current account deficit checked in at $190.8 billion for the second quarter of 2007. The number will undoubtedly provide fodder for critics of trade who see exports as the sole measure of success in the global economy and rising imports as a sure sign of failure.

The latest report is certainly newsworthy, but not in the negative way that many pundits and politicians will portray it.

The current account represents the broadest measure of America’s trade with the rest of the world, accounting for not only trade in goods but also services, investment income (such as interest, dividends, and profits), and unilateral transfers such as foreign aid and remittances.

The real news in today’s report is that America’s trade with the rest of the world continues to climb to new records despite the hand-wringing by many members of Congress and misguided pundits in cable TV land. Although the overall deficit declined slightly from the first quarter, our imports from the rest of the world are up 8 percent from a year ago and our exports are up 13 percent.

And although the rest of the world owns about $2.7 trillion more in U.S. assets than Americans own in assets abroad, we continue to earn more on our total investments abroad than foreigners earn on their investments here — about $16 billion more so far in 2007.

In a speech in Germany earlier this week, Federal Reserve Board chairman Ben Bernanke explained why running a current account deficit isn’t necessarily bad news for the U.S. economy, at least in the short to medium run. Among his main points:

First, these external imbalances are to a significant extent a market phenomenon and, in the case of the U.S. deficit, reflect the attractiveness of both the U.S. economy overall and the depth, liquidity, and legal safeguards associated with its capital markets….

Second, current account imbalances can help reduce tendencies toward recession, on the one hand, or overheating and inflation, on the other….

Third, although the U.S. current account deficit is certainly not sustainable at its current level, U.S. liabilities to foreigners are not, at this point, putting an exceptionally large burden on the American economy.

Check out the Center for Trade Policy Studies website for more on what the trade deficit means and what it doesn’t mean.

Norwegian Government Attempts Shakedown as Price of Lower Tax on Shipping

In an excellent example of the benefits of tax competition, Bloomberg reports that Norway’s left-leaning government intends to eliminate the corporate tax on shipping because of pressure from Bermuda, Liberia, and other open-shipping registries. But there is a dark lining to this silver cloud. The politicians want to extort $3.5 billion of alleged back taxes as part of the deal. Needless to say, Norway’s shippers are understandably suspicious about any deal that requires higher payments today in exchange for promises of less tax in the future:

The government said after the market closed on Sept. 7 it would seek 20 billion kroner ($3.5 billion) of payments in exchange for scrapping corporate tax on shipping companies. Shippers have been allowed to defer tax since 1996 provided they don’t use the money for dividends. … “The government is reneging on its previous agreement,” said Rikard Vabo, an analyst at Fearnley Fonds in Oslo who has a “sell” recommendation on BW Gas. “We will probably see shippers move abroad. It will also affect related companies, such as suppliers.” … The government wants to abolish corporate tax on shippers because lower rates outside Norway have encouraged companies to register new vessels in countries such as Liberia and Bermuda. … The Oslo-based Norwegian Shipowners’ Association will “consider everything” to reverse the tax ruling, spokeswoman Marit Ytreeide said by phone today.

Tax Competition Pushing Taiwan to Cut Corporate Tax Burden

The global shift to lower tax rates is continuing, with Taiwan’s government announcing its intent to reduce the corporate rate to at least 16.5 percent. reports:

A senior finance ministry official has indicated that the Taiwanese government is keen to cut the country’s rate of corporate tax to attract more investment… Chang Sheng-ford announced on Wednesday that the 25% corporate tax rate could be cut to 16.5% or lower, but revealed that this would not happen until the Statute for Upgrading Industries has expired in 2009. …A cut in corporate tax to 16.5% would put Taiwan on a par with Hong Kong, perhaps the most successful economy in the region.

Still Conservatives?

For those of us who experienced the revival of Britain during the Thatcher years, the dismal plight of the British Conservative party under a series of post-Thatcher leaders has been startling and increasingly dismaying.

Short-lived Tory leaders have been intent on ditching the classical liberal principles that Thatcher and her inner coterie foisted on the party – principles that gave the Tories their finest years of the 20th century and ones that pulled Britain out of decades of economic failure. David Cameron, the current no-doubt short-lived leader, has been as determined as his recent predecessors to distance himself and the party from the Iron Lady and all that she stood for – from low, or at least lower, taxation, to expanding individual choice and on to a healthy skepticism of government.

Now at last one Tory grandee has had enough of the retreat from Thatcher principles. The former Thatcher cabinet member, Michael Ancram unveiled this week an alternative manifesto [pdf], entitled “Still a Conservative,” to the Cameron agenda, one that calls for a return to the core values that won four successive elections for the Conservatives. He warns that the British public perceives that the party lacks “an overall sense of vision and direction.” And he argues that the party should support lower taxes, leaving people with more of their own money to make their own decisions. By contrast, Cameron wants to match the Labour government’s public spending and has turned his back on lower taxes.

And there is much else in Ancram’s manifesto that would please libertarians and classical liberals, especially his call for the regulatory state to be turned back and his advocating of widening the areas of life left to individual choice rather than government diktat. There are things, though, in the manifesto that are unappealing – from his over-defined Euro-skepticism to his rejection of treating gay civil partnerships equally with marriage when it comes to benefits and taxes. He says there are other long-term relationships outside marriage which should be welcomed for their commitment, but “for Conservatives there can be no fudging the issue of marriage.”

It is a great pity that he overdoes the Euro-skepticism and is prepared to treat gays unequally – for at heart Ancram’s alternative manifesto places classical liberal principles front and center.

And how has Cameron and his supporters responded? Not much of a welcome: they have told him to hold his tongue. A party spokesman said: “This is just a blast from the past. Just as Britain has changed, the Conservative Party has to change along with it.” And a former cabinet colleague of Ancram’s, Michael Portillo, said: “I was a great admirer of Margaret Thatcher but to invoke Thatcherism now, a phenomenon which is 25 years old, just makes the Tory party look old-fashioned and, of course, divided.”

Well, apparently that isn’t the viewpoint of Labour Prime Minister Gordon Brown, who like his predecessor, Tony Blair, realizes that Thatcher is still a name to conjure by. This week he spoke of his admiration for the Iron Lady. “I think Lady Thatcher saw the need for change,” he told a press conference. “Whatever disagreements you have with her about certain policies – there was a large amount of unemployment at the time which perhaps could have been dealt with – we have got to understand that she saw the need for change.”