Topic: International Economics and Development

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.

Kapuscinski Encounters Capitalism

The Polish journalist Ryszard Kapuscinski, who died in January, published an article in the February 5 New Yorker on his first trip outside Poland. Kapuscinski became a legendary foreign correspondent and travel writer, but this was his first international trip, in 1955 at the age of 23. His reminiscences are a useful reminder of the differences between capitalism and communism. Flying into Rome, he recalls:

I was dumbstruck.

The entire length and breadth of the blackness over which we had been flying was now filled with light. It was an intense light, blinding, quivering, flickering. I had the impression of a liquid substance, like molten lava, glimmering down below, a sparkling surface that pulsated with brightness, expanding and contracting. The entire shining apparition was alive, full of movement, vibration, energy.

It was the first time in my life that I had seen an illuminated city. What few cities and towns I had known until then were depressingly dark. Shop windows never shone, there were no colorful advertisements, the street lamps had weak bulbs. Who needed lights, anyway? In the evenings, the streets were deserted, and one encountered few cars.

The next day his seatmate from the airplane took him shopping in Rome.

We started making the rounds of the shops, accompanied by Mario’s wife. For me, these were expeditions of discovery. Three things dazzled me in particular. First, that the stores were brimming with merchandise, the goods weighing down shelves and counters, spilling out in colorful streams onto sidewalks, streets, and squares. Second, that the salesladies did not sit, but stood looking at the entrance; it was strange that they stood in silence, rather than sitting and talking to one another. The third shock was that they answered the questions you asked them. They responded in complete sentences and then added, Grazie! Mario’s wife would ask about something and they would listen with sympathy and attention, inclining forward with such focus that it looked as if they were about to start a race.

Now remember, this is Italy in 1955, only 10 years after its military defeat. Apparently it took only a decade for communism to produce shortages, indolence, and poor customer relations in Poland, while capitalism produced abundance and customer service in post-Mussolini Italy. Not to mention the difference in nighttime lights that anticipated today’s famous image of the two Koreas at night.

More Fallout from Switzerland’s Tax Fight with Brussels

This site has closely followed the European Commission’s attempt to undermine Swiss tax sovereignty - an effort that has implications for the US since high-tax nations like France and Germany could use the same argument (that low taxes somehow are contrary to free trade) against America at the WTO if the anti-Swiss campaign proves successful. Fortunately, that is not likely to happen. The European Commission ultimately has only one weapon, which is the ability to impose protectionist sanctions against Swiss goods and services. But as Euractiv.com notes, there are EU member states that support tax competition and presumably would not approve an effort to punish Switzerland for the supposed sin of good tax law:

The Commission, on 13 February, accused Switzerland of offering unfair company-tax advantages that it says amounts to illegal state aid, in order to lure multinationals away from the EU. …Member states are likely to give strong backing to the Commission, as frustration has grown with the increasing number of multinationals, including General Motors, Kraft Foods and Procter & Gamble, deserting their EU headquarters to set up in Switzerland. Tax competition is also a problem within the EU, with countries like Ireland and Luxembourg luring companies away from high-tax France and Germany thanks to their low business tax rates. But, a Commission move to harmonise tax systems across the EU is being fiercely resisted by low-tax member states.

Needless to say, the Swiss-EC fight has nothing to do with trade and everything to do with tax competition. Politicians from high-tax nations despise fiscal rivalry since it forces them to lower tax rates (or at least not to raise rates even further) in an effort to prevent the loss of jobs and capital. Switzerland is a beneficiary of this liberalizing process, both because its overall tax burden is low compared to the rest of Europe, but also because the nation has a genuine federal system, meaning that regional (cantonal) and local governments must compete to offer the most attractive fiscal policies. A recent paper published by the Center for Freedom and Prosperity explains the role of intra-national tax competition, and a report from Euro2day.gr shows that Swiss leaders understand the valuable role of their federal structure:

Zug has been particularly exposed. “We don’t understand why the Commission has made these accusations now,” says Peter Hegglin, the cantonal finance minister. …Like most Swiss, Mr Hegglin emphasises the role of tax competition as a cornerstone of Switzerland’s extreme form of devolution, where individual cantons and communities set their own levies, and as an instrument to ensure lean, efficient government. “Tax competition is something that is so deeply ingrained in Switzerland internally that the government has little leeway to negotiate anything,” says Walter Kielholz, chairman of Credit Suisse. …Zug is now the hub for companies from global commodities traders, such as Glencore, to the regional headquarters of leading pharmaceuticals groups. Nord Stream, the Russian dominated consortium planning a new gas pipeline under the Baltic, is the latest of many arrivals. Zug’s appeal lies in its proximity to Zurich, its lawyers, accountants and consultants – and its modest taxes. All companies must pay Switzerland’s nationwide 8.5 per cent federal profits tax. Some others also face cantonal and municipal levies, taking the total to 16-16.5 per cent.

Last but not least, a letter-to-the-editor of the Financial Times mockingly asks whether the bureaucrats in Brussels will extend their complaint about Switzerland’s tax laws to other policies:

The Swiss know many more ways of unfair competition to lure successful businesses to settle there. Take my own typical recent travel experience: Queueing for check-in and security control at Kastrup airport, Copenhagen: 2hr 15min. Queueing at Birmingham international airport: 1hr 45min. I always avoid using Heathrow and BA because it is even worse. No queueing at Geneva airport, check-in and security control completed in less than 20 minutes. …In the UK or Sweden the whole rail system breaks down if 5cm of snow falls. The Swiss trains run 90 per cent on time, even if it is snowing! Another example of unfair efficiency. The political system with its direct democracy is less corrupt in Switzerland than in the UK, Germany and Sweden. Is this not an outrageous example of unfair competition? Because of low taxes the Swiss public services must be well organised and more efficient than in Scandinavia and the UK. The efficiency of public services together with reasonable taxes is Switzerland’s most important advantage.