Topic: International Economics and Development

Europe is Falling Further behind the United States

Although some politicians argue that America should emulate Europe, that choice would mean lower living standards and less prosperity. A new study from Eurochambres reveals that Europe is decades behind the US in important measures of competitiveness. The study also calculates how long it would take Europe to catch up to America, but that assumes the US becomes stagnant. In reality, as the EU Observer reports, America is growing faster than Europe and the gap between the two is widening rather than shrinking:

The EU is 22 years behind the US on economic growth according to a new study, with several other economic indicators showing further gaps despite Europe’s ambitious reform agenda to be praised by leaders at this week’s summit.

A report by Eurochambers, the Brussels-based business lobby, published on Monday (5 March) argues that the US reached the current EU rate of GDP per capita in 1985 and its levels in employment and research investment almost 30 years ago.

…according to the Eurochambers study, the EU time lag behind the US has expanded further since 2003 when the group published its first report comparing the economic indicators on both sides of the Atlantic. …Authors of the study point out that if calculations included the latest newcomers of Bulgaria and Romania, the gap between the EU and US would be even larger… in a bid to start catching up with the US on key Lisbon indicators, Europe would have to perform better than the States, according to the Eurochambers study, while the latest results show the opposite: in 2006, the US registered an average GDP growth of 3.3 percent and the EU about 2.9 percent, the highest since 2000.

Russia Examining Corporate Tax Rate Reduction

Lower tax rates are not a solution to all Russia’s problems, but tax policy is moving in the right direction. Tax-news.com reports that the government wants to reduce the corporate tax rate to 20 percent. Even more impressive, policy makers seemingly understand that lower corporate tax rates will have a larger supply-side effect than a reduction in the value-added tax, demonstrating a better grasp of economics than nine-tenths of the US Congress. The story also notes that Russia has taken other positive steps, though it does not mention the 13 percent flat tax implemented in 2001: 

Russia may cut its corporate profit tax rate to 20% from 24% as part of a three-year tax policy plan, Deputy Finance Minister Sergei Shatalov stated last week. The government had previously been considering a further reduction in value added tax, currently 18%, to as low as 13%, but Shatalov said that a cut in corporate profit tax would be more likely to stimulate economic growth and boost levels of investment. …Putin has stated many times that while the government remains committed both to simplifying tax legislation and reducing the tax burden, tax reform must be balanced against needs of business, which requires certainty in the tax code. Since 2002, the Putin administration has reduced or abolished a number of taxes, including turnover tax, payroll taxes, sales tax, and value added tax. According to Putin, in 2005 Russia’s tax burden eased to 27.4% of GDP, from 28.7% in 2004.

When Common Sense Just Isn’t Enough

The National Association of Manufacturers has been in Washington long enough to know that sometimes, if you make that last appeal, that last argument, compliment the right person, then things might just go your way. 

In an unusual (to me, at least) letter expressing opposition to an utterly inane amendment sponsored by Sen. Charles Schumer that would required ALL inbound cargo at U.S. ports to be screened (an impossibility without bringing international trade to a halt), NAM’s Jay Timmons urges the Senate to oppose the amendment. In the letter, Timmons describes the impracticability of the idea and describes how such measures would actually make the ports less secure.

But, to be sure, to cover his bases, and to appeal to that special sense of honor and duty reserved only for politicians, Timmons concludes with this gem:

The NAM’s Key Vote Advisory Committee has indicated that votes on the Schumer amendment will be considered for designation as Key Manufacturing Votes in the NAM voting record for the 110th Congress.  Eligibility for the NAM Award for Manufacturing Legislative Excellence will be based on a member’s record on Key Manufacturing Votes.

That could be the clincher!

U.S. Treasury Secretary Challenges Protectionists

Hearing Washington officials speak sense on international trade has become a rare event these days. So a speech today by U.S. Treasury Secretary Henry Paulson was like a fresh spring breeze after a long dreary winter.

Speaking to the Economic Club of Washington, Secretary Paulson delivered an important address on the huge benefits Americans realize every day from our growing trade and investment ties with the rest of the world.

The secretary touted America’s booming exports, including a 32 percent jump in exports to China in 2006. More importantly, he focused on the benefits of imports, the real payoff from trade:

Trade fosters the environment of competition, innovation, research, and investment that leads to better goods and services at lower prices. Some people speak about trade as if its benefits come only from exports, ignoring the positive contributions of imports. Data show that internationally trade products tend to experience lower inflation rates—even real price declines—while non-traded goods tend to rise in price. Trade thus helps Americans provide for their families. When special interests seek protection in the name of low-wage workers, we should acknowledge that limitations on imports do not benefit the vast majority of Americas. They deny people the freedom to choose from a broader array of goods and services, and impose a cruel tax on people who rely on low prices to stretch their family budgets. The cost of protectionism falls most heavily on those who are least able to afford it—the poor and the elderly.

The speech is packed with other sound thinking and useful numbers on the hot trade topics of the day, including China, the trade deficit, manufacturing, foreign investment and adjustment-assistance programs.

Secretary Paulson’s speech is an antidote to the economic snake oil that is being hawked on what seems to be every street corner of Washington these days.

India Reveals Its Preference

My favorite concept in economics (it should tell you something about my dorkiness that I even have a favorite economics concept) is the theory of revealed preference. Basically, this theory (one of Samuelson’s) says that if you want to know the preferences of a rational economic actor, you just need to observe their behavior. It is basically the economists’ way of saying (and showing, using the ubiquitous diagrams) that actions speak louder than words.

India has treated us to a beautiful display of the theory by announcing yesterday that it will unilaterally reduce its tariffs on some goods and reduce its maximum tariff on non-agricultural goods to 10 percent (from a previous cap of 12.5 percent) in an effort to control inflation (more here).

This is the same India that is one of the main hold-outs in the Doha Round of multilateral trade talks. The same India that, in the poisoned atmosphere of the failed talks in Cancun, formed the G-20 in an attempt to assert developing countries “rights,” and to generally disrupt talks. Particularly in the agriculture negotiations, India has been frustratingly adamant that developed countries do more to open markets than developing countries and has been a strong proponent of mechanisms by which developing countries can shield a certain (20 percent, insists India) share of their “sensitive” agricultural products from tariff reductions.

Why, one is then tempted to ask, are India’s trade negotiators still clinging to the same tired mercantilist position in the Doha round, while the treasury goes ahead with (albeit limited) trade liberalization? Bureaucratic inconsistency, perhaps. Or maybe India enjoys, in the theater of the WTO, stickin’ it to the man. It’s a pity that the man they’re stickin’ it to is the man on the Indian street.

China and France May Copy America’s Punitive Tax Penalty on Non-Resident Citizens

America is the world’s only developed nation to impose tax on its citizens that live and work abroad – even though they already are subject to taxation by the foreign country where they reside. As the Wall Street Journal notes, China has decided to adopt this foolish policy:

The U.S. is the only developed nation to tax its citizens abroad. Now China has picked up on Mr. Grassley’s grand idea. From March 31, all mainland citizens working abroad will be taxed on their world-wide income. That might give some comfort to U.S. protectionists worried about China’s labor competitiveness, even though mainland employees aren’t so far a huge force abroad. But as America is now discovering, punitive taxation is an export that comes with a high price.

Not surprisingly, French socialists are intrigued by this self-destructive form of double-taxation. A column in The American comments on Segolene Royal’s interest in extending bad French tax laws to those who have escaped to friendlier jurisdictions:

…a report recently prepared for Royal’s camp floated a creative proposal—a “citizen contribution” (read: tax) for all French citizens residing abroad. The “contribution” would be designed to collect revenues from all French people residing abroad, irrespective of their reasons for leaving France: businessmen, families, retired workers, successful artists, etc. would all be affected. Former finance Minister Dominique Strauss-Kahn laid out the rationale: “It is no longer acceptable that French citizens be able to escape taxes by installing themselves outside of France. We propose to define a citizen contribution that will be paid in accordance with contributive capacities by each Frenchman residing abroad who does not pay taxes in France.” … If she implements her Socialist rhetoric, like Mitterrand in the early 1980s, financial forces beyond her control will quickly force her to change. For France’s sake, it is a situation she would do well to avoid.

“Cleaning Those Foreigners’ Clocks”

While a lame argument is disappointing for the opportunity cost of having read it, a lame argument put forth as rebuttal to one’s own assertions can be affirming.  But, to paraphrase a colleague, there’s nothing better than being challenged with lame arguments by adversaries who have wide media circulation.  For that, I thank you, Pat Buchanan.

Buchanan takes exception to the arguments I make in this piece, which appeared in the Washington Times last week.  The theme of my op-ed was that Congress should curtail its instinct to blame trade for everything that’s wrong with America.  I even go as far as to suggest that, with strong economic growth, strong job creation, and a low rate of unemployment, things might not be all that bad in America.  And at the very least, Congress should take the time to honestly assess the meaning of the trade deficit.  What Congress would find is that the deficit is highly pro-cyclical (meaning that is shrinks when the economy contracts, it grows when the economy expands, and grows faster when the economy grows faster – see some of Dan Griswold’s work on this topic).  I also suggested that the trade account has very little to do with trade policy, and much more to do with demand in the United States and abroad, as well as differences in habits of savings and consumption.

For those empirically sound (and verifiable) assertions, Buchanan lampoons libertarians for possessing some religious-like devotion to their beliefs regardless of the facts before taking two of my points out of context to serve as springboards into his xenophobic, isolationist, nationalistic rage.

When we win at trade, it doesn’t mean they lose (“cleaning those foreigners’ clocks”).  We are all winning at trade as the economic pie grows larger and larger—so much so that the large U.S. economy can grow at a moderate-to-strong pace every year with the exception of two for the past quarter century, while the small-to-medium-sized Chinese economy simultaneously can grow by double digits every year during the same period.  

But rather than reinvent the wheel under which arguments like Buchanan’s have been reliably squashed throughout the years, I invite you to peruse this collection of timeless commentaries from Cato scholars and others about Buchanan-like views on trade and globalization.