Czech President Vaclav Klaus routinely offends Europe's governing elite by speaking unpleasant truths. Like when he recently lectured the European Parliament — delivering a "blistering diatribe," reported one publication — about the danger of concentrating ever more power in Brussels.

The European Union grew out of the wreckage of World War II. European economic cooperation became a means, in addition to NATO, to link Germany to its neighbors. The organization started as the European Coal and Steel Community, turned into the European Economic Community (or "Common Market"), and became the European Union in 1993.

Further strengthening the EU has become the premier project of Europe's elite, an amalgam of supra-national politicians, continental bureaucrats, deracinated intellectuals, and borderless businessmen. The original benefits of intra-European trade were obvious: a continental market promoted European trade and prosperity, while the prospect of joining the most prosperous states of Europe spurred economic and political reform in the new nations formed out of the Soviet empire.

But the EU's goal of ever-expanding continental markets is running into rising nationalism. The Czech Republic, which holds the rotating EU presidency, is battling France over the latter's plan to bail out the French auto industry. Denmark and Germany fear further EU expansion if workers are free to move throughout Europe.

Moreover, the EU increasingly micro-manages economic activity, from mandating use of metric measurements to banning "defective" vegetables. To improve people's health, the Commission is proposing to limit the salt content of bread. "What the EU is doing amounts to stupid interference," complained Matthias Wiemers, chairman of the Central Association of German Bakeries.

Yet the Eurocrats dream of turning Brussels into more than a giant OSHA. They want to harness Europe's population of a half billion and GDP of $19 trillion in order to compete with the U.S. for global influence. For that they have proposed creating a stronger government structure with greater authority to develop a continental foreign policy. Hence the Lisbon Treaty.

In 2001 the Europeans began negotiating a constitution of formidable length and incomprehensible verbiage. It created a president and foreign minister, dropped the requirement of a commissioner per country, limited national vetoes, and reshuffled EU institutional responsibilities (the European Parliament continues to debate the exact apportionment of duties). Whether the treaty is a good let alone necessary is for the Europeans to decide. But which Europeans get to decide?

Signed in 2004, the constitution had to be approved by popular referendum and was quickly rejected by both Dutch and French voters. European consolidation looked dead, but the Eurocrats changed a couple of commas and reissued the constitution as the Treaty of Lisbon in 2007 — which, conveniently, didn't require popular approval. French President Nicolas Sarkozy admitted: "There will be no treaty at all if we had a referendum in France." Then the carefully prepared railroad unexpectedly ran off the rails. In June 2008 Ireland held a referendum, as required by its constitution, and the voters said no.

The wailing and gnashing of teeth could be heard across the continent. The collective reaction was: How dare they! Under the rules the treaty was dead, but the Eurocrats write the rules, and they agreed that the treaty must be ratified, irrespective of the rules. Manuel Barroso, the European Commission president, announced: "I believe the treaty is alive and we should now try to find a solution."

Much was said of democracy and majority rights by elites which were doing their best to prevent the people from having any say on their form of government. Britain's Lord Mark Malloch-Brown complained: "I am not sure whether the voters of Ireland should have a right of veto over the aspirations of all the other people of Europe. I am not sure whether that is, or is not, democracy." Similarly, German Interior Minister Wolfgang Schaeuble said: "a few million Irish cannot decide on behalf of 495 million Europeans."

Of course not. Only a few thousand people — the Eurocrats — are supposed to decide on behalf of 495 million Europeans.

The problem, argued Czech President Klaus, is that "There is no European demos — and no European nation," which intensifies the problem of "the democratic deficit, the loss of democratic accountability, the decision-making of the unelected." Klaus warned of "a situation where the citizens of member countries would live their lives with a resigned feeling that the EU project is not their own." He was particularly scathing of the EU's attempt to suppress popular sentiments: "Not so long ago, in our part of Europe, we lived in a political system that permitted no alternatives and therefore also no parliamentary opposition. We learned the bitter lesson that with no opposition, there is no freedom."

Although British Member of the European Parliament Graham Watson acknowledged "some kernels of truth" in Klaus' description of "the distance between the voters and the [European Parliament]," the Eurocrats are prepared to increase that distance in order to push through the Lisbon Treaty. One option is turning Dublin into a second class EU member; another possibility is tossing the Irish out of the EU. But the preferred result is having Ireland hold a second poll — so long as voters make the right decision. As Mats Persson of the think tank Open Europe observed: "Ever since the Irish voted No to the Lisbon Treaty in June, politicians in Ireland and across Europe have tried to find ways to force this unwanted document through — against the clear will of the people."

After winning some theoretical concessions, essentially promises to make future changes, on issues of interest to Irish voters, the government in Dublin announced plans to hold a revote later this year. Current polls have the "ayes" ahead and the EU is spending more than $2 million to lobby the Irish public. But the apparent upsurge in support may be temporary, reflecting economic fears, and groups like Declan Ganley's Libertas, which played a key role in defeating the treaty in the first Irish vote, plan to keep fighting.

If the Lisbon Treaty passes, then what? European policies will be further internationalized. European nations' sovereignty will be further eroded. European traditions will be further submerged. European peoples will be less free.

Which explains Vaclav Klaus' sharp critique. "Are you really convinced that every time you take a vote, you are deciding something that must be decided here in this hall and not closer to the citizens, i.e. inside the individual European states," he asked the European Parliament. Unfortunately, most of them are: His talk elicited "boos and catcalls and a walk-out by some members," explained New Europe.

Yet even if the Eurocrats win, they aren't likely to create a new nation state capable of challenging Washington for global influence. Rather, the EU will just create a slightly more pretentious political hollow shell.

In his valedictory address as European President, Nicolas Sarkozy said: "the world needs a strong Europe and that Europe cannot be strong if it is not united." But the Lisbon Treaty does not unite Europe. The wealthier West has rejected a plea by the East for a financial bailout. In a January poll barely one quarter of Europeans knew that parliamentary elections were even scheduled this year. The percentage likely to vote is down from the last election. And the governing establishment is afraid to let the people vote on the Lisbon Treaty. If the only way to strengthen the EU structure is to limit popular participation, then Europe must not be united. Would anyone, other than Belgians (and maybe not even them), today die for Brussels? Passing Lisbon won't create a continental identity now absent.

What the Sarkozys of Europe desire is greater international influence, but European unity or not, Europeans lack the desire and their governments lack the ability to take the necessary politically tough, financially expensive, and militarily risky steps. Even Sarkozy's supposedly successful EU presidency last year mostly reflected his stature as the hyperactive president of France. And European disunity quickly followed such ephemeral successes as confronting the Russia-Georgia war and economic crisis, for instance.

Washington is seen, for better or worse, as speaking on behalf of Americans as well as America. They consider the U.S. to be their country; they elect the head of government as well as the legislature; they finance and serve in a military actually capable of combat; they back their government (too enthusiastically too often, in my view) when it uses that military. None of these conditions apply to Europe today; none would be changed by Lisbon.

Some younger pan-Europeans exist, but most Europeans remain loyal first to their national government. Lisbon builds a higher appointed structure, not a broader elected structure.

Moreover, few European governments have militaries with meaningful combat capabilities, and even fewer are ready to use their militaries in real war. French President Sarkozy claimed that had Ireland not rejected the treaty Lisbon would have "guaranteed Europe's security for many years" by an "obligation of solidarity," whatever that is. However, former French Foreign Minister Hubert Vedrine admitted: "At no point have the Europeans shown an appetite for a truly European defense. They don't want to devote more money to defense." Indeed, Bastian Biegerich of the International Institute for Strategic Studies observed: "The majority of EU member states appear unable to deploy formations of even battalion size (500-800 troops) on a single mission." To the extent there is any European will for military action, it involves low-risk "peace-keeping" missions, not real wars. From such does not spring an influential nation state.

A surge of continental nationalism might eventually sweep Europe. But attempting to force recalcitrant peoples into a new political order is more likely to build resistance than support for Brussels. Vaclav Klaus, who says he will not approve the treaty's ratification until after the Irish vote, may not be popular with the European Parliament, but he, far more than the EU's official leaders, represents the European people.

Yet Secretary of State Hillary Rodham Clinton wants Congress to ratify the Law of the Sea Treaty, the ultimate in paper guarantees. LOST, which essentially creates a second United Nations, is an artifact of the collectivist New International Economic Order popular in the 1970s, but it is being resold as a guarantor of freedom of the seas.

The convention obviously doesn't do anything to prevent piracy. Moreover, the recent contretemps between the U.S. and Chinese navies demonstrates that LOST's navigational guarantees are no more certain.

The USNS Impeccable, an unarmed spy ship, was operating 75 miles from China's Hainan Island. Chinese vessels harassed the U.S. vessel and ordered it to leave, causing the U.S. Navy to send in a supporting destroyer.

Territorial waters extend just 12 nautical miles, but LOST empowers nations to exercise control over resources in the 200-mile Exclusive Economic Zone. Washington contends that U.S. ships are allowed to conduct activities "in waters beyond the territorial sea of another state without prior notification or consent," according to Defense Department spokesman Stewart Upton. Beijing disagrees.

Washington would seem to have the better argument, though China's contention that peaceful uses of the ocean do not include spying is plausible. Alas, LOST fails to offer the clear, unambiguous protection of navigational freedom as claimed by its proponents.

LOST largely codifies customary international law, which favors free transit. However, the treaty only offers a paper guarantee. Even if LOST recognizes the Impeccable's right to spy, it offers no practical protection of that right.

If China - or Brazil, Malaysia or Pakistan, which also purport to forbid intelligence gathering within their exclusive zones - believes it to be in its interest and ability to prevent foreign passage, it won't spend a lot of time parsing ambiguous LOST provisions before acting. Geopolitical interest and military capability, not juridical technicalities, will triumph.

The problem is likely to grow as Beijing develops a blue-water navy. Last month, Director of National Intelligence Dennis C. Blair told the Senate Armed Services Committee: "In the past several years, they have become more aggressive in asserting claims for the [exclusive zones] which are excessive under almost any international code." Despite China's adherence to LOST.

Although the treaty's navigational benefits are more theoretical than real, LOST has significant downsides. Most important, the so-called Part XI governing seabed mining was amended in 1994, but the result is only less bad.

LOST was crafted to redistribute wealth from First World democracies to Third World autocracies. The International Seabed Authority would regulate private ocean development, mine the seabed itself through an entity called the Enterprise, and pay off favored nations and groups. Those objectives remain unchanged.

Moreover, treaty proponents talk excitedly about new litigation opportunities created by LOST. Professor William C.G. Burns of the Monterey Institute of International Studies wrote that the convention "may prove to be one of the primary battlegrounds for climate change issues in the future." He dismissed the argument that the document does not authorize such litigation: "While very few of the drafters of [the United Nations Convention on the Law of the Sea] may have contemplated that it would one day become a mechanism to confront climate change, it clearly may play this role in the future."

Environmental activists also look forward to using LOST Article 207, which directs countries to "adopt laws and regulations to prevent, reduce and control pollution of the marine environment from land-based sources." Treaty advocates publicly claim the provision is merely hortatory.

Yet the mandate already has sparked litigation between Ireland and Britain. Moreover, Citizens for Global Solutions and the World Wildlife Federation argue that the convention will stop Russia from polluting the Arctic. They have yet to explain how LOST would bind Russia but not America.

No wonder Bernard H. Oxman of the University of Miami warned LOST backers to shut up about their plans. He explained: "Experienced international lawyers know where many of the sensitive nerve endings of governments are. Where possible, they should try to avoid irritating them."

Finally, the United Nations proclaims that LOST is not "a static instrument, but rather a dynamic and evolving body of law that must be vigorously safeguarded and its implementation aggressively advanced." If you like activist judges at the national level, imagine what you will get at the international level.

Before the Senate approves the Law of the Sea Treaty, members should consider the tradeoff they would be making. The convention offers paper benefits but imposes real costs. It's a deal only a pirate could love.

Several serious proposals are being floated in the nation's capital that would penalize Americans for investing in low-tax rather than high-tax jurisdictions. Proponents say the measures are needed to catch tax cheats — but ignore the fact that most of the low-tax jurisdictions such as the Cayman Islands, Switzerland, etc., already have tax information exchange (for cases of probable cause), or tax withholding, agreements with the U.S. and other countries such as the U.K. and France.

Nevertheless, Sens. Carl Levin (D., Mich.), Byron Dorgan (D., N.D.), and Max Baucus (D., Mont.), as well as officials of the Obama Treasury, want to make it more onerous and costly for American companies to do business around the world and for Americans to invest elsewhere. They would even make it more difficult for non-Americans to invest in the U.S.

Mr. Levin's bill is a hodgepodge of tax increases, more regulations and penalties on American taxpayers doing business in targeted low-tax jurisdictions. Mr. Dorgan's bill would prevent certain American companies that operate and are incorporated outside the U.S. from being treated as nondomestic corporations, thus denying them the right of tax deferral until their income is brought back to the U.S. Mr. Baucus, chairman of the Senate Finance Committee, is circulating a draft bill that, among other things, would extend the statute of limitations from three to six years for tax returns reporting international transactions. The Treasury Department is proposing expanded regulations on foreign financial institutions that bring needed investment funds into the U.S.

In addition to charges of tax evasion, some members of Congress — echoing European politicians including France's President Nicolas Sarkozy and British Prime Minister Gordon Brown — have even tried to scapegoat the low-tax jurisdictions as somehow being responsible for the global recession. They are demanding that the G-20 countries come up with action proposals against them at their meeting next month.

This is nonsense. The so-called tax havens are for the most part no more than way-stations to temporarily collect savings from around the world until they are invested in productive projects, such as building a new shopping center or semi-conductor plant in the U.S. This enables a better allocation of world capital, leading to higher, not lower, global growth rates.

Indeed, to the extent tax competition between jurisdictions holds down the increase in the growth of governments, citizens of all countries experience more job opportunities and higher standards of living. And to the extent that businesses and individuals are discouraged by taxes or regulations from investing outside their own jurisdictions, they may simply choose to work and save less, period.

Those who demand increased taxes on global capital often rail against financial privacy and bank secrecy — forgetting they are necessary for civil society. It is true that not all people are saintly. But it is also true that not all governments are free from tyranny and corruption, and not all people are fully protected against criminal elements, even within their own governments. Without some jurisdictions in the world enforcing reasonable rights of financial privacy, those living in un-free and corrupt jurisdictions would have no place to protect their financial assets from kidnappers, extortionists, blackmailers and assorted government and nongovernment thugs.

It is a fool's errand to pass ever more laws against things that are already illegal, or to pass laws against people trying to protect themselves from rapacious and corrupt governments. Despite the hundreds of local, state and federal laws against financial fraud, and financial regulatory authorities like the SEC, Bernie Madoff was able to conduct the biggest ever Ponzi scheme for decades.

The chief tax writer in Congress, House Ways and Means Committee Chairman Charles Rangel, Treasury Secretary Timothy Geithner, and former Senate Majority Leader Tom Daschle apparently did not report all of their foreign-source income. Their actions tell us that either the tax law is too complex, or they thought the tax burden was excessive. Would their behavior and that of millions of others improve by making the tax law more complex and punitive?

U.S. companies are being forced to move elsewhere to remain internationally competitive because we have one of the world's highest corporate tax rates. And many economists, including Nobel Laureate Robert Lucas, have argued that the single best thing we can do to improve economic performance and job creation is to eliminate multiple taxes on capital gains, interest and dividends. Income is already taxed once, before it is invested, whether here or abroad; taxing it a second time as a capital gain only discourages investment and growth.

In fact, the U.S. does not tax most of the dividend, interest and capital gains' earnings of foreign investors in the U.S. — which means, ironically, that the U.S. is the world's largest "tax haven" for non-U.S. citizens, and that we benefit from hundreds of billions of dollars of needed capital invested here. If the U.S. did not treat foreign investors better than its own citizens (who are double-taxed on most capital income), most of the "tax avoidance" problems critics complain about would disappear.

The proposals by Messrs. Dorgan, Levin, Baucus and the Treasury will almost certainly have the unintended consequences of driving more U.S. businesses elsewhere, discouraging foreign investment in the U.S., and actually encouraging more U.S. investors to move their funds (either legally or illegally) not only out of the country, but to places in Asia or the Mideast that tend to be less cooperative with U.S. tax authorities than are the European and British low-tax jurisdictions.

The correct policy for the United States to follow is to reduce its corporate tax rate to make it internationally competitive, and to move toward a tax system that does not punish savings and productive investment so severely. We know from the experiences of many countries that reducing tax rates and simplifying the tax code improve both tax compliance and economic growth. Tax protectionism should be rejected because it is at least as destructive to economic growth and job creation as are tariffs on goods and services.

Even the most interesting-sounding cases—such as the "fleeting obscenity" case, Federal Communications Commission v. Fox Television Stations, which one could be excused for thinking has something to do with the First Amendment—somehow come down to technical questions of administrative law.

One seemingly "boring" case, however, involving anti-dumping regulations of all things, is the opposite: What on the surface is a dry parsing of statutory definitions in the end implicates not just larger issues of international trade but also antitrust law, energy policy, national security, and the government's role in ordinary commercial activity.

On Tuesday, Nov. 4, while most of the country understandably had its attention elsewhere, the Court heard argument in United States v. Eurodif. The case is an appeal from a ruling of the U.S. Court of Appeals for the Federal Circuit holding that contracts with foreign companies to enrich uranium are outside the scope of U.S. anti-dumping law (and their corresponding tariffs) because they're "service" as opposed to "sales" contracts.

The decision reversed the Commerce Department's determination to the contrary and prompted a petition for certiorari from United States Enrichment Corp., a government spinoff that dominates the domestic enrichment market and would be hurt by competition from abroad. Although the U.S. solicitor general also requested cert (in which circumstance review is not uncommon), Eurodif is the first time the Court has accepted an international trade case in six years (and only the eighth time in the last two decades).

Why, then, is this case of such importance that it warrants the Court's intervention? Not to put too fine a point on it, but in these uncertain times, Eurodif stands at the crossroads of our political debates over how to grow the economy while doing right by workers. If foreign service contracts are all of a sudden subject to regulatory premiums, not only will international trade be hit, but all companies that have lowered costs by outsourcing parts of their operations will face legal uncertainty—and consumers will pay higher prices.

Goods And Services?

"Dumping" is similar to the antitrust concept of "predatory pricing," whereby a company allegedly sells goods at less than their "fair value" to drive its competition out of the market and then obtain monopoly profits. (Both dumping and predatory pricing claims are controversial as a matter of economic theory, but that's a different article.) In the context of international trade, an exporter of goods who prices them at less than this so-called fair value "dumps" those goods on the importing country.

Under the U.S. anti-dumping law, 19 U.S.C. §1673, the Commerce Depart­ment may impose duties on "foreign merchandise [that] is being, or is likely to be, sold in the United States at less than its fair value" when such "dumping" causes or threatens to cause material injury to a domestic industry. In 2001, Commerce determined that low-enriched uranium (LEU, a critical component for nuclear power) from France was thus being dumped and imposed a duty on LEU imports.

The controversy is that American utility companies—the respondents in the case, along with the French enrichers—acquire most of their LEU not by buying it abroad, but by "separative work unit" orders. In these transactions, a utility delivers to the enricher a quantity of unenriched uranium (known as a "feed," which it has acquired elsewhere) and then pays for the conversion of feed into LEU. So what they effectively purchased from France here is enrichment services, not goods in the sense of "foreign merchandise"—or so the respondents successfully argued to the Federal Circuit.

A Dangerous Position

Numerous economic studies have shown that anti-dumping law is facially contrary to free trade. It protects domestic special interests from the rigors of global competition and results in higher prices for U.S. businesses and consumers.

In this case, any duties added to LEU would drive up the cost of one of the more reliable sources of energy—just as the nation wants more noncarbon-based energy for financial, environmental, and even geo-strategic reasons. The ultimate result of these duties may be to harm all U.S. citizens—individuals who face their own hardships in this economic downturn and shouldn't be forced to subsidize USEC through higher utility bills.

USEC argues that the Commerce Department should be allowed to impose anti-dumping duties on service transactions when those transactions result in the importation of a tangible product—even though they do not involve the sale of that product at less than fair value. The government adds that the purpose of anti-dumping law is to protect U.S. industries and their workers from "unfair" competition, even if a sale of goods hasn't occurred.

These attempts to extend anti-dumping law to service transactions have four principal dangers:

• Judicially amending the law. A ruling in the government's favor subjects imports of services that result in tangible products to duties when the applicable statute unambiguously declines to cover services. A new Congress with a new president may choose to change the law, of course, and it might do so in response to this case, but that's a policy decision that shouldn't be imposed on the nation by the courts.



• Retaliation. The government arbitrarily hurts our trading partners, who could in turn burden the export of U.S. services—a large and growing part of the economy.



• Unpredictability. The government position creates uncertainty about which transaction Commerce considers when it determines whether dumping has occurred—the service order or the subsequent sale of merchandise. The government could then pick and choose among transactions on which to base complaints, perhaps focusing on outsourcing to India or China, as a way to maximize receipts from duties.
  
  If importers do not know whether Commerce will look at the service transaction or the downstream sale, they cannot know which price to set to avoid dumping tariffs. U.S. companies that produce goods through foreign contracts would suddenly be more vulnerable to dumping claims based on the price negotiated for the manufacturing alone.



• Maintaining a monopoly at consumers' expense. Commerce is acting to protect a government monopoly to the detriment of the free market system and more open trade. Ever since USEC was privatized in 1998, it has been trying to use dumping laws to exclude European companies (including filing this case in 2000). Both the nuclear enrichment industry and the overall economy would be better served by open competition than by a monopolist's attempts to insulate itself from more efficient providers.

Hurting Consumers

Contrary to the claims of some protectionists, anti-dumping law does not bolster America's national security. Instead it increases procurement costs, diverting funds from other worthwhile programs and stifling innovation among domestic companies. Although the United States may have a security interest in maintaining domestic enrichment capability, any subsidies that USEC requires should come from the normal appropriation process and not through a hidden tax on all foreign LEU.

For that matter, it is unclear why such enrichment needs to be done by a government monopoly rather than by regulated private energy companies akin to defense contractors.

The government and USEC lob final volleys to the effect that without a decision in their favor, Russia—not a party to these proceedings, but home to enrichers that will be affected by this case—would ramp up LEU production, crowding out U.S. investment in enrichment capabilities (while keeping its stocks of weapons-grade uranium instead of converting them to nonmilitary uses). But it is Congress' job to rewrite statutes that might be harmful to national security, not the courts'—and here, the president already has statutory authority to regulate, for security reasons, the trade of any property in which a foreign country has an interest.

Fundamentally, we should not enforce laws that impose higher prices on American consumers. Nor should we take steps that undermine the competitiveness of American companies doing business abroad. But that is exactly what the government is doing when it demands that special duties be placed on imports that supposedly are priced "too low."

The Court seemed of two (or nine) minds during oral argument, but if it finds in the end that uranium enrichment is subject to tariff, the entire range of foreign service contracts will be exposed to anti-dumping abuse. Such a decision could raise costs throughout global supply chains, as the Obama Commerce Department uses anti-dumping laws to punish outsourcers.

That would be an unfortunate result. Eurodif may not have received much attention on Election Day, but given the threat to U.S. business and all our interest in promoting commerce during difficult economic times, it is one of the term's most important cases. Those who want true competition and benefits to consumers should hope that the government loses and, accordingly, that freer trade wins.

Story No. 1: "A new commission appointed by Norway will investigate ways of putting a stop to the huge flows of money into tax havens. Tax evasion and corruption are believed to cost poor countries at least $50 billion a year (according to an estimate by Oxfam International). The commission, launched last week, includes Eva Joly, a special adviser on corruption for the Norwegian development agency Norad. Among the areas that have been labeled as tax havens are Andorra, Monaco, Gibraltar, Jersey, the Cayman Islands, Luxembourg, the Netherlands, as well as some parts of the financial system in London." (June 30, 2008)

Story No. 2: "A new commission created by several small low-income non-oil producing nations was established to seek ways of forcing oil rich nations to share their oil revenue with poor nations. The large increase in oil prices has caused particular hardship on the people in those countries without any oil resources of their own. Jean Louis Bona of Haiti, the temporary chairperson of the commission, said, 'subsurface oil and minerals are a heritage of all mankind, and should not be exploited by a few countries at the expense of the many.' " (July 7, 2008)

Story No. 3: "Senators declare war on offshore havens. Congressional scrutiny of the offshore vehicles used by companies, investment funds and wealthy individuals is increasing. A study by a separate Senate panel last week calculated that offshore abuses cost the U.S. government $100 billion a year in lost tax revenue. 'We're going to find a way to make a huge dent in this problem,' said Sen. Max Baucus, Montana Democrat and chairman of the Senate Finance Committee." (July 25, 2008).

If you are having trouble figuring out the real stories from the fictional one it is because you understand the tendency of politicians to blame things they have caused on others. (News items Nos.1 and 3 are real, and No. 2 is not.)

Norway, which now has the highest, or closest to the highest, per capita income on the planet due to its immense oil reserves and relatively small population, has decided to beat up on a number of poorer countries that do not have the luck to sit on a vast pool of oil. Smaller-resourced, poor countries need to find goods and services they can provide to the rest of world so their citizens can also prosper.

If a county does not have oil and mineral wealth, vast agricultural lands, and the population to create major manufacturing industries, what is it to do? The answer is, usually services. Creating a tourist industry can help, but there are limits to how wealthy a country can become on tourism alone. Many countries have dealt with this problem by developing financial services' industries.

When it comes to financial services, people often think of small island jurisdictions, such as Jersey, Bermuda, and Cayman, but the financial services' business is of great economic importance to Switzerland, Ireland, the City of London, and Wall Street in New York.

The Norwegians have been particularly hypocritical. Despite their enormous wealth, they still maintain very high tax rates that discourage productive activity within the country and encourage citizens and companies to move funds to lower-tax jurisdictions. And even the Norwegian government-controlled massive pension fund, the recipient of much of the oil revenue, has been investing in companies registered in tax havens.

The Norwegian socialists put themselves on a slippery slope when they argue for investing only in high-tax countries. Poor countries never get rich when they have high taxes. The rich, high-tax countries became rich before they had high taxes. Will the Norwegians agree to share their oil wealth with low-tax countries if these countries agree to increase their taxes?

When members of Congress advocate foolish trade and financial restrictions and regulations (like the Sarbanes-Oxley Bill, which has driven much of the IPO (initial public offering) market to London), they discourage foreign companies and individuals from investing in the United States, which causes the dollar to fall and fewer jobs to be created.

Most so-called tax havens are actually huge global money funnels into the United States. Were the havens to be shut down, capital investment would become more expensive in the United States, and less investment means fewer U.S. jobs.

The problem is that many politicians do not understand (or perhaps do not wish to) how their previous actions caused many of the current problems and how their proposed "solutions" will make things worse. One simple example: The United States has the highest corporate income tax rate in the world (about 40 percent). Thus, other things being equal, if you were to start a business with customers in many countries, would you choose to incorporate in the U.S. or elsewhere? (Note: the average corporate tax rate of the EU countries is now less than 25 percent, and some countries have their corporate tax rate as low as 10 percent.)

It is worth noting that many of the same senators and representatives who created the Fannie Mae and Freddie Mac mess by ignoring basic economic principles are at it again. Hint: If your competitor has lower prices (i.e., other countries with lower tax rates), the solution is lowering your prices (i.e., lowering your country's tax rates) rather than hypocritically criticizing your investors for seeking better returns elsewhere.

To his credit, John McCain has at least partially recognized the real problem and has proposed lowering the corporate tax rate to 25 percent instead of proposing measures that will only make the problem worse.

Administrations and congressional majorities from both political parties have been supportive of trade liberalization for several decades. But that is no longer the case. Recently introducing the Trade Enforcement Act of 2008, House Ways and Means Committee Chairman Charles Rangel and Trade Subcommittee Chairman Sander Levin wrote: "America's trading partners are running roughshod over our trade agreements [and] the Bush Administration has failed to insist that our trading partners abide by the same rules we do." Last month, Levin attributed the large trade deficit to the "Bush Administration's hands-off approach to trade enforcement," and decried its adverse effects on economic growth and job creation.

That is an alarmingly uninformed view to be held by the trade-subcommittee chairman, who really should know that the trade balance has virtually nothing to do with trade policy and everything to do with fiscal policy, monetary policy, and disparate patterns of savings and consumption around the world. Besides, as the trade deficit ballooned during the past quarter century, the U.S. economy grew by an average of 3.2 percent and added an average of 1.8 million net new jobs every year.

Rep. Levin's statement is consistent with the congressional leadership's carefully cultivated message that trade has fallen out of favor among Americans because the Bush administration has failed to enforce existing agreements. The House enforcement bill joins a similar Senate version, introduced late last year by Senate Finance Committee Chairman Max Baucus.

Among other things, the enforcement bills require the U.S. Trade Representative to appoint a Chief Enforcement Officer who will identify, investigate, and prosecute cases of incompliance by our trade partners. The legislation undercuts the president's discretion to block the imposition of trade barriers in so-called China Safeguard cases. The bills ease the evidentiary requirements for imposing antidumping duties against imports, and the Senate version calls for creation of a panel of judges to review adverse WTO dispute settlement decisions and advise Congress as to whether the United States should comply.

Note the irony in that last provision. The bill would force our trade partners to toe the line with respect to every legal provision in every trade agreement, yet it blithely gives Congress carte blanche to regard U.S. commitments as optional.

Some of the enforcement provisions make for bad policy and most are simply unnecessary. But the biggest concern is that the legislation confers priority status on enforcement, thereby reinforcing misconceptions about our trade partners and trade in general. This strategy is a sinister political play that serves a narrow set of interests at potentially heavy costs to the broader economy.

About 95 percent of the world's consumers live outside of the United States. U.S. manufacturers have been availing themselves of those large and growing markets, achieving record exports and buffering their bottom lines from the effects of a slowing domestic economy. But Congress's enforcement fetish ignores this trend and, indeed, threatens it.

Rules are an important part of the trading system, but enforcement requires lots of discretion because violations are often inadvertent or inconsequential. Only a tiny fraction of trade violates the rules, and the cost of responding to breaches often exceeds any benefits.

Reps. Rangel and Levin are right that Americans need to regain faith in the trading system. The polls speak of a growing antipathy toward trade. But Americans have soured on trade because they are routinely barraged with exaggerations about the costs.

The media's motive in scaring its customers is that fear sells advertising. In Congress, blaming foreigners for problems real and imagined provides the basis for press releases, photo opportunities and strident calls for action. And the fact that the most unpopular president in modern history is associated with trade liberalization makes it good politics to bash the policy.

But the rationale for such opposition is untruthful. The congressional leadership has perpetuated this enforcement myth to legitimize the protectionist agenda of some of its biggest benefactors. Selling that myth has undermined Americans' support for trade.

Most people, quite properly so, would argue the Mississippi sheriff has no business arresting people for a legal act committed in New York, even though it would have been illegal if committed in Mississippi.

Unfortunately, some prosecutors in the U.S. federal government are now acting like the rogue Mississippi sheriff described above when it comes to gambling, securities and tax laws in foreign countries.

Each country has the right to make its own laws which cover its own territory, but it does not have the right, absent a specific treaty or agreement, to enforce its laws on legal acts committed elsewhere. The United States has rankled other governments and has been accused of violating human rights by using agreements to share information on terrorism to prosecute individuals for other crimes that are not necessarily crimes outside the United States.

The United States has many tax treaties and legal assistance agreements (MLATs) that specify what information may be shared between countries, for what purposes, and under what conditions. However, now the United States is accused of greatly overstepping the bounds. Much of the current row stems from the alleged misuse of passenger manifest lists the U.S. demands from airlines flying into the United States.

Examples of overreach are plentiful. Internet gambling is legal in the United Kingdom, but that did not stop U.S. government officials from detaining U.K. gambling company executives who were just visiting - not doing business in - the United States. These executives had been engaged in legal activities in their own country. If some in the United States have decided to play on the London Internet, rather in U.S. casinos, that is an issue for U.S. authorities and their own residents, and should not involve London-based companies that were not specifically targeting the U.S. market.

UBS, a global bank, has recently warned its private bankers not to travel to the United States, because a Swiss private banker for UBS was detained by U.S. authorities as part of a broad tax evasion probe. Switzerland and other countries have different tax laws than the United States and different criteria as to what constitutes a tax felony.

The U.S. has no business going after bankers in Switzerland who have not committed felonies in the U.S. The legality of their actions in Switzerland is up to Swiss authorities to decide. The extent to which U.S. citizens or residents are engaged in illegal tax evasion is an issue between them and the U.S. government. The U.S. Justice Department is now also trying to force UBS to reveal the names of 20,000 of its clients, which could put UBS in violation of Swiss bank secrecy laws.

There are many good reasons for Switzerland and other jurisdictions to have bank secrecy laws. The Swiss originally passed them to protect German Jews and other anti-Nazi Germans from inquiries made by the Gestapo. Over the years, many who live under repressive regimes have been able to protect themselves and their property only because there were places outside their own countries with bank secrecy.

Swiss bank secrecy is not absolute, and the Swiss authorities do make the information known if there is probable cause to believe a specific mutually agreed crime has occurred and the proper legal procedures followed.

If the United States continues to unreasonably pressure the Swiss and other banks located in reasonably cooperative jurisdictions, many account holders will merely move their accounts to less cooperative jurisdictions, which will only benefit the terrorists and real criminals.

U.S. banks and U.S. government authorities normally do not engage in blanket financial information sharing with foreign governments - despite the demands of the French and some others. Most foreigners are not subject to U.S. withholding or taxes on their portfolio interest, dividends and capital gains earned in the United States - nor should they be, because to do so would drive needed foreign capital out of the United States.

Blanket financial information sharing among governments is subject to enormous abuse. As is well known, even the most competent governments frequently lose, or have stolen from them, confidential data, which is misused by thugs within governments and criminal groups in general.

The U.S. government is certainly not on the moral high ground on taxes, as long as it continues to tax gains only due to inflation (caused by the government) and not on real income; tax people on their global rather than U.S. income; tax those who live outside the country on non-U.S. income; and demand compliance with a tax code so long, complex, and contradictory no one can understand it or even be sure he or she is in compliance with it.

The United States needs the cooperation of the United Kingdom, Switzerland, and most other governments in the war on terrorism, but if it uses sensitive information it obtains to prosecute other crimes, particularly those where there is not dual-criminality, it may destroy the necessary cooperative relationships. This destructive overreaching puts everyone at greater risk.

In broad terms, trade facilitation includes reforms aimed at improving the chain of administrative and physical procedures involved in the transport of goods and services across international borders. Countries with inadequate trade infrastructure, burdensome administrative processes, or limited competition in trade logistics services are less capable of benefiting from the opportunities of expanding global trade. Companies interested in investing, buying, or selling in local markets are less likely to bother if there are too many frictions related to document processing or cargo inspection at customs, antiquated port facilities, logistics bottlenecks, or limited reliability of freight or trade-financing services.

According to recent studies from the World Bank and other international economic institutions, trade facilitation reforms could do more to increase global trade flows than further reductions in tariff rates. For many developing countries-particularly those that receive preferential tariff treatment from rich countries-reducing transportation and logistics-related costs through trade facilitation reforms would be much more beneficial than further tariff cuts.

But trade facilitation does not only offer promise to developing countries. All countries can benefit by removing sources of friction in their supply chains. The post-9/11 focus on minimizing the risk of terrorists exploiting porous international supply chains to sneak weapons of mass destruction into U.S. cities-obviously a vital objective -could hamper the capacity of Americanbased companies to attract investment and compete for markets. Likewise, U.S. prohibitions against foreign competition in transportation services and the political antipathy toward foreign investment in U.S. port operations raise the costs of doing business and increase the scope for trade facilitation in the United States.

The conflict between Germany and Liechtenstein also has triggered a broader debate about tax competition and the role of so-called tax havens. The Paris-based Organization for Economic Cooperation and Development is trying to use the imbroglio to resuscitate its initiative against tax competition. Willem Buiter, a professor at the London School of Economics, is using the issue to push an even more radical agenda: the forcible annexation -- by nations like Austria and France, under some unknown authority -- of jurisdictions such as Liechtenstein, Andorra and Monaco.

At best, these crusades against tax havens are misguided. At worst, they are an effort to create a tax cartel for the benefit of high-tax nations. This OPEC for politicians would mean higher tax rates for everyone and bigger government.

Wealthy tax evaders may not be sympathetic figures, especially to those of us who meekly comply with the law. But low-tax jurisdictions serve a valuable role in the world economy. Simply stated, they keep other governments honest. Globalization makes it easier for labor and capital to cross national borders, forcing governments to improve tax policy to keep the geese with the golden eggs from flying away.

Tax competition first became a big issue following the Thatcher and Reagan tax cuts in the 1980s. Responding to the increased attractiveness of the U.K. and U.S. economies, every single industrialized nation has been forced to lower personal tax rates in an effort to stay competitive. The average top tax rate in the developed world has dropped from more than 67% in 1980 to barely 40% today.

The same thing is happening to corporate tax rates. Back in 1980, corporate tax rates averaged nearly 50%. Today, led by Ireland's 12.5% corporate tax, the average corporate rate in the industrialized world is less than 27%. As the World Bank explained in its recent "Paying Taxes" report, these lower rates create incentives for more investment, which leads to faster growth, more jobs, higher incomes and what Berlin seems to be most concerned about: better compliance.

Perhaps most amazing, there is now a flat-tax revolution sweeping the globe. In 1980, there were just three flat-tax jurisdictions. Today, prompted by Estonia's 1994 reform, there are 25 governments with simple and fair flat-tax regimes.

All of these reforms have yielded big benefits -- particularly for the nations that have been the most aggressive tax cutters, notably Ireland, Estonia and Slovakia.

But tax rates are just part of the equation. In an ideal tax system, income also should be taxed just one time. This means no death tax, no wealth tax and no double taxation of interest, dividends or capital gains. Politicians often are tempted to impose extra layers of tax on saving and investment, both because they think such policies will give them more money to spend and because voters sometimes are sympathetic to class-warfare campaigns to "tax the rich." Yet the academic literature increasingly shows that excess taxation of capital income causes significant economic damage, largely because people have less incentive to set aside some of today's income to finance tomorrow's growth. High tax rates on saving and investment also cause inefficient tax-avoidance behavior.

Tax havens are particularly helpful since they encourage governments to reduce tax biases against saving and investment. From Sweden to Spain, politicians in Europe have been lowering tax rates on capital income. Death taxes have been killed. Wealth taxes have been abolished. And many nations have adopted lower tax rates for capital income.

Governments are improving their tax systems because they know that punitive tax burdens cause capital flight. In other words, they have finally realized that it is better to have modest tax rates and collect more tax revenue than it is to have confiscatory tax rates and collect less revenue.

But more important, the changes caused by tax competition and tax havens are good for ordinary people. The global economy today is much stronger than it was in the 1970s, in part because tax laws are much less hostile to work, saving and investment. This mean more jobs, higher income and greater prosperity. As Richard Teather of Bournemouth University noted, in a 2005 book published by London's Institute for Economic Affairs, "tax havens benefit us all, whether or not we personally invest through them."

Liechtenstein has a tax code that rewards productive behavior, and it is now the world's third-richest jurisdiction according to the World Bank. German tax laws, by contrast, are rated among the world's worst by the World Economic Forum's Global Competitiveness Report. Liechtenstein has privacy laws that respect individual rights, but which also have received a green light from the Financial Action Task Force and the U.S. Internal Revenue Service for being tough on dirty money. Perhaps most interesting, Liechtenstein scores highly on the World Bank's six governance indicators, beating out nations such as -- you guessed it -- Germany.

None of this should be surprising. Researchers have found that tax havens consistently rank as the best governed, most stable, fastest growing and most prosperous places in the world. Promoting better policy in other nations, though, may be their most important role. If Liechtenstein is forced to act as a deputy tax collector for other nations, the world's taxpayers will be the biggest losers.

If you doubt the vigor with which this debate is being waged, just type in "security contractors" to a law journal database and prepare for the deluge.

There appears to be little consensus on the issue. That is not surprising.

Given that it has taken centuries to get some sort of grudging acceptance of globally recognized rules — i.e. the Geneva Conventions and international humanitarian law — for the conduct of regular military forces (who, as I noted in my first column, have committed far worse atrocities than most non-state actors can ever dream of) it is naive to think that the cumbersome processes of international law could come up with some sort of accepted rules for the conduct of modern private military and security contractors, when the industry itself is only a few decades old.

Most existing international law relevant to the subject was developed with old style mercenaries in mind. Contemporary private military and security firms assert, and rightfully so, that what they do is not at all the same, and it is wrong to label them mercenaries.

Bear in mind that in the past contractors working for the U.S.-led Coalition Provisional Authority operated under three levels of legal authority: 1) the international order of the laws and usages of war and resolutions of the U.N. Security Council; 2) U.S. law; and 3) Iraqi law as amended by orders of the CPA.

Of course, now that sovereignty, at least in the de jure sense, has been handed back to Iraq, contractors must in theory comply with any new laws and regulations promulgated by the Iraqi authorities.

On the other hand, many contractors simply don't trust the Iraqi government, fearing that important institutions, such as the Ministry of Interior, which licenses foreign military contractors, are either corrupt or infiltrated by insurgents.

If international rules are not likely in the near future that leaves national legislation, especially in the countries that hire military contractors.

Recognizing that need, lots of academics and legislators in recent years have proposed various registration and licensing schemes. For example, in 2002 the British government published a so-called green paper on private military companies outlining six regulatory options.

Countries like the United States and Great Britain have more leverage than commonly believed, if only they would muster the will to use it. Since most of the truly profitable contracts are issued by Western governments, any firm that wants them should be persuadable to meet certain standards.

And the contracts that such governments issue are usually written to comply with laws that are far more stringent in terms of use of force and respect for human rights than those issued by companies or governments in developing nations. Security contractors could be significantly influenced and driven by their clients.

Still, there is a problem. In a globalized world, if a military or security contractor finds the cost of doing business in one country too high, it can simply move and reincorporate in a friendlier country quicker than you can say "Delaware-registered limited liability company."

But until international law develops new terms and legal mechanisms to address the private military and security industry, existing national legal frameworks are all that we have.

So I'd like to suggest a few largely overlooked and eminently practicable opportunities for progress.

• Extension of the International Court of Justice to Private Military Contractors' activities. Academics like Peter Singer have recommended the extension of the jurisdiction of the International Court of Justice to PMC activities with clear contract provisos that PMC personnel are subject to the legal authority of international tribunals. This idea has merit, and diplomatic negotiations to accomplish this could be instituted immediately by the United States and Britain, currently the world's two largest providers of PMCs. It might be negotiated in a matter of years. After all, the movement to ban anti-personnel landmines brought about a treaty in just 10 years.
• Negotiation of a new Convention on the Use of Armed Non-Military Contractors by an Occupying Force. Such a convention could be negotiated with the aim of closing some of the existing loopholes in international law.
• Harmonization of national laws to create common standards and to help the development of an eventual universal approach. The different national laws for PMC regulation could be harmonized to create a common standard in order to help set the basis for an eventual international approach. EU and U.S. cooperation or discussion to this end might be a useful starting place or the harmonization process could begin among NATO member states.

In the age of globalization, the relatively small staffs and budgets of the Consumer Product Safety Commission and the Food and Drug Administration make it impossible to inspect all but a small percentage of imports as well as domestic products.

Congress hopes to remedy this condition by enacting legislation such as the Consumer Product Safety Modernization Act of 2007, which would increase funding for the CPSC, ban products with even small traces of lead and require third-party testing and certification for selected children's products. Other proposed legislation would impose user fees on imported food to fund inspections and would require U.S. manufacturers to obtain a "recall responsibility certificate" to ensure they have the means to cover the costs of recalls.

The danger is thinking that such legislation can bring about a perfectly safe environment or that it can substitute for a self-regulating market, in which firms that violate consumers' confidence go bankrupt. If the government had perfect information, it could improve upon the market, but that is not the case.

The role of government is to safeguard private property rights and, thus, to protect people against fraud and violence. But an overzealous government that tries to keep all bad products off the market is likely to err by keeping too many good products off the market. It is increasingly costly for government to monitor every product. The only viable alternative is to allow private agencies to supplement government regulation to ensure the optimal amount of safety - that is, the amount that is worth what it costs.

Former FDA deputy commissioner Scott Gottlieb noted that "the FDA cannot be everywhere, every time a risk arises, especially as the supply chain for both food and drug products continues to grow more diverse and more global. Ultimately, (the) FDA needs to enable companies to be inspected by reputable private third parties that are certified by the agency."

The execution of Zheng Xiaoyu, former head of the Chinese State Food and Drug Administration, for taking bribes while approving deadly drugs and lead-tainted toys is a stark reminder that government oversight does not guarantee product safety. Even an advanced economy like the United States can fail to prevent hazardous products from entering the market.

Neither the government nor the market will lead to perfectly safe toys, pet food, toothpaste, seafood or drugs. Achieving 100% safety - zero risk - is not an option, and utopian solutions to socioeconomic problems have always proved to be disastrous.

The danger is that new legislation could be a veil for protectionism, as special interests try to gain advantage in the domestic market by restricting imports and also by handicapping smaller domestic firms by increasing their regulatory costs.

U.S. Ambassador Alan Homer, special envoy for China and the Strategic Economic Dialogue, said earlier this year that "safety requires continuous improvement, but it's important that any government policies in this area . . . not be protectionist."

In the U.S., Europe and other market economies, brand names are valuable and companies invest to ensure their long-run reputations. The culture of entrepreneurship, a transparent rule of law and competition help guarantee that innovation and product safety go hand in hand.

In China, the absence of a genuine rule of law and widespread private property rights means there is less concern with consumer welfare than there would be in a full-fledged market economy. Executing one public official or even several will not get to the core of the problem - namely, the need for fundamental institutional change that protects both personal and economic freedom.

Congress, meanwhile, should not forget the virtues of the free market and that, in the pursuit of safety as in all things, "the best is the enemy of the good."

The Committee report

The first report of the blue ribbon Committee on Capital Markets Regulation, issued on 30 November 2006, documented several types of evidence that the competitiveness of US capital markets appears to be eroding and made 32 recommendations to enhance that competitiveness. This committee of private experts is headed by Hal Scott, a professor at the Harvard Law School; Glenn Hubbard, the dean of the graduate business school at Columbia University; and John Thornton, the chairman of the Brookings Institution. Over the next two years, the Committee also expects to issue reports on the competitiveness of mutual funds and derivative markets. The major findings of this first report are the following:

• In 2000, 50 percent of the value of world-wide initial public offerings was raised in the US, falling to five percent in 2005.
• The US share of total equity capital raised in the world's top 10 markets was 41 percent in 1995, falling to about 28 percent in 2006.
• The listing premiums on US stock exchanges have declined substantially.
• Private equity firms, almost non-existent in 1980, sponsored more than $200 billion of capital commitments in 2005.
• Since 2003, private equity fundraising in the US has exceeded net flows into mutual funds, and going private transactions have accounted for more than a quarter of publicly announced takeovers.

Some of the decline in the US share of world equity markets is probably due to the increased efficiency of major foreign markets. The dramatic increase in the use of private US markets, however, is important evidence that regulation and litigation are contributing to the flight of many companies from the public markets.

Policy recommendations

Although the findings of this report are quite dramatic, the Committee's recommendations are surprisingly tepid. The Committee proposed several increases in shareholder rights based on little more than a wistful hope that this would reduce litigation. The financial regulatory organisations are encouraged "to move to a more riskbased regulatory process, emphasising the costs and benefits of new rules" and to periodically test existing rules by the same standard. And, of course, "There should be more effective communication and cooperation among federal regulators." The most substantive proposals would limit the authority of the federal enforcement authorities and the liability of outside board members and the audit firms. The report concludes that only "If the SEC finds that, even after the general reforms outlined above are implemented, the revised Section 404 is still too burdensome for small companies, it should recommend that Congress exempt small firms from auditor attestation." The report offers surprisingly little analysis and evidence that their recommendations would enhance the competitiveness of US capital markets, and it makes no proposals to change the major federal regulatory laws.

The Schumer-Bloomberg Report

A second report, issued on 22 January 2007, "warned that New York financial markets, stifled by stringent regulations and high litigation risks, are in danger of losing businesses and high-skilled workers to overseas competitors," estimating that US financial service revenues would fall between $15 billion and $30 billion a year without a major change in the public policies affecting US capital markets. This report was commissioned by US Senator Charles Schumer and New York City Mayor Michael Bloomberg, prepared by McKinsey and Company, and informed by interviews with more than 50 financial service specialists. Somewhat of a surprise, this report was endorsed at its release by Eliot Spitzer, the newly elected governor of New York, who was critical of the prior report by the Committee on Capital Markets Regulation. The Schumer-Bloomberg report recognised "that while many of the causes (of the erosion of the competitiveness of US capital markets) are due to improved markets abroad and sophisticated technology that has virtually eliminated barriers to the flow of capital, a significant number of the causes … are selfimposed," focusing on the effects of stringent US regulations, higher litigation risk, and restrictive immigration policy.

Policy recommendations

To my surprise, the Schumer-Bloomberg report recommends a substantially different set of policy changes than does the prior report by the Committee. The major policy recommendations that are quite different include the following:

• Implement securities litigation reform with particular shortterm emphasis on leveraging the SEC's existing authority.
• Ease immigration restrictions facing skilled non - US professional workers.
• Protect US competitiveness in implementing the Basle II Capital Accord.
• Modernise financial services charters and holding company structures.

Potential Congressional action

The fact that two reports that addressed much the same issue led to such different policy recommendations will make it more difficult for Congress to resolve what to do about this problem of increasing concern. Nevertheless, both Barney Frank and Christopher Dodd, the new chairmen, respectively, of the House and Senate banking committees, are expected to hold hearings on the issues raised and the policy recommendations by these two reports. And the SEC has already made some minor changes to the implementation of Section 404 of the Sarbanes-Oxley Act to respond to these concerns. The new Democratic Congress seems willing to address these issues primarily because of the substantive findings of these two reports, the bipartisan endorsement of these reports, and the concentration of the financial industry in the northeastern states that are now represented primarily by Democrats.

Major remaining problems

My primary disappointment with both reports is that they do not address the major conditions that limit the rate of return on US equity markets.

• Very few corporate boards now include a member with sufficient voting shares to be a credible threat to the incumbent management. The origin of this problem is the federal Williams Act of 1968, which substantially increased the cost of successful tender offers and completely eliminated the potential for surprise. Over the next several decades, corporations chartered in almost every state were authorised to implement one or more takeover defenses, and most did so. An important 2003 study by Paul Gompers and colleagues, however, found that the rate of return on the equity of individual corporations has been a strong negative function of the number of takeover defenses in that firm. This issue has not been subject to a public discussion and nothing has been done to correct this problem.
• The Sarbanes-Oxley Act substantially increased the role of the independent auditing firms and created an expensive and arguably unconstitutional board to regulate these firms. This Act, however did not correct the major potential conflict of interest between corporations and their independent auditors, in that the audit firms are still paid by the corporations that they audit.
• The primary public rationale for the Sarbanes-Oxley Act was to restore investor confidence by improving the quality of reported earnings, and the Committee report asserted that this has been the effect. The best test of this effect is whether investors are now willing to pay a higher price for a stock per dollar of reported earnings. The price-earnings ratio on the S&P 500-stock index, however, has declined continuously since the Sarbanes-Oxley Act was being drafted in the spring of 2002. Five years later, there is still no objective evidence that this Act has restored investor confidence in the equity values of the stocks listed on US exchanges and thereby subject to the regulations required by the Act.
• The largest long-term cost of the Sarbanes-Oxley Act, however, may be more risk-averse behavior by corporate managers and board members. Most CEOs, for example, are not accountants, and the requirement that they personally attest to the accuracy of the audits at the risk of a jail sentence is likely to divert the CEOs from more productive activities and lead to more riskaverse decisions. Individual shareholders can reduce the risk of their portfolio more efficiently by investing in a broad-based mutual fund rather than by counting on individual corporations to reduce the risk of individual stocks. Legislation designed to reduce the probability of "another Enron" may reduce US economic growth.

My major disappointment about this whole episode is the recognition that so many intelligent and informed adults do not acknowledge that Congress has probably made a mistake that should be reversed rather than be considered a new pillar of American securities law. Michael Oxley, recently retired from Congress, was asked whether he would have done anything differently if he knew then what now is known about the effects of the Sarbanes-Oxley Act. "Absolutely," Oxley answered. "Frankly, I would have written it differently, and he would have written it differently," he added, referring to Sarbanes. "But it was not normal times." Now is the time to revise or repeal the Sarbanes-Oxley Act.

The "doctors" in this case are a group of politicians, tax and law enforcement officials, who are operating without the constraint of national boundaries or economic sense.

People around the globe are justifiably concerned about terrorism and ordinary criminality. A certain international political class has used this anxiety to argue that since criminals and terrorists use money, all monetary movements and holdings must be monitored. Yes, it is useful to be able to trace the money trail of al Qaeda operatives. But does that mean all citizens of every country should be subject to having all their financial privacy destroyed? Furthermore, is it cost-effective to monitor almost everyone, or would both public and private law enforcement dollars be more wisely spent monitoring the activities of those individuals or groups known or strongly suspected of engaging in terrorist or criminal activities?

The problem is there are now literally dozens of organizations issuing rules and regulations that apply not only to financial institutions but to all "money service providers," including such activities as pawn shops, used car dealers and real estate agents. The agencies within the U.S. government issuing the new financial rules and regulations include the Internal Revenue Service, the FBI, the Justice Department, the Financial Crimes Enforcement Network (FinCen) and the Federal Reserve.

In addition, U.S. financial institutions and other businesses engaged in operations outside the U.S. or those involved in international transactions are also faced with a barrage of new rules and regulations from many foreign governments, plus the European Union, and from international institutions such as the Organization for Economic Cooperation and Development (OECD), the Financial Action Task Force (FATF) and the U.N.

Millions of businesses are subject to at least some of these rules and regulations, and it is close to impossible to inform them of their obligations. Even the largest international banks, with huge staffs of lawyers and anticrime enforcement personnel, are unable to fully work through this ever-expanding morass of regulation.

Smaller banks and businesses are at a competitive disadvantage because of the disproportionate effect of these regulatory costs. Some of the regulators are aiming at terrorists, others at ordinary criminals, and some at tax avoiders or evaders. Most of the regulations are directed at "money launderers," even though the term has a very elastic definition.

Many of these new rules and regulations are overlapping, some are contradictory, some violate basic civil liberties and many are costly to administer and do not meet reasonable cost-benefit tests. Yet the Bush administration just announced a doubling in the budget for FinCen, as well as budget increases for many of the other financial rulemaking bodies.

The reason we should care is that all of these extra, and in many cases totally unnecessary, costs are passed along to consumers of financial services as higher fees and more expensive and fewer choices in financial products. This directly translates into job losses not only in financial industries but in all businesses that rely on some outside financing.

In addition, it will make it more difficult for low-income people, the young and recent immigrants to open bank accounts. We are now seeing, for the first time in our nation's history, a rise in the portion of our citizens without banking relationships. Costly regulations that force more people into the cash economy not only make life more dangerous for those who cannot open bank accounts, but also have the perverse effect of making it more difficult for law enforcement to trace funds of criminals.

There is little evidence all the new rules and paperwork are having any appreciable effect on crime or terrorism, because there is an almost infinite number of ways to "launder" money, and organized terrorists and criminals can almost always find ways around the regulations. On the other hand, there is considerable evidence of damage to our pocketbooks and civil liberties from these regulations.

The U.S. government should expand the jurisdiction of the "Office of Information and Regulatory Affairs" (OIRA) to include the IRS and the other financial and law enforcement agencies that issue financial regulations, and insist financial regulations meet strict cost-benefit and civil liberties' tests.

In addition, an international organization is needed to apply the same strict cost-benefit and civil liberties' tests to all proposed regulations emanating from international bodies like the OECD, FATF, and the U.N., as well as those from governments that affect nonresident institutions.

If financial institutions and their customers are weakened or bled to death by regulatory malpractice, the war against real criminals and terrorists will only be made more difficult.

The new European version of the old Microsoft antitrust game has gone on nearly five years, so far. EU Competition Commissioner Mario Monte finally got around to accusing Microsoft of doing something terribly naughty by: (1) giving consumers for free Media Player with Windows, and (2) not giving competitors a free tour of the inner workings of Windows. Those odd complaints were accompanied by threats of big fines, which could theoretically top $3 billion. The stock market took one look at the evident absurdity of the charges and yawned, dropping Microsoft stock by one penny.

In the real world of political influence-peddling, any theoretical virtues of antitrust soon turn to vice -- protecting competitors rather than protecting competition. Europeans are not even shy or subtle about their intentions. The EU Commission claims to have gathered "evidence from a wide variety of consumers, suppliers and competitors." The comment about competitors is certainly true. The commission has been heavily lobbied by the Computer and Communications Industry Association, which represents the likes of Sun Microsystems, Oracle and AOL. As Brad Hill remarked in E-Commerce Times, the unseemly sight of watching U.S. companies go after another U.S. company in Europe is "an unusual and perhaps unique precedent."

One of the EU's two complaints is that Microsoft has an advantage in relatively inexpensive servers, those that link office PCs or workstations, because servers based on UNIX or Linux supposedly have trouble communicating with desktops using Windows. If that was a real problem with cheap servers, why would it not also be a problem with costly servers? If big UNIX and Linux servers also had trouble talking to Windows desktops, then Windows desktops would not work well on the Internet, which is dominated by UNIX-Linux servers.

These complaints about low-end servers emulate the U.S. government's previous efforts to define markets in ridiculously narrow ways. When our Justice Department claimed Microsoft had a monopoly of "Intel-based" personal computers, that excluded by definition all computers made by Apple, Sun Microsystems and Palm. Today, even that bogus distinction is breaking down because Sun is selling Intel-based servers. In the U.S. case, unlike Europe's, prosecutors prudently spoke only of "personal" computers because they knew Windows faces huge competition from servers and workstations using UNIX or Linux.

First quarter sales of Windows-based servers were up 10 percent from a year earlier, according to IDC, but Linux servers were up 35 percent. The IDC predicts sales of Windows-based servers may rise to $19 billion by 2006, but combined sales of UNIX and Linux servers would still top $34 billion. Such dominance of UNIX and Linux is why Mr. Monti is careful to confine his complaints to only low-end servers where Windows machines do well precisely because they're low-end (i.e., cheap). That is like defining low-end automobiles as a separate market and then complaining that market is unfairly dominated by Kia.

Among "vendors of low-end servers," as the EU puts it, Sun has been losing market share to both Windows and Linux hardware. Sun had to offer an Intel processor and Linux software to compete on price. Blaming compatibility with Windows would be an unlikely excuse because: (1) Compaq, Dell and IBM sold plenty of low-end Linux servers, and (2) Sun has long offered a card and software to read or use Windows applications and also sells Star Office for both its own operating system and Windows.

European gripes about media players are almost as technologically illiterate as our Justice Department's previous obsession with browsers. Apple just came out with a fabulous new Safari browser that will likely be available for Windows before long. But nobody still believes it makes any commercial difference which free browser people prefer. The only reason it made a difference to Netscape was that Netscape was trying to charge a lot of money for the browser and because it was then tied to the leading home page, or portal, where ads were sold. The only reason Netscape later mattered to AOL (which never used it) is that buying that company amounted to buying the valuable right to sue Microsoft.

A year ago, Nielsen/Net Ratings figured Real Media reached 17 million home viewers through streaming or downloads, Windows Media 15.1 million and QuickTime 7.3 million. But that involved counting by format (which ignores even MP3 music), and all three players can read rival formats. Besides, there are many other media players, including AOL's Winamp, QCD, Sonique and UltraPlayer. As more of us rip and burn CDs and DVDs, we use that same software for playback, such as Musicmatch Jukebox or Roxio Easy CD&DVD Creator. Some skip media players altogether and download music files to a portable player.

The big three media players still have advantages for streaming media -- watching or listening to something as it happens. Real dominates streaming, but there are new contenders including Macromedia Flash MX.

Microsoft, Apple and Real give away media players because they want to sell related software that produces content. No company can push its proprietary formats because consumers insist on a media player that can play all leading formats (such as MP3, mpeg and avi). Any archaic notion that consumers won't bother with downloading is nonsense: Apple boasts of 100 million downloads of QuickTime 6 in less than 10 months.

Europe's case is just all about pleasing Microsoft's competitors at the expense of ordinary consumers. When EU officials speak of evidence from "consumers," they mean an opinion poll from 157 corporations using server or audiovisual software. No ordinary consumer objects to having more useful features in Windows rather than fewer.

EU Commission spokesman Tilman Lauder explained his boss's threats as "yet another invitation" for a settlement. Invitation for a payoff sounds more like it. Mr. Lauder added that any fine would be based on the "gravity" of the accusations, not on any demonstrable damage to competitors (much less to consumers). They may be eager to settle since "Super Mario" has not been looking so super lately, after losing several cases in the Court of First Instance in Luxembourg. Australia's Financial Review recalled that court president "Bo Vestereforf has severely chastised Commission officials for sloppy casework and trampling on the rights of defendants." Looks like they're doing it again.

In England, the Economist warns of a danger that this European meddling with a hugely important U.S. company "could trigger a trans-Atlantic conflict of the sort that was widely discussed when General Electric's takeover of Honeywell was blocked by Monti after it had cleared regulatory hurdles in America."

Unless we have lost all sense of national pride and moral outrage, that seems the least the EU should expect.

In 1988 the Basel Committee on Banking Supervision completed the Basel Capital Accord, which set risk-weighted minimum capital standards for internationally active banks. The accord, which has been adopted by more than 100 countries, seeks to strengthen the banking system and level the playing field. It is not clear, however, that it achieves either of those goals or that the latter goal is even desirable.

Indeed, there is broad agreement among regulators, market participants, and academics that the accord's risk classification scheme has made the international financial system less stable, not more, while failing to level the playing field. The accord has encouraged banks to assume greater economic risk without a commensurate increase in capital. It has also encouraged banks to make short-term loans to other banks, which contributed to the Asian crisis in 1997-98.

The Basel Committee has attempted to fine-tune the accord over the years. Since 1999, the committee has been working on a major revision of the accord in an effort to "align capital regulatory requirements more closely with the underlying risks." The result, Basel II, is a work in progress that is expected to be finalized by the end of 2003 and fully implemented by the end of 2006.

Basel II is based on three mutually reinforcing pillars: capital requirements, supervisory review, and market discipline. Risk-based capital requirements are the major focus of the accord. The accord will allow some banks to use their internal risk-management models to determine capital costs, but that option could turn into a regulatory nightmare, even in industrialized countries. Worse yet, the accord's overly prescriptive and complex approach could end up stifling market-based innovation in risk management practices.

Consequently, a system that relies more on competition among different national regulatory regimes is preferable to the current approach. At the national level, the trend should be toward regulatory simplicity. If there are to be minimum capital standards, necessitated by government-sponsored deposit insurance systems, a simple capital leverage rule with no risk weights would suffice, especially if there is an emphasis on market discipline through a subordinated-debt requirement and disclosure. Countries without a public deposit insurance system should move toward a system of financial laissez-faire.

America's anti-dumping laws punish consumers and penalize foreign companies trying to compete in the U.S. market. The dumping charge recently upheld against Japanese supercomputer makers shows the economic illogic and systematic unfairness of the law.

By imposing punitive tariffs of up to 454 percent, the U.S. Department of Commerce has effectively killed import competition in the domestic supercomputer market. As a result, a federally funded agency has been forced to cancel a contract--depriving taxpayers and consumers alike of the full benefits of price competition.

The law is so biased against importers that the Commerce Department upholds 96 percent of the initial claims it receives. As a result, the law has become merely a tool to protect domestic industries from competition. Congress should repeal the anti-dumping code.

International telecommunications is a multi-billion-dollar industry, and the services it provides are crucial to the functioning of the global economy. Until recently, the business was organized in a monopolistic fashion. At best, national telecommunications administrations extracted huge profits from incoming and outgoing traffic, in effect treating international telecommunication as a luxury to be taxed to support domestic postal or telephone operations. At worst, communication across national boundaries was viewed as a threat to the government's power and thus was carefully controlled and monitored.

With the globalization of trade, the importance of unrestrained and efficient telecommunications has gained world recognition. National monopolies are now on the defensive, and many are beginning to unravel. On the world stage the United States has taken the lead in promoting a more competitive structure. The United States has opened up most of its own equipment and service markets and has deregulated some of its domestic industry. It is not unusual to hear U.S. government spokespersons criticize overseas monopolies and hold up our own fairly competitive system as a model for the rest of the world.

It may come as a surprise, then, to learn that the U.S. government is responsible for one of the most formidable obstacles to free competition in international telecommunications. U.S. policy prevents competing satellite systems from carrying international public switched telecommunications traffic, that is, any services that in any way use the public telephone network. The policy is designed to protect Intelsat, the international telecommunications satellite consortium, from competition. The restriction on alternative satellite systems was imposed in 1985, as part of the "Separate Satellite System Policy."

U.S. attempts to protect Intelsat from competition are groundless and counterproductive. Protecting Intelsat helps to sustain an obsolete, monopolistic structure that routinely overcharges users and restricts trade in telecommunications services. More is at stake, however, than lower prices, greater efficiency, and improved trade opportunities -- important as all those things are. The issue is also one of how the United States defines its role in the post-cold-war world. The protection of Intelsat is a classic example of how political and strategic concerns held over from the cold war are now handicapping the U.S. economy's ability to respond to new global economic challenges.