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consumers have to pay higher prices for goods

Kitty Miv, Editor
18 September, 2014

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

According to the World Trade Organization's definition, "dumping" occurs "when goods are exported at a price less than their normal value, generally meaning they are exported for less than they are sold in the domestic market or third-country markets, or at less than production cost." If a country feels that a domestic industry is under threat because it can't compete with foreign products dumped into its market, then it is within its rights under world trade rules to slap anti-dumping taxes on the offending imports to even up the competitive playing field, as Vietnam has just done for the first time on steel products from China and other countries in the region. Fair enough you might say. A Government that stood by and watched an industry crumble without intervening in some way wouldn't be in power for very long. Except that I find the whole concept of "dumping" quite mystifying. In this case it implies whole industries across national boundaries have conspired to drive Vietnam's steel makers out of business. I find that very hard to believe. And companies that sold their products at below-cost prices for a sustained period of time aren't going to be in business for very long. Isn't the whole purpose of the framework of world trade rules supposed to reward the most efficient producers and drive down prices? Vietnam is by no means the only country to have resorted to anti-dumping taxes recently; the European Union and the United States are among the worst offenders. But ultimately the ones that lose out as a result of anti-dumping duties are consumers who have to pay higher prices for goods.

We all know that small businesses are the life-blood of most economies. Large companies are of course important too in terms of the number of people they employ and the amount of taxes they pay into the system through profit and employment taxes. But large companies typically only constitute about 10 percent of the overall total of active businesses in an economy. Yet starting a company from scratch is still fraught with risk, and few successful entrepreneurs will get things right first time around. It is also a sad fact that while many governments claim to be on the side of the small business woman, they are often the ones preventing them from growing through unrealistic regulatory requirements and tax demands. Cash flow is vital in the early stages of a business, but too often it is absorbed by taxes. Lots of governments allow start-ups and small businesses to pay lower rates of income tax, but the Philippines could go a welcome step further with proposals to abolish national and local taxes for start-ups for the first two years of their life. Doubtless the Philippines Bureau of Internal Revenue is hoping the parliamentary bill is defeated. The Philippines is trying to raise its tax-to-GDP ratio and the Revenue is under pressure to collect more in tax from its citizens and businesses rather than less. But over the long-term surely this scheme will help rather than hinder these goals. If more businesses survive the crucial early stages of their existence, higher numbers than usual will go on to be profitable and pay taxes. Unfortunately, few governments have the courage to look long-term these days.

One leader who claims to have an eye on the long-term is Italy's (unelected) Prime Minister Matteo Renzi. Italy's Tony Blair (who was elected, the British one that is) came to the leadership offering an Italian version of New Labour's "third way." Put simply, this means that you can cosy up to the business sector while still maintaining a social conscience. You can be pro-enterprise without having to be a rabid Thatcherite. History tells us that the New Labour experiment got off to a bright start, but crashed and burned amid the wreckage of the credit crunch. Indeed, Gordon "Prudence" Brown's famous (or should that be infamous) "Golden Rule" went out of the window even before the financial whirlwind was unleashed, leaving the UK with a budget deficit bigger than Greece's. Anyway, moving on from the UK of the past and back to the Italy of the present, I guess the point I'm trying to make here is that Renzi, as youthful and fresh-faced as he is, needs to channel this energy into something more radical for Italy. Taxes – the Italian tax burden is one of the highest in Europe – need to come down, spending needs to be cut, entrenched, inefficient bureaucracies need sweeping aside and labor laws need to be loosened. Renzi's three-year economic and financial plan adopted by the Cabinet in April was an underwhelming start, and judging by the way that the 2015 Budget Bill is shaping up, the difficult issues will be dodged once more. Tax cuts will be in it, but at a level hardly worth talking about. A figure of EUR20bn in spending cuts initially made me sit up, but spending in certain areas will be increased. One can be too critical of Renzi I suppose. Italy's current problems have been built up by weak and ineffectual governments over decades, and there almost needs to be a complete overhaul of Italy's governmental system before anyone can realistically think of making the required economic reforms. Renzi has been hailed by some as the most skilled political operator in Europe right now. He needs to start proving it.

Not that you'd know by the lack of coverage of the event in the world's media, but the European Union and Ukraine should, by the time this blog is published, have ratified their controversial Association Agreement, giving Ukraine's exporters immediate and free access to the EU's market of 500m consumers once effective. Now, there are two ways of looking at this. One is that it is positive for Ukraine. It is said that Ukrainian businesses will save a total of EUR500m in customs duties and trade taxes as a result of the agreement, and that the resulting growth in trade volumes will add 1 percent to Ukraine's GDP every year. Ukrainian tariffs on EU imports will on the other hand be phased out to give the country's economy time to adapt. What's more, the EU will help to bring Ukrainian standards up to European levels. It's all good, right? Well, there's another way of looking at it. Bearing in mind that Ukraine's increasingly dangerous liaisons with the EU were one of the factors that sparked the conflict with Russia, the backlash that Kiev might face from Moscow could substantially outweigh the benefits accruing from increased trade with Europe. Last year, just under a quarter of Ukraine's total exports were made to Russia. Roughly another quarter went to the EU. What if Putin decided to punish Ukraine further by severing Russia's trade ties with its upstart southern neighbor? I'm not sure how feasible such a trade embargo would be, and presumably it's going to hurt Russia significantly too as Western sanctions begin to bite. The Association Agreement could prove to be a major step forward for Ukraine, which is in dire need of economic modernization. Then again, goading an already angry bear might turn out to be an unwise move.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 122nd) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at plus 1, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc and now it's on plus 1 again.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:

European Union bear baiting

Philippines a helping hand

And Kitty's Execrations:

Italy rudderless

Vietnam dumped




Tags: Euro | Government | Trade | Moscow | Gold

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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