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walking through trade treacle

Kitty Miv, Editor
15 May, 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.

It has been a good week, on the whole, for trade, with ABAC urging APEC to progress FTAAP through amalgamation of ASEAN, the TPP and RCEP via the Bogor goals. Sorry, I couldn't resist that. The bottom line is that most Asia-Pacific nations are very well disposed towards free trade deals. And the GCC (Gulf Cooperation Council) which has been demonstrating the opposite of cooperation by walking through trade treacle on its way to a regional tariff-free zone for the last ten years, is finally showing some signs of movement towards its goal. The GCC consists of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, so we can award stars to Dubai at least (confused? don't be, it's part of the UAE and a lot more market-friendly than most of the rest of it), although the remainder are all under a cloud of one kind or another at present.

Singapore, while slinging around many of the same acronyms, has also been re-affirming its commitment to free trade in general, and the RCEP (Regional Comprehensive Economic Partnership) in particular. Like Hong Kong, it sets out to be a regional centre for holding companies (aka trade), and like Hong Kong, it is successful because of the welcome it offers to international companies. I am stunned to read that there are more than 10,000 European companies in Singapore. Of course, I don't know how many of them are trading companies: there are 300,000 Chinese companies in the BVI, and I suppose that not many of them trade. But if you put your wealth in a place, and assuming that you are not over the hill like me, where else would you put your trading subsidiary, all otherwise being equal?

I'm not so sure though about the Senate Republicans' continued refusal to pass trade treaties which have been becalmed in Congress for years because of fears over the forced disclosure of private bank account information. This type of wrecking behaviour is a strong argument for the Trade Promotion Authority, which would prevent the Senate from holding tax treaties hostage to partisan goals, or at least force it into striking down treaties which have been meticulously negotiated with friendly countries and which would greatly benefit the US economy, something it would presumably hesitate to do. Led by Senator Rand Paul (R – Kentucky), the anti-treaty rhetoric seemingly conflates the usual tax treaty exchange of information wording, which has to some extent been expanded in newer treaties, with the out-and-out thoroughgoing nastiness of FATCA. But they are two separate things: the IGAs being reached between the Treasury and foreign countries are arguably unconstitutional, while the current crop of tax treaties are hardly more objectionable than dozens of previous ones. Or are they? The Treasury intones: "one of the critical principles under today's existing international standards for information exchange upon request is that the country receiving information must ensure that exchanged information is kept confidential and only used for legitimate tax administration purposes." In the age of Edward Snowden and the NSA this is a laughable proposition, but at least under traditional tax treaties there are limits to the type and amount of information that is to be exchanged, and the channels for exchange are narrowly defined; that is not so under FATCA, which sweeps up overtly innocent along with potentially deceptive behaviour. Much as we would like to see FATCA squashed, the attempt to do it via the sequestration of innocent tax treaties is inappropriate, and will not even be successful.

It seems repetitive to keep on congratulating Hong Kong for sticking to its last, and once again insisting that it will not increase taxes; but to do so against all the pressures for more spending that exist in every State implies a very clear commitment to small government and low taxation. Like Singapore, Hong Kong insists that it will not step onto the primrose path of popular appeasement. There are to be no bread and circuses! In limiting itself to a maximum level of public spending of 20 percent, the administration sets its face against increased debt as much as against increased taxes. For comparison, Denmark spends 67 percent of GDP, and even the USA, which is far from the top of the table, spends 43 percent of GDP, according to OECD figures. And it's not true that Hong Kong has a privileged population: there are just as many poor people, proportionately, as in other, larger countries. For years now the Government has rebated tax bills for poorer people and SMEs out of its annual surplus; there is no sales tax, no inheritance tax, no capital gains tax. Why do the dying economies of Europe not copy Hong Kong and its peers, instead of trying to squeeze the life out of them? No answer comes; but one good answer would be that, by now, they can't, because of the debt with which they have been saddled by their venal, populist politicians.

For a sad contrast, let's look at the Netherlands, where the parties are bickering over how to rearrange the deck-chairs on the Titanic. In power, there is one of the deadly left/right coalitions that have infected Europe in recent years (see also Italy and Germany). When neither left nor right can provide the answers, I suppose it makes sense to have both of them. The left wing wants taxes to be "fairer and greener," which includes extra taxes on wealth. The right wing would like to replace an "entitlement" structure with lower labor taxes across the board. Needless to say, they can't agree. 52 percent is the proportion of GDP spent by the Government; the top rate of individual tax is the same, 52 percent. Public debt has increased every year since 2008, and is reckoned to reach 73 percent of GDP in 2014. The government's deficit was 4.5 percent in 2013. Unemployment is about 8.5 percent, while youth unemployment is "only" 13 percent, just about half the EU average. What can they do? The Government, I mean. I know what the citizens can do: leave, or cheat.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 104th) two or three countries are given encomiums and two or three 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 neutral, 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:

Dubai smelling of roses as usual

Hong Kong careful as ever

Singapore hubbing it

And Kitty's Execrations:

The Netherlands in shtuck, like all the rest

United States in an information free-for-all




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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