http://middleclasspoliticaleconomist.blogs...e-to-intra.htmlThis is a blog post about trade deficits. The figures are american, but think it is safe to assume that a similar pattern will be shown in most developed countries where "globalisation" has been pursued and where multinational companies account for a lot of the trade. It happens that this week we have had very poor trade figures in the UK and despite what the government says, this is not attributable to contraction in they eurozone. Trade with the rest of the world was, if anything, worse. So this is pertinent.
Tax is a big part of this story. It can be argued that it is also about wages, and that is the usual story we are told to account for the movement of production overseas. Obviously it follows from the latter story that we must accept lower wages; more labour market "flexibility"; and greater job insecurity. At least that is what the elite and their puppets in the IMF etc tell us.
But these figures tell a different tale, arguably.
What they are showing is that a huge proportion of the US trade deficit is due to trade within multinational groups. It does not give comparative figures for many countries but it shows that this is not confined to poor countries which are presumably low wage economies. Three countries are actually shown and two of them are Ireland and Canada: hardly third world.
For both of those countries almost all of the US imports are bought from related parties - that is companies in those states which are at least partly owned by the same people as the purchasers. Why should this be? The author suggests it is because of the low tax regimes in those countries: unfortunately he cites the figures for Ireland but not for the two other examples: Canada and Mexico. I do not know what the tax arrangements in those countries are, so this is not enough to support the case being made but it is suggestive
Let us think about Ireland. It is a rich developed country (despite the impoverishment it has suffered from the banking disaster): and Ireland achieved that status through a very deliberate policy of low corporation tax to encourage inward investment. That policy was successful: indeed it is one of the reasons they are in trouble now because a lot of foreign money poured into the country and fuelled the property boom which is at the root of the problems they have
But what is the reason for a lot of exports to the US through related party trading? Does Ireland have skills or resources which cannot be found inside the USA? I dont think so. So why would US companies base in Ireland and produce stuff there, then export that stuff to America will all the attendant costs of transport and exchange rate commissions etc? One may argue that distances within america are huge and so transport may be a problem either way: but that seems thin, and there are always costs when using different currency so those costs presumably make a difference.
Transfer pricing works like this, in theory. Company X realises it can make product A quite cheaply in country number 1. So it sets up subsidiary to do that, called S1. S1 then makes the goods and sells them to Company X, which is based in the home country. Prices in that home country are higher than they are in country number one: and so long as the costs of transfer etc are not enough to make the total cost of production as high as they are at home, Company X can sell the stuff more cheaply and still make profit. That depends on adhering to "arms length pricing" and there are rules and regulation supposed to ensure that. They don't seem to work very well, but leave that aside.
This is justified by the apparently legitimate pursuit of cost cutting and profit. So long as you do not lift your head and look beyond the interests of the individual company, that looks ok. It is acknowledged that it costs jobs in the home country: but hey, that is a price worth paying: and in any case it redistributes wealth from rich countries to poor ones and so that is a good thing: redistribution is morally right and people in the developed world have been over privileged for far too long. It will be painful to redress that, but it has to happen. Narrow nationalism has had its day.
To support that story we are invited to look at places like India and China a lot of work has gone offshore to those countries and they have benefited from it in terms of economic growth. It is quite hard to argue against that simple story.
It kind of falls to bits if we are looking at countries like Ireland and Canada, though. And it really unravels when you consider that the benefit goes to the parent company, since that company is not based in the country concerned. Some benefit goes to the host country, certainly. They get jobs and some tax from the profits generated there: but the loss to the host country includes those jobs and the due tax: and also includes a trade deficit which leads to higher borrowing and thus to more calls for austerity and higher interest on government bonds.
That is true even if the "arms length" pricing is adhered to. The fact that a great deal of the profit is generated in tax havens gives the lie to even that safeguard. The related company often pays a high price for the imports and it is difficult to say what the prices should be, so it is difficult to regulate. According to neoclassical theory price sort of emerges from the interaction of supply and demand but when the transactions are within a group of companies that is at best unlikely. The company benefits from showing the profit in the low tax regime so it has a strong interest in selling to the producer in that country at an artificially low price (if, for example it supplies raw materials to the subsidiary through the first or a third company based somewhere else); and buying the stuff at an artificially high price. It makes minimum profit at home when it sells the stuff on: and the subsidiary makes most of the profit.
Hard to see how that can be prevented: it often isn't, or tax havens would not exist.
