Fisher Investments Editorial Staff

Predictable Politicking

By, 05/02/2012

Chinese whispers

China raised a few eyebrows Monday, announcing plans to increase imports through lower tariffs and more bilateral trade agreements—a surprising move from a country with well-documented protectionist leanings. The announcement provided more insight into Thursday’s release of the country’s inaugural five-year plan for trade, which targeted “mutually beneficial foreign trade development” through 2015.

At first blush, it’s an encouraging development—tearing down trade barriers would be a positive for all involved. However, it’s tough to get too excited without a firm timetable or exact policy framework, which both announcements lacked. Plus, if you take China’s diplomatic calendar into account, it seems international politicking may be the more immediate goal. The likely next premier, Li Keqiang, is meeting EU officials in Brussels this week, and US Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner arrive in Beijing for talks on Wednesday. China’s taken considerable heat for its trade practices and currency policies, and leaders could be taking a more accommodative stance to give Li a leg up as he establishes his international presence. And it’s not hard to imagine Chinese officials seeking to shift the world’s focus away from the latest scrutiny over their human rights record on the eve of the US’s visit.

All that said, China could very well follow through and slash tariffs in short order. But at this point, it’s very much wait-and-see.

Happy May Day! (We guess ...)

Yesterday, ostensibly to celebrate workers on May Day, Bolivian strongman Evo Morales announced the nation would take a more proactive stance in delivering electricity nationwide. A proactive stance headlined by the nationalization of most of Bolivia’s power grid—which happens to be owned by a Spanish firm.

Like his Argentinian counterpart, Morales claims the Spanish firm hadn’t been investing enough in Bolivia. But if this is the goal, nationalizing the firms’ Bolivian assets seems a bizarre way to get them to invest more. Spanish firms are large direct investors in many South American nations, a fact that (ironically enough) means they insource jobs to these countries. Should these recent expropriations become part of a larger trend, we bet fewer jobs get insourced in the future. (Happy May Day?)

As yet, there’s been little official response from Spain’s government. Though another strongly worded response from the government, a court case and potential sanctions at the EU level would be unsurprising. A reprisal from private businesses—reducing investment and thus, opportunities—would be equally unsurprising. Moreover, in our view, the private sector is just far more efficient at running a business than governments are. Potentially worse utility service and reduced opportunity for Bolivian workers doesn’t seem like much to celebrate in La Paz.  

Typical tax talk (Taiwanese edition)

Taiwan announced last week it will levy capital gains taxes on securities transactions for the first time in over two decades. Mind you, the last time such taxes were proposed in 1988, Taiwanese stocks didn’t respond well—until the government significantly softened the plan, exempting nearly everyone (though it remained on the books until it was officially suspended in 1990).

The plan includes a 15% tax on individual investors who realize more than NT$4 million (~$137,000) a year in stock- or bond-based capital gains and a 12% tax on institutional investors who realize more than NT$500,000 (~$17,000) annually in stock- or bond-based capital gains. A tax reduced by half would apply if the positions are held more than three years. Furthermore, the tax won’t apply to foreign investors without offices or “direct business operations” in Taiwan, nor  will it apply to futures or derivatives trades. The plan has yet to be passed by the legislature, but that’s expected, with implementation set for 2013.

The proposal is seemingly politically motivated—supporters claim it could narrow Taiwan’s “wealth gap.” Given the relatively high threshold before the tax applies, it seems near-guaranteed the tax will primarily impact those with more invested in the market—whether they coincide with the top income-earners or the wealthiest is debatable, but never mind. Never mind also the slim chances this tax is the magical antidote to Taiwan’s wealth gap, or that its wealth gap, to the extent one really exists, is necessarily the economic evil commonly thought.

One thing’s certain: Politicians seemingly routinely (and conveniently) forget if you tax something, you get less of it. In this case, that likely translates to less selling, and thus, less in realized capital gains. And it possibly ultimately translates to less overall investment in Taiwan’s local market—particularly when there are myriad alternatives in a global market. Oh well—at least we can count on politicians’ global consistency.

A Chilean corporate tax conundrum

Earlier this week, Chilean President Sebastian Pinera bowed to pressure from student protestors and announced his government would raise the corporate tax rate from 18.5% to 20.0% and reduce personal income taxes “by as much as 15%.” The move, which is likely to be fast-tracked through the Chilean Congress, also makes education spending tax deductible, sets pay-back periods on student loans to after graduation, cuts a stamp tax on loans and increases taxes on liquor. All told, the measures are estimated to raise as much as $1 billion a year for education reforms and fill a budget gap created by reducing student loan interest rates from 6% to 2%.

This marks the third time the Pinera government has changed the corporate tax rate since taking office in early 2010. Perhaps the administration succeeds in pacifying protestors (though they’ve already noted the moves aren’t enough). However, the uncertain tax environment may in fact accomplish something: cooling corporate investment. Constantly changing tax regimes create an uncertain investing environment for corporations operating in the country. So what many of those students might find when they graduate is a hiring environment largely stymied by their very demands.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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