Fisher Investments Editorial Staff
Geopolitics, Globalization, Taxes, Trade

Weighing Tuesday’s Follies

By, 06/27/2012

Welcome to Formosa?

Taiwan’s government is unleashing the big guns to prepare for its looming trade liberalization. As the state signs more memorandums of understanding and free trade agreements (FTAs), many politicians fear the impact of what’s widely perceived to be a devastating affliction: Imports. To counter this amphibious assault on the Island of Formosa, the government is bringing to bear subsidies and other means to (allegedly) support small- and medium-sized enterprises in “vulnerable” industries. (Which could be interpreted—understandably, in our view—by trade partners as counter to the FTAs.)

This attempt to outflank foreign competition seems destined for an uncertain future, though. Consider, as Chou Neng-chuan, deputy director-general of Taiwan’s Industrial Development Bureau (the Brigade) said, “We’d like to help … less competitive sectors.” Ahhhh … the soft underbelly. So while markets tend to allocate capital where it’s most efficiently used, this quasi-nationalistic effort targets those domestic industries likely to use it least efficiently?

We’re sure the aim here is boosting their competitiveness, but the fact is, most businesses tend to do that best when profits are on the line. Not when a government deal erects a huge competitiveness buffer. Ultimately, the victors of the competition brought by imports are likely to be consumers, who get more quality at reduced cost. The common jingoistic view of trade—us against them—simply doesn’t acknowledge this reality, though.

Wandering Toward Federalism?

EU institutions released their proposal for tighter European integration on Tuesday. Drafted by European Council President (and poet laureate) Herman Van Rompuy and “prepared in close cooperation” with the European Commission, ECB and Eurogroup (eurozone finance ministers), the report claims to outline a banking, fiscal and political union with democratic safeguards. But in reality, it’s seven pages of fuzzy (and possibly unworkable) ideas, general statements and items “to be defined,” which raises far more questions than it answers.

Yet officials have quixotic ambitions of finding broad agreement at this week’s summit and submitting a blueprint to the European Council (EU heads of state or government) by December. Based on how sketchy the draft is, how far apart all 27 states are and the likely treaty modifications and referenda required, quick consensus on something concrete, actionable and useful seems highly unlikely.

In fact, UK Prime Minister David Cameron already seems to be preparing ye olde British veto over the banking union. Even though the purpose of centralizing bank regulation, deposit guarantees and bad-bank resolution is to safeguard eurozone banks, officials seem bent on making the entire EU participate. That’s no good in Britain, which doesn’t want its global-powerhouse financial sector subject to Frankfurt’s whims. Nor does Cameron fancy liability for banking problems in a monetary union his country wants no part of.

As ever, expect rampant politicking but no quick fix—which is fine, since markets likely don’t need a quick fix to move higher, just continued confidence things aren’t falling apart. Mere discussion of federalism speaks to the prevailing will to keep the monetary union intact. Even if that means officials just plan to have a plan to have a plan.

When Taxes Fail

Also on Tuesday, Japan’s lower house of parliament passed a bill to double its national sales tax to 10% by 2015. The measure, advanced by proponents as a way to increase government tax revenues and decrease government debt, goes to Japan’s upper house for approval next. Based on current party support lines, the bill looks likely to pass. But as we’ve detailed before, historically and globally, tax something and you get less of it—the opposite of the intended result in most cases. In our view, sales tax increases likely serve as a disincentive to consume—meaning the government likely won’t see the level of tax revenues it hopes for—not as a result of this particular maneuver.

Compounding matters, passing the bill in the lower house greatly strained the ruling Democratic Party of Japan (DPJ). A faction of 57 lawmakers broke party lines and voted against party leadership’s support for the bill. Now, as the bill moves into the upper house, speculation abounds that after the bill passes (with opposition party support), a “no-confidence” vote might be called on Prime Minister Yoshihiko Noda. It’s possible a weakened DPJ (sans the 57 dissenters in the lower house) won’t survive the motion—which could ultimately result in another shuffle of Japan’s leadership and the seventh Prime Minister since 2006. In our view, politicking at its finest.

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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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