Adam Smith and David Ricardo gave economics the theory of International Trade by 1817 (Smith 1776) and what they said remains the basis of the reason economists favour free trade over protection.
The theory says that countries should specialise according to their comparative advantage and as a result overall production will rise and these gains in output will be redistributed through trade (i.e. swapping of goods and services).
To achieve specialisation a country must grow some industries while others shrink (those in which other countries specialise). The result will be more jobs in some industries and less in others.
The loss of jobs is regrettable and is referred to as an 'adjustment cost.' Economists are fully aware of this cost and could explain to those who are now unemployed the overall benefit of the process. It will not be a popular message with the unemployed.
The World Bank is reported to have written a report confirming Smith and Ricardo's conclusions. The growth of free trade (Globalization) has led to overall more jobs, but some have lost out. They estimate 20% of job losses in some areas, like the USA, are due to free trade.
The problem is that there is no guarantee that a country will gain as many jobs through their specialization as they lose. Portugal is a good example. They have lost many jobs to lower cost manufacturing nations (such as Eastern Europe and China), but don't have the comparative advantage in high tech and knowledge based industries they need to replace those jobs.
So the World Bank report is basically saying Smith and Ricardo were right.
Showing posts with label globalisation. Show all posts
Showing posts with label globalisation. Show all posts
Thursday, 6 October 2016
Wednesday, 27 January 2016
Will tax deal end transfer pricing?
Today many firms are multinationals and operate around the world. This has brought many benefits and the effect of globalization on living standards has been considerable. (This is actually the continuation of specialisation and trade you learn about in the first weeks of any economics course).
One of the drawbacks of this globalisation has been that multinationals have developed ways to pay their tax in countries where the profit taxes (corporate taxes) are lowest. This is, of course, rational behaviour for after-tax profit maximizing firms.
Transfer pricing works like this. Say you are a publisher and sell a really excellent economics textbook in the UK. The profit tax in the UK is 30%. Schools in Malaysia want to buy the book. Rather than sell them the book from the UK at £33 the publisher sells the books to their subsidiary in Singapore for £6, just over the cost of production. The subsidiary then sells the books to the Malaysian schools making all the profit in Singapore where the profit tax rate is just 10%.
I'm not bitter, but that's what Simon and Schuster did with my textbook, paying royalties only on the £6 earned in the UK.
This is perfectly legal. Firms such as Starbucks have bought their coffee from their Swiss subsidiary for the whole of Europe at high prices so the profit is declared in low tax Switzerland. Google have paid just £130m tax in ten years in the UK.
Now the OECD (The Organization for Economic Cooperation and Development - the 'rich countries club') have signed a deal to make multinational firms pay tax where they really earn it. This means they should pay profit tax on all the operations in the country where their activities take place.
It will be difficult to police, and only 31 countries have signed. This means firms might just start declaring their profits in a country which has not signed. However the system they hope to implement should allow countries to demand tax on the amount of tax the firm would have made if declared correctly.
One of the drawbacks of this globalisation has been that multinationals have developed ways to pay their tax in countries where the profit taxes (corporate taxes) are lowest. This is, of course, rational behaviour for after-tax profit maximizing firms.
Transfer pricing works like this. Say you are a publisher and sell a really excellent economics textbook in the UK. The profit tax in the UK is 30%. Schools in Malaysia want to buy the book. Rather than sell them the book from the UK at £33 the publisher sells the books to their subsidiary in Singapore for £6, just over the cost of production. The subsidiary then sells the books to the Malaysian schools making all the profit in Singapore where the profit tax rate is just 10%.
I'm not bitter, but that's what Simon and Schuster did with my textbook, paying royalties only on the £6 earned in the UK.
This is perfectly legal. Firms such as Starbucks have bought their coffee from their Swiss subsidiary for the whole of Europe at high prices so the profit is declared in low tax Switzerland. Google have paid just £130m tax in ten years in the UK.
Now the OECD (The Organization for Economic Cooperation and Development - the 'rich countries club') have signed a deal to make multinational firms pay tax where they really earn it. This means they should pay profit tax on all the operations in the country where their activities take place.
It will be difficult to police, and only 31 countries have signed. This means firms might just start declaring their profits in a country which has not signed. However the system they hope to implement should allow countries to demand tax on the amount of tax the firm would have made if declared correctly.
This issue has direct relevance to IB Paper 2 and for taxation policy. For VCE this is a topic that is relevant to trade and budgetary policy.
Monday, 13 January 2014
The high cost of manufacturing in Australia
The world started globalising five hundred years ago and the writing has been on the wall for high cost producers ever since.
No firm, and no government either, can subsidise a business indefinitely. The resources employed by a firm, must add more value to the process than they cost. The price that the firm must charge to achieve this must be lower than or equal too its competitors.
Of course there are other factors which can help you, quality, design and service all count for something. If that was not true then Apple wouldn't be in business. However you must in the long run be competitive somehow,
The car industry is a global industry. The same models are sold worldwide and there are plenty of manufacturers able to make them at the required quality. Australia simply can't compete in terms of costs or scale with virtually any of them.
Despite calls for government protection the car industry can't survive in Australia. And protection will cost jobs in the long run, not save them. If good government money is thrown after bad it will mean that resources are diverted from profitable, long run investments that will create the jobs of the mid 21st Century.
GM have explained their decision to pull out of Australia. The Age reports it below.
No firm, and no government either, can subsidise a business indefinitely. The resources employed by a firm, must add more value to the process than they cost. The price that the firm must charge to achieve this must be lower than or equal too its competitors.
Of course there are other factors which can help you, quality, design and service all count for something. If that was not true then Apple wouldn't be in business. However you must in the long run be competitive somehow,
The car industry is a global industry. The same models are sold worldwide and there are plenty of manufacturers able to make them at the required quality. Australia simply can't compete in terms of costs or scale with virtually any of them.
Despite calls for government protection the car industry can't survive in Australia. And protection will cost jobs in the long run, not save them. If good government money is thrown after bad it will mean that resources are diverted from profitable, long run investments that will create the jobs of the mid 21st Century.
GM have explained their decision to pull out of Australia. The Age reports it below.
Thursday, 7 November 2013
The dangers of not competing
Qantas have announced they will stop maintaining aircraft at Avalon. Despite the protests of the engineers they have themselves to blame to some degree.
The decision will mean that part of the Qantas fleet will be maintained abroad where it is much cheaper to do so. While this is unfortunate, especially for Geelong who might welcome Australia's first nuclear power plant right now, it is an illustration of the benefits of trade.
As Qantas will be able to save money on maintenance by this move they will be able to charge lower fares. Those lower fares will benefit Qantas consumers directly and other passengers as it adds to competition in the market.
There is no point complaining about lower wages abroad or lower quality (first may be true but the second isn't). The fact is that countries should specialise in what they are comparatively best at and import the rest. In the long run nobody wins by subsidising uneconomic industries, the taxpayers and consumers pay more for a brief period of higher wages and employment for the inefficient.
The actual answer is to invest in human capital via education and training to make Australia competitive in the high tech, knowledge based industries that will allow Australians to maintain their standard of living. The alternative is to drop living standards to those of the bulk of the Asian Pacific region. There will be few takers for that.
The decision will mean that part of the Qantas fleet will be maintained abroad where it is much cheaper to do so. While this is unfortunate, especially for Geelong who might welcome Australia's first nuclear power plant right now, it is an illustration of the benefits of trade.
As Qantas will be able to save money on maintenance by this move they will be able to charge lower fares. Those lower fares will benefit Qantas consumers directly and other passengers as it adds to competition in the market.
There is no point complaining about lower wages abroad or lower quality (first may be true but the second isn't). The fact is that countries should specialise in what they are comparatively best at and import the rest. In the long run nobody wins by subsidising uneconomic industries, the taxpayers and consumers pay more for a brief period of higher wages and employment for the inefficient.
The actual answer is to invest in human capital via education and training to make Australia competitive in the high tech, knowledge based industries that will allow Australians to maintain their standard of living. The alternative is to drop living standards to those of the bulk of the Asian Pacific region. There will be few takers for that.
Thursday, 21 February 2013
The Asian Century
Last year the government introduced their 'Asian Century' paper. It pointed out that Australia's future lay in Asia and that the reality was that the low cost, highly innovative Asia was where world growth would be centred.
Australia has to live with this simple fact and adjust. Strangely the discussion of the paper was centred on how more language teaching was needed and how Australia had to develop new service based industries to sell to this rapidly growing industrial continent.
Virtually nobody mentioned the implied decline of low tech and manufacturing jobs in Australia. Australians are paid very well and by comparison are much less productive in terms out costs per unit than Asian economies. For many years Australia was able to maintain high manufacturing employment and let technology pass them by for decades because they were so far away.
That is no longer an option. Globalisation, which the 'Asian Century' seeks to embrace, has made the usual Australian view of ' Australian made and owned' as up to date as a dinosaur.
Australia has to learn from the successful economies of Europe. Those who held on to the old industries and work practises, such as Spain and France, have fared very badly compared to those, such as Britain, who allowed the industries to decline and shifted resources to the more modern opportunities.
The pieces linked below illustrate this. The Telstra call centres are moving to Asia where University graduates will answer your call at any time of the day or night. Telstra will cut costs, raise profits and reinvest them in the high tech sector which will provide the sustainable jobs Australia needs.
The second piece is about a US/France spat where an American industrialist declared that they would be insane to invest in France due to the poor working practises.
Trade Unions beware, protecting an inefficient job does nothing to help the future economy of any country.
Australia has to live with this simple fact and adjust. Strangely the discussion of the paper was centred on how more language teaching was needed and how Australia had to develop new service based industries to sell to this rapidly growing industrial continent.
Virtually nobody mentioned the implied decline of low tech and manufacturing jobs in Australia. Australians are paid very well and by comparison are much less productive in terms out costs per unit than Asian economies. For many years Australia was able to maintain high manufacturing employment and let technology pass them by for decades because they were so far away.
That is no longer an option. Globalisation, which the 'Asian Century' seeks to embrace, has made the usual Australian view of ' Australian made and owned' as up to date as a dinosaur.
Australia has to learn from the successful economies of Europe. Those who held on to the old industries and work practises, such as Spain and France, have fared very badly compared to those, such as Britain, who allowed the industries to decline and shifted resources to the more modern opportunities.
The pieces linked below illustrate this. The Telstra call centres are moving to Asia where University graduates will answer your call at any time of the day or night. Telstra will cut costs, raise profits and reinvest them in the high tech sector which will provide the sustainable jobs Australia needs.
The second piece is about a US/France spat where an American industrialist declared that they would be insane to invest in France due to the poor working practises.
Trade Unions beware, protecting an inefficient job does nothing to help the future economy of any country.
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