Anti-Dumping Laws – To Be Applied To Huawei and ZTE In Europe?

Traditionally, anti-“dumping” laws are used by countries to erect non-market barriers to imports.

Sometimes, when the importer’s prices are much lower than domestic producers’ prices, thanks to subsidies the importer may have received in their home country, one could argue that the application of these laws is justified. In other situations though, when these laws are used to turn importers into pawns in tit-for-tat political games between countries, their use is a bit harder to justify.

Consider Huawei and ZTE, two Chinese makers of telecom equipment.

Long targeted in the US and elsewhere for supposed connections to the Chinese military, they found the going easier in Europe. But not anymore, writes the Economist

They are accused not of being spies (though Europeans also worry about security) but of being too cheap. On May 15th the European Commission agreed “in principle” to investigate the dumping of and subsidies for Chinese mobile-network equipment, of which the EU imports just over €1 billion-worth ($1.3 billion) a year. Karel De Gucht, the EU’s trade commissioner, says he will not start yet, to allow time for negotiations. Huawei, which is privately owned, has long denied being a tool of the Chinese state. ZTE, which is listed, insists it is “in full conformity” with the rules of the World Trade Organisation.

Interestingly, European telecommunication equipment makers are not too enthused about this unusual move and are fretting about potential tit-for-tat retaliations that may affect them in the very large, and growing, Chinese market.

Nokia Siemens Networks (NSN)

says it opposes “any efforts to erect trade barriers [and has] urged the commission to refrain from taking such steps”. Ericsson has damned Mr De Gucht’s foray. “We see nothing beneficial coming out of this,” says Ulf Pehrsson, the company’s head of government and industry relations. “Any protectionist measures taken are bound to trigger other protectionist measures.”

With billions of dollars in bilateral trade at stake, this situation is sure to be monitored closely in different parts of Europe and China. 

Tax Distortions, Apple and Its Bonds

This week, for a change, the world wasn’t obsessing over Apple’s stock. Instead, it was obsessing over the money Apple wanted to borrow from investors. 

And that obsession stemmed not just from the size of the bond offering (though that in itself was a record high $17B), but also the fact that, with $145B in cash, Apple really had no reason to borrow money to give some back to its’ shareholders. 

So why did it do it? Very low interest rates, and taxes. 

The former, colloquially called “cheap money”, has been fueling share buybacks and a lot of debt-financed M&A activity of late. Some think that we are in dangerous territory there though. 

The latter, is simpler. Companies face as much as 35% in taxes if and when they repatriate the cash they earned and now hold, abroad. So why bring back tens of billions of dollars and then pay billions of dollars in taxes in the process when Apple can quite easily raise the money here for super low interest rates and get a tax write-off on that interest? 

The Economist, yet again, frames the issue with this strategy more clearly

But think of it from the point of view of the hard-working American taxpayer. Apple’s money will still sit overseas and not be invested at home to create jobs. Apple’s tax bill will fall, as it offsets the interest payments against its profits. The buy-back will probably push up the share price in the short term*, boosting the value of executive options; profits from those options will probably be taxed at the long-term capital gains tax rate of 15%, lower than the rate many workers pay. Organising a bond issue, rather than using a company’s own cash, incurs costs in the form of fees to bankers on Wall Street; the same bankers taxpayers helped support five years ago.

the whole deal is linked to tax distortions; the treatment of repatriated cash, debt versus equity and capital gains versus income. The ideal tax system, as we have argued many times, is neutral between sources of income. The tax deductibility of interest played its part in creating this mess, both in the corporate and mortgage markets. Why should the taxpayer want to encourage higher leverage, when high leverage is the root of financial crises?

Yet another reason the American tax code and some of the complicated incentives therein must be changed and simplified – in a way that benefits both companies and the taxpayer. 

Taxes Drive Cross Border Traffic

 

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