Home' Trinidad and Tobago Guardian : August 16th 2015 Contents AUGUST 16 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCE | SBG15
The cloud hanging over
emerging markets seemed
to darken in the past week.
Fears that the Federal
Reserve is about to raise
rates, pushing up debt-ser-
vicing costs and sucking capital out of
emerging markets, already had been weigh-
ing on currencies and stock markets from
Brazil to Turkey. Now a fresh worry is blot-
ting the horizon. On August 11 China engi-
neered a small devaluation of the yuan,
prompting concerns that, with growth
sputtering, its government was ready to
risk a global currency war.
The angst about the state of the world s
two biggest economies is understandable.
China s economy has slowed markedly and
is likely to grow by seven per cent this year,
its most languid rate in a quarter-century.
In addition the government has been trying
to reorient the economy from investment
to consumption. For emerging markets
that had been catering to China s invest-
ment binge, those selling it coal and iron
ore, copper and bauxite, the past few years
have been little short of brutal.
The economy s slowing and rebalancing
explain much of the 40 per cent fall in
commodity prices since their peak in 2011
and, by extension, the travails of countries
which make their fortunes digging stuff
out of the ground, from Peru to South
For other emerging markets the impor-
tance of China as a source of direct demand
is less pronounced. Exports to China
account for less than nine per cent of total
shipments from developing countries, cal-
culates Jonathan Anderson of Emerging
Advisers, a consultancy, whereas exports
to the rich world account for 55 per cent.
For countries exporting food and fuel, the
majority of the global resource trade,
China s slowdown has had a limited impact.
Except for a small group of countries
heavily concentrated on exports of ores
and minerals, Anderson said, "China has
hardly mattered at all."
China can make itself felt in other ways,
however. A slowdown in the world s sec-
ond-largest economy, for instance, is bound
to have pass-along effects on demand.
Deflation in China puts pressure on com-
panies in other emerging markets to cut
Some also worry that the yuan s fall may
initiate a series of competitive devaluations,
with other exporters racing to weaken their
exchange rates or, perhaps, resorting to
trade barriers as a last resort. Fortunately
the changes to China s exchange-rate
regime do not seem nearly big enough to
set such a vicious cycle in motion. Even
after its devaluation, the yuan remains
stronger than it was a year ago in trade-
weighted terms. Moreover, the authorities
are now intervening to slow its decline.
In other words, the depreciation is a
small, belated step to keep the yuan s value
in line with those of its peers, not a dramatic
shift in exchange-rate policy.
China s slowdown continues to amplify
jitters about the Fed s impending "liftoff."
The sensitivity of developing countries to
changes in policy at the Fed was amply
illustrated by the "taper tantrum" of 2013,
when the announcement that it would
slow and eventually stop its huge purchases
of government bonds led to turmoil in
An American rate hike, which may come
as soon as September, could put pressure
on emerging markets in a variety of ways.
Rising rates will add to the allure of Amer-
ican assets, potentially making the dollar
even stronger. For the governments, house-
holds and companies in the developing
world that have borrowed trillions of dollars
in recent years, interest and repayment
costs will climb in terms of local curren-
cy.If fears about their debts lead to more
outflows of capital, central banks in the
weakest countries will face an invidious
choice between letting their currencies
plummet and ratcheting up interest rates
to defend them. The former will only aggra-
vate the burden of their foreign-debt load,
while the latter will stifle growth.
Bill Gross, the world s best-known bond
manager, has spoken of a "currency deba-
cle" for emerging markets.
Not all agree that higher American inter-
est rates need spell doom. That the Fed
has been edging toward liftoff is no secret.
Anticipation of this is one reason for the
dollar s recent strength. If its tightening is
gradual, as expected, emerging markets
may fare better than feared.
The presumption that the dollar
strengthens when the Fed raises rates is
not borne out by evidence. In the first 100
days of its four big tightening cycles of the
past 30 years, the dollar actually has weak-
ened every time, according to David Bloom
of HSBC, a bank.
The notion that Western central banks
efforts to keep interest rates low sent a
torrent of money into emerging markets
that is now about to drain away also may
be wrong. Average quarterly flows from
America to emerging markets were actually
higher before the crisis, according to Fitch,
a ratings agency. If so, monetary policy in
America may not be the be-all and end-
all for emerging markets.
That, at any rate, will be their hope.
@2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
It is the corporate equivalent of burning the
American flag. A "tax inversion" is a maneuver
in which a company, usually an American one,
acquires or merges with a foreign rival, then
shifts its legal headquarters abroad to reap tax
benefits. A spate of such deals last year led Pres-
ident Barack Obama to brand inversions as "unpatriotic,"
and the Treasury formulated rules to stamp out the
That stemmed the flow of inversions awhile. Now a
flurry of deals has put them back in the spotlight.
This month alone, Terex, a cranemaker, has announced
a deal with Konecranes that will move its headquarters
to Finland, while CF Industries, a fertiliser-maker, and
Coca-Cola Enterprises, a bottler, have unveiled trans-
actions in which they will redomicile in Britain.
Policy-makers are talking about making inversions
even harder. The perverse consequence would be to
make it more likely that taxes and jobs would leave
The boardroom case for inversions stems from Amer-
ica s tax exceptionalism. It levies a higher corporate-tax
rate than any other rich country, a combined federal-
and-state rate of 39 per cent, against an average of 25
per cent for the other countries in the Organisation for
Economic Cooperation and Development. It also spreads
its tentacles worldwide, so that profits earned abroad
also are subject to American taxes when they are repa-
To this problem, the tinkering of officials is no answer
at all. Making it hard for American companies to invert
does precisely nothing to alter the comparative tax advan-
tages of changing domicile. It only makes it more likely
that foreign companies will acquire American ones
instead of vice versa and, indeed, that is precisely what
Salix, an American drug company that was seeking
to invert before last year s saga, since then has been
bought by a Canadian company called Valeant, which
reckons that it can save more than half a billion dollars
in taxes over five years by changing Salix s domicile.
Shire, an Irish drug company firm, has turned from prey
to predator: Once the target of an American company
called Abbvie, it is now hunting Illinois-based Baxalta
and dangling tax savings as part of the rationale for the
deal. Since the start of the year, foreign companies have
announced acquisitions of American targets worth US$315
billion, according to S&P Capital IQ, a data provider.
The annual record, set in 2007, is US$326 billion.
Tax is not the only factor in these deals, but it plays
a big part. At the moment the earnings that American
companies keep abroad---US$2.1 trillion and counting---
act like a magnet for tax-advantaged acquirers. Research
suggests that the higher the amount of these locked-
out earnings, the more likely it is that an American com-
pany will be snapped up by a foreign one. If American
policy-makers really worry about losing out to lower-
tax environments, they should get rid of the loopholes
that infest their tax rules, drop the corporate-income-
tax rate and move to a territorial system.
That would have three effects. First, trapped foreign
earnings would be more likely to come back to America.
Second, American companies would be more likely to
buy than to be bought: A 2013 paper reckoned that
switching from a worldwide system of taxation to a ter-
ritorial one would result in a 17 per cent jump in cross-
border acquisitions by American firms. Third, jobs would
be less likely to flow abroad. Moving domiciles may
once have been about moving the office nameplate, but,
as attitudes toward tax avoidance harden, changes of
corporate control will increasingly involve senior people
pulling up stakes.
It is hard for American politicians to explain to voters
that taxing companies foreign earnings is a poor idea.
Instead Obama has proposed taxing foreign profits at
a lower rate, whether or not the money is repatriated.
Alas, that would only cement the advantages of foreign
ownership. How un-American. @2015 The Economist
The inverted logic
of corporate taxes
China, the Fed and emerging markets
Shake, rattle and roll:
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