Today’s Beef With Government Regulation

Tuesday’s news review revealed some interesting—if frustrating—global government regulations.

Russia erected new trade barriers this week, banning cattle, pig and animal feed imports from the EU. Officially, the ban rests on health and safety grounds—Russia cited the possible “transmission of spongiform encephalopathy agents,” which could cause birth defects in cattle.

It seems like a reasonable move, until one considers nations regularly shroud traditional protectionism in public health concerns. Take Taiwan, which has long banned US beef and pork containing traces of the leanness-enhancing drug ractopamine, citing inconclusive scientific evidence of its safety. The government is considering lifting the beef ban to meet preconditions for joining the Trans-Pacific Partnership talks, but pork would remain blacklisted “out of concern for public health and the interests of the local pig husbandry industry” (italics are ours). Not coincidentally, Taiwanese pork farming and consumption vastly outstrip beef, and thousands of pig farmers recently protested the ban’s lifting. Plus, the Taiwanese pork market already faces a supply glut, prompting the government to intervene to stem the price drop—next week, the Council of Agriculture will order 9,000 pig carcasses frozen in hopes pork prices will rise back to $2/kg. Imagine the uproar if the government decided to allow American pork inside Taiwan’s borders, further lowering prices. A political nightmare! Using “scientific” reasons to protect pig farmers is an easy fix.

So is Russia, too, using public health to validate protectionism that could otherwise violate WTO rules? The European Commission thinks so, pointing out pigs don’t carry the pathogen in question. Plus, Russia’s embargo came four days after the European Parliament passed a resolution condemning Russia’s “fraudulent” presidential election. It’s a circumstantial link, to be sure. But it wouldn’t be the first time Russia banned certain agricultural imports after being “lectured” by western officials over its undemocratic leanings.

India’s Tax Boycott and an Indian Tax to Boycott

India’s government seems poised to teach the EU a little lesson in taxation: If you tax something, you get less of it. How? India’s recommending its airlines boycott the EU’s carbon tax, either by ignoring it or simply reducing flights to Europe. Yet it’s beyond ironic India’s government is the one doling out lessons on silly taxation.

Just last week, the government demonstrated it has little opposition to silly taxes on foreign businesses, provided the silly taxes are theirs. For years, India’s government has sought to retroactively assess capital gains taxes on transactions like one in which a foreign wireless firm acquired an Indian company to enter the nation’s burgeoning marketplace. Recently, the Indian Supreme Court rejected the government’s claim. Following the ruling, the government proposed changing tax law regarding cross-border acquisitions to permit the assessment of taxes. Oh, and to circumvent the court, the tax would be retroactive to ... wait for it ... 1962.

So should the proposal pass, if a firm acquired an Indian arm to market Beatles LPs during rock and roll’s British Invasion, it could be subject to tax in 2012. Call us cynical, but we doubt many multinationals would be quick to ante up. Hey, maybe foreign governments will tell firms to boycott India’s way-back tax! (Assuming the companies still exist all these years later, that is.) But it isn’t as though the proposed protectionist tax would have no impact. After all, multinationals could rethink plans to acquire an Indian presence—in that way showing if you tax something old, you’re likely to get less of something new.

One step forward, two steps back ...

As we detailed in Tuesday’s cover story, global trade appears on a fairly consistent trajectory toward increased openness and fewer barriers—though that doesn’t preclude some steps in the opposite direction, as Brazil seemingly indicates.

Last week, Brazil strong-armed Mexico into renegotiating an old car trade agreement that would put a temporary, three-year quota system in place, limiting the value of vehicles Mexico can export to Brazil. Now, in the grand scheme of the global economy (and even the economies of the two Emerging Markets in question), this is a very small thing. But the quota system—and the political pressures behind it—does illustrate the rise of the Brazilian consumer. After all, that a quota system is in discussion seemingly implies Brazilians can and do purchase Mexican-produced vehicles. But the principle behind Brazil’s response, which many see as largely protectionist in aim, is likely a small step in the wrong direction.

In the long run, Brazil’s leaders would be wise to learn from the lessons of the past and present. While protectionism is often politically popular, centuries of economic history show the benefits more open economies can bring—and the ravages of closed, non-capitalist and non-free market societies (*ahem, North Korea).

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