Subsidized Global "Free Trade" - II (Industry)

In the contemporary worldview, a belief and endorsement of "free trade/ market" - competition, level-playing field, removal of trade-barriers/ subsidies, etc. - has become a fashion statement of a liberal and modern mindset. It is also taken as a fact of life, since it is perpetuated by the popular mainstream media (which now also often includes management education and reports by investment analysts).

A couple of months back, this blog/newsletter had carried a posting about how the the rich and developed nations heavily subsidize their Farm and Agriculture (while at the same time, they put pressure on the less-developed countries to dismantle the subsidies on their agriculture and industry - through the "conditionalities" of loans given by the nations and multilateral agencies)

Even for the industry, the fact of subsidy holds. All global trade is subsidized (one may like to call it "incentivized") by developed countries

All developed countries have what are broadly called the ECAs (Export Credit Agencies), who provide lower-than-the-market loans to companies, loan guarantees for bad investments, low-risk financing for high-risk projects. These credits/loans allow the companies to export and market their products in other countries at a price lower than their manufacturing costs.

In US, for instance, (and am quoting this primarily, since US is a champion of "free-trade" cause), there are these various agencies/programs which serve this purpose:

Exim Bank of USA

Overseas Private Investment Corporation

Export Enhancement Program

Martime Subsidies

Advanced Technologies Program

Accelerated Depreciation Deduction

Corporation Tax Credits

Deferral of Taxes on US Corporations
etc.
This link lists 55 Corporate Welfare programs, inder different names, and their outlay in 1997:
http://www-hoover.stanford.edu/publications/epp/88/88d.html#table1

These program and agencies provide various kinds of subsidies and grants to businesses, e.g.,

below market loans and loan guarantees to businesses

below-cost or free provision of government goods and services to businesses;

above-market price purchases of goods and services by governments from businesses;

tax breaks and loopholes for businessesto escape taxes

loans for projects which cannot be funded due to international law; and,

business-protection laws or changes in laws that help business bottom lines.

One of the reports from Cato Institute estimates that during 1996-2002 these subsidies/incentives/ corporate welfare programs (have your pick for the term) amounted to $3.7tn - yes, $3.7 TRILLION!!! - that was doled out to american corporations... [essentially, meaning that a US company can market its produce at a price lower than its manufacturing cost!!!]

The "economic stimulus packages" which give tax breaks to large corporates, provide for further cushion. Interestingly, the benefits of this "stimulus" mostly go to large, successful and profitable corporations. A study found that between 1996-2000, just ten large profitable companies enjoyed a total of $50 billion in corporate tax breaks. That brought their combined tax bills down to only 8.9 percent of their profits over the five years (please note that in US for companies with taxable income of $10mn or above, the corpoate tax rate is 35% of taxable income). These were:

Microsoft enjoyed more than $12 billion in total tax breaks over 1996-2000. In fact, Microsoft actually paid no tax at all in 1999, despite $12.3 billion in reported U.S. profits.

General Electric, America’s most profitable corporation, reported $50.8 billion in U.S. profits over this 5 year period, but paid only 11.5 percent of that in federal income taxes. That low tax rate reflected almost $12 billion in corporate tax welfare for GE.

Ford enjoyed $9.1 billion in corporate tax welfare over 1996-2000.

Worldcom paid no taxes at all in two of the last three years during 1996-2000, despite reported U.S. profits of $15.2 billion. Worldcom’s total tax rate over the three years was only 1.6%.

IBM reported $5.7 billion in U.S. profits in 2000, but paid only 3.4 percent of that in federal income taxes. In 1997, IBM reported $3.1 billion in U.S. profits, and instead of paying taxes, got an outright tax rebate.

General Motors paid no taxes at all in three of this five years period, despite $12.5 billion in reported U.S. profits. GM’s tax rate for the past three years was negative 1.3 percent.

Enron paid no income taxes at all in four of these five years, despite $1.8 billion in reported U.S. profits. Enron’s total taxes over the five years were a negative $381 million.

El Paso Energy reported $1.6 billion in U.S. profits over the five years, but paid less than nothing in federal income taxes, getting tax rebates of $254 million.

Colgate-Palmolive paid no taxes at all in three of the five years, despite $1.6 billion in reported U.S. profits. Colgate’s total tax rate over the five years was negative 1.3 percent.

Navistar, on $1.4 billion in U.S. profits over the five years, paid only $28 million in federal income taxes, a tax rate of only 2 percent.

In addition, corporations - specially, the large ones - receive numerous subsidies from the states and local governments. Donald L. Barlett and James B. Steele in an article (Corporate Welfare,The Time, Nov 9,1998) report:

"State and local governments now give corporations money to move from one city to another--even from one building to another--and tax credits for hiring new employees. They supply funds to train workers or pay part of their wages while they are in training, and provide scientific and engineering assistance to solve workplace technical problems. They repave existing roads and build new ones. They lend money at bargain-basement interest rates to erect plants or buy equipment. They excuse corporations from paying sales and property taxes and relieve them from taxes on investment income."

They go on to give some specific examples:

In 1989 Illinois gave $240 million in economic incentives to Sears, Roebuck & Co. to keep its corporate headquarters and 5,400 workers in the state by moving from Chicago to suburban Hoffman Estates. That amounted to a subsidy of $44,000 for each job.

In 1991 Indiana gave $451 million in economic incentives to United Airlines to build an aircraft-maintenance facility that would employ as many as 6,300 people. Subsidy: $72,000 for each job.

In 1993 Alabama gave $253 million in economic incentives to Mercedes-Benz to build an automobile-assembly plant near Tuscaloosa and employ 1,500 workers. Subsidy: $169,000 for each job.

In 1997 Pennsylvania gave $307 million in economic incentives to Kvaerner ASA, a Norwegian global engineering and construction company, to open a shipyard at the former Philadelphia Naval Shipyard and employ 950 people. Subsidy: $323,000 for each job.

... and so on.

Needless to say, all this at the expense of the tax-payers' money...

I am sure what is true of US would also be true, in different degrees, for other developed economies... In fact, may even be true for the fast developing economies like China and India...

Yes, one may feel that all is not "fair" in the "free market economy"... But at least, now we do know how and why some "globally competitive companies" become gloablly competitive...

Sources:
http://www.cato.org/testimony/ct-sm060397.html
http://www.endgame.org/subsidies1.html
http://www.corporations.org/welfare/
http://www.ctj.org/html/corp0402.htm
http://www.socialconscience.com/articles/welfare/
http://www-hoover.stanford.edu/publications/epp/88/88a.html
http://www.time.com/time/archive/preview/0,10987,989508,00.html