The Hindu Business Line : Protectionist code

When your house is devastated by a tsunami, you don’t hand out your money to others so that they can rebuild their houses. You concentrate on rebuilding your own. The US President, Mr Barack Obama’s proposals in respect of the US tax code have to be viewed in this light. Over the years, the code has made it more profitable for US firms not to invest in the US, but abroad. It has also made the line between tax avoidance and tax evasion almost invisible, primaril y by making profits from trading in capital more-or-less exempt from income tax. But now that the US is short of money, Mr Obama is trying to plug those leaks as every dollar retained will come in useful. He hopes that trapping US profits and savings within US boundaries will result in higher domestic investment and more jobs for Americans.

This, it should be evident, is the logic of all capital controls, which appear gradually to be coming back into fashion. It is worth pointing out that this is the policy that developing countries have been following since 1950, and for which they have been roundly castigated for over three decades by globalisers. Indeed, even now there are many who believe that it is wrong to adopt a policy that prevents capital from seeking the most financially profitable destinations, never mind other national concerns. What is sauce for the goose, is obviously not sauce for the gander.

India and others, who need to tap into foreign savings in one way or another, have been expressing deep concern at international fora, most notably at the G-20 meetings, that the financial catastrophe in the US will lead it to financial protectionism. The US has been denying that it will do so, but the truth is now out. While it may not use direct quantitative restrictions on capital outflows, it will use indirect ones through its tax laws. It can thus argue at the international fora that it is not protectionist because the right to tax and the laws that follow are sovereign functions that cannot be abridged through international commitments. But that is sophistry. The effect, regardless of the chosen method, will be the same: a reduction in global capital flows and therefore Foreign Direct Investment in the developing countries. This was exactly what was done at the very beginning of the Great Depression, which became the worse for it. The only difference is that then such protectionism extended to trade in goods as well. The moral of the story is clear and simple: when it comes to national interest, fancy theories and ideologies have to make way for pragmatism.

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