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The Iran Dilemma – The Tyrant Has Spoken

By Peter Koenig

 

The tyrant, of course, is Donald Trump. He launched tirade after tirade, and keeps launching them, insult after insult, lies after lies after miserable lies at the Government of Iran – about Iran not fulfilling the conditions of the Nuclear Deal. The typical mass indoctrination of the western world through the presstitute mainstream media. Goebbels might smile in his grave, how well the neolibs or neo-Nazis have learned from the Nazis of his time – and perfected this science of deceit in the last 50 years. Fortunately, the counter culture, the truth seekers have also become more sophisticated. More people are waking up to the truth every day.

This Nuclear Deal was an agreement reached after 9 years of meticulous, often perilous and at times for Iran demeaning and offending negotiations. But Iran endured, because Iran’s negotiators, notably the Foreign Minister Javad Zarif, knew what they were talking about, namely that Iran had never any plans to develop nuclear weapons, but using the enrichment process for the production of nuclear power. This was, by the way, confirmed by all 16 US security agencies. To no avail. The media all but ignored it. The announcement received little coverage by the MSM and was soon shoved under the carpet by the massive wester lie-propaganda.

Iran knew that justice was on her side – the agreement concluded in Vienna, Austria, on 14 July 2015 between the 5 + 1 (the five permanent members of the UN Security Council, China, France, Russia, UK, the United States plus German), as well as the European Union with the so called Joint Comprehensive Plan of Action (JCPOA). Of course, this was under Obama’s Presidency, and Obama was not as friendly to Netanyahu as is Trump, who is through his family closely interlinked with the Master Zionist of the Zionists, Mr. Bibi Netanyahu.

President Trump wants to cancel the Nuclear Deal. He has said this from the very beginning of his Presidency. And lately he started new outbursts of false accusations against Iran. Now that the entire world is against him, wanting to adhere to the nuclear agreement, including some Republican members of Congress – all of the five signatories, even the otherwise vassal EU, they all say that Iran is fully complying with the agreement, and they will stick to the deal. The International Atomic Energy Agency (IAEA) in Vienna has also confirmed that Iran is fully compliant with the rules of the terms of the accord.

Since it is now difficult for Mr. Trump or any of his handlers to pretend that Iran has failed the agreement, Trump has changed his language. He, and some of his most ridiculous stooges say now that Iran is infringing on the “spirit” of the agreement, as if Trump even knew what spirit and spirituality means.

The only National Security Threat to virtually ALL the nations of the globe, minus Israel, is the only rogue state we know – the United States of America.

He, the tyrant, keeps insulting and hammering down on the Government of Iran all the same – spreading lies which even Iran’s enemies know are lies: Iran is spreading and funding terrorism in the region, and the world, they are [military] threat to the region – and they are even a “National Security Threat” – 12,000 km away from Washington. Imagine, one of the most peaceful countries in the world. The only National Security Threat to virtually ALL the nations of the globe, minus Israel, is the only rogue state we know – the United States of America.

So, for now The Donald has retracted from his strong statement of cancelling the Nuclear Deal and said simply he will not “certify” it, whatever that means. Because “cancelling” by the US alone is simply another outrageous arrogance of Washington’s. The US is a mere signatory among 5+1 and the EU. So, cancelling is legally impossible. For now, he has relegated the “Issue” – the Trump problem, that is – to Congress to come up with a solution – i.e. more sanctions on Iran or – else?

Iran is beyond sanctions. Iran is already part of the new economic system – the one emanating from the Shanghai Cooperation Organization (SCO), led by China and Russia, and detached from the dollar hegemony. Therefore, slandering Iran, threatening Iran with war and sanctions or both, is one big bluff – and Trump, Netanyahu’s puddle, believe the world will go for it.

More likely, Trump’s handlers want the Donald to create more confusion, spread chaos. Since the Iran “issue” was delegated to Congress to handle, Trump is again verbally firebombing North Korea, threats after threats. And dangerously provoking military games on DPRK’s sea and land borders. More sanctions are not enough, because by now everybody knows they don’t work. How can Washington impose sanctions on China and at the same time hope China will uphold the sanctions the US is imposing on the DPRK? North Korea’s economy is tied at the tune of 90% to China. Not to mention that “sanctions” – by now the hearing or reading of the mere term is laughable – imposed on China and Russia are totally meaningless, useless, toothless.

Both countries are trading with the world since quite a while outside of the fiat dollar system, using instead yuans and rubles convertible into gold. That’s the new currency standard offered to the world. The west can take it or leave it. It’s like jumping on the fast train that has already left the Shanghai station, racing through Eurasia towards Europe, called the OBI – the One Belt Initiative, President Xi’s answer to the western economy of fraud, that will lay the tracks for a new and peaceful economy, possibly for the next few hundred years. I have said it many times before, and will keep repeating it, the future is in the east; the west is passé. It is committing suicide, greed, war and lie-driven auto-destruction. Iran, India, Pakistan are already members of the SCO, others, including NATO Turkey, are vying to join and be no longer vulnerable to US imposed sanctions and sledgehammer policies.

How can Washington impose sanctions on China and at the same time hope China will uphold the sanctions the US is imposing on the DPRK?

Even far-away Venezuela has decided to trade her hydrocarbon resources with China in gold-convertible yuans. Hence, Venezuela is detaching herself from the dollar economy, freeing herself from the financial and economic shackles of Wall street, the FED and the Bretton Woods Institutions. Venezuela is a beacon illuminating a new economy for South America, as well as an example of a solid democracy, as demonstrated by this past weekend’s regional fully transparent elections to elect governors and state legislators – a new path to follow by other Latin American countries, who are still enslaved and trampled by the dictate of Washington.

So – why is Trump letting off his steam, showing off in such ridiculous brinkmanship? A piece of theatre for a public that is afraid to see the light? – Outbreaks of aggressive rants against Iran, North Korea, Syria, Venezuela and lately again Cuba – who is next? It’s like a dance of death – a final ritual that may end up in total nuclear annihilation or implode by its own weight, because those deep dark forces behind The Trump love life too much to let it be destroyed by their overdose of thrill.

Photo Source: http://edition.cnn.com/2017/10/11/politics/iran-trump-reliability-north-korea/index.html 

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About the Author

koenig-webPeter Koenig is an economist and geopolitical analyst. He is also a former World Bank staff and worked extensively around the world in the fields of environment and water resources. He lectures at universities in the US, Europe and South America. He writes regularly for Global Research, ICH, RT, Sputnik, PressTV, The 4th Media, TeleSUR, TruePublica, The Vineyard of The Saker Blog, and other internet sites. He is the author of Implosion – An Economic Thriller about War, Environmental Destruction and Corporate Greed – fiction based on facts and on 30 years of World Bank experience around the globe. He is also a co-author of The World Order and Revolution! – Essays from the Resistance.

Who Will Be the Next Fed Chief – And Why It Matters

By Dan Steinbock

Janet Yellen’s term is ending at the Federal Reserve. With new appointments, President Trump can indirectly shape US monetary policy for years to come – for better or worse. 

 

Serving as the “epitome of calm”, Fed chief Ben Bernanke responded to the global financial crisis by cutting the federal funds rate to zero and initiating rounds of quantitative easing (QE) soon thereafter.

When Janet Yellen replaced Bernanke in 2014, US economy had begun the exit from zero-interest-policy-rates (ZIRP) but not balance sheet normalisation.

As Yellen’s term will end on February 2018, President Trump will soon select the next Fed chief and several new members of the Fed Board. Consequently, Trump will indirectly shape US monetary policies for years to come.

Not surprisingly, Trump has been assisted by Vice President Mike Pence, who has met with outside advisers – including Heritage Foundation economist Steve Moore, conservative economist Larry Kudlow and former President Ronald Reagan economic adviser Art Laffer – to assess the criteria for the next Fed leader.

Trump’s current shortlist features half a dozen viable candidates. In line with his “America First” approach, Trump is likely to ignore the international implications of the next Fed chief. Nor has he any interest in the Phillips curve that has influenced Yellen’s monetary stance.

Instead, Trump is likely to choose a candidate that will not prove too independent and who will prioritise Main Street, not Wall Street – and one that will support his proposed fiscal expansion.

 

Monetary Hawks

The Fed has a dual mandate to maintain stable prices and full employment. Monetary “hawks” tend to stress prices at the expense of jobs, whereas “doves” tend to focus on jobs at the expense of prices.

Both Yellen and Bernanke are academic experts of the Great Depression. As a Keynesian economist and monetary dove, Yellen has been cautious with the pace of normalisation. The Fed shortlist features several Wall Street insiders who have been seen as frontrunners. Such assessments underestimate Trump’s suspicions about Wall Street.

Kevin Warsh is a “hard money hawk” with close ties to Wall Street. Married with the $2 billion heiress Jane Lauder, his father-in-law is Ronald Lauder, a longtime friend of Trump. After serving as Morgan Stanley’s M&A executive, Warsh was President Bush’s director of the National Economic Council. At just 35 years old, he became the youngest appointment in the Fed.

Like Greenspan, Warsh is an ultimate free-market advocate. In 2007, less than a year before the rescue of Bear Stearns, he argued that financial innovation made the system safer. During and after the 2008 crisis, Warsh served as a governor of the Fed and its primary liaison to Wall Street. As US economy fell into deflation, he kept predicting that inflation would rise.

If Warsh is a monetary hawk, Taylor is a monetary conservative.

More recently, Trump met Stanford’s John B. Taylor, an accomplished academic of monetary economics. Taylor believes that the global crisis was caused by flawed macroeconomic policies in the US and elsewhere. Under Alan Greenspan, the Fed created “monetary excesses”. Interest rates were kept too low for too long, which led to the housing boom.

Unlike Bernanke and Yellen, Taylor has long cautioned the Fed should move away from quantitative easing measures and opt for a more stable monetary policy. If Warsh is a monetary hawk, Taylor is a monetary conservative.

Gary Cohn is Trump’s Director of the National Economic Council and his chief economic advisor. Unlike Warsh and Powell, Cohn is a registered Democrat. As former president and COO of Goldman Sachs, he is considered aggressive and arrogant. But unlike his rivals, he supports reinstating the Glass-Steagall legislation, which would separate commercial and investment banking.

Monetary Doves

After law school, Fed governor Jerome Powell worked as an associate for an investment bank and private equity giant Carlyle Group. He served as an assistant secretary and undersecretary of the Treasury under President George H.W. Bush.

Unlike his rivals, Powell is not a PhD-trained economist, but his grasp of monetary economics is highly regarded. He has solid Republican credentials and is seen to represent institutional continuity. He is believed to be Treasury Secretary Steven Mnuchin’s preferred candidate and Trump’s current favourite. Unlike Warsh or Taylor, Powell believes in a more dovish monetary stance.

Trump could also opt for the incumbent Fed chief Janet Yellen. While in the past he has criticised some of Yellen’s actions and her Democratic legacies, he has also announced that he is a “low interest rate person” like Yellen.

Job growth is no longer accompanied with wage growth.

Yellen continues to believe in the modern Phillips curve, which sees an inverse relationship between unemployment and inflation. Historically, a short-run trade-off between unemployment and inflation reflected the postwar Keynesian era when rates climbed from 2% in the 1950s peaking at 20% in early 80s. In the past three decades, rates have shrunk to zero, however.

In light of the Phillips curve, decreased unemployment should go hand in hand with higher rates of inflation. Since unemployment rate is only 4.2%; that should translate to rising inflation. Yet, that has not been the case. Job growth is no longer accompanied with wage growth.

 

Fiscal Expansion vs Fed’s Normalisation

In his Crippled America (2015), Trump argued that “our airports, bridges, water tunnels, power grids, rail systems; our nation’s entire infrastructure is crumbling, and we aren’t doing anything about it”. As a result, fiscal expansion – a $1 trillion dollar infrastructure plan – is a central tenet of the Trump agenda.

To raise capital, Trump has hoped to create an infrastructure fund supported by government bonds, similar to “Build America Bonds”.

When Trump first developed his infrastructure plan, interest rates were close to zero. But as the Fed is normalising – about to hike up the rates and exiting from quantitative easing – the plan will be a lot more expensive to execute.

“If we raise interest rates and if the dollar starts getting too strong, we’re going to have some major problems”, Trump warned already in summer 2016. That is now the reality. He can no longer rely on the Fed to ease and thus to monetise the debt issuance. Conversely, aggressive infrastructure modernisation could slow rate increases, or keep them lower.

Moreover, the Fed’s rate hikes tend to strengthen the dollar, while Trump’s debt tsunami would weaken it. Despite the rhetoric of normalisation and strong dollar, Trump needs low rates and weak dollar, while the Fed is raising rates and boosting the dollar.

 

The Role of Equities and Bond Yields

Trump cannot mitigate the realities of normalisation, but he can slow its pace by selecting a monetary dove. In this view, neither Warsh nor Taylor will do. The former would make Trump’s fiscal expansion prohibitively costly; the latter’s penchant for conservative stability would undermine infrastructure debt-taking.

That leaves Cohn, Powell and Yellen. However, Cohn and Yellen are Democrats, Powell is not.

After a September report that Trump had met with Warsh, stocks fell slightly before recovering, while Treasury bonds saw a significant sell-off and yields rose. It was foretaste of the kind of yield pricing that would undermine Trump’s fiscal expansion.

From the White House’s standpoint, a monetary hawk would hurt equities while boosting bond yields. In this view, the appointment of Powell – or even Yellen – would mean continuity, support equities while keeping bond yields low (Figure 1).

 

Figure 1: Rates, Normalisation and Successor Trajectories

 

That would be in line with Trump’s fiscal plans.

 

Featured Image: Janet Yellen with the former Fed chairs Ben Bernanke, center, and Paul Volcker. Donald Trump said he would most likely replace her as Fed chairwoman if he became president. © Andrew Renneisen/Getty Images

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About the Author

dan-steinbock-webDan Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

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How To Fight Corruption in the Philippines

Interview with Dr. Dan Steinbock

Despite opposition, President Duterte’s Anti-Corruption Commission is vital in light of Philippine history and international experience. To be effective, the anti-corruption agency must be independent.

 

On October 4, President Duterte signed Executive Order 4 creating the Presidential Anti-Corruption Commission (PACC). The Commission is mandated “to directly assist the President in investigating and/or hearing administrative cases primarily involving graft and or corruption against all presidential appointees.”

Opposition has renounced the PACC as “unconstitutional”, “redundant” and “afflicted with congenital infirmity.” While some critics have expressed legitimate concerns, others may have a more self-interested agenda.

The fact remains that the Philippines ranks 101st in the current Corruption Perceptions Index (CPI); well behind China, India and Indonesia.

Yet, the fact remains that the Philippines ranks 101st in the current Corruption Perceptions Index (CPI); well behind China, India and Indonesia. Clearly, there is a reason for a strong and different anti-corruption initiative. The former is critical for effectiveness; the latter is vital because other efforts have failed.

In light of historical and international evidence, the effort to raise living standards in the Philippines is not viable without a broad and deep anti-corruption initiative.

 

Historical Realities

When the Ramos era ended in the late 1990s, average Philippine per capita income was about $3,100, which meant 112th rank in the world.  In the corruption index, its score (3.3) was one of the lowest worldwide.

During the Estrada rule, per capita income grew to $3,600 but, after a hopeful start, the country fell further in the Index. In the Arroyo era, per capita income climbed to more than $5,500 but corruption remained widespread and got worse in the subsequent political turmoil.

In 2010, President Aquino began his term with a stated anti-corruption campaign. Barely three years later, the Inquirer cited his speech at the World Economic Forum: “Anti-corruption program [is] now bearing fruits.” In May 2016 – at the eve of the presidential election – the Rappler headlined: “PH anti-corruption drive most improved,” relying on consultant experience of 16 countries.

Yet, in light of the global corruption index, Aquino’s mid-term showed only slight improvement as the Index initially climbed to the Estrada-era level, only to fall further back at Ramos-era figures. So after two decades and much talk about progress, the Philippines corruption score was where it had been in the late 1990s – as if nothing had happened (see Figure).

Corruption moved to an entirely new level as drugs proliferated from shantytowns to chic clubs as the Philippines became a transshipment hub for drug syndicates operating in East Asia and cooperating with Mexico’s Sinaloa cartel.

If anything, corruption moved to an entirely new level as drugs proliferated from shantytowns to chic clubs as the Philippines became a transshipment hub for drug syndicates operating in East Asia and cooperating with Mexico’s Sinaloa cartel. When Duterte warned about the coming of a “narco-state” during his campaign, that was bypassed as political propaganda until abundant evidence became available about the spread of narco-money.

Corruption, poverty, illicit finance and bribery tend to go hand in hand.

Figure. Corruption and Slow Progress in Per Capita Incomes

International Experience

Today, Singapore is one of the world’s most attractive destinations, clean and wealthy, known for its strict rule of law.  Yet, in the postwar era, corruption was rampant in the city-state.

In 1952, the British colonial government created the Corrupt Practices Investigation Bureau (CPIB) at the Attorney-General’s Chambers. Yet, not much happened until Singapore attained self-government in 1959, when Prime Minister Lee Kuan Yew moved the CPIB into his office so that it would be independent from the police force and other government agencies.

Today, Singapore ranks 5th in the global corruption index; well ahead of Canada, Germany, and the UK.

Hong Kong learned from Singapore. In the 1970s, it was still widely considered one of the most corrupt cities in the world.  Reforms came only after huge protests, which led to the launch of the Independent Commission Against Corruption (ICAC), with wide investigative and executive powers and answerable to only the Governor Hong Kong, unlike the old police Anti-Corruption Branch.

Today Hong Kong is 15th in the corruption index; before Japan, US and France.

Upon taking office in the early 2010s, China’s President Xi Jinping pledged to crack down on “tigers and flies.” The anti-corruption campaign has been executed largely under the direction of Central Commission for Discipline Inspection (CCDI), and its smart and tough secretary Wang Qishan, along with corresponding judicial and military bodies. The CCDI has gone after both high-level officials and lower-level civil servants; from former military leaders, such as Xu Caihou and Guo Boxiong, and former politburo member Zhou Yongkang to Chongqing’s former party chief Bo Xilai.

As of 2016, the Chinese campaign had ‘netted’ over 120 high-ranking officials, including about a dozen high-ranking military officers, several senior executives of state-owned companies, and five national leaders.

 

The Lessons

Ordinary people appreciate anti-corruption initiatives. Today, one of the most popular TV dramas in China is “In the Name of People.” Its plot revolves around a prosecutor’s effort to unearth corruption in a present-day fictional Chinese city.

But there are other common denominators in successful anti-graft campaigns. In each case – Singapore, Hong Kong and China – many talked a lot about corruption. Yet, anti-corruption struggle became effective only when leaders executed a truly independent campaign against graft.

In each case, critics initially accused the anti-corruption campaign for political purges, personal vendettas and economic destabilization. In reality, the latter often proved to be a pretext for an effort by corrupt officials not to get caught and to retain looted funds and illicit economic privileges.

In each case, too, not much success was achieved until truly untouchable officials took charge of the campaign, while reporting directly and only to the nation’s leader.

The Philippines is no different. After two decades of anti-graft rhetoric, an effective initiative requires independent leadership that must target both “tigers and flies,”” and report directly to the country’s chief executive.

In the long-term, corruption, left unpunished, will doom all branches of government, including state, society and church, even police and military – as evidenced by the recent Philippines history as well.

In the long-term, corruption, left unpunished, will doom all branches of government, including state, society and church, even police and military – as evidenced by the recent Philippines history as well.

What the Philippines needs is a tough but humane, independent but responsive, broad but deep anti-corruption initiative. Without such a campaign, even rapid growth will only mean polarization and poverty to most Filipinos.

The original commentary was released by The Manila Times on October 9, 2017

Featured Image: President Rodrigo Roa Duterte presides over the 19th Cabinet Meeting in Malacañan Palace on October 4, 2017. KARL NORMAN ALONZO/PRESIDENTIAL PHOTO

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About the Author

dan-steinbock-webDan Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

The Trump-Goldman Sachs Tax Cut for the Rich

By Jack Rasmus

It seems that one of the agenda of the Trump administration is to make sure that the rich keeps getting richer, the poor stays where they are, while the middle class joins the latter. This is what the Trump-Goldman Sachs Tax Cut will ensure through the redistribution of wealth from the masses to the rich. Dr. Jack Rasmus’ analysis is a must read.

 

Trump has introduced his long awaited Tax Cut, estimated between $2.0 to $2.4 trillion. Like so many other distortions of the truth, Trump claimed his plan would benefit the middle class, not the rich – the latest in a long litany of lies by this president.

Contradicting Trump, the independent Tax Policy Center has estimated in just the first year half of the $2 trillion plus Trump cuts will go to the wealthiest 1% households that annually earn more than $730,000. That’s an immediate income windfall to the wealthiest 1% households of 8.5%, according to the Tax Policy Center. But that’s only in the first of ten years the cuts will be in effect. It gets worse over time.

According to the Tax Policy Center, “Taxpayers in the top one percent (incomes above $730,000), would receive about 50 percent of the total tax benefit [in 2018].” However, “By 2027, the top one percent would get 80 percent of the plan’s tax cuts while the share for middle-income households would drop to about five percent.”

By the last year of the cuts, 2027, on average the wealthiest 1% household would realise $207,000, and the even wealthier 0.1% would realise an income gain of $1,022,000.

When confronted with these facts on national TV this past Sunday, Trump’s Treasury Secretary, Steve Mnuchin, quickly backtracked and admitted he could not guarantee every middle class family would see a tax cut. Right. That’s because 15-17 million (12%) of US taxpaying households in the US will face a tax hike in the first year of the cuts. In the tenth and last year, “one in four middle class families would end up with higher taxes”.
The US Economic “Troika”

The Trump Plan is actually the product of the former Goldman-Sachs investment bankers who have been in charge of Trump’s economic policy since he came into office. Steve Mnuchin, the Treasury Secretary, and Gary Cohn, director of Trump’s economic council, are the two authors of the Trump tax cuts. They put it together. They are also both former top executives of the global shadow bank called Goldman Sachs. Together with the other key office determining US economic policy, the US central bank, held by yet another ex-Goldman Sachs senior exec, Bill Dudley, president of the New York Federal Reserve bank, the Goldman-Sachs trio of Mnuchin-Cohn-Dudley constitute what might be called the “US Troika” for domestic economic policy.

The Trump tax proposal is therefore really a big bankers tax plan – authored by bankers, in the interest of bankers and financial investors (like Trump himself), and overwhelmingly favouring the wealthiest 1%.

Given that economic policy under Trump is being driven by bankers, it’s not surprising that the CEO of the biggest US banks, Morgan Stanley, admitted just a few months ago that a reduction of the corporate nominal income tax rate from the current 35% nominal rate to a new nominal rate of 20% will provide the bank an immediate windfall gain of 15%-20% in earnings. And that’s just the nominal corporate rate cut proposed by Trump. With loopholes, it’s no doubt more.

 

The Trump-Troika’s Triple Tax-Cut Trifecta for the 1%

That’s because 15-17 million (12%) of US taxpaying households in the US will face a tax hike in the first year of the cuts. In the tenth and last year, “one in four middle class families would end up with higher taxes”.

The Trump-Troika has indicated it hopes to package up and deliver the trillions of $ to their 1% friends by Christmas 2017. Their gift will consist of three major tax cuts for the rich and their businesses. A Trump-Troika Ta Cut “Trifecta” of $ trillions.

1.The Corporate Tax Cuts

The first of the three main elements is a big cut in the corporate income tax nominal rate, from current 35% to 20%. In addition, there’s the elimination of what is called the “territorial tax” system, which is just a fancy phrase for ending the fiction of the foreign profits tax. Currently, US multinational corporations hoard a minimum of $2.6 trillion of profits offshore and refuse to pay US taxes on those profits. In other words, Congress and presidents for decades have refused to enforce the foreign profits tax. Now that fiction will be ended by officially eliminating taxes on their profits. They’ll only pay taxes on US profits, which will create an even greater incentive for them to shift operations and profits to their offshore subsidiaries. But there’s more for the big corporations.

The Trump plan also simultaneously proposes what it calls a “repatriation tax cut”. If the big tech, pharma, banks, and energy companies bring back some of their reported $2.6 trillion (an official number which is actually more than that), Congress will require they pay only a 10% tax rate – not the current 35% rate or even Trump’s proposed 20% – on that repatriated profits. No doubt the repatriation will be tied to some kind of agreement to invest the money in the US economy. That’s how they’ll sell it to the American public. But that shell game was played before, in 2004-05, under George W. Bush. The same “repatriation” deal was then legislated, to return the $700 billion then stuffed away in corporate offshore subsidiaries. About half the $700 billion was brought back, but US corporations did not invest it in jobs in the US as they were supposed to. They used the repatriated profits to buy up their competitors (mergers and acquisitions), to pay out dividends to stockholders, and to buy back their stock to drive equity prices and the stock market to new heights in 2005-07. The current Trump “territorial tax repeal/repatriation” boondoggle will turn out just the same as it did in 2005.

2. Non-Incorporate Business Tax Cuts

The second big business class tax windfall in the Trump-Goldman Sachs tax giveaway for the rich is the proposal to reduce the top nominal tax rate for non-corporate businesses, like proprietorships and partnerships, whose business income (aka profits) is treated like personal income. This is called “the pass through business income” provision.

That’s a Trump tax cut for unincorporated businesses – like doctors, law firms, real estate investment partnerships, etc. 40% of non-corporate income is currently taxed at 39.6% (the top personal income tax rate). Trump proposes to reduce that nominal rate to 25%. So non-incorporate businesses too will get an immediately 14.6% cut, nearly matching the 15% rate cut for corporate businesses.

In the case of both corporate and non-corporate companies we’re talking about “nominal” tax rate cuts of 14.6% and 15%. The “effective” tax rate is what they actually pay in taxes – i.e. after loopholes, after their high paid tax lawyers take a whack at their tax bill, after they cleverly divert their income to their offshore subsidiaries and refuse to pay the foreign profits tax, and after they stuff away whatever they can in offshore tax havens in the Cayman Islands, Switzerland, and a dozen other island nations worldwide.

For example, Apple Corporation alone is hoarding $260 billion in cash at present – 95% of which it keeps offshore to avoid paying Uncle Sam taxes.

For example, Apple Corporation alone is hoarding $260 billion in cash at present – 95% of which it keeps offshore to avoid paying Uncle Sam taxes. Big multinational companies like Apple, i.e. virtually all the big tech companies, big Pharma corporations, banks and oil companies, pay no more than 12-13% effective tax rates today – not the 35% nominal rate.

Tech, big Pharma, banks and oil companies are the big violators of offshore cash hoarding/tax avoidance schemes. Microsoft’s effective global tax rate last year was only 12%. IBM’s even less, at 10%. The giant drug company, Pfizer paid 18% and the oil company, Chevron 14%. One of the largest US companies in the world, General Electric, paid only 1%. When their nominal rate is reduced to 20% under the Trump plan, they’ll pay even less, likely in the single digits, if that.

Corporations and non-corporate businesses are the institutional conduit for passing income to their capitalist owners and managers. The Trump corporate and business taxes means companies immediately get to keep at least 15% more of their income for themselves – and more in “effective” rate terms. That means they get to distribute to their executives and big stockholders and partners even more than they have in recent years. And in recent years that has been no small sum. For example, just corporate dividend payouts and stock buybacks have totalled more than $1 trillion on average for six years since 2010! A total of more than $6 trillion.

But all that’s only the business tax cut side of the Trump plan. There’s a third major tax cut component of the Trump plan – i.e. major cuts in the Personal Income Tax that accrue overwhelmingly to the richest 1% households.

3. Personal Income Tax Cuts for the 1%

There are multiple measures in the Trump-Troika proposal that benefits the 1% in the form of personal income tax reductions. Corporations and businesses get to keep more income from the business tax cuts, to pass on to their shareholders, investors, and senior managers. The latter then get to keep more of what’s passed through and distributed to them as a result of the personal income tax cuts.

The first personal tax cut boondoggle for the 1% wealthiest households is the Trump proposal to reduce the “tax income brackets” from seven to three. The new brackets would be 35%, 25%, and 12%.

Whenever brackets are reduced, the wealthiest always benefit. The current top bracket, affecting households with a minimum of $418,000 annual income, would be reduced from the current 39.6% to 35%. In the next bracket, those with incomes of 191,000 to 418,000 would see their tax rate (nominal again) cut from 28% to 25%. However, the 25% third bracket would apply to annual incomes as low as $38,000. That’s the middle and working class. So households with $38,000 annual incomes would pay the same rate as those with more than $400,000. Tax cuts for the middle class, did Trump say? Only tax rate reductions beginning with those with $191,000 incomes and the real cuts for those over $418,000!

But the cuts in the nominal tax rate for the top 1% to 5% households are only part of the personal income tax windfall for the rich under the Trump plan. The really big tax cuts for the 1% come in the form of the repeal of the Inheritance Tax and the Alternative Minimum Tax, as well as Trump’s allowing the “carried interest” tax loophole for financial speculators like hedge fund managers and private equity CEOs to continue.

The current Inheritance Tax applies only to those with estates of $11 million or more, about 0.2 of all the taxpaying households. So its repeal is clearly a windfall for the super rich. The Alternative Minimum Tax is designed to ensure the super rich pay something, after they manipulate the tax loopholes, shelter their income offshore in tax havens, or simply engage in tax fraud by various other means. Now that’s gone as well under the Trump plan. “Carried interest”, a loophole, allows big finance speculators, like hedge fund managers, to avoid paying the corporate tax rate altogether, and pay a maximum of 20% on their hundreds of millions and sometimes billions of dollars of income every year.

 

Who Pays?

As previously noted, folks with $91,000 a year annual income get no tax rate cuts. They still will pay the 25%. And since that is what’s called “earned” (wage and salary) income, they don’t get the loopholes to manipulate, like those with “capital incomes” (dividends, capital gains, rents, interest, etc.). What they get is called deductions. But under the Trump plan, the deductions for state and local taxes, for state sales taxes, and apparently for excess medical costs will all disappear. The cost of that to middle and working class households is estimated at $1 trillion over the decade.

Trump claims the standard deduction will be doubled, and that will benefit the middle class. But estimates reveal that a middle class family with two kids will see their standard deduction reduced from $28,900 to $24,000. But I guess that’s just “Trump math”.

The general US taxpayer will also pay for the trillions of dollars that will be redistributed to the 1% and their companies. It’s estimated the federal government deficit will increase by $2.4 trillion over the decade as a result of the Trump plan. Republicans in Congress have railed over the deficits and federal debt, now at $20 trillion, for years. But they are conspicuously quiet now about adding $2.4 trillion more – so long as it the result of tax giveaways to themselves, their 1% friends, and their rich corporate election campaign contributors.

The general US taxpayer will also pay for the trillions of dollars that will be redistributed to the 1% and their companies.

And both wings of the Corporate Party of America – aka Republicans and Democrats – never mention the economic fact that since 2001, 60% of US federal government deficits, and therefore the US debt of $20 trillion, are attributable to tax cuts by George W. Bush and Barack Obama: more than $3.5 trillion under Bush and more than $7 trillion under Obama. (The remaining $10 trillion of the US debt due to war and defence spending, price gouging by the medical industry and big pharma driving up government costs for Medicare, Medicaid, and other government insurance, bailouts of the big banks in 2008-09, and interest payments on the debt).

 

The 35-Year Neoliberal Tax Offensive

Tax cutting for business classes and the 1% has always been a fundamental element of Neoliberal economic policy ever since the Reagan years (and actually late Jimmy Carter period). Major tax cut legislation occurred in 1981, 1986, and 1997-98 under Clinton. George W. Bush then cut taxes by $3.4 trillion in 2001-04, 80% of which went to the wealthiest households and businesses. He cut taxes another $180 billion in 2008. Obama cut another $300 billion in his 2009 so-called recovery programme. When that faltered, it was another $800 billion at year end 2010. He then extended the Bush tax cuts that were scheduled to expire in 2011 two more years. That costs $450 billion each year. And in 2013, cutting a deal with Republicans called the “fiscal cliff” settlement, he extended the Bush tax cuts of the prior decade for another ten years. That cost a further $5 trillion. Now Trump wants even more. He promised $5 trillion in tax cuts during his election campaign. So the current proposal is only half of what he has in mind perhaps.

Neoliberal tax cutting in the US has also been characterised by the “tax cut shell game”. The shell game is played several ways.

In the course of major tax cut legislation, the elites and their lobbyists alternate their focus on cutting rates and on correcting tax loopholes. They raise rates but expand loopholes. When the public becomes aware of the outrageous loopholes, they then eliminate some loopholes but simultaneously reduce the tax rates on the rich. When the public complains of too low tax rates for the rich, they raise the rates but quietly expand the loopholes. They play this shell game so the outcome is always a net gain for corporations and the rich.

Since Reagan and the advent of neoliberal tax policy, the corporate income tax share of total US government revenues has fallen from more than 20% to single digits well below 10%. Conversely, the payroll tax has doubled from 22% to more than 40%. A similar shift within the personal income tax, steadily around 40% of government revenues, has also occurred. The wealthy pay less a share of the total and the middle class pays more. Along the way, token concessions to the very low end of working poor are introduced, to give the appearance of fairness. But the middle class, the $38 to $91,000 nearly 100 million taxpaying households foot the bill for both the 1% and the bottom. This pattern was set in motion under Reagan. His proposed $752 billion in tax cuts in 1981-82 were adjusted in 1986, but the net outcome was more for the rich and their corporations. That pattern has continued under Clinton, Bush, Obama and now proposed under Trump.

To cover the shell game, an overlay of ideology covers up what’s going on. There’s the false argument that “tax cuts create jobs”, for which there’s no empirical evidence. There’s the claim US multinational corporations pay a double tax compared to their competitors, when in fact they effectively pay less. There’s the lie that if corporate taxes are cut they will automatically invest the savings, when in fact what they do is invest offshore, divert the savings to stock and bond and other financial markets, boost their dividend and stock buybacks, or stuff the savings in their offshore subsidiaries to avoid paying taxes.

All these neoliberal false claims, arguments, and outright lies continue today to justify the Trump-Goldman Sachs tax plan – which is just the latest iteration of neoliberal tax policy and tax offensive in the US. The consequences of the Trump plan, if it is passed, will be the same as the previous tax giveaways to the 1% and their companies: it will redistribute income massively from the middle and working classes to the rich. Income inequality will continue to worsen dramatically. US multinational corporations will begin again to divert profits, and investment, offshore; profits brought back untaxed will result in mergers and acquisitions, dividend payouts, and financial markets investment. No real jobs will be created in the US. The wealthy will continue to pump their savings into financial asset markets, causing further bubbles in stocks, exchange traded funds, bonds, derivatives and the like. The US economy will continue to slow and become more unstable financially. And there will be another financial crash and great recession – or worse. Only this time, the vast majority of US households – i.e. the middle and working classes – will be even worse off and more unable to weather the next economic storm.

Nothing will change so long as the Corporate Party of America is allowed to continue its neoliberal tax giveaways, its tax cutting “shell games”, and is allowed to continue to foment its ideological cover up.

Featured Image: US President Donald Trump with Gary Cohn, the Chief Economic Advisor to President Donald Trump & Goldman Sachs Ex-President © projectrepublictoday.com

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About the Author

Dr. Jack Rasmus is author of the just published book, “Central Bankers at the End of Their Ropes?: Monetary Policy and the Coming Depression”, Clarity Press, August 2017, and the previously  published “Looting Greece: A New Financial Imperialism Emerges”, October 2016, and “Systemic Fragility in the Global Economy”, January 2016, also by Clarity press. More information is available at Claritypress.com/Rasmus. For more analyses on the Trump and neoliberal taxation, listen to Dr. Rasmus’s Alternative Visions, on the Progressive Radio Network at http://alternativevisions.podbean.com. He blogs at jackrasmus.com and his website is http://kyklosproductions.com.

 

A Past of Brilliance and 21st Century Hopes: Should You Invest in Russia?

By Walter C. Clemens, Jr.

The decline in Russia’s cultural creativity under post-Communist as well as Soviet rule belongs to a larger syndrome that emits warning signals to outside investors. Why do nations fail? Top down exploitation of people and resources tends to backfire. The whims of autocrats throttle not only cultural development but also the prospects for mutual gain in business.

 

For centuries investors in the West have been tempted to invest in Russia, largest country in the world and rich in resources both human and material. For more than a thousand years, however, authoritarian rule has prevailed over law in Russia. Conditions have improved since Stalin, but have slid backward in the 21st century under Vladimir Putin.

This essay traces a sharp decline in the level of cultural creativity in Russia – a trend that parallels low levels of public health, societal trust, and respect for law. The UN Human Development Index (based on education, health, and income) rates Russia 49th in the world (from Norway, 1st, to the Central African Republic, 188th). Freedom House deems Russia “not free”, with a score just slightly higher than Saudi Arabia, Sudan, and North Korea. On a scale of corruption that includes 176 countries (with Denmark the least corrupt), Transparency International places Putin’s Russia at 131st. This situation depresses the quality of life for most Russians and helps foster dangers to regional and world peace. It also presents serious risks to outsiders hoping to do business in Putin’s Russia.

This situation depresses the quality of life for most Russians and helps foster dangers to regional and world peace. It also presents serious risks to outsiders hoping to do business in Putin’s Russia.

Part of the old Russia remains, as we see in Ukraine, an imperial bully intent on dominating any neighbour unable to repulse the world’s largest power. But Tsarist Russia, for all its negative traits, had redeeming features. Nineteenth and early twentieth century Russia gave rise to some of the greatest music, dance, and literature in human history – a flowering not spawned by Vladimir Putin’s petrostate.

Great civilisations can whither – even when built on the material and human foundations of a potential superpower. China, the West, and the world of Islam are all in jeopardy. But what happened to Russian civilisation? What has happened to deep creativity that for more than a century broke through the shackles of tsarist autocracy? Its sparks continued to glow on occasion in Soviet times but have now, despite the nominal end of Communist dictatorship, nearly burned out.

What happened to the literary scene that gave the world some of its greatest ever poets and novelists – Pushkin, Lermontov, Tolstoy, and Dostoevsky? Where is today’s Gogol, whose somewhat crazy stories lampooned Russian life, including the tsarist bureaucracy? (One descendant inhabits New York City, where Gary Shteyngart carries on the surrealist tradition.)

What has happened to deep creativity that for more than a century broke through the shackles of tsarist autocracy?

Several major Russian poets continued working in Soviet times. Vladimir Mayakovsky begged, “Make me a part of the Five-Year Plan!” When controls tightened, however, he committed suicide, as did his more romantic comrade, Esenin (spouse for a time to Isadora Duncan). One of Stalin’s favourite writers, Mikhail Sholokov won the Nobel Prize in literature in 1965 for his novels about the Russian Civil War and collectisation of agriculture. Three years later in 1958 Boris Pasternak also won a Nobel prize for Dr. Pasternak, but the Khrushchev regime kept him from accepting it. Solzhenitsyn also won a Nobel in 1970 for his novels exposing life in the gulag. Expelled from the USSR in 1974, he moved to Vermont. (He returned to post-Communist Russia in 1994 and died there in 2008.)

One of the leading dissident poets from the Khrushchev era, Yevgeny Yevtushenko, departed post-Soviet Russia to teach and recite in the USA. He told me that Russian audiences no longer appreciated poetry and – in the 1990s – could not afford books. His best known poem was Babi Yar, about the mass murder of Jews in Nazi-occupied Ukraine. The poem begins:

 No monument stands over Babi Yar.
A steep cliff only, like the rudest headstone.
I am afraid.
Today, I am as old
As the entire Jewish race itself.

Yevtushenko passed away in Tulsa, Oklahoma in April 2017, having given one of his last public presentations at a synagogue in Boston.

Where is the musical scene that gave humanity some of its greatest music, dance, and theatre? The symphonies and operas of Glinka. Mussorgsky, Tchaikovsky, and Rimsky-Korsakov are still played – often by Russian masters with superb technical skills. Stalin smothered two giant composers, Prokofiev and Shostakovich. Risking censure for degenerate modernism, Prokofiev wrote Romeo and Juliet in 1935 and got it produced in 1940. Defying official and popular anti-Semitism, however, Shostakovich managed in 1962 to play his Symphony No. 13 to accompany the Yevtushenko poem, Babi Yar.

One of the world’s greatest cellists, Mstislav Rostropovich, provided refuge to Solzhenitsyn in his dacha after Communist officials criticised him for Gulag Archipelago (not published in Russia until much later). Rostropovich was then banned from performing except in provincial towns. Like Solzhenitsyn, the cellist and his singer wife eventually took exile in the West.

Similar tales abound in all the arts and sciences. Stalin and his successors suppressed, killed, or drove into exile many of the Soviet Union’s best and brightest. Yevtushenko was the most vital – most alive – person I have known. Edward Kuznetsov, jailed for attempting to hijack a plane to take Jewish dissidents to Israel, is the bravest man I have met. Andrei Sakharov, a father of the Soviet H-bomb but also the country’s leading campaigner for human rights, was probably the greatest Russian of all time. (I missed a meeting with him a year or so before his death in 1989 because my driver’s car ran out of gas on a rainy night.)

Other Russians – Balanchine, Nureyev, and Baryshnikov – transformed ballet from Paris to New York. When I look at the Met’s production of Boris Godunov or Eugene Onegin, I weep for the civilisation that gave rise to their birth but is no more. When I visited Moscow’s Tretyakov Art Gallery in 1958, the works of Chagall, Kandinsky, and other avant-garde painters were kept in a dark storage room. One needed a lantern to see them. Now, of course, they are displayed – in part to draw tourists. So are works by the dissident artist, Oskar Rabin, who took exile in Paris. Asculpture by the lateErnst Neizvestny still graces the tomb ofNikita Khrushchev,but the artist moved toNew York.

Borodin’s opera Prince Igor revived at the Met in 2014 recalls not only the glory of Russian musical genius but also a leitmotif of Russian and Ukrainian politics. Prince Igor leads his forces against invaders from Central Asia but is defeated. He and his fellow princes in today’s Ukraine quarrel among themselves and cannot unite to repel the attackers. Here is an old story: chaotic infighting at the top makes what remains of “Rus” unable to cope with determined challenges. The opposite of chaos is rigid order – imposed in later centuries by autocrats in Moscow, St. Petersburg, and, for a time, in Kyiv. Many people may demonstrate, but the outcome is uncertain. Even apparent victories may be short-lived.

Strangled by top-down rule for a millennium, many bright shoots burst forth in the century before the Bolshevik revolution.

What happened to Russia? Strangled by top-down rule for a millennium, many bright shoots burst forth in the century before the Bolshevik revolution. Tsarist rule was incomparably milder than Soviet. Exiled to Siberia for a time, the anarchist prince Petr Kropotkin and Communist V. I. Lenin could receive books, walk, and enjoy nature. Soviet rule, 1917-1991, chocked the creative breath from Slavic and other civilisations subdued by tsars and then by commissars. Since 1991 these peoples have struggled first under near anarchy and then under a dictatorship – neither conducive to cultural or societal fitness, as shown in death tolls from alcoholism and suicide. Unlike the United States, mainstream Russia has found no way to integrate other cultures that could enrich its way of life except by conquest.

What does this mean for Westerners trying to do business in Russia? Caveat emptor! 

This article expands and updates an essay posted in Global Asia Forum, March 10, 2014 at http://www.globalasia.org/Forum/Detail/37/what-happened-to-russia.html

Featured Image: Landmarks of Moscow Kremlin © Getty Images

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About the Author

Walter Clemens is Professor Emeritus of Political Science, Boston University, and an Associate of Harvard University’s Davis Center for Russian and Eurasian Studies. He has written many books including Can Russia Change? (Abingdon, Oxon: Routledge, 2011). His most recent book is North Korea and the World: Human Rights, Arms Control, and Strategies for Negotiation (University Press of Kentucky, 2016). He can be reached at [email protected]

The Costs of Mass Deportations

By Mark Humphery-Jenner

The Trump administration has committed to deport millions of undocumented immigrants. However, such wide-reaching deportations are costly. Deportations carry significant direct costs. Wholescale deportations undermine the US labour market, put loan repayments at risk, and harm immigrants’ US citizen dependents. The administration should weigh these costs when designing an efficient immigration policy.

 

Introduction

The United States government has sought to curb illegal immigration. The administration claims that this is to ensure citizens’ safety and security. Nevertheless, the government should find the most economically efficient solution. Mass deportations are not it. 

Recent legislation has targetted undocumented immigrants. The House has passed legislation has addressed sanctuary cities1 and people who repeatedly enter the US illegally.2 The Department of Homeland Security (DHS) has issued memos,3 which potentially place most4 of the 11 million undocumented immigrants at risk of deportation. These cement the approach in President Trump’s executive orders5. The deportations are potentially wide-reaching.

These deportations can have economic consequences. These involve shocks to labour supply, lending, and to US citizen dependents. This is in addition to the significant cost of deportation itself. These costs should be considered when pursuing any deportation plan.

 

Labour

Undocumented immigrants are a useful source of labour in some sectors. Undocumented immigrants constituted around 8 million, or 5%, of the workforce in the United States according to the Pew Research Center.6 This has remained relatively stable7 since 2009. This labour spikes in several key states,8 such as Nevada, California, Texas, and Florida.

 

Figure 1: Unauthorised Immigrant Labour Force Participation, By State

This graph contains unauthorised immigrant labour participation by state in 2014. Data is from the Pew Research Center.9

Undocumented immigrants are unlikely to be “stealing” citizens’ jobs. Undocumented immigrants often work in less desirable jobs that citizens often shun, and will often do so at lower cost. This manifests in unauthorised labour concentrating in specific industries. US businesses might not be able to directly replace undocumented immigrants, and if they did, would face lower profits. This, in turn, undermines corporate growth and future job creation.

 

Figure 2: Unauthorised Immigrant Participation in Certain Industries

This figure contains the percent of the labour force comprised of unauthorised immigrants, by industry, in 2014. The data is from the Pew Research Center.10

Recent estimates highlight the significant cost to growth of mass deportations. Deporting all 11 million undocumented immigrants is estimated11 to reduce the US GDP by $1.6 trillion. This should be a major deterrent to wholescale deportations.

Loans

Deporting all 11 million undocumented immigrants is estimated11 to reduce the US GDP by $1.6 trillion.

Illegal immigrants can take out loans, and indiscriminate deportations put those at risk. Illegal immigrants can borrow money to buy property,12 and cars, for example. Such loans can be to people who were originally lawful residents, but who overstayed their visas. It can also arise because some lenders will lend if the borrower provides an Individual Taxpayer Identification Number (ITIN), which an undocumented immigrant could obtain, rather than requiring a Social Security Number (SSN). 

Deported immigrants remain liable for that debt. However, deported immigrants are unlikely to have the income to service the debt. This is significant: 35% of all undocumented immigrant households are homeowners, rising to 45% in those households that have been in the US for at least a decade.13 Many of these homeowners will own their properties outright. However, at least some will have incurred debt, which would be put at risk under mass deportations.

 

Dependents

Illegal immigrants can have dependents who are US citizens. As a general rule, people born in the United States are automatically citizens. Around 8% of all births in the United States are to illegal immigrants.14 Around 4 million undocumented adults live with their US born children, a number that is only increasing as heretofore undocumented immigrants start families.15

Illegal immigrants can have dependents who are US citizens. As a general rule, people born in the United States are automatically citizens. Around 8% of all births in the United States are to illegal immigrants.

Deporting productive members of society with dependents risks those dependents’ future education and career outcomes. Children have better career and education outcomes when they live in a stable family environment. Deporting undocumented parents leaves those children reliant on other family members, if they exist, or the state-based childcare system.

Deportations thus impose future costs. These costs arise from increased welfare payments, reduced future productivity, and reduced tax revenue. Disrupting families also jeopardises future entrepreneurship, which is ordinarily a key benefit of allowing immigration.

 

Deportation Costs

Mass deportations will further encumber the already overburdened immigration system. The immigration department faces a backlog of at least 500,000 cases,16 which take around two years to resolve, on average.17

Increased deportations with exacerbate these problems. Several cities have sought to raise funds to help fight deportation cases. These include a $10 million fund sought in Los Angeles,18 a $1 million fund sought in in Seattle,19 and the allocation of $10 million to undocumented immigrants’ cases in New York.20 These resources would further prolong deportation cases, and add to the cost and backlog already inherent in the system.

The deportations themselves are also costly. ICE indicates that the cost of deporting one undocumented immigrant is $10,854. ICE spent $3.2 billion deporting undocumented immigrants in 2016.21 ICE removed nearly 250,000 undocumented immigrants in 2016.22 Even deporting an additional one million immigrants over President Trump’s four-year term would more than double ICE’s existing workload. The American Action Forum argues that deporting all 11 million undocumented immigrants would cost $400-600 billion, so even deporting one million such immigrants would cost at least $35-55 billion.23

 

Where To From Here

Mass deportations will hurt the economy. Undoubtedly, some undocumented immigrants do drain the United States economy. However, mass deportations risk further economic costs. Indeed, immigration brings myriad economic benefits.24 Immigrants also are especially prone to establish new businesses,25 which, in turn, drive economic growth. A more productive approach would seek to leverage these economic benefits. The government should further weigh the costs of deportations when considering whether to embrace such a policy. 

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About the Author

Mark Humphery-Jenner is an Associate Professor of Finance at UNSW Business School. His research spans Corporate Finance, Venture Capital, and Law. He has published and forthcoming papers in finance journals including the Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Review of Finance, Journal of Financial Intermediation, and Journal of Corporate Finance.

 

References

1. No Sanctuary for Criminals Act 2017. Available from: https://judiciary.house.gov/wp-content/uploads/2017/06/GOODLA_028_xml.pdf

2. Kates Law 2017. Available from: https://judiciary.house.gov/wp-content/uploads/2017/06/GOODLA_029_xml.pdf

3. United States Department of Homeland Security. 2017. Memorandum “implementing the President’s Border Security and Immigration Enforcement Improvements Policies.” Available from: https://www.dhs.gov/sites/default/files/publications/17_0220_S1_Implementing-the-Presidents-Border-Security-Immigration-Enforcement-Improvement-Policies.pdf

4. Casselman, Ben and Bacon, Perry. FiveThirtyEight. 2017. “How Trump’s New Plan Affects The 11 Million Undocumented Immigrants In The U.S.” Available from: https://fivethirtyeight.com/features/how-trumps-new-plan-affects-the-11-million-undocumented-immigrants-in-the-u-s/

5. Executive Order: Enhancing Public Safety in the Interior of the United States. 2017. Available from: https://www.whitehouse.gov/the-press-office/2017/01/25/presidential-executive-order-enhancing-public-safety-interior-united

6. Krogstad, Jens Manuel and Passel, Jeffrey S and Cohn, D’Vera. 2017. “5 facts about illegal immigration in the U.S.” . Available from: http://www.pewresearch.org/fact-tank/2017/04/27/5-facts-about-illegal-immigration-in-the-u-s/

7. Passel, Jeffrey S and Cohn, D’Vera. 2016. “Size of U.S. Unauthorized Immigrant Workforce Stable After the Great Recession”. Available from: http://www.pewhispanic.org/2016/11/03/size-of-u-s-unauthorized-immigrant-workforce-stable-after-the-great-recession/

8. Pew Research Center. 2016. “U.S. unauthorized immigration population estimates”. Available from: http://www.pewhispanic.org/interactives/unauthorized-immigrants/

9. Pew Research Center. 2016. “Estimated unauthorized immigrant population, by state, 2014.” Pew Research Center. Available from: http://www.pewhispanic.org/interactives/unauthorized-immigrants/

10. Passel, Jeffrey S. and D’Vera Cohn. 2016. “Size of U.S. Unauthorized Immigrant Workforce Stable After the Great Recession.” Pew Research Center. Page 27.

11. American Action Forum. 2015. “The true cost of Trump’s immigration plan”. Available from: https://www.americanactionforum.org/oped/true-cost-trumps-immigration-plan/

12. Huseman, Jessica. 2014. National Mortgage News.“Setting the Record Straight on Mortgages for Undocumented Immigrants”. Available from: https://www.nationalmortgagenews.com/news/setting-the-record-straight-on-mortgages-for-undocumented-immigrants

13. Passel, Jeffrey S and Cohn, D’Vera. 2009. Pew Research Center. “A portrait of unauthorized immigrants in the United States: Social and Economic Characteristics”. Available from: http://www.pewhispanic.org/2009/04/14/iv-social-and-economic-characteristics/

14. Passel, Jeffrey S and Cohn, D’Vera. 2015. Pew Research Center. “Number of babies born in U.S. to unauthorized immigrants declines”. Available from: http://www.pewresearch.org/fact-tank/2015/09/11/number-of-babies-born-in-u-s-to-unauthorized-immigrants-declines/

15. Passel, Jeffrey S and Cohn, D’Vera and Krogstad, Jens Manuel and Gonzalez-Barrera, Ana. 2014. Pew Research Center. “As Growth Stalls, Unauthorized Immigrant Population Becomes More Settled”. Available from: http://www.pewhispanic.org/2014/09/03/as-growth-stalls-unauthorized-immigrant-population-becomes-more-settled/#parents-of-u-s-born-children

16. The Economist. 2017. “Congress and the courts will poke holes in the president’s deportation plans”. Available from: http://www.economist.com/news/united-states/21717387-barack-obamas-administration-deported-hundreds-thousands-people-every-year-donald

17. Blitzer, Jonathan. 2017. The New Yorker. “What Will Trump Do with Half a Million Backlogged Immigration Cases?”. Available from: http://www.newyorker.com/news/news-desk/what-will-trump-do-with-half-a-million-backlogged-immigration-cases

18. Smith, Dakota. 2017. Los Angeles Times. “A $10-million fund will help immigrants fight deportations. But should it help those with violent criminal convictions?”. Available from: http://www.latimes.com/local/lanow/la-me-ln-la-justice-fund-20170417-story.html

19. Beekman, Daniel. 2017. The Seattle Times. “Seattle wants $1M legal-defense fund for immigrants facing deportation”. Available from: http://www.seattletimes.com/seattle-news/politics/seattle-wants-1m-legal-defense-fund-for-immigrants-facing-deportation/

20. Blanco, Octavio. 2017. CNN Money. “New York to provide lawyers for immigrants facing deportation”. Available from: http://money.cnn.com/2017/04/13/news/economy/new-york-immigrant-legal-defense-fund/index.html

21. Blanco, Octavio. 2017. CNN Money. “How much it costs ICE to deport an undocumented immigrant”. Available from: http://money.cnn.com/2017/04/13/news/economy/deportation-costs-undocumented-immigrant/index.html

22. S. Immigration and Customs Enforcement. “FY 2016 ICE Immigration Removals”. Available from: https://www.ice.gov/removal-statistics/2016

23. American Action Forum. 2015. “The true cost of Trump’s immigration plan”. Available from: https://www.americanactionforum.org/oped/true-cost-trumps-immigration-plan/

24. The National Academies of Science, Engineering, and Medicine. 2017. “The Economic and Fiscal Consequences of Immigration”. Available from: https://www.nap.edu/catalog/23550/the-economic-and-fiscal-consequences-of-immigration

25. Kerr, Sari Pekkala and Kerr, William R. 2016. Harvard Business Review. “Immigrants Play a Disproportionate Role in American Entrepreneurship”. Available from: https://hbr.org/2016/10/immigrants-play-a-disproportionate-role-in-american-entrepreneurship

 

Using Employee Trophies as Non-Monetary Incentives

By David De Cremer

Employee appreciation can go a long way. In this article, the author elaborates on giant telecom Huawei’s strategy of using “trophies” as incentives and motivation for its employees and teams and how these contribute to Huawei’s global success.

 

In the aftermath of the financial crisis, economic growth in advanced economies slowed down considerably. According to the IMF this slower rate may be here to stay for quite some time. At the same time, growth rates in emerging economies are also slowing down, with the decision of China to let go of double digit growth and adjust to more achievable targets as maybe the prime example of this development. An important consequence of this global slow-down in growth is that living standards will not improve for the next few years. This also means that organisations expect their employees to work harder and longer without any increase in remuneration. From the perspective of motivating employees – and especially so the most talented ones – to keep putting the work in and staying loyal to the organisation, such an economic downturn is extremely challenging. The lack of resources holds that financial incentives are less easy to use in talent management. As such, organisations are looking for non-financial incentives that recognise the work of the employee in such a way that they feel they belong to the organisation and remain motivated to put in the hours.

When financial resources are lacking, psychology dictates that people will consider money as a less diagnostic cue to assess how they are evaluated by the organisation and how they compare to their co-workers. Rather, because all employees have a desire to have their hard work recognised, they will compare themselves with others on more social and relational dimensions. In other words, in situations of economic turndown, employees will achieve their sense of pride and confidence from social feedback that signals what their status within the organisation is. Status is defined as an index of social worth that include the prestige and esteem that others ascribe to an individual.1 One way to recognise the work of employees in a relational manner concerns the use of employee awards or trophies. Using trophies to reward your employees can take place at all levels in the organisation and represent a symbolic message of how much you value your employees. Because of its clear relational value, employees are positively affected in their sense of esteem, pride and loyalty to the organisation.

Broadly speaking two types of relational awards can be distinguished. The first one involves the individual award in which the personal performance of the employee is used as criteria to award a trophy. The second type involves the team award in which performance based on cooperation is rewarded. Important to note is that these trophies are not new ways of motivating employees, but because of the economic slow-down more cost-effective incentives are necessary, and therefore the use of trophies have gained attention from companies again. In addition, it is also interesting to see that the use of symbolic labels and trophies are actually popular tools among millennials or also called the generation Y. Millennials are born between 1980 and 2000, and considered more self-focussed and savvy in putting their profiles out there in the public. This latter aspect makes that this generation is sometimes also referred to as a “trophy generation”, motivated to share any status recognition enthusiastically on social media.2 The group of millennials count around 80 million people and are currently coming to age in the workforce.3 Because this large group will be the future leadership in our organisations, a closer look to effective use of trophies is warranted.

Another reason that warrants a focus on the use of trophies concerns the fact that the economic downturn is a global one. This makes that it is necessary to zoom in closer as well on possible cultural differences in the use of trophies as motivation tools. It is known that motivational factors can vary a lot across cultures, and when it comes down to being recognised by the company as a valuable employee, differences do exist between the East and West. For example, until now, scholars and business consultants assume that individual trophies and symbolic awards indicating your status within the organisation are more likely to be accepted and reveal effects in more individualistic cultures rather than relational and collective cultures like China and Japan, respectively. In these latter countries, rewarding a specific individual may undermine team cohesion as in Asian cultures employees prefer to be recognised for their collective rather than individual efforts. As a result, if a specific individual is recognised by the company it may even lead to a loss of face for this employee. In China, for example, the respect and dignity they receive from others contributes to their face, but because of the relational nature of their culture, their identity is more a social identity rather than a personal identity.4 Hence, being recognised as a team player and contributing to the collective rather than an individual doing well is more important.

In situations of economic turndown, employees will achieve their sense of pride and confidence from social feedback that signals what their status within the organisation is.

As these symbolic recognitions are embraced by the future workforce that will come into charge (millennials) and it needs to work at a global level, I analysed the approach of a multinational company where East and West meets. This company is Huawei. Huawei was founded in 1987 by Ren Zhengfei and over the years this company has become a global leader in the telecom industry. In 2012, surpassed Ericsson as the world leader in terms of sales revenue and net profit. Ever since then, revenue has only increased each year. In the fiscal year of 2016 Huawei’s revenue reached CNY521,574 billion (US$75,103 billion) and CNY37,052 billion (US$5,335 billion) in net profit. The company is hailed as the only truly global company with Chinese roots as the largest part of its revenue is earned outside of the Chinese market (67%), which no other Chinese company has achieved so far, and out of its 170,000 employees over more than 40,000 are international employees. As this company represents a mix between East and West management practices and philosophies, to what extent is recognition trophies used and in what way?

In light of this question, it is necessary to first emphasise the importance that Huawei assigns to experimenting with Human Resource practices. Specifically, inspired by the passion of its founder Ren Zhengfei to understand more deeply the workings and psychology of human nature, the company has adopted an approach where it uses human desires to inspire new HR practices.5 This is also the case when it comes down to motivating employees. One important means to motivate is to respect and reward employees showing a transformation at the job that indicates loyalty and high level of morale. Huawei uses different types of trophies to reward employees. No distinction is made between Chinese and international employees; all are eligible to participate for the same trophies.

Some aspects with regard to the award process of these trophies are important to mention. First of all, the decision-making process is a bottom-up one. Contrary to traditional Chinese work cultures where decision-making takes the form of a top-down approach, Huawei’s first selection process to identify potential recipients of the trophies takes place within the departments these employees work. The departments coordinate and execute this selection process by means of their own criteria. A second characteristic concerns the level of trophy, that is, whether it is an award for the individual or team. By making this distinction Huawei shows that it integrates both Western and Eastern approaches by reflecting both individual and collective identities of its employees. A third characteristic concerns the selection dimension used to select employees for these trophies. Some trophies reflect people’s actual performance levels whereas other trophies go beyond the performance of the employee and look more at his or her citizenship behaviour. Based on these dimensions, Huawei allocates three different types of trophies (see Table 1).

 

 

The first two trophies are included in the category called “Golden Trophy” and these are allocated to both an outstanding individual and team. The Golden Trophy is the company’s most important award and only the team and individual with the best performance level can win this award. The departments within Huawei decide on the Golden individuals and teams when they have their administration meeting. When each department has decided on their individual and team, the names move up to the Huawei leadership level where it is decided which individual and team wins the Golden Trophy. The winners are admitted to the hall of honour in Huawei’s headquarter office.

The third type of award is the trophy for future star and is different from the Golden trophies in the sense that it is an award that is not based on the performance of the individual employee. The future star is someone who is considered active and passionate in helping others and being a good citizen. Huawei takes the perspective that not every employee can perform in outstanding ways but that it is important to keep all employees motivated and that in this process it needs to be communicated that not only performing matters to make a company successful. Each department selects its future stars and because it is rewarding citizenship behaviour the criteria are less rigid and more open to interpretation than those used for the Golden trophies (which solely depend on the actual performance ratings). Once each department has decided on their future stars, the trophies will be given by the Huawei leadership.

One important means to motivate is to respect and reward employees showing a transformation at the job that indicates loyalty and high level of morale.

Non-monetary incentives like trophies can be powerful motivation tools to make employees loyal to the company and adhere to higher morals. These employee attitudes are important for companies to perform better, especially so on the long-term. In fact, companies populated by loyal and committed employees who are value-driven are increasingly recognised more as the ones likely to survive on the long term in today’s unstable economy. An additional challenge is that business has become a global issue and therefore the use of trophies needs to represent traditions of both individualistic and collective cultures. As our Huawei examples demonstrates, these awards also should be based on both performance and non-performance dimensions, if its symbolic value of respecting and valuing employees is to be salient to the recipients. Only if this symbolic message is clear to employees will they be motivated.

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About the Author

David De Cremer is the KPMG Professor of Management Studies at the Judge Business School, University of Cambridge, UK, where he heads the Department of Organisational Leadership and Decision-Making. He is the author of the book Pro-active Leadership: How to overcome procrastination and be a bold decision-maker (2013) and co-author of “Huawei: Leadership, culture and connectivity” (2017).

 

References

1. Blader, S. L., & Chen, Y.-R. (2012). Differentiating the effects of status and power: A justice perspective. Journal of Personality and Social Psychology, 102, 994–1014.
2. Ethics Resource Center (2013). Generational differences in work-place ethics. Washington, DC: Ethics Resource Center.
3. Weber, J. (2017). Discovering the millennials’ personal value orientation: A comparison to two managerial populations. Journal of Business Ethics,143, 517-529.
4. Leung, T. K. P., & Chan, R. Y. K. 2003. Face, favour and positioning – A Chinese power game. European Journal of Marketing, 37, 1575-1598.
5. De Cremer & Tao, 2016

Oscillating Nationalism in an Era of Trump and Putin

By Glen Duerr

At odds with each other for half a century, American and Russian nationalist animosity thawed with the end of the Cold War. Oscillating between baited friendship and menacing animosity, successive US presidents have tried different tactics with President Putin. President Trump’s approach certainly differs from his predecessors – the key question is whether the nationalistic relationship with Russia will change in the long term?

 

For almost half a century between 1945 and 1990, the United States and the Soviet Union grappled for global supremacy. Years passed with fever pitched tensions between the superpowers threatening to bring the world into a third global conflagration in the 20th century, likely with the use of nuclear weapons. Then, with the fall of the Berlin Wall in November 1989 and the dissolution of the Soviet Union in December 1991, the Cold War thawed dramatically. In the aftermath, relations between the US and the reconstituted Russia became much friendlier. For example, when Russian President Boris Yeltsin met with US President Bill Clinton for a joint press conference in New York in October 1995, Yeltsin told jokes to the media rendering Clinton in paroxysms of laughter with the adjacent body language depicting two fraternity brothers rather than historic enemies.

In the time since the Clinton/Yeltsin meeting, the US-Russia relationship has been through its vicissitudes. President George W. Bush and President Vladimir Putin entered their respective roles in short succession to one another. Throughout Bush’s first term, he and Putin maintained a good working relationship – Putin was the first foreign leader to call Bush in the aftermath of 9/11 pledging his support in fighting terrorism. The relationship soured, though, as Bush entered his second term given his nascent plans to expand NATO to Georgia and Ukraine, and, from the Russian side, a sense that Moscow was not being given a high enough profile in world affairs. Putin wanted a change on both counts. Russia was preoccupied during this time with quashing its restive republic in the Second Chechen War – a scorched earth policy, which stopped terrorism, but also every other conceivable human right in the region. However, in August 2008, when Russia invaded Georgia effectively annexing Abkhazia and South Ossetia, the lame duck Bush presidency could do little to fend off Putin’s land grab.

When President Barack Obama entered the Oval Office in January 2009, he pledged a “reset” with Russia under newly minted Russia President, Dmitri Medvedev – a marionette of “Prime Minister” Putin, who castled places with Medvedev in a façade of constitutional legality. For a short period, the reset worked well with Obama and Medvedev signing the New START treaty further reducing American and Russian nuclear weapons stockpiles.

When Putin returned to the presidency in 2012, the US-Russia relationship had already soured again. Russia annexed Crimea in March 2014 and then engaged in semi-formal military action in the Donetsk and Luhansk regions of eastern Ukraine creating a “frozen conflict” in the region that has left the sovereignty of the area unknown, and contested in the international arena. Russia then began an intervention in the Syrian Civil War in September 2015 as a means of maintaining the position of its last ally in the Middle East, President Bashar al-Assad, and usage of its last warm water naval port at Tartus on the Mediterranean coast.

The candidacy of (now) President Trump re-envisioned longstanding Republican positions on a vast array of foreign policy platforms. Chief among them the changes was the position of Russia. Trade between the US and Russia tends to be limited as Russia is only the United States’ 28th largest trading partner. Broader foreign policy, of course, is another matter. Trump presented a position much closer to Moscow, and much more affectionate to Putin. Part of the thinking behind this strategy is that in order to boost domestic American workers by restoring jobs – a key plank in the Trump campaign – requires a more peaceful international environment that does not take away from the issues of jobs and the economy.

In the aftermath of Trump’s victory, a longstanding issue has been whether Russia meddled, or tampered, or worse, in the US election. Recent news indicates a meeting between Donald Trump Jr. and Russian lawyer, Natalia V. Veselnitskaya, in June 2016 over a range of potential issues such as punitive information on the Clinton campaign, as well as defanging the Magnitsky Act – US legislation signed into law in December 2012 – to sanction 18 high-ranking Russian officials for killing the human rights lawyer. The full details and outcomes of this meeting is still unknown.

Some level of interference on the part of the Russian government to sway the outcome of the election away from Democratic Party candidate, Hillary Clinton and towards Mr. Trump remains a major point of contention.

In the aftermath of the 2016 Presidential election, Russia has also become very controversial in the US. Some level of interference on the part of the Russian government to sway the outcome of the election away from Democratic Party candidate, Hillary Clinton and towards Mr. Trump remains a major point of contention. From Putin’s perspective, then-Secretary of State Clinton attempted to oust him with her statements decrying the results of the fraudulent 2011 parliamentary election in Russia. These statements had the effect of rallying of anti-Putin protesters, which could have dovetailed with the ongoing Arab Spring protests at the time. Of course, Russian interference is likely to have had little impact on voters in key Trump-victory swing states like Ohio, Florida, Iowa, and North Carolina, as well as states like Pennsylvania, Michigan, and Wisconsin that moved from their historically Democratic Party Blue moorings to the Republican Party Red for Trump. Nonetheless, foreign interference in an American election is a very serious issue. The full details of what happened and where seem to be released on a monthly basis with new elements adding to the conversation. Major Republican lawmakers like Senator John McCain has called for a formal investigation of what happened.

Writ large, Russian nationalism is still largely viewed with significant suspicion in the US heartland and well as the beltway of Washington D.C. However, with the campaign of Donald Trump, overtures towards Russia became part of the campaign. Mr. Trump saw an opportunity for a proper reset of relations.

In Russia, animosity towards US still looms large over several issues. First, US intervention in the Yugoslav conflicts on behalf of Kosovo in 1998 rankled the Russian establishment given Moscow’s historic old ties with Serbia. Second, the US-led invasions of Afghanistan and Iraq, in the Russian view, further encircled Moscow. Third, in the perception of Russian leaders, the US never gave Russia a large enough profile in the aftermath of the Cold War relegating the country to middle power status – a position unacceptable to many in Russian foreign policy circles. Finally, in the aftermath of the aforementioned Magnitsky Act was followed up with the Dima Yakovlev Act – named after the young Russian born boy who died under the care of his US adoptive parents at the age of three. All of these issues, in the Russian view, have caused Moscow to lash out to protect its core interests.

Nationalistic overtones on both sides revolve around the strategic space in Eastern Europe. For Americans, the large-scale fear is that Russia will continue its Cold War era policy of maintaining a buffer zone in Eastern Europe with control – whether overt or covert – over its near neighbours. Military action in Georgia and Ukraine could be followed up with incursions in the Baltics, or other portions of the former Soviet Union or Warsaw Pact. For Russians, the large-scale fear is an erosion of the Cold War era buffer area with NATO membership further extended to countries along Russia’s western border.

For President Putin, the expectation is to maintain Russian security. Russia’s history is littered with cases of foreign invasions and incursions that ultimately weakened the state and stifling economic and cultural advancement. For example, in 1237, the Mongols invaded occupying for almost 250 years, in 1610 the Commonwealth of Poland-Lithuania invaded and sacked Moscow, the Great Northern War of the early 1700s saw several neighbours rally together to confront Peter the Great, in 1812 Napoleon invaded Russia as part of the Sixth Coalition in the Napoleonic Wars, in 1917 numerous foreign forces sent troops to support the Whites in the Russian Civil War, and in 1941, Hitler invaded the Soviet Union. All of these markers present Russia with its Cold War era core interest: security through a buffer zone in Eastern Europe.

Coupled with diminution fears of Russia’s declining population, which shrunk from 148.7 million in 1992 to just 142.7 million in 2008, Putin is trying to use pragmatic realist calculations to maintain security whilst also annexing territories considered historically part of Russia – the addition of Crimea’s almost two million people has raised Russia’s population. Although birth rates have declined dramatically and life expectancy for men remains low, the population increase by force temporarily offsets a vision of a declining Russia.

American core interests have historically revolved around the advancement of democracy and human rights. While Cold War calculations were often more pragmatic, post-Cold War president like President George W. Bush advanced the “freedom agenda”, which could have brought numerous former Soviet republics into NATO as a mechanism of entrenching democracy in those countries. President Barack Obama sought to advance human rights in different parts of the world, including Eastern Europe.

In the perception of Russian leaders, the US never gave Russia a large enough profile in the aftermath of the Cold War relegating the country to middle power status – a position unacceptable to many in Russian foreign policy circles.

Under President Trump, neither democracy or human rights seem at the forefront of his foreign policy agenda. For Trump, his mantra to “Make America Great Again (MAGA)” stems from his desire to focus on economic matters, and to create a circumstance where business can thrive. This involves avoiding foreign entanglements where possible; on the campaign trail, Candidate Trump repeatedly voiced his opposition to the 2003 invasion of Iraq and the ensuing war. MAGA necessitates peace in the international arena in order to allow a focus on domestic issues and growing higher paying jobs, especially in some of the aforementioned states that were key to Trump’s victory.

Part of Trump’s view of Russia is to revisit the idea of Moscow as a baited friend since true friendship is difficult between recent enemies. Yet, pragmatic politics and domestic forces make it difficult for an American President to cozy up to an authoritarian Russian President. As a result, nationalist contentions will oscillate frequently during the Trump administration as he attempts to create a peaceful, business-friendly international environment whilst simultaneously having to watch for the erosion of American power around the world. Accomplishing both of these interests will be nearly impossible, which is why nationalist forces in both countries will ebb and flow throughout the duration of the Trump and Putin presidencies.

The biggest danger is swinging nationalism towards heightened tensions, which could result in some form of skirmish – any time great powers become entangled, there is a major concern for conflagration. There is also a danger, however, in not supporting democratic reforms because it sets a norm of accepting dictatorial rule instead of promoting constitutional rights for all people. Ironically, if President Trump does not promote democratic tenets, he could find that the very conditions to MAGA could be eroded because institutional protections for freedom are necessary for developed economies to thrive. Maintaining a friendly relationship with Russia, then, is the most useful stance, provided that a) there is a review of Russian actions in the 2016 election, b) a push for democratic reforms in Moscow, and c) Russia stops annexing the sovereign territory of its neighbours, whilst also returning stolen lands to Georgia and Ukraine. Negating any of these tenets will swing the nationalist pendulum back towards menacing animosity – a position that neither country wants.

Featured Image: Russia’s President Vladimir Putin shakes hands with US President Donald Trump during their bilateral meeting at the G20 summit in, Germany July 2017 © Carlos Barria / Reuters

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About the Author

Dr. Glen M.E. Duerr is Associate Professor of International Studies at Cedarville University in Ohio, USA. He currently resides in Washington D.C. as part of the university’s “DC semester”. He is the author of Secessionism and the European Union, which was published by Lexington Books in 2015, and numerous other journal articles and book chapters on issues related to nationalism primarily in Europe and North America.

 

Can Sustainable Peace and Co-operation Be Achieved in the South China Sea Region?

By Li Jianwei and Ramses Amer

Since mid-2016, positive improvements have been made in the South China Sea region. However, more efforts are needed to sustain such peaceful and co-operative trend.

2016 was a dramatic year in the development of the South China Sea disputes. Before 12 July when the award was issued relating to the South China Sea (SCS) Arbitration Case unilaterally initiated by the Philippines’ previous administration against China, tension had been increasing and prediction was high that the Case could be an event triggering further damage of regional security or even lead to military confrontation. However what happened afterwards proved to be the opposite. The relevant parties have exercised restraint and efforts have been made towards functional co-operation.

 

Background Briefing

Asia is the most vibrant region in global economy and China is considered the engine, expected to contribute over 30% of world annual economic growth rate up till 2020.1 At the same time maritime disputes exist from the Sea of Japan in the north down to the marginal seas in Southeast Asia. Conflicts which might be sparkled by the sensitive issue of territorial disputes have haunted the region. The SCS disputes are most complicated in regard to parties involved and nature of disputes.

Since 2009, two divergent trends co-exist and have developed in parallel in the SCS region. On the one hand, tension and danger of conflicts has been increasing due to various moves from claimants to consolidate their maritime interests. On the other hand, attempts have been made to create mechanisms at bilateral and regional levels to not only manage the tension and reduce mistrust but also to build confidence and promote functional co-operation. The highlighted event was the Arbitration case, which had brought the relations between China and the Philippines to the lowest and the risk was that negative impacts could spill over in the region. Furthermore, with external powers like the US and its allies involved, big power rivalry further complicated the regional security situation. The concerns were that the disputes might reduce the economic vitality of the Asian countries, the Southeast Asian countries in particular.

 

 

Economic relations between China and ASEAN countries have kept on growing, seemingly not affected by the existence of maritime disputes. Trade has been increasing steadily (see Table 1 and Figure 1), with a peak in 2014 of 480.12 billion USD, 2.3 times of that in 2009. Bilateral trade between China and the Southeast Asian claimants in the SCS has also been expanding during the same period, which indicates that tensions relating to maritime disputes have not impacted negatively on overall bilateral economic relations. However it can be noted that the year-on-year growth rate fluctuates in some cases, which may imply that bilateral economic interaction could be influenced at certain specific time when relations deteriorate due to maritime disputes, e.g. in the case of China-Philippines. Another possible impact of maritime disputes is on bilateral tourism. The number of tourists to the Philippines from China dropped by 7.4% on the year-on-year basis in 2014, one year after the Philippines initiated the Arbitration case, an obvious decline from a growth rate of 69.9% in 2013.2

Developments After the Arbitration

After the Arbitration case, the dominant trend in the SCS region is towards co-operation. Efforts at both regional and bilateral levels increased aiming at promoting dispute management and functional co-operation.

At the regional level, on 25 July 2016 the Foreign Ministers of ten ASEAN States and China met in Laos, committing to “the full and effective implementation of the Declaration on the Conduct of Parties in the South China Sea (DOC)” and to achieve the early adoption of a Code of Conduct in the South China Sea (COC). Their Joint Statement emphasised the resolution of the SCS disputes through friendly consultations and negotiations by countries directly concerned and that parties were to explore or undertake co-operative activities in areas of navigation safety, search and rescue, marine scientific research, environmental protection, and combatting transnational crimes at sea. In August the 13th Senior Officials’ Meeting for the implementation of the DOC (SOM) and the 18th Joint Working Group (JWG) meeting were held concurrently in China at which two outcome documents were adopted, i.e. Guidelines for Hotline Communications among Senior Officials of the Ministers of Foreign Affairs of ASEAN Member States and China in Response to Maritime Emergencies at Sea and Joint Statement on the Application of the Code for Unplanned Encounters at Sea in the South China Sea and they were approved at the 19th China-ASEAN Summit in September 2016. In May 2017 at the 14th SOM and 21th JWG Meeting the COC framework was adopted which lay a solid foundation for the next stage of consultation on the final COC. On 6 August the framework was formally adopted at the China-ASEAN foreign ministerial meeting in Manila.

At the regional level, on 25 July 2016 the Foreign Ministers of ten ASEAN States and China met in Laos, committing to “the full and effective implementation of the Declaration on the Conduct of Parties in the South China Sea (DOC)”.

At the bilateral level, top leaders of Vietnam (September 2016, January and May 2017), the Philippines (October 2016 and May 2017) and Malaysia (November 2016 and May 2017) visited China. At the meetings between leaders of China and the three main SCS claimants emphasis were put on managing the SCS issues and expanding cooperation areas. For example, the China-Malaysia Joint Press Release stressed the importance of “incremental engagement and close rapport” of defence establishments of both countries and welcomed the signing of the “Framework of Cooperation on Joint Development and Construction of the Littoral Mission Ship for the Royal Malaysian Navy (RMN)”.3 What China and the Philippines have done to mend their relations have positive impacts on not only their SCS relations but also to a significant extent on consolidating the co-operative trend in the SCS region.

 

China-Philippine Efforts to Manage Their Sea Issues

Since President Rodrigo Duterte took office in June 2016, China and the Philippines have taken pragmatic policies in handling their SCS issues. Duterte intentionally shelved the Arbitration and both countries are committed to address their territorial and jurisdictional disputes by peaceful means through friendly consultations and negotiations.

Efforts of confidence-building have been carried out at different levels. During Duterte’s milestone visit to China last October, top leaders from both countries affirmed that contentious issues are not the whole picture of the China-Philippines relationship and agreed to continue discussions on confidence-building measures to increase mutual trust and confidence. In May 2017 President Xi held telephone communication with Duterte pointing out the importance of “continuously deepening political mutual trust and comprehensively carrying out cooperation in various fields” and later in the same month both leaders met again in Beijing at China’s Belt & Road Forum and exchanged views on issues of mutual concern.

To implement the agreements listed in the October 2016 Joint Statement, exchanges of visits followed between different ministries from both countries. The Philippine Finance Minister headed a delegation to China in January 2017 and then his Chinese counterpart visited the Philippines in March. Chinese Vice Premier Wang Yang visited the Philippines in March to attend the opening ceremony of the China-ASEAN Tourist Cooperation Year.

 

 

Confidence-building on the SCS issues is one of the main priorities in China-Philippine relations. The 20th Philippines-China Foreign Ministry Consultations (FMC) was held in Manila on 18 January 2017. Both sides reaffirmed their commitment to uphold peace and stability in the SCS and agreed to establish a bilateral consultation mechanism. On 19 May, the first meeting of the China-Philippines Bilateral Consultation Mechanism on the South China Sea (BCM) was held in China. Regular meetings will be arranged to discuss current and other issues of concern relating to the SCS and to explore areas of co-operation.

Bilateral interactions in two new areas have positive impact on bilateral relations. One is between coast guards of both countries. In October 2016, a memorandum of understanding (MOU) was signed on the establishment of a joint coast guard committee on maritime co-operation, which signified that bilateral co-operation on maritime affairs was underway. On 15-16 December, the first organisational meeting was held in Manila to discuss the formation of a Joint Coast Guard Committee on Maritime Cooperation. On 20-22 February 2017, the Second Organizational Meeting and Inaugural Meeting of the Joint Coast Guard Committee (JCGC) took place in Subic Bay. The JCGC adopted the Implementing Guidelines of the MOU and the Terms of Reference (TOR) of the Working Groups. It was intended to promote co-operation in the sectors of preventing and combatting drug trafficking and other transnational crimes, search and rescue (SAR), environment protection and emergency response through, among other modalities, information exchange and pragmatic empowerment activities unique for coast guards and enforcement agencies. In May, officers from the Philippine Coast Guards participated in a training course organised by China Maritime Police Academy for capacity building and promotion of understanding.

The other is between the two defence forces. On 1 May 2017 two Chinese warships and one support vessel docked in Davao City. Duterte boarded a Chinese naval ship during its stay. It was the first visit by Chinese warships to the Philippines in the past seven years, and for the first time a Philippine president boarded a Chinese naval ship.

Mechanisms were also explored and identified to encourage cooperation on marine resource development. After Duterte’s visit to China in October 2016 and by some tacit arrangements the Filipino fishermen were back fishing in the sea area near the Scarborough Shoal where a bilateral standoff occurred in 2012. China also offered financial and technical assistance to Filipino fishermen in Masinloc to enable them to initiate near-shore fish farming along the coast. Another important step forward in promoting bilateral functional co-operation at sea is that both sides have agreed to restart negotiation on joint development of oil and gas in the SCS. This was announced during Chinese Foreign Minister Wang Yi’s visit to Manila in July 2017.

 

Future Prospects

The claimant States are the key actors in shaping the future developments of the SCS disputes. There is no doubt that China should play an important, if not vital, role in maintaining the current peaceful and co-operative trend in the SCS region. Since the Arbitration case, pro-active interaction between China and ASEAN as well as between China and other claimant countries, in particular China and the Philippines have created a favourable environment for the SCS claimants to manage their disputes. The spill-over impact, if sustained, is conducive to enhancing peace and co-operation in the region.

However, factors exist which may disturb the positive developments. Maritime disputes have not been resolved, which may turn into a trigger leading to confrontation again. Actions by any claimant to consolidate its own interests, such as the unilateral action in an area of overlapping claims, could negatively impact on the situation. This makes it an urgent need to effectively constrain activities of claimant countries. The framework of the COC has laid a good foundation, but to make it effective will be a challenge to the ASEAN countries and to China.

Featured Image: Philippines President Rodrigo Duterte, right, receives a hat from captain Hu Jie of the Chinese navy’s missile destroyer Changchun during the ship’s goodwill visit in Davao city, Philippines. May 2017 © Yu Wei/Xinhua via AP

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About the Authors

Li Jianwei is Director of Research Center for Maritime, National Institute for the South China Sea Studies, China ([email protected]). Her research interests include a) legal perspectives and state practice in maritime dispute resolution and b) Illegal, Unregulated and Unreported (IUU) fishing issue in the South China Sea.

Ramses Amer is Associate Professor and PhD in Peace and Conflict Research, Associated Fellow, Institute for Security & Development Policy, Sweden ([email protected]). His major areas of research include a) security issues and conflict resolution in Southeast Asia and the wider Pacific Asia and b) the role of the United Nations in the international system.

 

References

1. “In what aspects China influence world economy? [in Chinese]”,www.chinairn.com/news/20160823/16455678.shtml, viewed on 31 July 2017.
2. Sources are from statistics of the Ministry of Tourism of the People’s Republic of China, www.cnta.gov.cn/ and the website of ASEAN Secretary, www.aseanstats.org/publication/tourism-dashboard/?portfolioCats=58.
3. The Joint Press Release, www.kln.gov.my/web/guest/press-release/-/asset_publisher/FCk0/content/joint-press-statement?redirect=%2Fweb%2Fguest%2Fpress-release, viewed on 1 August 2017.

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