Randomly Noted

As many note the passing of  long-time New York Yankees’ owner, George Steinbrenner, and discuss his outsized impact on New York City and on baseball, perhaps his celebrity will prompt the U.S. Congress to finally come to terms with an important tax issue.

It feels unseemly to discuss financial matters right after a person’s death. But it’s a financial news event whenever an American of significant wealth dies because of Congressional inaction. The news is that right now, no matter how wealthy the person who passes away, there is no federal estate tax.

This is not a call for any specific level of estate tax, itself a subject of heated debate in Congress and in the country. It’s a call for Congress to have a consistent level of tax for a reasonable number of years.

As press reports have noted, Steinbrenner’s fortune – Forbes estimated his net worth at about $1.15 billion – wouldn’t be subject to estate tax because in 2010 there is no federal estate tax.

In 2009, the federal estate tax rate was 45%. In 2011, if Congress doesn’t act, the rate will be 55%.

This stunningly irresponsible set of circumstances occurred because of Congress’s inability to act on deadlines it essentially set for itself back in 2001.

At that time, tax-cutting was in vogue, but there was a compromise achieved by essentially making annual reductions in the estate tax temporary. Said another way, Congress kicked the can down the road.

After a declining rate starting from 2001, the rate went to zero for 2010 and then reverts to 55% in 2011. The idea presumably was that no one who voted on the measure would want the zero rate or the 55% rate to ever be put into practice.

Those two opposing-ends-of-a-bell-curve numbers were put there essentially as a warning from Congress to itself. We put off a decision, but we have a whole bunch of years to work things out. They haven’t yet worked things out.

Some have speculated that if Congress finally does get around to stepping up and settling the state tax issue, it will try to apply the rate retroactively, making the heirs of those who pass away in the tax-free year of 2010 pay something.

The idea of retroactivity has raised legal questions. More imporatnt, it assumes Congress will finally do something to settle the estate tax issue.

Pardon our skepticism on that score.

(This earlier ran on Dow Jones Newswires as a Money Talks column)

For all the talk about new world orders, new blocs, new spheres of influence and such we are yet to see the Group of 20 flex much muscle, or the BRICs (Brazil, Russia, India and China) manage to stay on message.

 This while European Union members wrestle publicly with how to deal with Greece–particularly how much money to hand over.

Governments still prioritize their individual needs over collective decision-making, and some groupings are proving a particularly fractious bunch.

That means, noise aside, we are unlikely to witness a sea change shift from the U.S. as a central decision maker or the U.S. dollar as the main global currency, or a major change in the phrasing and nature of world trade agreements; we are likely to also see a fair amount of protectionism persist.

The weekend meetings in Washington DC of the World Bank, the International Monetary Fund, the G-20 plus the G-7 were a classic exercise in maintaining the status quo. Only last year everyone was talking about how the G-20 would soon supersede the G-7/G-8, especially given the growing influence of China among the pack of the stronger developing nations.

That had implications for all sorts of things in terms of the balance of power, from emerging-market nations’ ability to negotiate things like trade, to what sort of currency should be the world’s dominant medium of exchange.

China and India, et al, are emerging powers. They are gobbling up more of the world’s resources and playing a bigger role as well in global politics.

But why presume the “south” is any more of a united grouping than the “north”? Emerging market nations may be just that, but they don’t necessarily have a lot else in common. Grouping them together and saying they will have the same agenda on trade, currencies and monetary policy is ridiculous.

Countries will act together, but only up to a point. Unions look less solid when their individual interests may be put at greater risk. That’s true for the G-7, G-20, EU and BRICs alike.

Witness the comments from officials from India and Brazil in recent weeks along the lines that it wouldn’t be a bad thing if China allowed its currency to rise. Are we seeing a crack in the BRICs?

Witness the German Foreign Minister Guido Westerwelle reminding everyone on Sunday that his country is “not ready to write a blank check” for Greece, after Athens appealed for an E.U. and IMF bailout.

 
We all like to bang on about a new world financial order. In reality, any change will be slow and incremental. The U.S. (with its outsize influence on the IMF and World Bank) and its currency will be top dog for a while yet.

This summer we’ve learned quite a lot about the cost of doing business in China, thanks to the Rio Tinto case, and the Green Dam web-filtering software fracas. Today, we were reminded of something we already knew: that foreign firms which want to  do business in China usually, if not always, have to go through some sort of Chinese entity. What happened today is the World Trade Organization ruled against China for forcing U.S. media producers to route their business in China through Chinese state-owned firms. This echoes last year’s settlement in which China agreed that the state-run Xinhua news agency would no longer serve as sales agent and regulator of foreign providers of financial information even as it competed against them. (Full disclosure: this case affected Dow Jones and our competitors.) All this – Rio, Green Dam, WTO, Xinhua and more – adds up to a litany of business hazards to those venturing into China. As I’ve written before, however, none of this will stop the flow of foreign firms into China. It will just make Chinese commerce costlier. Surely, CFOs and corporate risk managers ’round the world are tapping fresh figures into their calculators as they assess what it takes to compete in China circa August 2009. Low labor costs, a fast-growing economy (at an 8% annual pace despite the economic crisis), a rising middle class, vast regions populated by increasingly modern factories – it still amounts to a compelling proposition despite China’s statist, anti-WTO and anti-competitive tendencies. We should prepare for many more years of WTO cases as China, which joined the organization in 2001, clings to its practices as Beijing’s leadership weans its business and political cadres off the goodies they’ve grown accustomed to while “partnering” with foreigners. It will take many years, and certainly an economic crisis isn’t the time for the central government to deprive too many influential colleagues of their livelihoods.

The U.S. has launched a World Trade Organization complaint against China on the grounds that Beijing unfairly helps domestic makers of steel, aluminum and chemicals, among others, by effectively blocking overseas exports of raw materials (eg. the ingredients that go into steel, aluminum and chemicals.) In essence, the complaint alleges that Chinese steel, aluminum and chemical companies get first dibs on raw materials – at ultra-low prices – from domestic producers, and are therefore more potent when competing against overseas companies. For their part, non-Chinese steel/aluminum/chemical makers have to buy raw materials in the open market, and arguably at higher prices because a lack of Chinese output limits the available supply. Here’s what USTR boss Ron Kirk said today at a Washington, D.C., press conference: “And we are most troubled that this appears to be a conscious policy to create unfair preferences for Chinese industries by making raw materials cheaper for China’s companies to get, and goods more economical for them to produce.” The EU has filed a similar complaint. As often happens with WTO matters, this spat might get resolved during a consultation period in which the parties discuss, debate and negotiate. But the dispute has been going on for a couple of years and it’ll take many more months to sort it out. In the meantime, China will keep doing what it’s doing – and, frankly, it can’t really afford to pull back from its preferential quotas and export duties at this point. That’s because Beijing’s huge economic stimulus plan has launched a wave of infrastructure projects across that vast country, all of which need the very products (especially steel) which are helped by the allegedly unfair practices. Continue reading…