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Tuesday, 9 June 2015

Should China's South China Sea ambitions be thwarted?

If absolute power corrupts absolutely then it surely follows that absolutely strong, big economies can bully absolutely. That now seems to be the scenario unfolding in the South China Sea where China is claiming sovereignty over 90% of the region even though its mainland is about 650 miles from the disputed Spratly islands, while Vietnam and the Philippines are only about 350 miles away, both of whom also lay claim to these islands and reefs, thought to be rich in oil and gas.

The Philippines has submitted evidence to a UN tribunal hearing its case against China's territorial claims but China has refused to take part in the arbitration and warned that the case would damage bilateral ties and is already doing so in artful ways. The Philippines claims that China's claims are illegal under the UN Convention on the Law of the Sea but it is unlikely that there will be any ruling until the end of this year. Meanwhile, China has militarised Mischief Reef by building an artificial island with an airstrip and installed mobile artillery. Not content with that, China is building another runway on Subi reef and has built a substantial port on Fiery Cross reef. Subi, Mischief and Fiery Cross reefs are three of at least seven reefs in the Spratlys that have been filled in by China and are being fitted out for what can only be military purposes.

The Philippines has challenged its Asean (Association of South-East Asian Nations) members "to finally stand up" to China and demand an end to China's reclamation works. Asean, however, has a history of failing to respond vigorously to Beijing owing to China's immense trade and diplomatic leverage and because not all 10 Asean members have a stake in the maritime disputes. This means that the likelihood of US intervention following more Chinese provocation is stronger.

International relations between south-east Asia and China are reportedly lower than at anytime since the 1960s and the Japanese Prime Minister, Shinzo Abe, has compared the situation to 1914 just before the outbreak of World War One. The potential of this rising tension has huge implications for global logistics that stretches far beyond the costs of higher insurance and the re-routing of ships to avoid the South China Sea, through which passes about US$5.5 trillion of trade every year, should it come to a shooting war.

It is an irony of history that the best of intentions regarding foreign trade can midwife the law of unintended consequences, and its sometimes baleful outcome. In the bid for liberalizing US trade with China back in the 1990s advocates said economic interdependence would inevitably lead to peaceful co-existence. Well, yes, but that is more likely in open, transparent, democratic societies rather than autocracies like China. What Washington has failed to do in recent years is to keep a careful watch over what goods are made where, especially when it comes to vital items like electronics and drugs, which means America now depends far more on China than vice versa, and that can only weaken America's political leverage.

The asininity of western corporations' over reliance on Japan in 2011 for a host of key electronic and vehicle components, a choke point for nearly 100 products, left them nursing billions of pounds in losses following the 2011 Japanese tsunami which severely disrupted JIT-supplied components because alternative sources could not be quickly mobilised. That lesson should not be lost on logisticians who should now be ensuring that they have robust alternative supply sources for all their needs, or else build up their reserve stocks, given now the potential for political disruption spreading from the South China Sea.

This is not to argue that globalization of trade has been wrong-headed. On the contrary, it has pulled China up by its boot straps, kept western inflation down, and enriched its nearby trading partners. But the fact remains that one-sided dependencies invite military adventurism, as China's growing belligerence today proves. What America must now do is address the fundamental flaws in the international trade system that give China such a big advantage.

The most likely outcome of China's latest developments on the Spratlys is that it will repeat its actions of 2013 when China unilaterally imposed an "air defence declarization zone" covering portions of the East China Sea and claim territorial waters around its man-made islands in the Spratlys. Such chutzpah should be vigourously resisted by all nations who depend on unhindered navigation through these seas. America, reportedly, is considering conducting "freedom of navigation" exercises where it would send warships into the waters around the reclaimed Chinese man-made islands. This would show that it does not recognize the sandbanks as islands with their own territorial waters, but all other nations using these waters should be at one with America in this.

China is a land with a sorrowful past but history can have valuable lessons for avoiding a repetition of past mistakes. The likelihood, however, is that China's leaders will ignore the Spanish philosopher Santayana's warning: "Those who cannot remember the past are condemned to repeat it." In becoming much wealthier over the last two decades through foreign trade expansion, China had a great opportunity to show the world that true greatness does not spring from the barrel of a gun, but through friendly, honourable cooperation with its global trade partners in which there is no place for bullying smaller neighbours and intimidating military strutting like cockerels on a dunghill. But human nature does not change so easily, despite the benefit of hindsight that history offers.

What concerns Chinese people most is rising living standards but it only takes a handful of politicians in an autocracy like China to risk all that. Maintaining face is deeply rooted in the Chinese psyche and they will only act soberly when they are resolutely faced down. China's top leaders should be paying far more attention to their internal problems where its greatest political risks lurk. Nature can be cruel to China through its immensely costly floods, typhoons and earthquakes, from which there will be no respite. The people rightly deserve to see their hard-earned wealth channelled to where it is most needed, rather than frittered away on risky, foreign adventurism. Its very low-lying sandbank islands in the Spratlys could easily succumb to a tsunami washing away everything at huge cost, and it may come sooner than expected.

For bullies to triumph all it takes is for good men to look the other way. Recent history shows how dreadful the consequences can be for such insouciance.
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Wednesday, 27 May 2015

Logisticians must reassess Asian supply chain threats

Global logisticians now have two reasons to dust down their contingency plans to cope with heightened supply chain risks in the Far East -- financial and now political. As mentioned in my last blog: "Heightened global supply chain risks herald gathering storms?" the Chartered Institute of Purchasing and Supply's latest quarterly risk index shows that the risk of disruption to corporate supply chains is running at an almost record high, and in particular highlights China's slowdown and its manufacturing sectors at serious risk of defaulting on state-backed loans. So much for the financial risks but now comes the political, which if realized will have far greater adverse, global economic consequences.

The problem is the potential flashpoint over China's development of artificial islands in the South China Sea, around the largely uninhabited Paracel and Spratly islands, a region potentially rich in oil and gas but contested by geographically much closer countries like Vietnam, the Philippines and Malaysia. China says its right to the area goes back centuries to when the Paracels and Spratly island chains were regarded as integral parts of the Chinese nation, and in 1947 it issued a map detailing its claims. Vietnam says it has actually ruled over both the Paracels and the Spratlys since the 17th century and has the documents to prove it. The other major claimant is the Philippines, which invokes its geographical proximity to the Spratlys as the main basis of its claim for part of the islands' grouping.

China's fatuous claim lacks merit and is akin to Britain, say, reclaiming the Hawaiian Islands, previously called the Sandwich Islands after the Earl of Sandwich and whose flag today contains a Union Jack. Geographical proximity must surely be a more valid claim, which does not favour China.

The fear is that, natural resources apart, China's moves are politically motivated, and America's President Barack Obama said that his county is concerned that China is "flexing its muscles and power" to dominate smaller countries in the region. According to American estimates, China has expanded the artificial islands in the Spratly chain to 2,000 acres, up from only 500 last year. It has already built an airstrip capable of taking jet fighters. If China' activity continues apace it would give them defacto control of the maritime territory they claim, said Admiral Samuel Locklear, head of the US Pacific Command, speaking to the US Senate. That means China could base warships and 'planes on the islands, and install long range detection radars, potentially giving them the ability to enforce an air defence identification zone.

China has embarked on a substantial modernization of its maritime and paramilitary forces, as well as naval capabilities to enforce its sovereignty and jurisdiction claims, if necessary. At the same time it is developing capabilities that could put US forces in the region at risk in a conflict. The flip side of this development is a significant rearmament programme by China's smaller neighbours who feel threatened by China's posturings. They are prioritizing their spending on their navies amid the rising tensions in the South China Sea, with annual defence spending in South East Asia projected to reach $52 billion by 2020, up from the expected $42 billion this year, and submarines will feature prominently in that.

Peter Dutton, professor of Strategic Studies and Director of the China Maritime Studies Institute at the American Naval War College, said: "Tensions in the South China Sea pose an economic security risk to the entire globe." He went on the say that: "If a flare up were to arise between China and one of its smaller neighbours those global trade routes could be affected, hurting the world economy." It is not difficult to see why. Each year an estimated $5.3 trillion of trade passes through the South China Sea, with US trade accounting for $1.2 trillion of the total. In 2013 the US exported $79 billion of goods to countries around the South China Sea and imported $127 billion from that region. Should a crisis occur the diversion of cargo ships to other routes would harm regional economies as a result of increased insurance rates and longer transits. Even if shipping companies still attempted to pass through the area during a conflict, whether to access resources there or to cut transit times, "the insurance costs would be prohibitive," said Peter Dutton.

There are some who feel that the trade routes and the concern over freedom of navigation will never become a point of contention in the region because, as the argument goes, everyone needs the shipping lanes to function, most of all China. But if recent history is any guide politicians pay scant regard to economics.

Sensible global logisticians, therefore, should reassess their vulnerability to any disruption to trade passing through the South China Sea, especially if they are reliant on JIT deliveries of component supplies that are only sourced from that region, and so avoid a repeat of the upheaval caused by the Japanese tsunami of 2011, which cost global corporations around the world billions of dollars.
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Saturday, 16 May 2015

Heightened global supply chain risks herald gathering storms?

In the logistics firmament it is often said that demand for forklifts is an accurate bellwether for any economy, in that it is usually the first into a recession and the last out but that observation tends to apply to individual economies. For a global take on economic prospects perhaps the best bellwether is shipping, particularly the dry bulk vessels, and the bells from that quarter are not ringing joyously.

As if to highlight the gathering storm, the Chartered Institute of Purchasing and Supply's latest quarterly risk index, backdated to 1995, shows that the risk of disruption to corporate supply chains is running at an almost record high, helped by a drop in commodity prices and a slowdown in China. Admittedly, the risk rise is not universal. In North America and western Europe the supply chain risk fell last year but that does not mean these areas will escape unscathed if current trends in global commodity trade and deflation persist much longer.

What we are seeing in the global supply chain is essentially a financial risk that began with the global financial crisis in 2008. In the Far East, particularly China, the manufacturing sectors are at serious risks of defaulting on state-backed loans, while in South America collapses in soya bean, copper and oil prices are affecting much of that Continent. In Australia the collapse in mineral prices, particularly iron-ore and coal, have left the country with the highest unemployment for 13 years, with apparently worse to come as investment continues to fall. In Japan, once the world's second largest economy, manufacturers are reluctant to spend on machinery upgrades, where the average age of their facilities and equipment is now 15 years, the highest in 30 years, and the antithesis for any efforts to boost economic recovery. Japan's lost decades of stagnation and deflation have prompted companies to restrain investment and now those same fears over deflation threaten the rest of the global economy.

Nowhere, perhaps, is the problem most acute and obvious than in shipping, and by extension the banking industry, which by some estimates has about half a trillion dollars worth of outstanding loans to shipping companies, much of which is at significant risk of default. The current market state for shipping commodities across the world's oceans is dire, which even an expected record of over 100 ship scrappings this year will not improve. Daily earnings for the industry will still tumble, though it must be said that prediction is not the shipping industry's forte. As recently as February this year it forecast that shipping rates would jump but now forecasts are turning bearish as China's imports of coal plunge and its iron-ore imports expand at its lowest pace on record. As the world's second largest economy, China will expand the least in a generation this year, according to estimates compiled by Bloomberg. Despite an expected demolition of 6% of Cape-size vessels, earnings per vessel will still slump about 20% this year, based on a survey of 10 shipping analysts. Freight rates have been pushed to historic lows, thanks to a perfect storm of collapsing commodity shipments, particularly in coal and iron-ore, combining with a market glutted  with vessels ordered as long as a decade ago. Ships competing for spot cargoes today are earning about $4,200 a day this year so far, the worst start since 2000. Cape-size average earnings are now expected to drop to $11,000 a day this year, having been predicted only in February this year to rise to $18,750 a day.

China is the world's top iron-ore and coal consumer, importing almost 60% of the world's sea-borne iron-ore and about a quarter of the global coal shipments. It is worrying, therefore, when China's Iron and Steel Association sees overcapacity for sea-borne iron persisting until at least 2019, as the world's largest suppliers expand production even more. The risk to coal shipments, however, has more permanent forces at work --- pollution. China's biggest coal company, China Shenhua Energy Co, which supplies about 16% of the country's coal, cut its sales 10% last year and forecasts another 10% cut this year. This reflects China's attempts to reduce its energy intensity in coal dependence so as to cut pollution, understandable in a country where air pollution from all sources kills an estimated 1.2 million a year. Part of China's strategy is to develop alternative sources of electricity generation, such as hydro, wind, nuclear, gas, and solar PV. Cuts to China's demand for fossil fuels are so great that its imports will be heavily affected. The sea-borne market in coal cannot expect any comfort elsewhere from fast-developing countries. India's Energy Minister has made it clear that India's thermal coal imports could potentially go to zero within two to three years.

China's imports of copper in February 2015 tumbled the most in four years, while oil and iron-ore imports slowed to the weakest rate in 3 months. China is now already building the world's largest renewable energy system, for which it deserves a bow, and which in 2013 stood at just over one trillion kw/hrs, almost as much as the combined electricity generated by France and Germany. All this bodes ill for the shipping industry and shipyards, where orders for new ships have plunged to about 400,000 dwt a month for this year, according to Clarkson, the world's biggest ship broker, the smallest since the early 1990s, and about 98% below the peak commissioning rate set in 2007, when 23 million dwt were ordered in a single month.

Now is not a good time to be in shipping, without a long purse, and never, perhaps, have global logisticians faced such uncertain times. Let us hope that uncertain times do not mean living through "interesting times" as the old Chinese curse goes.  
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Saturday, 9 May 2015

Will the Tories save Britain's economy?

Unsurprising to this writer, the Tory party won an overall majority in the British general election but was its greatest recruiting sergeant, a recovering economy, worthy of its achievements and if not what now needs to be done? In response to the first part, the answer looks negative. It's true that the previous coalition Government presided over a fall in unemployment to 5.6%, among the lowest in Europe, and that economic growth last year was impressive for a mature, developed economy but that is only a small part of the picture, outweighed, it seems, by the dark side of the economy.

Britain has two persistent economic problems: falling, inflation-adjusted pay and poor productivity. On the former, inflation-adjusted pay is down by about one tenth since the start of the financial crisis in 2007, a fall not exceeded since the 1920s. This means that by early 2014 the nation's buying power was still almost 6% below its pre-recession 2007 peak, and it will not recover quickly anytime soon, according to research by the independent National Institute Economic Review. This publication predicted that the drop in inflation-adjusted wages is so steep that "it will not be until early 2020 that this previous peak is regained."

The picture for poor productivity looks even direr. After Gross Domestic Product (GDP) fell sharply in 2008-09 there was a brief rebound in 2010-11 but its growth rate since has scarcely budged above zero. According to the Bank of England, output per hour of work has not been so sluggish since Queen Victoria's time, excluding two exceptional times in the immediate aftermath of two world wars.

The weak productivity growth, said the BoE's governor, Mark Carney, is not the result of a lazy workforce, bu rather that companies have not been buying new machines and software workers to raise their performance. While there may be an element of stricter bank loan conditions and uncertainty over the economic prospects holding back such necessary investment, it seems companies have found it cheaper and easier to add people rather than buy equipment, said Carney, (and easier to release people --Ed). This parlous problem is reflected in Japan today, where the average age of the country's machinery is the highest in years because manufacturers are reluctant to spend on upgrades. At an average age of 15 years for facilities and equipment, it is the highest in 30 years. This means that Japanese companies, like Britain's, could fall behind their foreign rivals. Behind Japan's dangerous strategy of using near clapped out, low productivity machines was the country's lost decades of stagnation and deflation, which prompted companies to restrain investment. Just such a scenario could now face Britain if prompt action is not taken.

It is to be hoped that any pre-election nerves that may have held back British investment will now be dispelled, especially now that horse trading between the two former coalition partners, so emasculating for firm policies desperately needed in the country's best interests, is over. But it will need much more than a more conducive political climate.

Just as businesses have their qualms over making new investments so, too, do individuals take a more frugal view of their spending habits when the devil drives, a point that might also crimp business investment. The current labour market does not instill much confidence in that regard. Job creation, for example, between 2008 and 2014 has been dominated by rising self employment and part-time work, with the latter now accounting for 27% of the total workforce, the highest since records began and which includes many professions. The Trades Union Congress (TUC) claims that the number of part-time workers who say they want to work full-time is still almost double the number before the recession at 1.3 million and that at the moment the economy is still not creating enough full-time employee jobs to meet demand. Zero hours contracts, while suiting some, also create uncertainty over employees' future spending plans.

To avoid a long, Japanese-style situation, the British Government must take firm action over the economy, education and its social programme, all of which impact each other. Job vacancies in skilled areas run into hundreds of thousands and they do so because many school leavers' literacy and numeracy levels are lamentable. UK school leavers are among the least literate and numerate in the developed world, with 80% of 16-24 year-olds' standards no better than primary school leavers' achievements. It is the most damning indictment of British school education, admittedly influenced by social problems like single-parent families. This brings us to how social problems impact education and the economy. The Government's spending on social benefits by far and away absorbs the lion's share of total Government spending and so it is here where the scalpel must be wielded more but with expert precision. If taxpayers' largess is showered on single parent families, for example, in a way that encourages more, then not only does that increase the likelihood of children achieving poor academic standards it also diminishes the potential pool of apprentices so desperately needed in certain manufacturing industries.

The UK Government could cut billions of pounds from its budgets, with the savings partly going into measures to boost economic productivity as well as paying down its high debt. Much of industry encouragement should focus on manufacturing, particularly the export market because here the country's disturbing, chronic and worsening balance of payments crisis is a serious threat. This problem has been ignored for far too long and time is running out on both the balance of payments and poor productivity.
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Thursday, 26 March 2015

Thailand's filthy human trafficking remains untrammelled

A four-strong delegation from the International Transport Workers Federation (ITF) investigating labour rights abuses in Thailand this week have found that little has changed in that country's fishing industry, so notorious for its trafficking in migrant workers, slavery, torture, brutality and murder, despite media exposure last year and the laudable lead by America to downgrade Thailand to Tier 3 in its annual report on human trafficking. Tier 3 is the worst level for nations that fail to meet the minimum standards to protect workers as laid out in the Victims of Trafficking and Violence Protection Act of 2000.

The ITF team found that the fishers on board vessels it investigated were subject to poor working conditions, cramped accommodation and long contracts, some of them with no hope of returning home with any pay. ITF inspector, Keith McCoriston, commented on conditions aboard one vessel he inspected. "The crew was scared to talk to us. They had no contracts, no toilet, no shower and no mattresses. Cooking facilities consisted of an open flame and basic utensils. The 24-crew slept in cramped accommodation. We spoke to one fisher who had been on board for 10 months although we expect this is a gross understatement."

Apinja Tajit from the Stella Maris seafarer centre in Sriracha remarked: "We are dealing in many cases with abandoned fishers in Thailand and of the abandoned fishers outside of Thailand. We know of one fisher who was abandoned in hospital with no pay for breaking his leg while on board a vessel. Another fisher was so traumatized by his experience of abuse that he needs trauma counselling. He struggled to explain to us that he was chained like a dog for trying to escape the vessel he was on."

The fishing industry is big business in Thailand. Overall fish exports are said to be worth US$7.5 billion a year, of which canned tuna accounts for $2.3 billion or a 20% share of the world market. The farmed prawn export market is also huge, itself the offspring of the tuna industry. In the pursuit of tuna vast amounts of 'trash fish', too small to be edible, are scooped up and ground into meal for sale to the Thai prawn farmers, where it often ends up on shop shelves around the world as part of dishes like prawn stir fry. According to the Thai government 300,000 work in the fishing industry, while in the canneries they rely on foreign migrants for 80% of their labour needs. In all there are reportedly four million migrants working in Thailand's factories, fishing fleets and brothels. Most migrants in Thailand are undocumented. The ITF states that there are 40,000 Thai fishing vessels operating with only 10,000 registered, many with fake licences, and crewed by unregistered migrant workers. This "cloak of invisibility," says the ITF, "allows the boat captains to treat workers like modern day slaves."

Supporting these captains is a network of odious brokers who for extortionate fees promise migrants, many from poorer countries like Myanmar and Cambodia, jobs in factories and construction, while all the time planning to sell them to trawler captains for as little as £250 each. Helped by energy-boosting drugs, these duped, hapless fishers work 20 hours a day. Beatings are regular and there is torture and execution-style killings. One trafficking victim claimed he saw 20 slaves killed, including one whose limbs were tied to four trawler bows and torn apart at sea.

Thailand's fish worth more than fishers

Mark Davis, ITF deputy regional secretary for the Asia Pacific region, added: "The industry is facing huge challenges throughout the region but is is the workers who are suffering because of this. Neglect and abuse are rife for migrant workers and Thai nationals, too. How have we got to a position where a fish has more value than the worker who catches it?"

In my blog headed: "Thailand's trawlers of terror shame food supply chains," I implied that western buyers of Thailand's prawn-based exports, namely the big food retailers like Walmart, Carrefour, Costco and Tesco, often extolled their roles as responsible citizens shunning all forms of slavery and exploitation in their supply chains yet the problem remains almost untrammelled, indicating that consumers can no longer rely on such ineffectual protestations. Since then it would be fair to say that leading retailers like the UK's Tesco, a wholesale buyer of Thai canned tuna, are under pressure to improve worker protection following America's downgrading of Thailand to Tier 3, but what are they really doing to hit the insouciant, mega Thai industries who are still wanting in cleaning out their Augean stables of worker abuse in their supply chains? Certainly not, it seems, as much as Norway which, for example, has led the way in applying pressure, with one leading Norwegian retailer removing CP Foods' scampi-related products from its shelves, a move actively backed by the ITF and the Norwegian Seafarers' Union. CP Foods is a giant straddling the Thai fishing industry, with annual sales reportedly in the tens of billions of dollars.

It may seem blinkered and irresponsible to urge foreign consumers to boycott Thailand's seafood exports indefinitely, given that such action could hit the workers harder than their employers but there is a good chance that when faced with looming collapse these mega corporations, and the corrupt military government supporting them, will back down quickly, for nothing concentrates business minds better and so quickly than the power of the purse.

There are signs that Thailand's downgrade to Tier 3 has damaged its reputation, increasing pressure on big food retailers to improve worker protections in their supply chains, says Max Tunon, senior programme officer in Bangkok with the ILO, which monitors worker conditions worldwide. There are claims from the Thai tuna industry association that Tier 3 status has prompted improvements in the working conditions. The canneries have cut down on child labour and papers are being provided to workers which makes arbitrary detention more difficult. But critics say that the Thais have not addressed the crushing debt loads that workers take on to pay the brokers who land them jobs. The Government remains as corrupt as ever while the corrosive hand of the Thai mafia is ubiquitous. Until all this changes Thailand should remain firmly in Tier 3. Concerned consumers, meanwhile, could help by encouraging food retailers to source sea food products outside Thailand by boycotting all Thai-labelled products.
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Sunday, 15 March 2015

Britain's new "Google Tax" threatens Irish recovery

A new British "Google tax" could threaten Ireland's impressive economic recovery, with unimaginably adverse consequences for both countries, so should Britain think again and wait for the OECD's reforms, know as the "base erosion and profit sharing (BEPS) project? The risks of Britain's unilateral approach suggests that it would be safer to adopt the OECD joint approach, even if that process would take years compared with the British "diverted profits tax" that will be levied next month on foreign companies that use "contrived arrangements" to avoid having a taxable presence in the UK and route profits to a foreign tax haven. The tax will be 25%, some 5% more than Britain's corporation tax. It is designed to sidestep Britain's treaty obligations by introducing a charge that would fall outside the corporate tax system.

The UK Treasury has denied that its new "Google tax", described as "a highly aggressive piece of legislation" by the Association of Chartered Certified Accountants, conflicts with the OECD's reforms and says that its diverted profits tax is complementary to BEPS and is consistent with the principle of aligning taxing rights to economic activity. Australia has indicated that it may follow Britain's lead.

                            Mine's a double Irish

The  UK Treasury cited the "Double Irish" as an example of the tax dodging arrangements in its cross hairs. This legal tax avoidance ploy, used mainly by American technology and pharma companies, routes profits to tax havens like Bermuda, where they hold intellectual property rights. The Double Irish (DI) exploits the different definitions of corporate residency in Ireland and America. Ireland taxes companies if they are controlled and managed in Ireland, while America's definition of tax residency is based on where a corporation is registered.

Companies exploiting the DI put their intellectual property into an Irish-registered company that is controlled from a tax haven such as Bermuda. Ireland considers the company to be tax resident in Bermuda while the US considers it to be tax resident in Ireland. The result is that when "royalties" go to the company they go untaxed, and these royalties can be so substantial and manipulable that they sharply reduce or eliminate profits in a relatively higher taxing country like Ireland, even though Ireland has the EU's lowest corporation tax rate of 12.5%. Ireland, too, therefore, does not reap much corporate tax revenue from global corporations. In 2013, for example, Facebook, who employ about 425 in Ireland, saw its revenues there rise from Euro1.798 bn to Euro2.997 bn, but its corporate tax bill fell to a derisory Euro5.2 million. 

Ireland does, however, benefit substantially from the tens of thousands of jobs created by US multi-nationals, which generates employee and VAT taxes and excise duties, which has a trickle down effect that boosts the many dependent industries. It also strongly boosts tangible exports provided by the likes of Apple and Pfizer. Foreign-owned firms, mainly American, are responsible for about 90% of Irish tradeable exports, and this rises to the mid 90s in respect of services exports. Much of that, however, could be put at risk, even though the foreign technology companies have invested heavily in Ireland and therefore, according to some, unlikely to move. Facebook's customers in Ireland, however, are dwarfed by those in Britain so it might find that paying 25% rather than 20% UK corporation tax if registered in Britain would be incentive enough to up sticks from Dublin to Britain, followed by others if the law of comparative costs, including tax, are in Britain's favour. 

Well on the road to economic health, Ireland has done well, having suffered years of austerity, albeit brought on largely by themselves through their naivety over an unsustainable property boom. In 2014, for example, Irish tax payers paid Euro 3.5 bn more than in 2013, thanks to rising employment. But it is not out of the woods yet, and there is a real chance of a second Irish banking crisis related to high, non-performing mortgage loans. Now is not the time for Britain to risk harming that recovery, given the billions of pounds it stumped up to tide Ireland over its economic crisis and the importance of the Irish market for its exports. 

The Institute of Chartered Accountants in England and Wales was right to say that the rush to push the legislation through ahead of the General Election meant it was unlikely to be "afforded the scrutiny it needs." Sod's law may always be at work but the law of unintended consequences, though far less common, can be far more ruinous.
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Friday, 13 March 2015

Was Afghanistan's war worth the cost?

Rarely, if ever, in the annals of military logistics have operations in Afghanistan cost so much and achieved so little. Underlying much of this tragic waste was the arrogant belief that concerns about the logistics problems of supplying a land-locked country, ideally suited to guerrilla warfare, with highly vulnerable supply lines stretching thousands of miles, could be tossed aside, given the overwhelming fire power and manpower of the invading allies.

Figures just released by Britain's Ministry of Defence (MOD) on the cost of the Afghan war for their financial year 2013-2014 show that supporting the 5,200 military personnel cost £232,225 per head, or £1.212 billion overall. That, however, was a year when operations in the 13-year war were beginning to be wound down. In the year 2012-2013 the comparable cost of supporting 9,000 military personnel at £297,025 per head was £2.673 billion. To these figures must be added the additional cost of new equipment, described as urgent operational requirements, which were £57.5 million in 2013-2014 and £333.3 million in 2012-2013.

Those figures are far from the end of the tally. Supporting the British military personnel in Afghanistan were 8,529 and 11,476 civilians for the years 2013-2014 and 2012-2013 respectively. And finally, one must not forget the high, tragic cost of supporting the permanently maimed personnel and the wives and children of the 450-plus killed in action, a figure that will inevitably grow given the expected suicides to come over years which, if previous recent military entanglements are any guide, will exceed the numbers killed in battle. At one stage the total costs of all the allied involvement was estimated to be US$2 billion a week, with the Taliban support costs calculated to be less than one tenth of the coalition forces.

Leaving aside the ignored historical lessons from previous super power invasions of Afghanistan over the last 200 years or so, any logistician worth his salt could see just how nightmarish and difficult the costs would be in supplying the allies in Afghanistan, surrounded by potentially hostile or ambivalent countries like Iran and Pakistan who lent succour willingly or otherwise to the Taliban. This meant that most of the supplies had to be airlifted from western Europe at a cost of US$14,000 a tonne compared with only $500 a tonne if Russia had allowed rail-borne supplies through its territory. The alternative to airborne supplies was the dangerous land supply line up from Karachi and through the mountainous passes. In just one attack in these passes, however, 40 oil tankers were destroyed by the Taliban.

So now that the last battle flags are being furled as the coalition forces depart, leaving only a small advisory contingent, could it be said that the allies' costs were worth it and what are the lessons for military logistics?
As far as the British financial cost goes, estimates will vary, the only certainty being a rising cost over years to come to support the wounded and their families. Sir Sherard Cowper-Coles, Britain's former ambassador to Afghanistan, who believed that there could never be a military victory, estimated the British cost running at £6 billion a year, while the MOD claimed that between 2001-2010 the cost was only £11.6 billion, but it subsequently admitted that the Afghan war was absorbing about 30% of the £35 billion UK annual defence budget. The true total British costs may never be known, especially as much depends on how the costs are calculated. But based on the MOD's last two accounting years, a total cost to date of the 13-year war of over £30 billion looks decidedly conservative.

The mooted positive effects of the Afghan war are broadly political and economic. On the political side, one of the reasons for the Afghan invasion was to prevent Afghanistan from becoming a safe haven for Al-Qaeda to prosecute its mischief abroad. In that regard, at the best this goal has been only partly successful. Al-Qaeda still has a presence in the country and the Taliban, estimated at 20,000 strong, are a long way from being defeated. Many question how the much bigger Afghan army would fare against the Taliban insurgents without the help of a departed NATO force.

On the socio-economic front, there seem to be more positives. Various polls show many Afghans in a positive mood about their future. Education for both sexes is now available and women are allowed to play a much fuller role in all branches of the economy. But even on this front nothing is certain, because the cause of their oppression remains in the wings. Meanwhile, the wealthy Afghans are taking no chances. They are quietly moving their wealth abroad.

In the wider scheme of things the economic ramifications of debt-fuelled war are like the sins of the fathers being visited on future generations. Soaring government debt means soaring interest costs, and that means two things: money diverted from pressing social needs and possible cuts in Government social security budgets. Back in the 6th century BC, the Chinese sage, Sun Tzu, summed up the economic problem of war succinctly: "Where the army is prices are high. When prices rise the wealth of the people is exhausted." Trying to put a price on such repercussions is incalculable but the outcome unarguably very pernicious.

Military logistics is not just about controlling the supply chain effectively to deliver all that is required to the war theatre at the right time. It is also about how the chosen battlefield can be used to degrade an enemy's military ambitions. In this respect, the Taliban had the country's geographical and climatic conditions working in their favour. That, perhaps, more than any other factor ensured the allies could not win a military victory. It is to be hoped that in future before nations consider going to war in distant lands they will think of all the costs against the perceived benefits and leave arrogance at the door.
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