Tuesday, May 5, 2009

A Protectionism Move by the U.S.

During the G20 meeting last month, many global leaders (U.S. was one of them) voiced their oppositions against the protectionism policies imposed by other countries. However, on Monday, the U.S. President Obama pushed out a protectionism policy: a tax proposal which will eliminate the off-shore tax-avoidance techniques used by multinational U.S companies, which will increase the government’s tax revenue.

Obama also wants to use this proposal to increase the U.S. employment. But I don’t think it is feasible. Will the U.S. multinational corporations scale back their overseas businesses to minimize their tax expenses and sacrifice the overseas business opportunities to other foreign companies? I doubt it would happen. Here are the reasons:

The current recession is not turning into a depression because a lot of manufacturing activities are supported by many multinational corporations such as Caterpillar, Procter & Gamble, Johnson & Johnson, 3M, etc. Their annual reports showed their profits over the past couple of years were mainly driven by an increasing growth in international businesses and sales, especially in Asia. On the other hand, corporations that do not have international businesses were struggling hard to maintain profit margins, and even suffering losses.

As the multinational corporations have to incur heavier tax expenses, their profits will be lowered. However, foreign companies who are not affected by this proposal will generate more profit, given all else equal. Therefore, Obama’s tax proposal will seriously drag down the U.S. multinational companies’ competitiveness in the global platform, and possibly increase unemployment from those multinational corporations.

Therefore, if Obama really wants to create jobs in his tenure, this tax proposal may not be the right one.

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