One of the most important critics of the efforts by the United Kingdom to withdraw from the European Union as a result of the referendum of 2016 has been the ‘Big Business’ community on both sides of the Channel. There has been an almost universal view expressed by the business community that the possibility of a “no deal” Brexit, a departure from the European Union on March 29, 2019 without a previously-arranged withdrawal agreement satisfactory to both sides would bring about disaster, economic damage and chaos in British industry. The media is full of their dire predictions and warnings. The fact that the majority of the elected members of Parliament are ardent ‘Remainers’ has led them to adopt and broadcast this Project Fear forecast of gloom expressed by the business community as a reality requiring a response.
That the Remainers can believe such dire fantasies is a measure of how little they understand business, banking and international trade. It is tragi-comic to hear such idiocies and childish ignorance spouted by the elected of the land. They pose their views as confronting a min-Manichean plot and devote their deliberations to the attempt to frustrate the results of the referendum. They do so from a deep ignorance of what they are describing and attach a spewing of ideological claptrap as justification of their puerile views.
The business community has no such constraints. They issue their edicts on Project Fear and their assessments of the gloom and despair which will inexorably occur when March 30th, 2019 arrives without a withdrawal deal in place. This is not as a result of a sudden affinity of the business community to democracy or free competition in the marketplace; the universal motivator is one of man’s eternal drives – greed.
Commerce and banking in the European Community has never been about competition. It has been the agreement among manufacturers, traders and their financial backers to create a Europe of cartels and similar restraints of free trade. The problem of these businesses is not that they will lose business as a result of the BREXIT; they are afraid that the cosy club of interlocking cartels and price-fixing mechanisms of the EU might be exposed to the European citizens if Britain leaves and is free to compete with them.
Capitalism is rooted in the belief that free and open competition will create the “hidden hand of the market” to promote efficiency and competitive pricing; a sort of economic Darwinism. The only problem is that these promoters of capitalism want this competition to take place in somebody else’s business. For their own businesses they would prefer a situation where free competition is controlled and a small band of producers join together to fix prices, restrain trade by preventing the new entry into the market of non-cartel manufacturers, and establishing a cosy relationship with the political regulators whose job it is to control them and promote free competition.
The Euro Cartels
They don’t call their activity ‘operating a cartel’; the euphemism is “operating an orderly business”. The level of cartelisation within the EU is startling both in terms of the fines imposed on these cartels by the EU as well as the fact that these proceedings against the EU cartels are only a scratch on the surface by the EU of the most egregious of the cartels.
There are regular publications by the EU which show that, even in the limited cases they have pursued, an enormous amount of fines have been assessed by the EU Competition Commission (adjusted for Court judgments) for the period 2014 to 2018 in excess of €8.5 billion euros.
During the period from 1990 to 2018 the amount of fines is over 28 billion Euros.
That is twenty-eight and a half billion Euros so far from a Commission that is slow, unreliable and reluctant to keep the barriers on competition in place. A recent study at Oxford reports “One of the most contentious and high-profile aspects of EU competition law and policy has been the regulation of those serious competition or antitrust violations now often referred to as 'hard core cartels'. Such cartel activity typically involves large and powerful corporate producers and traders operating across Europe and beyond, and comprise practices such as price fixing, bid rigging, market sharing, and limiting production in order to ensure 'market stability' and maintain and increase profits.”[i]
Antitrust violations are very common within the EU. Most EU citizens have no idea how widespread and pernicious these cartels can be. A key defining principle of doing business within the EU is that many, if not most, European industries operate outside the rules of free competition. Most operate as cartels; groups of businesses in the same industry which meet and establish prices and working relationships. They set high prices for the goods they produce, sure in the knowledge that their cartel will prevent any other company underbidding them on price. There are EU cartels for steel, sugar, milk, transport, cement, food production, pharmaceuticals, electrical goods, paper and paper products, computers, cars, construction, mobile phones, vacuum cleaners and scores of others. This both raises prices and inhibits innovation.
They are widespread, costly and ubiquitous
These fines involve some of the EUs largest companies.
This is still going on. As a selection, look at last month, December 2018:
a. The European Commission fined the clothing company Guess €39 821 000 for restricting retailers from online advertising and selling cross-border to consumers in other Member States ("geo-blocking"), in breach of EU competition rules. (December 17, 2018)
b. The European Commission has fined Bulgarian Energy Holding (BEH), its gas supply subsidiary Bulgargaz and its gas infrastructure subsidiary Bulgartransgaz (the BEH group) €77 068 000 for blocking competitors' access to key gas infrastructure in Bulgaria, in breach of EU antitrust rules.(December 17, 2018
c. The European Commission found that Gibraltar's corporate tax exemption regime for interest and royalties, as well as five tax rulings, are illegal under EU State aid rules. The beneficiaries now have to return unpaid taxes of around €100 million to Gibraltar.
d. The European Commission has informed four banks of its preliminary view that they have breached EU antitrust rules by colluding, in periods from 2009 to 2015, to distort competition in secondary market trading in the EEA of supra-sovereign, sovereign and agency (SSA) bonds denominated in US Dollars.
This cartelisation is a continuing process, carried out by Europe’s major producers. These are not just random small companies. They are the Euro-elite.
The top ten offenders (by fines) include
These are just a few of the cases brought by the Competition Commission. However, the fact that these cases were brought and fines levied does not mean that these fines were actually imposed or collected. The EU clearly recognises that cartels are the leitmotiv of European business and have prosecuted some cases, but that does not mean that the cartels are deterred or fined.
When these cases were heard and a fine imposed the EU allowed for a mitigation of the penalty. It reaches a “settlement” with the cartels reducing the fines and limiting the liabilities of the companies found to be operating cartels. Recent settlements include cartels in the following cases: DRAMs, animal feed phosphates, washing powder, glass for cathode ray tubes, compressors for fridges, water management products, wire harnesses, Euro and Yen interest rate derivatives, polyurethane foam, power exchanges, bearings, steel abrasives, mushrooms, Swiss Franc interest rate derivatives and bid-ask spreads, envelopes and parking heaters.
Multinational Global Corporations
There is a lot of talk by the Remainers about the implications for Brexit on global corporations and their need for ‘just in time’ international integration in manufacturing. They should examine how the international integration of production started and who actually paid for it. The first big move towards international production was created by Ford. Ford used to manufacture tractors in Highland Park, Michigan, Dagenham in England, and ran an assembly line for tractors in Genk, Belgium. Ford decided to specialise. It manufactured all the engines and transmissions in Highland Park, the bodies in England and continued assembly in Genk, Belgium. They shipped the engines and transmissions to England and Belgium; the bodies and integrating parts from England to the US and Belgium and assembled them in all three places. That meant that the tractors could be sold as ‘domestic production’ in the U.S., UK and Belgium. That meant that there would not be heavy duties to pay for imports of tractors into the U.S., only a reduced rate for bodies. The same was true for the UK which also qualified Ford tractors for the “Imperial Preference” operated by the UK for exports to the Commonwealth; and finally as local production in the emerging European Economic Community.
The opportunities that this fractioning of production were picked up by General Motors. They began to expand on the fractioning of the production process pioneered by Ford to fund their international expansion worldwide. The mechanism was “transfer pricing”. That is when General Motors manufactured the various components of its cars produced in several countries it could ship off the parts for assembly to these countries. In the late 1960s I was asked to help prepare the case for the Australian Metalworkers who had to go to the hearing for the Metal Trades Award which regulated the basic pay and conditions in the metal (mainly auto) industry for their GM Holden subsidiary.
I looked at the financial records of the company and I saw that the company was producing cars at a loss in Australia. I examined it further and found that about 62% of the components in the Holden were imported – some from Europe and Britain; some from the U.S. General Motors was charging its subsidiary in Australia enormously high prices for the components produced by GM. This made the composite cost of the Holden very high. So, when they sold the Holden they lost money. However, they lost money to themselves. If a spark plug, which was sold by GM to its plants in the U.S. for fifty cents, it was sold to Australia for eight dollars. The seven dollars and fifty cents extra per sparkplug raised the price of the Holden and it operated at a loss while the actual seven dollars and fifty cents stayed with GM, who was using the Holden revenues to fund their investment in Malaysia. The Australian government lost the revenues from the non-profit of Holden; the U.S. was charged only fifty-cents which kept down U.S. taxes; and the unions were faced with a company which could not afford to pay a raise in pay because it was, notionally, losing money. It turned out, on examination, that the GM subsidiary lost money every year that they had to negotiate a union contract and made large profits in the years when they weren’t negotiating a contract. This was similar to their profit-sharing plan, like the one in Mexico, where, since the 1947 Mexican law allowing profit-sharing was introduced, GM Mexico never made a profit. Transfer pricing prevented a profit, but the money stayed with GM.
Once GM set the stage for the use of international transfer pricing it opened a new set of opportunities for everyone in the manufacturing business. The companies not only could use transfer pricing but this opened up the opportunity to engage in purely financial engineering. The easiest was the use of transfer pricing to avoid currency risk. If the Argentine peso was constantly devaluing it would have a detrimental effect on the profits of Argentine sales of cars in local currency. The major corporations, who were supplying these subsidiaries with parts from various countries, decided to operate a system which was financially efficient. At the beginning of the year GM used to estimate the number of cars it would sell in Argentina and an approximate price. It would total that up and borrow the equivalent value in Argentine pesos. It changed the Argentine peso at the spot rate in dollars and kept the dollars offshore. As the Argentine peso devalued GM would use the revenues garnered from the sale of the cars to repay the debt of the pesos it borrowed. This it eliminated the currency risk of devaluation and the borrowing costs. It paid its workers in the falling peso.
Soon this wasn’t enough to satisfy the new breed of financial wizards who were gradually replacing the manufacturing specialist at the heads of these companies. They added the concept of notionally pre-paying or delaying their bills (‘leads and lags’). That meant that if they were operating in a wide range of currencies the company could pay its bills in the weaker currencies later and delay its payments to the stronger currencies. This would give the a high advantage in sheltering the costs of the currency factors in international trade. The key was that it was entirely internal . They could pay or not pay notionally at any time as they were both supplier and consumer. A whole industry of financial engineers was turned loose by the fractioning of the work product. As tax authorities became aware of the manipulation of the transfer pricing mechanism and the trade in “leads and lags” in bill paying a new mechanism was needed.
The final triumph was the passage by the U.S. Congress, in 1971, of the Domestic International Sales Corporations” (‘DISC’). Congress voted to subsidize exports of U.S. made goods through the income tax. The initial mechanism was through a Domestic International Sales Corporation (DISC), an entity with no substance which received tax benefits. Goods were sold by the domestic company to the DISC who would sell the goods abroad and pay no tax. The corporate shareholders of a DISC received reduced income tax rates on qualifying income from exports of U.S. made goods. Essentially a DISC could be set up by a company to sell its goods abroad, including components, as would pay no tax on the profits. So, for example, GM could sell its spark plugs overseas (to itself through a local subsidiary) and pay no tax on the sale, irrespective of transfer pricing.
“DISCs were challenged by the European Community under the GATT. The United States then counterclaimed that European tax regulations concerning extraterritorial income were also GATT-incompatible. In 1976, a GATT panel found that both DISCs and the European tax regulations were GATT-incompatible. However, these cases were settled by the Tokyo Round on Subsidies and Countervailing Duties (predecessor to today's SCM), and the GATT Council decided in 1981 to adopt the panel reports subject to the understanding that the terms of the settlement would apply. However, the WTO Panel in the 1999 case would later rule that the 1981 decision did not constitute a legal instrument within the meaning of GATT-1994, and hence was not binding on the Foreign Sales Corporation (FSC) was created in 1984 as an alternative to the DISC”. [ii] This has been an important factor in global business – integrating production horizontally and sheltering taxes to the governments and pleading poverty to the unions.
What Will A Real Brexit Mean For Global Business?
The global companies desperately desire to avoid competition and the need to pay taxes on their real incomes. An independent British company will no longer be constrained by the Procrustean bed of cartelisation. It can sell anywhere and to anyone on the basis of its real costs. This will be of immeasurable assistance to the middle-range of British industries. Europeans can only sell their goods to other Europeans because they have largely priced themselves out of the world market. Britain will not have that restraint. This is a golden opportunity for British industry, British taxpayers and British workers. It should not be missed by listening to the self-serving lies of the giant global companies. The Remainers should be ashamed of themselves by latching their ideological gibberish with the greed of the global corporations and banks.
[i] Christopher Harding, Julian Joshua, "Regulating Cartels in Europe "Oxford Studies in European Law 2016
[ii] World Trade Organization: WTO legal texts; General Agreement on Tariffs and Trade 1994