Economy
A global economic Cold War is coming – The Globe and Mail
U.S. President Joe Biden has left a threat of global economic war hanging out there with his warning that China would face consequences if it aided Russia in its invasion of Ukraine. But even if that devastating economic clash is averted, the stage has been set for an economic Cold War.
The sanctions imposed against Russia mark the first time economic weapons have been wielded so extensively against such a large adversary.
The freezing of oligarchs’ assets, cutting Russian firms off from the SWIFT payment system, imposing tariffs on many Russian goods – all are being used, quite rightly, to punish Vladimir Putin in lieu of a direct military confrontation with a nuclear power.
They have been imposed in lockstep by countries around the world, notably the massive economies of the United States and the European Union – who remain willing to threaten more.
In others words, economic warfare has been embraced as a viable method of dealing with a geopolitical conflict. That will have an impact.
The world has changed. Our policies – on defence, the economy, and beyond – will have to as well
Even if the direct economic warfare isn’t extended to China and becomes global, the world’s largest economies – China, the U.S., the EU – will surely conclude that they must insulate themselves against economic warfare in the future.
In Beijing and Washington, we can expect an acceleration of efforts to “decouple” their economies from each other. That might cleave the global economy into blocs, and slow trade. It will encourage an economic Cold War.
The effects of a direct economic clash between China and the U.S. are so potentially ruinous that the smart bet is that Chinese President Xi Jinping and Mr. Biden will avoid it.
Sanctions against Russia have led to further rising oil prices and concern for Europe’s energy security. But Canadian business, for example, has seen it mainly as an opportunity to promote Canadian oil and gas as a secure supply for the U.S. and Europe.
“China is a whole different ball game,” said Patrick Leblond, the CN-Paul M. Tellier Chair On Business and Public Policy at the University of Ottawa. “Economically it would be a disaster for China if Chinese firms could not export goods to the rest of the world. But it would also be a disaster for the rest of the world.”
There would be supply chain bottlenecks beyond those seen during the COVID-19 pandemic, spiking inflation even higher. Slowing global trade could lead to global recession. “The stock market would crash,” Mr. Leblond said. “You could see this nightmare scenario.”
Because there is so much at stake, Mr. Leblond doesn’t think it will happen. If China did help Russia, it would probably be limited; the U.S. would probably respond with targeted sanctions, perhaps cutting off access to advanced computer chips and high-tech goods, he thinks.
That is akin to the Cold War nuclear logic known by the acronym MAD: mutually assured destruction. No one can reasonably start such a conflict. But there are still risks.
Mark Manger, professor of political economy at the Munk School of Global Affairs and Public Policy in Toronto, also thinks the interdependence of the U.S., European and Chinese economies will lead all to avoid a major clash. But things can go awry. Limited Chinese aid to Russia might lead the U.S. to impose targeted sanctions, but an affronted China might retaliate. “Things can very quickly spiral out of control.”
Even if none of that happens, the threat of economic warfare is now more palpable.
China will want to shield itself. The U.S. and possibly Europe will want to ensure they are not so dependent on China that they cannot use economic measures. They will look to accelerate decoupling.
Mr. Biden, like predecessor Donald Trump, has advocated decoupling, notably reducing reliance on Chinese supply chains and keeping Chinese firms out of tech infrastructure such as 5G networks. Beijing has called for securing its own supplies, in tech, energy and even food. Earlier this month, Mr. Xi called for increasing agricultural output to ensure “Chinese bowls are mainly filled with Chinese food.”
Those trends will probably be redoubled now. Other countries will feel the effects. Canada will need a risk assessment of its own vulnerabilities. It also needs economic allies. It is likely to affect business. Canadian firms selling, for example, artificial intelligence technology, might not have longer-terms prospects in the Chinese market.
In the Ukraine war, those economic measures have been an important tactic to punish Mr. Putin. But now every power has to expect they could be used again.
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Economy
Biden's Hot Economy Stokes Currency Fears for the Rest of World – Bloomberg
As Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it.
The push-back from central bank governors and finance ministers gathering for the International Monetary Fund-World Bank spring meetings highlight how the sting from a surging US economy — manifested through high interest rates and a strong dollar — is ricocheting around the world by forcing other currencies lower and complicating plans to bring down borrowing costs.
Economy
Opinion: Higher capital gains taxes won't work as claimed, but will harm the economy – The Globe and Mail
Alex Whalen and Jake Fuss are analysts at the Fraser Institute.
Amid a federal budget riddled with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already-lagging investment climate, and to make matters worse, research suggests it won’t work as planned.
Currently, individuals and businesses who sell a capital asset in Canada incur capital gains taxes at a 50-per-cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is subject to taxation at the individual or business’s marginal tax rate. The Trudeau government is raising this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.
The problems with hiking capital gains taxes are numerous.
First, capital gains are taxed on a “realization” basis, which means the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.
For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means the Trudeau government is likely overestimating the potential revenue gains from its capital gains tax hike, given that individual investors will adjust the timing of their asset sales in response to the tax hike.
Second, the lock-in effect creates a drag on economic growth as it incentivizes investors to hold off selling their assets when they otherwise might, preventing capital from being deployed to its most productive use and therefore reducing growth.
Budget’s capital gains tax changes divide the small business community
And Canada’s growth prospects and investment climate have both been in decline. Canada currently faces the lowest growth prospects among all OECD countries in terms of GDP per person. Further, between 2014 and 2021, business investment (adjusted for inflation) in Canada declined by $43.7-billion. Hiking taxes on capital will make both pressing issues worse.
Contrary to the government’s framing – that this move only affects the wealthy – lagging business investment and slow growth affect all Canadians through lower incomes and living standards. Capital taxes are among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. And while taxes on capital gains do raise revenue, the economic costs exceed the amount of tax collected.
Previous governments in Canada understood these facts. In the 2000 federal budget, then-finance minister Paul Martin said a “key factor contributing to the difficulty of raising capital by new startups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an explicit acknowledgment of the lock-in effect and costs of capital gains taxes. Further, that Liberal government reduced the capital gains inclusion rate, acknowledging the importance of a strong investment climate.
At a time when Canada badly needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. In delivering the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canadians right now.” Individuals and businesses across the country likely agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.
Economy
Nigeria's Economy, Once Africa's Biggest, Slips to Fourth Place – Bloomberg
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The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.
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