Question

Answer the following questions for the U.S. and Russia:

Are there specific industries, or individual firms, that the government protects with restrictive trade policies?

Are there special taxes (or subsidies) on foreign investment?

Answer 1

1. US:

Trade benefits are based on relative production costs rather than on the level of production costs. Every nation has a relative cost advantage in some pursuit. A country such as the United States has lower relative total production costs in some endeavors because of its high labor productivity and low capital costs. Another less industrialized country’s comparative advantage with respect to another product is likely to be due to its lower labor costs. Free trade allows one country to benefit from the comparative advantages and specialization in production found the world over. It is through the price mechanism that individuals and nations discover their comparative advantages.  

Protectionism temporarily helps some producers, but it cannot do this without harming others. Who is hurt by tariffs? First there are those who buy a product upon which the tariff has been levied. Consumers of the tariffed foreign good and consumers who buy an American made product at a high price that is protected by the tariff both bear the cost of the tariff. Both foreign and domestic producers can raise their prices as the result of the tariff. Purchasers would have less wealth to spend elsewhere. Further, there are the nonconsumers who would have entered the market if the lower price had been in effect. Also injured are domestic firms that now sell fewer goods because Americans have to spend more to purchase the tariffed products. In addition, American companies would necessarily export fewer goods because foreigners have made fewer dollars in America to pay for American exports. Trade restrictions on imports are also restrictions on exports. When we purchase foreign products, we actually create American jobs as dollars come back to the U.S. as payments for American made goods, as investments in America that beget domestic job opportunities, or to pay off debt burdens.  

Russia:

U.S. companies face a number of tariff and non-tariff trade barriers when exporting to Russia. For example, for importers of alcoholic products there is a long-standing requirement that all Customs duties, excise taxes, and value-added taxes on alcohol be paid in advance using a bank guarantee and deposit, for which the reimbursement process is very slow. U.S. industry is concerned that the assessment and licensing procedures administered by different Russian government agencies and the EEC (Eurasian Economic Commission, the executive body of the Eurasian Economic Union, a.k.a. EAEU) add an unnecessary level of complexity leading to increased costs and delays.
Laws governing the information technology (IT) sector have made it more difficult for U.S. technology companies to provide/export goods and services to the Russian market. For example, Russian Government Resolution No. 1236, in effect since the start of 2016, requires Russian government agencies to give priority to Russian software based on a registry published and updated by the Russian Communications Ministry. The law of the Ministry of Telecom and Mass Communications of the Russian Federation envisioned a transition to the use of domestic office software by federal executive agencies and state extra-budgetary funds from 2016-2018. Government agencies may only buy foreign software when a suitable domestic substitute is not available.

2. US:

It can be counterproductive and very costly for a government to offer investment incentives if the “fundamentals” of the potential investment sites fail to meet serious investors’ basic requirements. In fact, many of the government that have been successful in attracting FDI are also among those that best meet the requirements for good governance. Moreover, while governments often formally justify FDI incentives with a need to steer corporate investment to poorer areas within the host economy, it appears that in practice incentives are of limited effectiveness in this regard. The report recommends a broad reform of policy-making including regulatory reform, privatisation and liberalisation of trade policies (external as well as internal) as a key element in a developing country strategy to attract FDI. It further highlights the need to raise levels of accountability and transparency to limit the risk of illicit practices developing in connection with investor attraction strategies.

Regulatory incentives and the foreign investment decision-  Economic theory justifies public regulatory intervention in markets where these are absent, incomplete or inefficient. In practice, this can be seen as a requirement to: (i) ensure property rights; (ii) correct for economic externalities; and (iii) prevent abuse by monopolies. The first and third criteria provide the basis for strong regulatory disciplines that underpin property rights (extending from guarantees against expropriation to upholding patents) and ensure market access to all firms as well as protect consumers. In this situation, stronger regulatory regimes can be expected to attract foreign investment. The effect of reducing legal barriers to foreign ownership is similar. However, it should be noted that national firms may enjoy protection from such measures and thus may consider themselves to be prejudiced by their removal

Russia:

The most important tax incentives available in Russia include: • The standard profit tax rate of 20% can be reduced to 0%; • The standard property tax rate of up to 2.2% (of the cadastral value or net book value of assets, depending on regional legislation) may be reduced and certain types of assets may even be exempt; • The standard regressive social security contribution rates may be reduced from: – 30% on annual remuneration up to RUB 718k (approx. USD 10k); – 27.1% on annual remuneration between RUB 718k and RUB 796k (approx. USD 10.7k); – 15.1% on annual remuneration exceeding RUB 796k*; • Special VAT and customs regimes.