Since the Global Financial Crisis, and especially since 2010, there has been a significant decline in the volume of commercial freight carried by aircraft. Whilst regional and national economies have been hit by fiscal problems, credit snarl-ups and twitchy consumer demand, increases in the price of crude oil (until recently) have compounded air freight cost increases, leading to substitution towards the main alternatives.
Whilst some multinational businesses have shifted production back ‘on-shore’, there has been unprecedented growth in sea freight. In the latter case there are, of course, both ‘winners’ and ‘losers’. As the world’s seas and oceans become more and more congested, one of the distinct losers is a large species which shares the water with commercial maritime transport: the whale.
A recent ‘Sharing the Planet’ documentary on BBC Radio 4, highlighted the plight of whales in the world’s open waters. Since the imposition of controls upon the whaling industry, whale numbers had stabilised and even increased. However, the past five years has seen the most significant threat coming from the eerily clinical-sounding ‘ship strike’: that is, unintended incidents of ships hitting and either injuring or killing whales. In particular, the Blue Whale and the Right Whale have been most affected – the Right Whale was almost driven to extinction by ship strikes in the North Atlantic region.
International action is driving a regulatory approach which aims to intervene, for example, to impose speed restrictions in known waters where whales congregate. But this isn’t a universal solution. Even where it is applied, enforcement is tricky and there is industry resistance as already slow shipping freight delivery times are further extended, thus challenging producers under pressure to respond rapidly to changing consumer demand in the world of ecommerce.
But where is the link to the movie Frozen? Well, this year’s top-selling range of toys are tie-ins to Disney’s wintery animated blockbuster. Excess demand for some of the tie-in merchandising has led to 
short supply in toy stores and carefully planned production and shipping plans junked. Panicked creation of extra capacity in off-shore production has had to be complemented by the contracting of air freighting options – the lead times are too long to get last-minute products to distributors and retailers in time. Whilst someone has to bear the increased financial cost, the whale might therefore become – at least temporarily – a beneficiary.
But the message is clear: globalised production and distribution involve a complex web of trade-offs. 
Where negative externalities hit those without a global voice, this adds weight to the continued efforts towards sustainability and the full costing of production and exchange. Whales are a ‘flagship species’ in diverse ecological systems. The planet cannot afford to lose them. And so, whilst your gift purchases this festive season may have been made possible by products having been air-freighted rather than being sent by yet another ship, don't rest on your laurels. Consider this variant on a traditional injunction: whales are for life, and not just for Christmas.
Guest post by Simon Blake, University of Warwick
Books and articles
Nature in the Balance: The Economics of Biodiversity Oxford Dieter Helm and Cameron Hepburn (eds) (2014)
Frozen dolls sell out Express Sarah Ann Harris (9/12/14)
Biodiversity Finance and Economics Tread Softly November 2014
Information
EU Business and Biodiversity Platform EC Environment DG
Whales & Dolphins (cetaceans) World Wildlife Fund
Questions
- Why might UK-based businesses be concerned with the plight of whales in the world’s seas and oceans?
- In what ways might shipping firms – and the manufacturers who contract their services – be regarded as ‘good’ businesses?
- Using the concept of externalities, how would you account for the impacts of global commerce upon whales?
- How could you conduct a scientific evaluation of the trade-offs involved?
- Can damage to one species by the actions of business ever be offset by ‘making good’ through corporate action elsewhere?
An investigation by the International Consortium of Investigative Journalists has revealed how more than 1000 businesses from 340 major companies from around the world have used Luxembourg as a base for avoiding huge amounts of tax. Many of the companies are household names, such as Ikea, FedEx, Apple, Pepsi, Coca Cola, Dyson, Amazon, Fiat, Google, Accenture, Burberry, Procter & Gamble, Heinz, JP Morgan, Caterpillar, Deutsche Bank and Starbucks. Through complicated systems of ‘advanced tax agreements’ (ATAs), negotiated with the Luxembourg authorities via accountants PricewaterhouseCoopers (PwC), companies have used various methods of avoiding tax.
Although such measures are legal, they have denied other countries vast amounts of tax revenues on sales generated in their own countries. Instead, the much reduced tax bills have been paid to Luxembourg. The result is that this tiny country, with a population of just 550,000, has, according to the IMF, the highest (nominal) GDP per head in the world (estimated to be $116,752 in 2014).
So what methods do Luxembourg and these multinational companies use to reduce the companies’ tax bills? There are three main methods. All involve having a subsidiary based in Luxembourg: often little more than a small office with one employee, a telephone and a bank account. All involve varieties of transfer pricing: setting prices that the company charges itself in transactions between a subsidiary in Luxembourg and divisions in other countrries.
The first method is the use of internal loans. Companies lend money to themselves, say in the UK, from Luxembourg at high interest rates. The loan interest can be offset against profit in the UK, reducing tax liability to the UK tax authorities. But the interest earned by the Luxembourg subsidiary incurs very low taxes. Profits are thus effectively transferred from the UK to Luxembourg and a much lower tax bill is incurred.
The second involves royalty payments for the use of the company’s brands. These are owned by the Luxembourg subsidiary and the overseas divisions pay the Luxembourg subsidiary large sums for using the logos, designs and brand names. Thus, again, profits are transferred to Luxembourg, where there is a generous tax exemption.
The third involves generous allowances in Luxembourg for losses in the value of investments, even without the company having first to sell the investments. These losses can be offset against future profits, again reducing tax liability. By transferring losses made elsewhere to Luxembourg, again usually by some form of transfer pricing, these can be used to reduce the already small tax bill in Luxembourg even further.
Tax loopholes offered by tax havens, such as Luxembourg, the Cayman Islands and the Channel Islands, are denying exchequers around the world vast sums. Not surprisingly, countries, especially those with large deficits, are concerned to address the issue of tax avoidance by multinationals. This is one item on the agenda of the G20 meeting in Brisbane from the 12 to 16 November 2014.
The problem, however, is that, with countries seeking to attract multinational investment and to gain tax revenues from them, there is an incentive to reduce corporate tax rates. Getting any binding agreement on tax harmonisation, and creating an essentially global single market, is likely, therefore, to prove virtually impossible.
Webcasts and videos
Luxembourg Leaks: Tricks of the Trade ICIJ in partnership with the Pulitzer Center (5/11/14)
Luxembourg ‘abetted’ companies in avoiding taxes France 24, Siobhán Silke (6/11/14)
Tax deals with Luxembourg save companies billions, says report Deutsche Welle, Dagmar Zindel (6/11/14)
Luxembourg: the tax haven and the $870m loan company above a stamp shop The Guardian, John Domokos, Rupert Neate and Simon Bowers (5/11/14)
Luxembourg leaks: nation under spotlight over tax avoidance claims euronews (6/11/14)
Northern and Shell used west Dublin address to cut Luxembourg tax bill on €1bn The Irish Times, Colm Keena (6/11/14)
The ATO’s global tax avoidance investigation ABC News, Phillip Lasker (9/11/14)
Pepsi, IKEA Secret Luxembourg Tax Deals Exposed TheLipTV, Elliot Hill (9/11/14)
Articles
Leaked Docs Expose More Than 340 Companies’ Tax Schemes In Luxembourg Huffington Post, Leslie Wayne, Kelly Carr, Marina Walker Guevara, Mar Cabra and Michael Hudson (5/11/14)
Luxembourg tax files: how tiny state rubber-stamped tax avoidance on an industrial scale The Guardian, Simon Bowers (5/11/14)
Fact and fiction blur in tales of tax avoidance The Guardian (9/11/14)
companies engaged in tax avoidance The Guardian, Michael Safi (6/11/14)
The Guardian view on tax avoidance: Europe must take Luxembourg to task The Guardian, Editorial (6/11/14)
G20 leaders in the mood to act on tax avoidance after Luxembourg leaks Sydney Morning Herald, Tom Allard (6/11/14)
Scale of Luxembourg tax avoidance revealed economia, Oliver Griffin (6/11/14)
EU to press Luxembourg over tax breaks amid fresh allegations BBC News (6/11/14)
Luxembourg leaks: G20 alone can’t stamp out tax avoidance The Conversation, Charles Sampford (7/11/14)
‘Lux leaks’ scandal shows why tax avoidance is a bad idea European Voice, Paige Morrow (8/11/14)
EU to Probe Luxembourg’s ‘Sweetheart Tax Deal’ with Amazon International Business Times, Jerin Mathew (7/10/14)
Investigative Project
Luxembourg Leaks: Global Companies’ Secrets Exposed The International Consortium of Investigative Journalists (5/11/14)
Questions
- Distinguish between tax avoidance and tax evasion. Which of the two is being practised by companies in their arrangements with Luxembourg?
- Explain what is meant by transfer pricing.
- Do a search of companies to find out what parts of their operations as based in Luxembourg.
- In what sense can the setting of corporate taxes be seen as a prisoner’s dilemma game between countries?
- Discuss the merits of changing corporate taxes so that they are based on revenues earned in a country rather than on profits.
- What type of agreement on tax havens is likely to be achieved by the international community?
- Is it desirable for companies to be able to offset losses against future profits?
The market structure in which firms operate has important implications for prices, products, suppliers and profits. In competitive markets, we expect to see low prices, many firms competing with new innovations and firm behavior that is in, or at least not against the public interest. As a firm becomes dominant in a market, its behavior is likely to change and consumers and suppliers can be adversely affected. Is this the case with Amazon?
Much attention has been given to the dispute centering around Amazon and its actions in the market for e-books, where it holds close to two thirds of the market share. Critics of Amazon suggest that this is just one example of Amazon using its monopoly power to exploit consumers and suppliers, including the publishers and their authors. Although Amazon is not breaking any laws, there are suggestions that its behavior is ‘brutal’ and is taking advantage of consumers, suppliers and its workforce.
But rather than criticizing the actions of a monopolist like Amazon, should we instead be praising the company and its ability to compete other firms out of the market? One of the main reasons why consumers use Amazon to buy goods is that prices are cheap. So, in this respect, perhaps Amazon is not acting against consumers’ interests, as under a monopoly we typically expect low output and high prices, relative to a model of perfect competition. The question of the methods used to keep prices so low is another matter. Two conflicting views on Amazon can be seen from Annie Lowrey and Franklin Foer, who respectively said:
“Amazon relentlessly drives down prices for goods and services and delivers them fast and cheap. It ploughs its profits into price cuts and innovation rather than putting them in the hands of its investors. That benefits millions of families – full stop.”
“In effect, we’ve been thrust back 100 years to a time when the law was not up to the task of protecting the threats to democracy posed by monopoly; a time when the new nature of the corporation demanded a significant revision of government.”
So, with Amazon we have an interesting case of a monopolist, where many aspects of its behaviour fit exactly into the mould of the traditional monopolist. But, some of the outcomes we observe indicate a more competitive market. Paul Krugman has been relatively blunt in his opinion that Amazon’s dominance is bad for America. His comments are timely, given the recognition for Jean Tirole’s work in considering the problems faced when trying to regulate any firm that has significant market power. He has been awarded the Nobel Prize in Economics. I’ll leave you to decide where you place this company on the traditional spectrum of market structures, as you read the following articles.
Amazon: Monopoly or capitalist success story? BBC News, Kierran Petersen (14/10/14)
Why the Justice Department won’t go after Amazon, even though Paul Krugman thinks it’s hurting America Business Insider, Erin Fuchs (20/10/14)
Is Amazon a monopoly? The Week, Sergio Hernandez (19/11/14)
Big, bad Amazon The Economist (20/10/14)
Questions
- What are the typical characteristics of a monopoly? To what extent does Amazon fit into this market structure?
- Why does Paul Krugman suggest that Amazon is hurting America?
- How does Amazon’s behaviour with regard to (a) its suppliers and (b) its workers affect its profitability? Would it be able to behave in this way if it were a smaller company?
- Why is Amazon able to charge its customers such low prices? Why does it do this, given its market power?
- Is there an argument for more regulation of firms with such dominance in a market, as is the case with Amazon?
- The debate over e-books is ingoing. What is the argument for publishers to be able to set a minimum price? What is the argument against this?
- Should customers boycott Amazon in a protest over the alleged working conditions of Amazon factory employees?
On my commute to work on the 6th October, I happened to listen to a programme on BBC radio 4, which provided some fascinating discussion on climate change, growth, capitalism and the need for co-operation. With more countries emerging as leading economic powers, pollution and emissions continue to grow. Is it time for a green revolution?
The programme considers some ‘typical’ policies and also discusses some radical solutions. There is discussion on developing and developed nations and how these countries should be looked at in terms of compensation, entitlement and aid. Carrots and sticks are analysed as means of saving the planet and how environmental damage can be reduced, without adversely affecting the growth rate of the world economy. I won’t say any more, but it’s certainly worth listening to, for an interesting discussion on one of the biggest problems that governments across the world are facing and it is not going to go away any time soon.
Naomi Klein on climate change and growth BBC Radio 4, Start the Week (6/10/14)
Questions
- What are the market failures with the environment?
- Why is global co-operation so important for tackling the problem of climate change?
- Which policies are discussed as potential solutions to the problem of climate change?
- What has been the problem with the European carbon trading scheme?
- Why may there be a trade-off between capitalism, growth and the problem of carbon emissions?
- To what extent do you think that countries such as Bangladesh should be ‘compensated’?
The Office for National Statistics (ONS) reported that the quantity of retail sales in the UK was 3.9% higher in August than it had been in July. However strong price competition meant that the value of these sales increased by only 0.4%. What were the key factors driving the big increase in the quantity of sales? Was it simply the response of consumers to falling prices?
The data indicated that there was strong demand for goods associated with the housing market such as carpets, fridges and cookers. Spending on furniture increased very rapidly with sales rising by 24% over a 12 month period. Flat packed furniture proved to be particularly popular with consumers.
There was also strong demand for electrical goods and more specifically vacuum cleaners. The ONS estimated that a boom in the sale of vacuum cleaners in August was responsible for 25% of the increase in retail sales.
Why did the sales of vacuum cleaners increase so rapidly in August? Did UK households suddenly decide to keep their houses cleaner? The sales data shows that certain types of vacuum cleaners sold in much larger numbers than others.
For example, Tesco reported a 44% increase in the sales of 2,000 watt vacuum cleaners in the last two weeks in August while the Co-op reported an increase of 38%. Referring to the last weekend in August, the head of small domestic appliances at the on-line retailer ao.com stated that
We saw a huge surge in sales of corded vacuums over 1,600 watts over the weekend, with sales quadrupling.
There were also reports that a significant number of customers were buying more than one vacuum cleaner with these larger motors.
The key reason for the sudden surge in demand was the implementation of new regulations by the European Union as part of its energy efficiency directive. The ultimate objective of this directive is to reduce climate change. The specific policy that appears to have had such a big impact on consumers in the UK was the ban imposed on firms in the EU from making or importing vacuum cleaners that have motors above 1600 watts. This ban came into effect on the 1st September 2014.
A spokesperson for the consumer group Which? stated in August that
If you’re in the market for a powerful vacuum, you should act quickly, before all the models currently sell out. A Best Buy 2,200-watt vacuum costs around £27 a year to run in electricity – only around £8 more than the best scoring 1,600-watt we’ve tested.
The EU plans to reduce the maximum permitted wattage in vacuum cleaners to 900 watts in 2017. Restrictions have already been imposed on bigger electrical appliances such as televisions, washing machines and refrigerators. The EUs Ecodesign directive may also be extended to a range of smaller electrical appliances such as toasters and hair dressers in the future. It’ll be interesting to see if consumers respond in the same way to regulations imposed by the EU in the future.
Ten days left to vacuum up a powerful cleaner BBC (21/08/14)
Housing boom, food discounting and vacuum ban boost UK spending The Guardian, Larry Elliott, Phillip Inman, Lisa Bachelor (18/9/14)
UK retail sales boosted by vacuum cleaner sales BBC (18/9/14)
Retailers sell out of vacuum cleaners ahead of EU ban The Telegraph, Elliot Pinkham (30/8/14)
Power surge! Fourfold rise in sales of super vacuums: Some customers buying two or more models to beat new EU regulations Daily Mail, Andrew Levy (1/9/14)
Energy Efficiency Directive European Commission (accessed on 24/9/14)
Vacuum cleaner splurge pushes up UK retail sales The Guardian, Phillip Inman (18/9/14)
Questions
- Using a demand and supply diagram, illustrate what has happened in the market for high wattage vacuum cleaners in August. Pay particular attention in your answer to the role of expectations.
- What did your previous diagram predict would happen to the price of high wattage vacuum cleaners in August? Did this in fact happen?
- A fully informed rational consumer may purchase a higher wattage vacuum cleaner if they consider that the improvement in cleaning performance is greater than the extra cost of purchasing and using the cleaner. Can you provide an economic rationale for banning the sale of these machines in these circumstances?
- Using a demand and supply diagram illustrate the impact of banning the sale of a product in a competitive market.
Since the Global Financial Crisis, and especially since 2010, there has been a significant decline in the volume of commercial freight carried by aircraft. Whilst regional and national economies have been hit by fiscal problems, credit snarl-ups and twitchy consumer demand, increases in the price of crude oil (until recently) have compounded air freight cost increases, leading to substitution towards the main alternatives.
short supply in toy stores and carefully planned production and shipping plans junked. Panicked creation of extra capacity in off-shore production has had to be complemented by the contracting of air freighting options – the lead times are too long to get last-minute products to distributors and retailers in time. Whilst someone has to bear the increased financial cost, the whale might therefore become – at least temporarily – a beneficiary.
Where negative externalities hit those without a global voice, this adds weight to the continued efforts towards sustainability and the full costing of production and exchange. Whales are a ‘flagship species’ in diverse ecological systems. The planet cannot afford to lose them. And so, whilst your gift purchases this festive season may have been made possible by products having been air-freighted rather than being sent by yet another ship, don't rest on your laurels. Consider this variant on a traditional injunction: whales are for life, and not just for Christmas.
