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Busch: How To Compete Globally….(Even Against the Chinese!)

The key to competing globally consists of using the natural and unnatural advantages your country has to go up against other nations.

For some, this can be a low cost labor force or it can be a well trained and educated work force.

For some, it can be natural resources or strategic location.

However, there are governmental advantages as well.

If a country runs a small fiscal deficit or even a fiscal surplus, this nation has a distinct advantage over the competition. First, they can fund themselves relatively cheaply compared to say a Greece. Or better yet, they can entice companies to move to their country by maintain low corporate tax rates or reducing corporate tax rates.

It’s well known that the US has one of the highest corporate tax rates in the OECD at 35%. The UK isn’t much better at 28%. The Chinese have an official rate at 25%. But with all their additional export incentives and tax breaks, this works out to be more like 12.5%.

The simplest way to go head-to-head with China is to level the playing field by doing what is the least disruptive to the global economy and to foreign policy.

Switzerland
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Switzerland

The US needs to be like Switzerland!

I’m not talking about becoming neutral or making watches here, I’m talking about improving our fiscal position and cutting corporate taxes.

Switzerland has a fiscal surplus and has a federal corporate tax rate of 8.5%. Recently, one of their individual cantons (states) cut their taxes enough to entice Tyco Electronics to move from Bermuda to their canton Schaffhausen.

Bloomberg carries a story that details all of the advantages Swisscantons are throwing at companies to get them to move. “Schaffhausen, the size of the New York City borough of Queens, is one of 26 Swiss cantons offering tax deals to attract hedge funds, biotechnology firms and Internet entrepreneurs, and companies fleeing tax havens such as the Cayman Islands that are encountering international pressure. The practice threatens to undermine efforts by countries seeking to tame budget deficits that ballooned in the wake of the global financial crisis.”

In other words, go ahead and engage in fiscal austerity.

But if you tax your corporations to fix things, then Switzerland will be there ready to pick up the pieces. Hopefully, this will pressure governments including the US to not tax its way out of its problems, but cut their way out. Cutting spending (federal and state) is the best way to prune the fiscal tree while sowing the seeds of growth down the road. Yes, it will be temporarily painful. However, the snap back in growth will be quick as wasteful spending is removed and funding returns to the private sector. Remember, studies show the positive multiplier for fiscal spending is between 0.4-0.5 while the negative multiplier from tax increases is -1.1.

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

This is one of the reasons why Europe remains such an economic downer for the global economy.

Their major focus has been to raise taxes on the wealthy and corporations while they cut spending mildly due to public sector union pressure. As an example of this pressure, European trade unions announced plans on Wednesday to hold a "European Day of Action" on Sept. 29, including a rally in Brussels, to protest against spending cuts across the region. This insures that the negative European theme will persist throughout the summer with a lead up to this date in the fall.

The bigger point should not be lost: use the tools you can to compete or go the way of Greece.

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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.