Friday, September 29, 2017

China's Military Expansionism

One news story that received relatively light coverage by the American mainstream media involves China's relationship with Djibouti, a small nation located near the tip of the Horn of Africa as shown on this map:

As you can see, Djibouti is strategically placed along the point where the southern Red Sea and Gulf of Aden meet.  It is also located within 1000 kilometres of the Persian Gulf/Gulf of Oman through which much of the world's daily supply of oil passes.

Back in 2015, negotiations began between China and Djibouti regarding the building of a naval base for the People's Liberation Army Navy (PLAN) with the base to be built near the Port of Doraleh.  Construction began in April 2016 and, according to Xinhua, the base is being built to:

"...ensure China's performance of missions, such as escorting, peace-keeping and humanitarian aid in Africa and west Asia.  The base will also be conducive to overseas tasks including military co-operation, joint exercises, evacuating and protecting overseas Chinese and emergency rescue, as well as jointly maintaining security of international strategic seaways."  (my bold)

Given its location in the Middle East and its proximity to the world's largest oil producing nations, I would suggest that China has elected to build its first permanent overseas base in Djibouti for the last reason given by Xinhua.  This is not China's first infrastructure project in Djibouti; Beijing has built numerous infrastructure projects including two new airports, a bulk terminal for potash at Tadjourah, a salt extraction plant at Lake Assal, a new port and a railway connecting Ethiopia and Djibouti.  Given the nation's small size and small population, it is clear that China views Djibouti as a strategic partner.

According to the South China Morning Post, on July 11, 2017, the first ships carrying Chinese military personnel departed from Zhanjiang in southern China as shown on this photo:

On August 1, 2017, the flag was raised over China's Djibouti base, marking its official opening. 

According to Stratfor, the Chinese base has the following features:

1.) an extensive security perimeter which has three layers of defense including an inner layer with a large 8 metre thick perimeter wall with several two-story towers at the corners for observation or for troop access. Outside of these walls, there is a smaller wall or thick fencing with several observations towers along the perimeter.  The space between the wall and the outer wall provides a third layer of defense.

2.) along the north side of the base there is an underground entrance that will allow vehicles to emerge from below ground level.

3.) there is a 23,000 square metre underground structure with several ramps leading into the structure.

4.) several smaller tunnels are built throughout the base which allow for unobserved activity as well as offering protection to vehicles and other key materiel.

5.) there is a row of eight hangers and a 400 metre long runway - this suggests that helicopters will be based there rather than fixed wing aircraft since the runway quite short.

Here is a satellite photo showing part of the infrastructure of the Port of Doraleh at the top of the screen capture with the Chinese base to located immediately to the southwest:

...and here is a closeup of the base while under construction:

You can clearly see the short runway and and hangers to the side.  

It is important to keep in mind that China is not the only major military power that has facilities in Djibouti or nearby.  The United States Naval Expeditionary Base (Camp Lemonnier) is located at Djibouti's Djibouti-Ambouli International Airport, a base that is jointly shared with France.  Here is a satellite photo of the base which originally belong to the French Fifth Overseas Task Force:

France also has access to a naval base at Heron.   Japan's facilities in Djibouti are called the Deployment Airforce for Counter-Piracy Enforcement, part of the nation's commitment to protect shipping in the Gulf of Aden from piracy.  For a nation that is less than one fifth the size of Oklahoma, it certainly has a concentration of military bases.

The most recent news from Djibouti/China suggests that China is now starting to flex its muscles as a global military power.   According to the South China Morning Post, People's Liberation Army troops from China's base in Djibouti have now staged their first live-fire drills outside of the boundaries of their new base as part of their move toward combat readiness.  Here is a video showing one of their drills:

A contingent of up to 10,000 soldiers is set to remain at China's Djibouti base until at least 2026 when the agreement between China and Djibouti is set to expire.  By way of comparison, America's Camp Lemonnier is home to approximately 4000 U.S., joint and allied forces military and civilian personnel as well as Department of Defense contractors.

While the military exercises by China's People's Liberation Army in Djibouti are at a completely different scale than U.S. military exercises, they mark the beginning of China's move to become a global military power.  Until now, China has been satisfied with flexing its muscles in the South China Sea; the move to Djibouti is a game-changer and will give China's Navy access to much more of the world.  

Thursday, September 28, 2017

Corporate America and Tax Fairness - How to Play the Game

With the Trump Administration "adjusting" America's corporate tax regime in favour of the corporate sector, a study by Americans For Tax Fairness and the Economic Policy Institute shows us how Corporate America plays the U.S. tax system to its benefit.

As we are all aware, the current, pre-Trump statutory tax rate on corporate income is 35 percent, among the highest in the world and well above the worldwide weighted average and average rates as shown here:

By way of comparison, here are the 20 nations with the lowest statutory corporate tax rates:

..and here are the nations with no corporate tax whatsoever:

This gives us some sense of why Corporate America has consistently whined about the high headline/statutory corporate tax rate in the United States.

The study of corporate taxes by Americans For Tax Fairness found the following:

1.) Corporate profits in 1952 were 5.5 percent of GDP and corporate taxes were 5.9 percent of GDP.  Today corporate profits are 8.5 percent of the economy and corporate taxes are just 1.9 percent of GDP as shown on this graphic:

That works out to a 55 percent increase in corporate net income and a 68 percent decrease in corporate tax revenue.

2.) In the past, corporations contributed $1 out of every $3 or 32.3 percent of federal revenue.  Today that has dropped to $1 out of every $9 or 10.8 percent of federal tax revenue despite the rise in profitability as shown on this graphic:

3.) Even when the statutory/headline corporate tax rate was 35 percent, the effective rate that corporations paid on both domestic and overseas profits was far lower as shown on this graphic:

Over the period from 2010 to 2013, according to data from Gabriel Zucman, the effective U.S. corporate tax rate (i.e. what Corporate America actually paid in taxes) was 12.5 percent, down from 43 percent in the 1950s.  When we look at the corporate tax rate on tax-haven profits, this is what we find:

Obviously, it is extremely beneficial for companies to avail themselves of corporate tax havens.

4.) Over the decades since the early 1980s, the share of U.S. offshore corporate profits that are being held in tax havens such as Ireland, Singapore, Bermuda and the Caribbean, Luxembourg and the Netherlands has risen from 23 percent in 1982 to 55 percent in 2013.  The share of untaxed offshore profits has also risen substantially as both a share of GDP and in nominal terms as shown here:

In 2004, Congress enacted a one-time profit repatriation tax holiday which allowed Corporate America to repatriate its overseas profits and pay only 5.25 percent in taxes.  It is estimated that up to 92 percent of these repatriated profits went to benefit shareholders and, in particular, executives, through stock repurchases.

5.) The $2.4 trillion in offshore profits are held primarily by information technology and health care sector companies as follows:

Information Technology - 29 percent of the total
Health Care - 20 percent of the total
Industrial - 13 percent of the total
Consumer Staples - 11 percent of the total
Financial - 10 percent of the total
Energy - 7 percent of the total
Consumer Discretionary - 6 percent of the total
Material - 4 percent of the total

Companies that have proprietary technology/products are the ones that benefit the most from the ability to shelter profits overseas. 

A total of four companies held 25 percent of the $2.4 trillion in untaxed offshore profits; Apple, Pfizer, Microsoft and General Electric.  A total of fifty companies hold 77 percent of the untaxed offshore profits.  In total, using the statutory tax rate of 35 percent, these companies would owe up to $695 billion in U.S. taxes on the $2.4 trillion in offshore profits.

With Corporate America paying an increasingly small portion of U.S. tax revenue when compared to what Main Street America is remitting to Washington as shown here: appears that the Trump Administration's corporate tax "readjustments" are playing right into the hands of the corporate sector.  But then again, why should we be surprised given the Administration's close connections to Big Corporate America?

Wednesday, September 27, 2017

Where Do American Taxpayers Spent Their Tax Dollars?

With the Trump Administration tax plans about to be revealed, I wanted to take a look at exactly who (since companies are people too) in Corporate America benefits from all of Washington's debt accrual.  Thanks to USA Spending, we can see exactly which companies have been the recipient of taxpayers' beneficence and which government departments are spending the most.
Let's start by looking at total government spending on contracts, grants, loans and other financial assistance going back to 2008:

It's interesting to see how "other financial assistance" spending blossomed during the period between 2011 and 2013, hitting a peak of $2.953 trillion in fiscal 2013.  If you are interested in even more detail on local federal government spending, you can click on this link and actually see the federal agency spending in your zip code.

Now, let's look at federal government spending for fiscal 2017.  Here are the top 25 spending government agencies thus far in 2017:

Here are the 25 companies that have received the largest total contracts so far in fiscal 2017:

You may have noticed that the defense and healthcare industries are very well represented.  In fact, of the top ten contract recipients, nine are defense companies and one, McKesson Corporation, is a healthcare/pharmaceutical distributor.

Let's take a more detailed look at the top three spending federal government agencies:

1.) Department of Health and Human Services: DHHS has awarded the highest dollar value of services at just under $1.01 trillion (including contracts, grants and other financial assistance) in fiscal 2017.  Here are the top ten companies that benefitted from DHHS contracts:

Can we say "Big Pharma"?

Here are the states that have received the most awards from the Department of Health and Human Services:

2.) Social Security Administration: SSA has awarded a total of $740 billion in fiscal 2017.  Here are the top ten companies that benefitted from SSA contracts:

Here are the states that have received the most awards from the Social Security Administration:

3.) Department of Defense:  DoD has awarded at total of $177.63 billion in fiscal 2017.  Here are the top ten companies that benefitted from DoD contracts:

Here is a breakdown of DoD spending by Department/Agency:

Here are the states that have received the most awards from the Department of Defense:

While we generally receive information on total government or total federal department spending, we rarely get a breakdown of exactly who benefits from the spending habits of Washington.  When looking through the historical data, it is interesting to see that the same companies reappear in the top recipients category year after year, giving us a sense of how important federal government awards are to some sectors of Corporate America.  Without federal government contracts and other financial assistance, I would suspect that the economy would be far less healthy than it is now.  

Tuesday, September 26, 2017

Where the Iran Nuclear Deal is Headed

While the world is distracted with the "penis measuring contest" between Donald Trump and Kim Jong-un, Iran seems to have taken the back seat when it comes to attention from the mainstream media.  That said, with Donald Trump's repeated criticism of the Iran nuclear deal (the Joint Comprehensive Plan of Action or JCPOA) as shown here (a launch that, as it turns out did not take place):

...a recent document circulating in Washington sheds interesting light on where the Iranian situation will end up.

The memorandum was written by Richard Goldberg, a former Republican House and Senate policy advisor, Deputy Chief of Staff to former Republican Senator Mark Kirk (IL) and a member of the Israeli lobby that works Washington to its advantage and a former Republican House and Senate policy advisor.  In looking through Mr. Goldberg's Twitter account, you can clearly see his anti-Iran stance, a stance that is shared with Israel's Benjamin Netanyahu who has long had a "bug up his butt" about Iran's continued existence.

Before we take a detailed look at Mr. Goldberg's musings and as background, let's look at the key parts of the JCPOA:

Nowhere in the document does it mention that Iran must limit further testing related to its ballistic missile program.  Remember that the key part of the JCPOA was the lifting of international sanctions that were imposed on Iran for the ongoing development of its nuclear program.

Let's now look at how the United States added to the conditions imposed on Iran by the JCPOA.  Here is a key excerpt from the Iran Nuclear Agreement Review Act (INARA) (H.R. 1191), a separate law which was passed by Congress in 2015 and became law on May 22, 2015:

The President shall, at least every 90 days, determine whether the President is able to certify that: 
1.) Iran is fully implementing the agreement,

2.) Iran has not committed a material breach of the agreement,

3.) Iran has not taken any action that could significantly advance its nuclear weapons program, and

4.) suspension of sanctions against Iran is appropriate and proportionate to measures taken by Iran with respect to terminating its illicit nuclear program and vital to U.S. national security interests.

The only time that ballistic missiles are mentioned in the Iran Nuclear Agreement Review Act are as follows:

It is the sense of Congress that: 
1.) U.S. sanctions on Iran for terrorism, human rights abuses, and ballistic missiles will remain in place under an agreement; 

2.) issues not addressed by an agreement on Iran's nuclear program, including compensation for Americans held in captivity after the seizure of the U.S. Embassy in Tehran, Iran, in 1979, the freedom of Americans held in Iran, the human rights abuses of the government of Iran against its own people, and the continued support of terrorism by the government of Iran, are matters critical to ensure justice and U.S. national security, and should be addressed; 

3.) the President should determine the agreement in no way compromises the U.S. commitment to Israel's security, nor its support for Israel's right to exist; and 

4.) in order to implement any long-term agreement reached between the P5+1 countries and Iran, it is critically important that Congress have the opportunity to review any agreement and take action to modify the statutory sanctions regime imposed by Congress.

Notice that INARA technically gives Washington an "out" when it comes to Iran's ballistic missile program and the reimposition of sanctions that were relieved under the JCPOA.  That's a bit on the sneaky side, isn't it?

Now, let's look at the Goldberg document in its entirety, released thanks to Foreign Policy:

Here are the key sections:

"Iran’s refusal to allow inspections at key military sites makes it impossible to fully verify Iranian compliance with the JCPOA. The regime’s accelerating ballistic missile program violates the JCPOA’s related agreements and, given the proliferation nexus between Iran and North Korea, poses a clear and present danger to U.S. national security. Meanwhile, Iran’s exploitation of sanctions relief to build up its military presence in Syria and Lebanon undermines U.S. security interests and puts our closest Middle East ally in grave danger....

The President should determine that he cannot certify Iran’s compliance with the JCPOA and/or that sanctions relief is vital to U.S. national security – and he should base this determination on a specific list of Iranian behavior that the United States will observe and reevaluate during the following 90-day period. This may include the impossibility of verifying compliance without access to certain sites, testing or development of ballistic missiles, or military activities in Syria and Lebanon." (my bold)

Note that the entire premise of Mr. Goldberg's argument is based on Iran's ballistic missile program, a program that is not even mentioned in JCPOA itself and appears to be changing the basis on which the JCPOA was signed by all parties.

Here is how Mr. Goldberg feels that the Trump Administration could back Iran into a corner:

Since the act of “decertifying” under INARA is itself not a violation of the JCPOA, the moment the President makes his determination, the United States will still remain a party to the P5+1 agreement. A decision by Iran to abandon its JCPOA nuclear commitments would be unwarranted. However, this is the key moment when Iran either views “decertification” as meaningless symbolism or as a credible threat.

To influence Iranian behavior after “decertification,” Iran’s leaders must credibly believe two things: 

1) an immediate U.S.-led economic embargo is possible, and 

2) the regime would not win a race to the bomb if it chose to break away from its remaining JCPOA commitments.

The United States can remain a party to the JCPOA even though it has decertified Iran under INARA based on Iran's ongoing willingness to expand its ballistic missile program, a program that "threatens America's "closest Middle East ally (i.e. Israel)". (my bold and insert)  

With the decertification in place, under its own laws (INARA), the United States would be free to reimpose sanctions.  Under Mr. Goldberg's scenario, Iran would suffer from "regime instability and economic collapse", putting an end to the nation's current dictatorship as shown here:

"A sudden termination of access to its foreign accounts, suspension of insurance across all industries, cutoff from SWIFT and all foreign financial institutions and a dramatic drop in expected oil exports would trigger an immediate currency crisis inside Iran. The bazaars of Iran would be overcome with chaos and fear. A period of regime instability would quickly follow, posing an existential threat to the Supreme Leader far sooner than the 7-12 month timeline needed for Iran to “break out” (based on where the Iranian nuclear program paused under the JCPOA). At the very least, the period of instability triggered by the U.S. sanctions embargo would buy valuable time to explore more creative and effective military options as a last resort.

In the end, we must keep in mind the fundamental rule of dictatorship: the regime’s top priority is staying in control. A credible threat to regime stability – a sanctions Sword of Damocles hanging over the Supreme Leader – could incentivize Iranian behavioral change." (my bold)

Let's close with a very recent quote about the situation in Iran from Secretary of State Rex Tillerson (2 minute 45 second mark):

...and here is an excerpt from his address on nuclear non-profliferation to the United Nations on September 21, 2017:

There are also lessons here for Iran, which was on its own pathway to develop nuclear weapons – in violation of its Non-Proliferation Treaty and nuclear safeguards obligations and multiple, legally binding UN Security Council resolutions. Iran seems keen to preserve for itself the option to resume such work in the future, even while sponsoring international terrorism, developing missile systems capabilities of delivering nuclear weapons, and destabilizing its neighbors in a dangerous quest of regional hegemony.” (my bold)

How dare another nation (other than the United States) attempt a quest for hegemony of any kind!

The writing is on the wall when it comes to Iran and the United States; it is just a matter of time before the hostilities begin.

Thanks to America's substantial investments in both Saudi Arabia and Israel and its long-term hawkish approach to Iran, it appears to matter little whether Iran remains compliant to the terms of the JCPOA (which they appear to be based on the most recent report dated August 31, 2017 from the IAEA).  At the very least it appears that the plan is to create yet another unstable nation in the Middle East, all in the name of regime change that is favourable to Washington.  It's no wonder that Iran's leadership feels a need to protect itself with its ballistic missile program given that Israel, Saudi Arabia and the United States have long held an anti-Iran war mindset.

And, we all know how well regime change has worked out for the United States in Afghanistan, Iraq, Libya and Syria, don't we?