The Economist (February 2nd 2019)

72 Pages·2019·6.703 MB·English

by  The Economist

How to handle Huawei
Talking to the Taliban
Better ways to tax the rich
The future of fertility
FEBRUARY2ND–8TH2019
The battle for
Venezuela
Contents The EconomistFebruary2nd2019 7
The world this week Britain
10 Around-up of political 23 May’s temporary triumph
andbusinessnews
24 Labour’s Latin love
25 Firms plan for no deal
Leaders
25 Manchester’s buses
13 The battle for Venezuela
28 Rent controls in London
How to intervene
29 Adoctor in your pocket
14 The war in Afghanistan
Talking to the Taliban 29 Alex Salmond accused
14 Chinese technology 30 BagehotJeremy Corbyn’s
Handling Huawei badBrexit
15 The Brexit negotiations
OvertoEU Europe
16 Taxingtherich 31 Regional defence
On the cover
Awaythroughthewarren 32 How the Baltic states
The world’s democracies are resist Russia
right to seek change in Latin
Letters 33 Catalonia’s trials
America’s worst-governed
18 Onchildhood,science, 33 The marten menace
country. But their
Wetherspoons,Disney,
responsibilities go further: 34 The gilets jaunes organise
Chicago
leader,page 13. A failed 34 ATurkish ghost town
revolution may itself be
35 Charlemagne Yanis
Briefing
overthrown, page 20. How
Varoufakisabroad
Venezuela’s economy can 20 Venezuela
recover from the Maduro Achance,atlast,
United States
regime, page 22. Hyperinflations forliberation
can end quickly: Free exchange, 22 Theeconomy 37 Facebook and America
page72 Thedayafter 38 The government is open
39 Lasers in space
•How to handle Huawei
Banning one of China’s leading 39 Picking a mayor
firms from operating in the West 40 Roger Stone
should be a last resort: leader,
42 LexingtonDemocratic
page 14.The tech giant is
populists
accused of rewarding trade-
secret pilferers on staff, page 60
The Americas
•Talking to the TalibanA deal
43 El Salvador’s election
to end the Afghan insurgency
44 Brazil’s fatal dam disaster
would be wonderful—as long as
it is not a figleaf to cover an 44 El Chapo on trial
American retreat: leader,
page 14. Edging towards a peace
deal, page 49
•Better ways to tax the rich
Middle East & Africa
How to raise money, reduce
inequality—and limit the 45 Africa’s smack track
economic damage: leader, 46 Pain relief in Africa
page 16. The Democratic
BagehotJeremy Corbyn 47 Nigeria’s elections
presidential primary contest is
is having a bad Brexit,
47 Lebanon’s debt crisis
already the most left-wing in
page 30
decades: Lexington, page 42 48 The pope in Arabia
•The future of fertilityThanks
to education, global fertility
could fall faster than the UN
expects,page 56
1 Contents continues overleaf
8 Contents The EconomistFebruary2nd2019
Asia Finance & economics
49 The war in Afghanistan 67 Governing e-commerce
50 Japan and Naomi Osaka 68 Italy’s struggling economy
50 Jihad in the Philippines 69 Counting dirty money
51 Religion in Pakistan 69 Credit-default swaps
51 Sexism in Australia 70 ButtonwoodHeaven
can wait
52 BanyanInChina’sdebt
71 Bank mergers in the Gulf
China 71 Banking in Puerto Rico
53 Baijiu’s global quest 72 Free exchangeEnding
55 ChaguanThe politics hyperinflation
of pigs
Science & technology
73 Stopping ethics dumping
74 An Earth rock on the Moon
76 SETI with X-rays
International
76 Anew typhoid vaccine
56 When will humanity
77 Did people create pandas?
shrink?
Books & arts
78 Football and politics in
Turkey
79 Wild Bill Hickok
Business 80 Don McCullin’s camera
59 The meteoric rise of a 81 JohnsonLearning from
Chinese grain trader mistakes
60 America v Huawei
61 BartlebyThe joy of Economic & financial indicators
missing out 84 Statisticson42economies
62 Comcast’s Sky deal
63 Oleg Deripaska Graphic detail
63 Harley-Davidson’s woes 85 The“trilemma”oftheIsraeli-Palestinianconflict
64 Netflix for video games
Obituary
65 SchumpeterA Brazilian
86 Frank Blaichman, a leader of the Jewish Partisan Army
mining disaster
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10 The world this week Politics The EconomistFebruary2nd2019
saidhehadheldsecrettalks strong grounds to challenge a forces if the Taliban promise
withtheVenezuelanarmyto request for her extradition not to harbour terrorists, stop
persuadeittoswitchsides. from Canada to the United fighting and begin talks with
Americasaidthatpaymentsfor States to face fraud charges. the Afghan government.
oilimportsfromVenezuela
wouldbeputintoaccounts The Supreme Court of Paki-
thatwouldbeavailableonlyto stanrejected a petition calling An artless deal
ademocraticgovernment. for a review of its earlier deci- The government shutdownin
sion to acquit Asia Bibi, a America ended on January 26th
AcourtinnorthernChina Christian woman accused of after 35 days, making it the
sentencedahuman-rights blasphemy. Rioting zealots had longest in history. President
lawyer,WangQuanzhang,to previously called for her to be Donald Trump blinked first in
More Venezuelanstook to the fourandahalfyearsinprison hanged anyway. This time his dispute with Congress,
streets to demand that Nicolás for“subversion”.Hewasthe protests were muted, as 3,000 having promised to keep the
Maduro, who rigged an elec- lasttogoontrialofmorethan zealots had been locked up. government closed until he
tion last year, step down in 200lawyersandactivistswho received funding to build a
favour of the head of the na- weredetainedin2015.Journal- Two bombs exploded near a wall on the Mexican border.
tional assembly, Juan Guaidó, ists,diplomatsandMrWang’s cathedral in the Philippines, But he warned there would be
as the constitution prescribes. wifewerebarredfromthe killing 20 people and injuring another shutdown—or that he
Mr Guaidó is recognised by proceedings. many more. Islamic State would declare a national emer-
most Latin American democ- claimed responsibility for the gency—if legislators did not
racies, as well as the United attack, which came just after fund his wall by February 15th.
States and Canada. Several It’s my way or the Huawei voters in the Muslim-majority
European countries said they Canada’s prime minister, region voted in favour of more Roger Stone, a former adviser
would recognise Mr Guaidó Justin Trudeau, fired his coun- political autonomy. to Mr Trump, was arrested in
unless elections are called try’s ambassador to China, Florida. The office of Robert
soon. Mr Maduro, whose mis- John McCallum. Mr McCallum American officials said they Mueller, the special counsel
rule has led to hyperinflation had ruffled feathers when he were making progress in talks investigating links between
and food shortages, retains the suggested that Meng Wanzhou, with the Taliban about ending Russia and Mr Trump’s elec-
support of Russia, Turkey and, a senior executive of Huawei, a the war in Afghanistan. Amer- tion campaign, levelled seven
lukewarmly, China. Mr Guaidó technology firm, might have ica has offered to withdraw its charges against Mr Stone, 1
The EconomistFebruary2nd2019 Theworldthisweek 11
2includingwitnesstampering Barnier,theeu’sleadnegotia- He is in trouble over his order Gantz’s new party is expected
andobstructinganofficial tor,saidhewasunwillingto to stop 177 migrants from to win more than 20 seats in
proceeding. reconsiderthepreviousagree- leaving a boat. Mr Salvini had the 120-seat Knesset. Likud, the
ment.JeremyCorbyn,Britain’s previously welcomed the trial, party of Binyamin Netanyahu,
oppositionleader,metMrs saying he was proud to defend the prime minister, is expected
Time to smell the coffee Maytodiscussoptions. his country. to win 30 or so.
Howard Schultz, a former boss
of Starbucks, said he was con- Greecevotedtorecognise More than 130 people are feared
sidering running as an in- Macedonia,itsneighbour, to have drowned off the coast
dependent candidate in the underthenewnameofNorth of Djiboutiafter two boats
next presidential election. Macedonia.Theagreement carrying migrants capsized.
Critics warned that doing so opensthedoortoNorthMac- The vessels were carrying
would split the anti-Trump edonia’sadmissiontotheeu people from Africa to the Ara-
vote, thus helping the presi- andnato. bian peninsula, where they
dent to secure another term. were hoping to seek work.
Giletsjaunesprotestersin
A polar vortexfroze the Ameri- Francesetupnotonebuttwo A judicial commission into
can Midwest, with tempera- newpoliticalparties.Neither corruption in South Africahas
tures falling to -33oC in Chica- soundscoherent.Onevowsto heard testimony from a busi-
go. At least eight people have “remakepoliticsaroundthe Zimbabwe’s police and army nessman thatgovernment
died because of the inclement heartandempathy”.Other have been accused of mass officials and members of the
weather. giletsjaunesdenouncedthe rapes, beatings and robbery ruling African National Con-
party-buildersforsellingout. while crushing protests gress were put on monthly
Britain’s Parliament voted to against costly fuel. retainers, paid bribes and
back the Brexitdeal proposed given gifts including sports
by Theresa May, the prime Pride, swallowed Benny Gantz, a retired general, cars by a firm that won govern-
minister, so long as she re- Matteo Salvini, Italy’s deputy jumped in opinion polls after ment contracts. The daughter
places the Irish “backstop”, prime minister, asked his launching his campaign for of one minister was also of-
which seeks to avoid a hard government to bar prosecutors Israel’sparliamentary elec- fered driver training because
border in Ireland, with some from pressing potential kid- tions, due in April. No one is she kept crashing the cars she
unspecified alternative. Michel napping charges against him. sure what he stands for, but Mr had been given.
12 The world this week Business The EconomistFebruary2nd2019
Ocean. But it is now paying the saidthecompanywouldre- should be provided in aid for
price for expanding too fast; duceitsheadcountby15%,or coal-mining states affected by
last year it lost NKr3.8bn. iag, byabout250jobs,accordingto the move, which is less than
an airline group that owns theWallStreetJournal.Verizon the figure of around €60bn
British Airways, recently MediaGroup,whichownsrival they had asked for. It is hoped
pulled out of takeover talks websitessuchasHuffPost, that the new target will partly
with Norwegian and sold its Yahoo,andaol,alsosaidit offset the extra carbon emis-
stake in the airline. wouldsack800employees. sions caused by Germany’s
abandonment of nuclear pow-
The euro zone’s economy er, which its government
failed to bounce back in the No pig’s land announced in 2011.
final three months of 2018, Denmark is to build a 70km
with growth remaining at 0.2% fence along its German border
A dam belonging to Vale, the in both the third and fourth to repel stray pigs. It will be Sailing high
world’s largest iron-ore pro- quarters. Italy fell into reces- constructed to stop the spread
ducer, collapsed in Brazil, sion over the period. Mean- of African swine fever. The
killing at least 84 people. About while, Spain’sunemployment Danes, famed for their exports
276 are still missing. The com- rate fell to 14.5% in the last of bacon and other pork pro-
pany’s share price has fallen by quarter of 2018, its lowest rate ducts, are worried about in-
18% since the collapse; in- in a decade. Although 3.3m fected wild boar bringing the
vestors fear a torrent of com- people in the country are still untreatable disease north,
pensation claims and regu- looking for work, the un- which could devastate live-
latory fines. The firm said that employment rate has fallen stock and hurt the country’s
it will decommission dams steadily since its peak of nearly farming industry.
similar to the one that col- 27% in 2013.
lapsed, a move which will De Beers, the world’s largest
reduce its annual output of Boeing, the American aero- producer of diamonds, said
iron ore by 10%. space giant, announced that sales fell by a quarter at the Royal Caribbean, a cruise line
annual revenues last year start of this year. The mining based in America, announced
In America, the Federal Re- exceeded $100bn for the first giant is particularly being that revenues in the last three
serve ditched its guidance to time, helped by strong demand affected by slower economic months of 2018 rose by 16% and
investors suggesting that for its commercial aircraft. Last growth in China, the world’s profits by 9.6%, year on year.
further rises in interest rates year the firm received 20% second-biggest consumer of Bookings for cruise holidays
lie ahead. The American cen- more orders for its civil jets the stones. were unexpectedly healthy
tral bank pledged to be “pa- than its European rival, Airbus. over the winter. Last year the
tient”, citing low inflation and A government-appointed company expanded by acquir-
recent economic turbulence as BuzzFeed, a news website once commission in Germany ing Silversea Cruises, a luxury
reasons not to raise rates. It known for “listicles”, an- agreed that the country should brand, and launching into
also said it would slow down nounced another round of job phase out the use of coal by service the Symphony of the
its policy of shrinking its bal- losses. BuzzFeed’s founder and 2038. The body agreed that a Seas, the largest passenger ship
ance-sheet if needed. chief executive, Jonah Peretti, total of at least €40bn ($46bn) in the world by gross tonnage.
America’s Justice Department
accused Huawei, a Chinese
technology company, of a
series of misdeeds including
theft of intellectual property
and the obstruction of justice.
Huawei is also accused of
duping four banks into vio-
lating sanctions on Iran, on
which basis Canadian police
arrested Meng Wanzhou, its
chief financial officer, in De-
cember. America formally
requested her extradition this
week. If the allegations against
Huawei are proven, American
firms could be banned from
selling it their technology.
Norwegian Air said that it
would try to raise NKr3bn
($350m) in a rights issue. The
troubled carrier bet the house
on making a success of low-
cost flights across the Atlantic
Leaders Leaders 13
The battle for Venezuela
The world’s democracies are right to seek change in Latin America’s worst-governed country
If protests alone could oust a president, Nicolás Maduro he serves as acting president if the office is vacant—which, be-
would already be on a plane to Cuba. On January 23rd at least cause Mr Maduro is not a legitimate occupant, it is.
1m Venezuelans from across the country took to the streets de- The question is not whether the world should help Mr
manding Mr Maduro step down. They were answering the call of Guaidó, but how (see Briefing). This week the United States, still
Juan Guaidó, who last week proclaimed himself the rightful head Venezuela’s main trading partner, imposed what amounts to
of state. Mr Guaidó has won the backing of most of Latin Ameri- sanctions on oil exports and on imports of the diluents needed to
ca, as well as the United States and Europe. Protests planned for market its heavy oil. By ordering that payments for Venezuelan
February 2nd promise to be even bigger. But Mr Maduro is sup- oil must be put in bank accounts reserved for Mr Guaidó’s gov-
ported by the army as well as Russia, China and Turkey. As The ernment, the United States aims to asphyxiate the regime, in the
Economist went to press, he was still holding on to power. hope that the armed forces will switch to Mr Guaidó.
Much is at stake. Most important is the fate of 32m Venezue- One danger is that Mr Maduro digs in and orders the security
lans made wretched by six years under Mr Maduro. Polls suggest forces and the collectivos, organised thugs at the regime’s service,
that 80% of them are sick of him. Other countries are also hurt by to impose terror. Another is that the United States overplays its
Venezuela’s failure. The region is struggling with the exodus of hand. Just now it is working with the Lima group of regional gov-
over 3m of its peoplefleeing hunger, repression and the socialist ernments. But its sanctions could hurt the people more than the
dystopia created by the late Hugo Chávez. Europe and the United regime. If, bent on regime change, it acts unthinkingly, it could
States suffer from Venezuela’s pervasive corruption, which en- come to be seen once again in Latin America as imperialist and
hances its role as a conduit for narcotics. And as world leaders overbearing. Russia is portraying the United States’s interven-
pile in for Mr Maduro or against him, they are battling over an tion as an attempt to dominate its backyard. Its media are already
important idea which has lately fallen out of favour: that when a saying that Vladimir Putin’s interest in Ukraine is no different.
leader pillages his state, oppresses his people and subverts the The situation is a test of President Donald Trump and his for-
rule of law, it is everybody’s business. eign-policy team, including the hawkish national security ad-
The scale of the disaster Mr Maduro has brought down upon viser, John Bolton. This week Mr Bolton hinted at the use of
Venezuela is hard to comprehend. In the past American troops. Barring state violence against
five years gdp has fallen by half. Annual infla- American citizens, that would be a mistake.
tion is reckoned to be 1.7m per cent (the govern- Mr Guaidó’s backers have ways to help with-
ment no longer publishes the numbers), which out resorting to force or dirty tricks. These fall
means that bolívar savings worth $10,000 at the into two categories. The first includes incen-
start of the year dwindle to 59 cents by the end. tives for Venezuelans to demand change, for the
Venezuela has vast reserves of oil and gas, but army to abandon the regime and for Mr Maduro
the state oil company has been plundered and to go. Now that Mr Guaidó has been recognised
put under one of the country’s 2,000 generals, as interim president, he stands to control bil-
who has watched production tumble to 1.1m barrels a day. People lions of dollars of Venezuela’s foreign assets if power shifts. The
are malnourished and lack simple medicines, including anti- national assembly has passed a law offering an amnesty to sol-
biotics. Hospitals have become death traps for want of power and diers and civilians who work to re-institute democracy. Mr Ma-
equipment. Blaming his troubles on foreign conspiracies, Mr duro is being promised the chance to flee the country.
Maduro has rejected most offers of humanitarian aid. The second way to help is to let Venezuelans know that the
Despite this litany of suffering many outsiders, especially on world is ready if Mr Guaidó takes power. The lesson from the
the left, argue that the world should leave Venezuelans to sort Arab spring is that even a leader who starts by sweeping away a
out their differences. Some adopt Mr Maduro’s view that Mr tyrant must bring improvements rapidly or risk losing support.
Guaidó’s claim to the presidency, recognised immediately by the The immediate priorities will be food and health care. The very
United States, is really a coup. Russia, which has worked hard to fact of a new government will help stop hyperinflation (see Free
discredit the idea that Western intervention can ever be benign exchange), but Venezuela will also need real money from
or constructive, is reported to have sent 400 troops from a priv- abroad—international lenders, including the imf, should be
ate military contractor, also spotted in Syria, Ukraine and parts generous. The to-do list is long: Venezuela will need to remove
of Africa, to protect either the regime or Russian assets. price controls and other distortions and build a social safety-net.
Abandoning Venezuela to the malevolent rule of Mr Maduro It must restart the oil industry, which will entail welcoming for-
would be wrong. If anyone has launched a coup it is he. He was eign investment. Its debt will need restructuring—including the
inaugurated on January 10th for a second term having stolen last debt to Russia and China which is due to be paid in oil. And amid
year’s election. In his first term, won in 2013 in another dubious all this, Mr Guaidó’s caretaker government must hold elections.
vote, he eroded democracy by silencing critical media and evis- A generation ago, Venezuela was a functioning state. It can be
cerating the constitution. He packed the electoral commission again. It is blessed with oil and fertile land. It has an educated
and the supreme court with puppets and neutered the national population at home and in the diaspora that fled. And in Mr
assembly, which the opposition controls. By contrast, Mr Guaidó Guaidó it has a leader who, at last, seems to be able to unite the
has a good claim to legitimacy. As head of the national assembly, fractious opposition. But first it must get rid of Mr Maduro. 7
14 Leaders The EconomistFebruary2nd2019
The war in Afghanistan
Talking to the Taliban
A deal to end the Afghan insurgency would be wonderful—as long as it is not a figleaf to cover an American retreat
After more than17 years, it is the longest war in American called Resolute Support, but the resolve of President Donald
history.AmericanforcesarenoclosertodefeatingtheTali- Trump,atleast,isclearlydissipating.Hehasmadenosecretof
ban—therepressiveIslamistmilitiathatruledmostofAfghani- hisdesiretobringAmericantroopshome,andgivennosignthat
stanbefore2001—thantheywereadecadeago.Infact,theshare hevaluesthethingstheirpresenceachieves.
of the country under full control of the elected, American- BeforeAmericatoppledtheTalibanregime,Afghanistanwas
backed government is humiliatingly small. The conflict has aviolenttheocraticdespotism.Womenwerenotallowedoutof
reachedsomethingclosetoastalemate,butabloodyone:some their homes unless covered head to toe and accompanied by a
10,000 police and soldiers, 3,400 civilians and an unknown malerelative.AnydeparturefromtheTaliban’sbarbaricversion
numberofinsurgentsdiedin2017alone.Sincethen,theauthori- of Islam, such as dancing or shaving or educating girls, could
tieshavestoppedreleasingdataonmilitarycasualties—not,pre- earn floggings, imprisonment or even death. Ancient statues
sumably,becausethingshavegotbetter. weredynamitedaspaganidols.Keepingsuchzealotsatbay,for
ThenewsthatAmericaandtheTalibanaremakingheadway aslongastheytrytoimposetheirbeliefsbyforce,isanincalcula-
innegotiationstoendtheconflictisthereforewelcome(seeAsia blebenefittothetwo-thirdsofAfghans(some24mpeople)who
section). Zalmay Khalilzad, America’s chief ne- liveingovernment-controlledareas.
gotiator, says the two sides have agreed on a TherearebenefitsforAmerica,too.IftheTa-
“framework” for a deal. America would with- libanweretooverthrowtheAfghangovernment
draw its troops in exchange for an undertaking afteranAmericanwithdrawal,itwouldbeahu-
fromtheTalibannottoprovidesanctuarytofor- miliationonaparwithVietnam.Evenifthegov-
eign terrorists, as they once did for Osama bin ernmentstaggeredon,apull-outwithoutasol-
Laden.TheTalibanwouldalsohavetoagreetoa id peace agreement would cause chaos.
ceasefire and begin negotiations with the Af- Regional powers such as China, India, Iran,
ghan government, which they have long de- PakistanandRussiawouldallstruggletofillthe
nouncedasanAmericancreation. vacuum.Atbest,theresultwouldbeagruesomesurgeinfight-
The goals of drawing the Taliban into peaceful politics and ing;atworst,thewholeregioncouldbedestabilised.Anoffshoot
thus extricating America from a costly and destructive conflict of the Taliban in Pakistan set off something close to civil war
aretherightones.Butthereare,sadly,manyreasonstofearthat therein2014.Americacouldeasilybesuckedbackin.
theframeworkwillnotproduceeitheroutcome.Foronething, Withaforceof140,000,AmericacouldnotwipeouttheTali-
thedetailswillbethorny.TheTalibanalreadysoundlukewarm ban. But with a mere13,000 troops bolstering the Afghan army
abouttheceasefireandthetalks.Settingtheorderinwhichthe today,itseemsabletokeeptheinsurgentsmoreorlessincheck.
agreedstepsaretakencouldalsobeastumblingblock,especially MrKhalilzadshouldbeclearthatAmericaislookingforadura-
whenitcomestothetimingandpaceofAmerica’swithdrawal. blesettlement,notafigleaftocoveritsretreat.Itstroopsshould
Another worry is that the Taliban will promise the moon to stayuntiltheTalibanshowthattheyaresincereabouttakingup
ridthemselvesoftheAmericans,ontheentirelyreasonableas- politicsandlayingdownarms.Otherwise,theTalibanwillhave
sumptionthat,eveniftheygoontobreaktheirword,thegisare no reason to change their stripes—and Afghanistan, already at
unlikelytoreturn.TheAmerican-ledmissioninAfghanistanis warfor40years,willbecondemnedtoyetmoreconflict.7
Chinese technology
How to handle Huawei
Banning one of China’s leading firms from operating in the West should be a last resort
On january 28th Liu He, a Chinese vice-premier, landed in guise. The first is benign: it is China’s most successful global
Washington ready for talks to calm the trade war between firm. Last year it booked $110bn of sales and shipped 200m
America and China. Instead he was met by a geopolitical tem- smartphones. It has built 1,500 networks, reaching a third of the
pest. That day America’s attorney-general charged Huawei, one planet’s population. Huawei’s second face, prosecutors allege, is
of China’s biggest firms, with 23 crimes, including sanctions- that of a grubby enterprise that breaks laws for profit. They say it
busting, stealing corporate secrets and obstructing justice. offered bonuses to staff who stole intellectual property and that
American officials also made clear that they view Huawei as a Meng Wanzhou, its finance chief and the daughter of its founder,
threat to national security, since it builds the telecoms networks misled banks about doing business in Iran. She was arrested in
that underpin modern societies. Some 170 countries that use Canada in December and courts there are considering an Ameri-
Huawei must now decide whether doing business with it is safe. can extradition request. China says the allegations are a “smear”.
That decision is hard, because Huawei has more than one Huawei’s third identity is the most disturbing and the hardest1
The EconomistFebruary2nd2019 Leaders 15
2to pin down. It could be a vehicle for Chinese spying or even, in a wei were announced. The exclusion of a firm on the say-so of
time of war, sabotage. Rumours of this have circulated for years American officials, without evidence of spying, would set a dan-
without any public evidence (including this week), but it makes gerous precedent. The same precautionary logic would justify
sense to be wary. Huawei has a high market share in new 5gnet- banning all hardware made in China or keeping Chinese firms
works, which will connect everything from cars to robots. The out of industries like e-commerce or finance. Might China be en-
networks’ dispersed design makes them hard to monitor. And titled to impose a similar ban on American firms with a big role
China’s leaders are tightening their grip on business, including in its economy? Think of General Motors or Boeing.
firms such as Huawei in which the state has no stake. This influ- Instead of spiralling into a cold war, leaders should create
ence has been formalised in the National Intelligence Law of mechanisms and rules that favour trade by minimising mistrust
2017, which requires firms to work with China’s one-party state. (see Business section). Both sides have a part to play. Host coun-
The nuclear option would be to ban Huawei. Since 2012 it has, tries need to develop structures to monitor Huawei and offer a
in effect, been prevented from selling equip- fair response if things go wrong. European po-
ment in America. Australia recently prohibited litical leaders complain that they have not been
Huawei’s 5g equipment. Japan has toughened shown evidence of Huawei spying. The more
its rules. America could probably put Huawei credible and law-like America’s process is, the
out of business if it wanted to, by banning Amer- better. Britain has a board that allows spooks to
ican firms such as Qualcomm and Intel from review Huawei’s equipment. Germany has cop-
supplying it with crucial components and by ied it and Singapore may follow. Governments
cutting it off from the global banking system. can lower the risk by insisting on a diversity of
Such aggressive action would come with suppliers. A country with four networks should
huge costs for all, including America. The economic ones are ob- have at least two that were not built by Huawei.
vious: supply chains would be wrecked, at least 180,000 jobs For its part, China Inc needs to get serious about demonstrat-
would go, mainly in China, and customers would have less ing that it can be trusted abroad. Huawei’s governance is a mix-
choice. On January 29th an Australian operator deprived of Hua- ture of obfuscation and opacity. It should appoint foreign direc-
wei gear abandoned plans for a new 5gnetwork. But the greatest tors, recruit Western investors and set up subsidiaries overseas
cost would be a splintering of the global trading system. The line that have their own boards and indigenous managers. China’s
between justice and trade negotiations has become blurred. government, meanwhile, can complain that it is being treated
American officials insist that they are just enforcing the law, but unfairly, but if it really wants better treatment it should send a
President Donald Trump has said that Ms Meng’s fate is a bar- signal that it understands the anxieties it stirs up. As the Huawei
gaining chip. Wilbur Ross, the commerce secretary and a China affair shows, President Xi Jinping’s growing authoritarianism is
hawk, was present this week when the allegations against Hua- undermining China’s commercial interests abroad.7
The Brexit negotiations
Over to EU
How Brussels should respond to Britain’s confused demands
Theresa mayhas become so used to losing votes in the House keen for Britain to just go, deal or no deal, should think again. A
of Commons that when, on January 29th, the prime minister chaotic exit with no withdrawal agreement would represent a
got mps to back her on a motion regarding her Brexit deal, it was colossal failure by both sides. The eucannot solve Westminster’s
treated as a breakthrough. “She did it!” announced one front tumultuous politics, let alone the contradictions within the
page the next morning. Another hailed “Theresa’s triumph”. Brexit project. But one thing Britain urgently needs in order to
Alas, it is anything but. mps agreed that they would support sort out its mess is time—and that is where the eucan help.
the exit deal she has agreed to with the European Union, so long Those Brexiteers urging the euto make “concessions” on the
as the Irish “backstop” was removed (see Britain section). But on Irish backstop misunderstand its purpose. Britain wants an in-
the crucial question of what might replace it—something that dependent trade policy, an invisible border with Ireland and no
negotiators in Brussels have spent almost two years scratching customs checks between Northern Ireland and the British main-
their heads over—the motion suggested no more than unspeci- land. These three aims are incompatible. If Britain sets its own
fied “alternative arrangements”. Mrs May vowed to take this tariffs, it will mean customs checks on goods passing between it
vague demand to have her cake and eat it back to Brussels. and the eu, of which Ireland is a member. That means inspec-
She will get short shrift, and she deserves it. A sensible ap- tions at the border. Britain believes that in future it will be pos-
proach to the Brexit talks would have been to agree at home on sible to do such checks remotely, perhaps using new technology.
what kind of deal to go for, then begin negotiations. The prime One day that may be true. Until then, an interim solution is need-
minister did the opposite, talking to the eufor nearly two years ed. This is the backstop, under which Britain would remain in a
before coming back to find that her treaty could not pass her own customs union with the eu, keeping both borders open but de-
Parliament. With less than two months before Brexit day, she laying its ability to strike trade deals.
now proposes to reopen negotiations on what she herself recent- The backstop thus exists as a logical consequence of Britain’s
ly insisted was “the only possible deal”. own negotiating objectives, not European caprice. By definition,
It is abject. But any exasperated European leaders who are it expires when someone comes up with a way to carry out cus-1
16 Leaders The EconomistFebruary2nd2019
2toms checks with no border infrastructure. Hardline Brexiteers’ The longer Britain has to sort out its mess, the more chance
calls for the backstop to be time-limited are thus not just unreal- that it can avoid disaster. Mrs May’s strategy has been to get the
istic but nonsensical. Beyond more words of reassurance about hardline Brexiteers in her Conservative Party to back the deal.
the arrangement’s temporary nature—which it should ladle on The vote this week for the cake-based motion, which more or
liberally—the eucannot do much about the backstop. less united Conservative mps, has helped feed the idea that this is
Where it can make a difference is on the timing. Unless Parlia- still possible. But the response from Brussels ought to put paid to
ment agrees on a deal by March 29th, Britain will fall out of the eu that thinking. In reality, Mrs May is likely to have more luck win-
without any exit arrangements in place. Britain itself would suf- ning votes from the opposition. The price of Labour’s support
fer most from this. But for the eu, and especially Ireland, it seems to be a permanent customs union. The backstop, as Brexi-
would also be horribly damaging to lose one of its most impor- teers complain, already amounts to something close to this. It is
tant members in such circumstances. Parliament this week possible to imagine a deal being done, but not in the two months
made clear that it was against leaving with no deal. If Mrs May remaining. With more time, Parliament may yet feel its way to a
wants to avoid this fate, she will surely have to ask for more time. solution. Brexit is a British problem that only Britain can fix. But
The eushould signal that it will agree to her request. the eucan give it the time it needs—and it must. 7
Taxing the rich
A way through the warren
How to raise money, reduce inequality—and limit the economic damage
During hislesser-known run for president, which began in prise. Meanwhile, bureaucrats would repeatedly find them-
1999, Donald Trump proposed levying a wealth tax on Ameri- selves having to value billionaires’ art collections and other illi-
cans with more than $10m. He may soon find himself campaign- quid assets. Eight rich countries have scrapped their wealth
ing on the other side of the issue. That is because Democrats are taxes since 1990, often amid concerns about their economic and
lining up to find ways to tax the rich. Senator Elizabeth Warren, administrative costs. In 2017 only four levied them.
who wants Mr Trump’s job, has called for an annual levy of 2% on There are better ways to raise taxes on capital. One is to in-
wealth above $50m and of 3% on wealth above $1bn. Alexandria crease inheritance tax, an inequality-buster that, though also too
Ocasio-Cortez, a prominent new left-wing congresswoman, has easily avoided, is relatively gentle on investment and work in-
floated a top tax rate of 70% on the highest incomes. centives when levied at modest rates. Another is to target eco-
In one way these proposals are a relief. Left-wing Democrats nomic rents and windfalls that inflate investment returns. High-
have plenty of ideas for new spending—Medicare for all, free col- er property taxes can efficiently capture some of the
lege tuition, the “Green New Deal”—that would need funding. astronomical gains that landowners near successful cities have
Mainly because America is ageing, but also boosted by Mr enjoyed. It is also possible to raise taxes on corporations that en-
Trump’s unfunded tax cuts, the debt-to-gdpratio is already ex- joy abnormally high profits without severely inhibiting growth.
pected to nearly double over the next 30 years. If a future Demo- The trick is to shield investment spending by letting companies
cratic administration creates new spending deduct it from their taxable profit immediately,
programmes while maintaining existing ones, rather than as their assets depreciate. (Mr
US real household income
higher taxes will be necessary. After taxesandtransfers,1990=100 Trump’s reform accomplished this, but only
250
If revenues are to rise, there are good partially and temporarily.)
Top1% 200
grounds to look first to the rich. Mr Trump’s tax What about income tax? Ms Ocasio-Cortez’s
150
cuts are just the latest change to have made life boosters point out that a 70% levy is close to the
100
at the top more splendorous. Between 1990 and rate that is said to maximise revenue in one no-
Middle20% 50
2015 the real income of the top 1% of households, table economic study. In truth the study is nota-
1990 95 2000 05 10 15
after taxes and transfers, nearly doubled. Over ble because it is an outlier—one that ignores the
the same period middle incomes grew by only about a third— benefitsofentrepreneurial innovation or of workers improving
and most of that was thanks to government intervention. Global- their skills. France’s short-lived 75% top tax rate, which was
isation, technological change and ebbing competition have all scrapped at the end of 2014, raised less money than was hoped.
helped the rich prosper in recent decades. Techno-prophets fear America’s top rate of federal income tax is 37%; higher is clearly
that inequality could soon worsen further, as algorithms replace feasible, but it would be wise to keep change incremental.
workers en masse. Whether or not they are right, the dispropor- Although there is scope to raise taxes on the rich, they cannot
tionate gains the rich have already enjoyed could justify raising pay for everything, if only because the rich are relatively scarce.
new revenues from them. One estimate puts extra annual revenue from Ms Ocasio-Cortez’s
Unfortunately, the proposed new schemes are poorly de- idea, which applies only to incomes above $10m, at perhaps
signed. Ms Warren’s takes aim at wealth inequality, which has $12bn, or 0.3% of the tax take. Ms Warren’s proposal would raise
also risen dramatically. It is legitimate to tax wealth. But Ms War- $210bn a year, her backers say—but they assume, implausibly,
ren’s levy would be crude, distorting and hard to enforce. A busi- limited avoidance and no economic damage. Ultimately, the
ness owner making nominal annual returns of around 5% would price of ambitious spending programmes will be tax increases
see much of that wiped out, before accounting for existing taxes that are also far-reaching. The crucial point about a strategy for
on capital. That prospect would squash investment and enter- taxing the rich is to realise that it has limits. 7