clock menu more-arrow no yes

The Panama Papers show something Bernie Sanders gets right about the economy

Throughout the 2016 primary campaign, Bernie Sanders has distinguished himself as an opponent of the pro-globalization consensus that characterized the administrations of both Bill Clinton and Barack Obama. Typically this consensus is framed in terms of trade, but global economic integration is about much more than the flow of goods across borders — it's about the nature of the rules that govern (or don't) economic activity on a worldwide basis.

It's about breaking down particular kinds of barriers and establishing particular kinds of common rules. Deliberate choices are made that advantage some and disadvantage others; working-class residents of rich countries generally get the short end of the stick, not because of choices that help the global poor but because of deliberate efforts to safeguard the interests of the global financial elite.

Deep globalization is about much more than trade

The key fact about the process of globalization over the past 30 years is that it's about a lot more than the physical movement of goods across international borders.

The United States, for example, is a major global exporter of both pharmaceuticals and entertainment products. Many foreign countries where these are not major industries have intellectual property rules that are friendlier to consumers of medicines and TV shows and less friendly to their producers. In bilateral and multilateral trade agreements, American negotiators typically put a high priority on inducing foreign countries to changing their domestic laws to more closely conform to US practices and the interests of big US-based firms.

America's bilateral trade promotion agreement with Panama is no exception to this, with the US Trade Representative's Office touting "important disciplines ... related to intellectual property" that are included in the agreement.

Tax enforcement is a low priority

As part of the negotiation, the US did also reach a bilateral tax transparency deal with Panama that will make it somewhat easier for the US Treasury Department to catch egregious cases of illegal tax evasion using Panamanian shell companies. But these tax information exchange agreements are relatively weak tools. As IRS Commissioner Douglas Shulman has explained:

This is not to say that treaties and TIEAs are some sort of silver bullet; they have their shortcomings. It often takes a long time to get the requested information from partners; and the information may also be incomplete. There are also very strict rules and you may have to jump through a lot of hoops to get the information you need.

This isn't nothing. But it falls well short of what trade deals normally demand of US partner countries in terms of legal reforms to protect multinationals' intellectual property, or the way domestic legal processes are circumvented to protect American investments abroad.

The nature and extent of global economic integration is deeply driven by elite priorities, and cracking down on tax evasion isn't that high of a priority.

In the specific case of Panama, it's worth recalling that back in 1989 the United States sent a small military force to invade Panama, depose its president, extradite him to the United States, and put him on trial for drug trafficking charges. If there were a strong bipartisan consensus in favor of coercing Panama into changing its laws regarding taxation or shell companies, we could get the job done.

Globalization is asymmetrical and class-biased

And illegal evasion is only a small part of the larger picture of perfectly legal tax avoidance. Companies and individuals are perfectly within their legal rights to structure economic activity so as to make as large a share of it as possible take place in low-tax jurisdictions. Hedge funds whose staff is located in New York are often formally incorporated in the Cayman Islands. Apple registers a very large share of its global profits as accruing to its Irish subsidiary rather than its US-based parent company. In both cases, this is to take advantage of a low corporate tax rate.

If these kinds of relatively small countries were acting to undermine the integrity of the global pharmaceutical patent system, they would be stopped. But political elites in powerful countries allow them to undermine the integrity of the global corporate tax system — even when Ireland was desperately in need of bailout funds from the European Union, it was not forced to change its corporate tax system — largely because the wealthy and powerful want the global corporate tax system undermined.

Globalization is sometimes a process of writing common global rules for economic activity.

And it's sometimes a process of not writing common rules, and implicitly allowing integration to erode standards. Different choices are made on different subjects, and it's not a coincidence that the choices made have tended to be systematically biased in favor of the priorities of Western economic elites. The Panama Papers, by revealing the quasi-secret activity that's been hiding in plain sight, offer an unprecedentedly detailed look at how that works in practice.


Watch: The power of wealth in American politics