The Pandemic Depression
The Global Economy Will Never Be the Same
U.S. President Donald Trump has promised a bloodbath for regulations. He argues that regulatory overreach hinders commerce and stunts economic growth. Even if that’s true, he likely won’t be able to deliver what he promises by attacking the regulatory edifice alone. That’s because the companies that drive the U.S. economy are multinationals. They will still have to follow regulations elsewhere, which will mute the impact of killing those regulations at home. Indeed, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act is a good example of how globalization will sap the power of Trump’s plan.
Section 1504 of Dodd-Frank is still formally law, but the regulations needed to implement it were spiked in February. These regulations required oil and gas producers and miners to publicly disclose all payments of more than $100,000 that they make to governments. The point was to curb corruption, because when financial flows are public, it is harder to hide bribes. Companies involved in resource extraction protested when the law was passed and filed lawsuits that have delayed implementation.
In the middle of that battle, governments in other parts of the world decided to adopt the move. Canada, Norway, and the United Kingdom passed similar laws, and the European Union has mandated that its member countries do so. American companies that work there—in the Canadian tar sands or in the North Sea’s oil fields, for example—will still have to make these disclosures. And the laws typically also apply to any company traded on a stock market in that country. At the moment, there are 39 American mining companies and 11 oil and gas producers trading on Canadian stock exchanges.
The laws provided a grace period before reporting begins, so only a handful of global resources titans have made disclosures so far, including Shell, France’s Total, Norway’s Statoil, and Russia’s Gazprom, whose stock trades on the London Stock Exchange. U.S. companies have argued in the past that having to comply with the disclosure rules would put them at a competitive disadvantage to those from other countries which might not have to report—in particular, state-owned oil companies. But now, most of the competitors are tied up in transparency regimes as well. Further, thus far, the companies that have reported don’t seem to be suffering: there have been no scandals or profit losses attributed to the regulations. Economists, meanwhile, have not adjusted their growth forecasts.
Dallas-based Kosmos Energy is another helpful data point. It appears to be the only American resources company that voluntarily provides this information. The company started reporting payments by country in 2012 and moved to reporting them on a project-by-project basis in 2014. This hasn’t led to excessive costs or any competitive disadvantages, says Reg Manhas, Kosmos’s senior vice president of external affairs. But it does help the company build trust where it operates and ward off criticism. “We can point to our disclosure on the web site, and that’s helped to create a lot of constructive conversations.’’
Attacking U.S. regulations will be of limited value.
The next step for this disclosure trend is geographical expansion. The groundwork was laid at a meeting mid-March, at the Extractive Industries Transparency Initiative in Bogota. This group has a roster of 51 member countries, all of which commit to an independent reconciliation of the financial flows between the government and resource companies. Under the current EITI rules, those financial flows are tallied by company, but EITI’s board upped the ante in Colombia by requiring the payments to be reported on a project-by-project basis, as the country laws do and as Dodd-Frank would have done. EITI members include major resource countries across Africa, Asia, and Latin America.
The United States has been a supporter of the process in the past and had been working on disclosure reports of its own for the EITI to evaluate, but its membership and future involvement are no longer certain. Worldwide, however, the options are shrinking for U.S. companies hoping to work only in places without this sort of disclosure requirement. According to figures from Exxon-Mobil’s 2015 annual report, for example, disclosure mandates apply in at least fourteen countries in which it operates. Chevron, ConocoPhillips, and others will also be required to make the disclosures in other countries.
Although other countries’ laws and the EITI’s presence make up for some of what was lost when the U.S. regulations were killed, it’s not yet clear how effective the laws and regulations will be in other countries. For example, the definition of the word “project” in national laws and the enforcement process may involve some interpretation. Shell holds rights to dozens of oil blocks in Nigeria, for instance, but aggregated payments into five groups in its initial report to British regulators.
Financial flows on a project-by-project basis are more helpful in the fight against corruption because the information helps watchdogs verify or challenge what governments and companies say versus what they do. And in cases in which companies or governments have also shared copies of contracts they sign for energy fields or mines, revenue tracking can also mean comparing what the government receives to what the contract says it should. Watchdogs can go from verifying financial flows to evaluating if and how contracts are enforced. A new study by the Natural Resources Governance Institute found that 29 of the EITI’s 51 countries have disclosed at least some of these contracts. Nine other countries outside the EITI have done so, as has the Canadian province of Alberta. With transparency measures on the rise worldwide, miners or oil companies that prize their privacy are looking at a shrinking universe of possibilities.
In the end, then, if killing the regulation won’t change much, it’s fair to question whether it will create any economic growth. This and other cases are examples of globalization’s impact on the American legal and regulatory landscape. Some involve regulation and some law, and some were created by international organizations to which the administration could cut funding or other forms of support. But what is common in each case is that cutting regulations in the United States doesn’t change anything outside its borders. Multinationals may account for just one percent of U.S. companies, but they also provided a third of economic growth. That means that the leaders in this sector are also the most exposed to the rules elsewhere and that attacking U.S. regulations will be of limited value.