William Krist's Blog, page 42

Is the European Union’s Investment Agreement with China Underrated?

The European Union is very open to foreign direct investment. By comparison, despite considerable liberalisation in the past two decades, foreign investors in China’s markets still face significant restrictions, especially in services sectors. Given this imbalance, the EU has long sought to improve the situation for its companies operating or wanting to operate in China.

After eight years of negotiations, the EU and China concluded in December 2020 a bilateral Comprehensive Agreement on Investment (CAI). The text awaiting ratification aims to give foreign investors greater market access, enforceable via state-to-state dispute settlement. It does not yet, however, cover investor protection (such as against expropriation). Meanwhile, investor protection is covered by bilateral investment treaties between EU countries and China, which remain in force.

The CAI has been met in some quarters with scepticism on economic and geopolitical grounds. The main criticism is that it provides little new market access in China, and that this small economic gain for the EU comes at the price of breaking ranks with its main political ally, the United States. Our assessment, which focuses on the economic implications, is different. It is true the CAI provides only modest new market access in China, but this is because China has already made progress in recent years in liberalising its foreign investment regulations unilaterally. The CAI binds this progress under an international treaty, marking an improvement for EU firms insofar as their market access rights can be effectively enforced.

Most important, the CAI includes new rules on subsidies, state-owned enterprises, technology transfer and transparency, which will improve effective market access for EU firms operating in China. These bilateral new rules could also pave the way for reform of the multilateral rules under the World Trade Organisation, with the aim of better integrating China into the international trading and investment system – a goal shared by the EU, the United States and other like-minded countries.

From an economic viewpoint therefore, the CAI is an important agreement, and one worth having. However, its ratification by the European Parliament is unlikely while China continues to apply sanctions against some members of the European Parliament and other critics of China’s human rights record.

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To read the full policy contribution from Bruegel, please click here. 

 

The Evolving Gender Gap in Labor Force Participation During COVID-19

Despite many significant gains by women in the paid workforce in recent decades, the percentage of women participating in the labor force has remained lower than the percentage of male participants. Now, in response to the COVID-19 pandemic and the global economic downturn it precipitated, the gap in labor force participation between men and women1 in some economies has actually widened, with potentially damaging repercussions for women’s career prospects and pay. 

The gender gap discussed in this Policy Brief measures the difference between the share of women employed or actively looking for paid work, relative to the share of men. To gauge its evolution over time, and especially during the pandemic, we have compiled a new database across 43 countries (36 member countries of the Organization for Economic Cooperation and Development [OECD] and 7 emerging-market economies) representing 60 percent of global GDP (in current US dollars as of 2019).3 These data track trends over 30 years, providing many valuable insights into the evolving and varied nature of male and female workplace presence. The data will also be updated quarterly and made publicly available. Forthcoming research will examine trends over the three decades of the database, with a focus on demographic factors, differences among sectors of the economy, and what can be learned from the experience of varied government policies. Some preliminary analysis of the trends in 2020, a time of enormous disruption because of the pandemic, suggests that: 

• Out of the 43 countries in this study, two Latin American countries—Chile (+2.3 percentage points) and Colombia (+1.3)—and Finland (+1.1) experienced the largest gender gap expansion in monthly labor force participation from early 2020; Colombia and Cyprus experienced the largest expansion in quarterly labor force participation gap by more than 2 percentage points.

• The gender gap widened in the United States, driving 2.5 million women from their jobs in what Vice President Kamala Harris called a “national emergency” for women.

• The quarterly gender gap narrowed the most in three small European economies (Luxembourg, Lithuania, and Malta) by 2.9, 2.1, and 1.5 percentage points, respectively. Nine other countries (Austria, Belgium, Denmark, Ireland, Romania, Russia, the Slovak Republic, Turkey, and the United Kingdom) have also experienced a shrinking of the gender gap in 2020 (see appendix table).

• Female labor force participation fell the most in countries where women are more likely to be employed in the services and retail sales sectors, which were disproportionately affected by the lockdown measures adopted to curb the spread of the virus.

• Employees on temporary contracts were more likely to have lost their jobs during the pandemic. In countries with a lower share of female workers on such contracts relative to men, women were less likely to drop out of the labor force relative to men. Generally speaking, women in temporary employment are at the lower end of the income scale and do not include professional women with credentials who seek career opportunities in their jobs, a sector that has opened up for women in many advanced economies in recent years.

• Not surprisingly, countries with stronger laws against gender discrimination, as measured by the overall World Bank’s Women, Business and the Law index score, experienced fewer disparities between men and women in keeping jobs during the pandemic.

• Greater government expenditure on childcare in the pre-COVID-19 era does not appear to have insulated female workers from the labor-market impacts of the pandemic.

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To read the full policy brief by the Peterson Institute for International Economics, please click here. 

We Need to Talk Trade and Technology!

“It’s May 3, 2021. Don’t forget to upgrade the embedded software in your shoes before you go for a run!”

This may sound like a commercial for the 1986 Puma Smart Sneaker, the first running shoe with embedded sensors and software in its heel. It could also be an opening line from an old sci-fi movie describing a distant point in the future. Sci-fi movies have a great track record of predicting the future, from video calls to self-driving cars. The former is a dominant part of our daily professional routine these days. The latter is no longer science fiction. So, what if the growing interplay between  goods and services is not about the future but a good description of the present? Nowadays we live in a world of connected objects that rely on sophisticated embedded software. Recently, the Volkswagen’s CEO admitted that the only way for VW to remain a successful car manufacturer is to become a successful software company. And while he may be the latest CEO to recognise the business irrelevance of such a goods-services distinction, he certainly is not the only one. Apple understood it well before many other companies when designing mobile phones and their underlying software ecosystem without having any production facilities. Now Apple wants to produce cars. And so do several Chinese telecom giants, like ZTE or Huawei. And the list is longer: Amazon, Tencent, Google, Baidu. All these corporate announcements are another way of saying that mode 5 services are going to be one of the most important ingredients of global competitiveness in many sectors.

Car companies are right to get interested in software. Future autonomous and electric vehicles are primarily software-driven products compared to traditional cars. Already in 2010, the General Motors’ Volt car was dubbed as one of the most sophisticated IT products, with over 10 million lines of software code and its own IP address. So, in the future, car manufacturers might need to do software in order to produce cars successfully. Surely, along complex global supply chains with many suppliers scattered around the world.

These headline announcements from global manufacturing companies entering the software market and vice-versa, confirm a simple truth: in order to stay competitive, companies can no longer see themselves just as a manufacturing firm, or a services firm. And this simple truth goes beyond the automotive sector. Underpinning this radical shift is a series of digital disruptive technologies, affecting everything from product standards, industrial design, intellectual property, and investment decisions. Such technological developments are game changers for many traditional manufacturing sectors.

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To read the full policy brief by the European Centre for International Political Economy, please click here.

The Good, the Bad and the Ugly: Taking Stock of Europe’s New Trade Policy Strategy

This Policy Brief takes stock of the EU Trade Policy Review – the Commission’s proposed strategy for trade. Despite appearances, the Review doesn’t come close to its billing as a strategy for the new geopolitics of trade. In fact, the Review is weak on key geopolitical developments and rather gives the impression that the EU doesn’t have an ambition to shape outcomes. Obviously, the Review is anchored in Europe’s general economic climate: defensiveness on globalization, competition and digitalization. It follows that Europe is getting increasingly detached from world developments.

There are several good parts in the Review. The Commission wants to revive and reform the World Trade Organisation, and it’s clear about what factors that have made the Geneva-based trade body dysfunctional. The Review also acknowledges that the EU will seek a closer alliance with the United States and use that for constructive purposes. Finally, it is welcome that the Commission proposes some new instruments for dealing with market distortions caused by foreign subsidies and protectionism in government procurement. All these initiatives can achieve good outcomes. However, they all require that Europe makes changes in its own policies and positions.

The bad parts in the Review are Europe’s weak agenda for getting better market access in the growth regions in the world and its continued passivity on matters related to China. Europe’s main trade-policy challenge in the next decade is to ensure that businesses and consumers in Europe get better integrated with a world-market dynamism that predominantly will come from the Asian region. Absent a realistic and medium-term strategy for dealing with challenges connected to the rise of China, Europe will have difficulties getting the EU-China Comprehensive Agreement on Investment approved. Europe needs an actionable agenda for addressing bilateral frictions with China and problems that occur outside bilateral trade.

Finally, the ugly part of the trade strategy are all the commercial policies in the EU – with strong effects on trade – that aren’t recognized or only casually mentioned in the Review. The latter category includes the ambition to introduce an autonomous carbon border tax on imports. Such a policy comes at a high political and economic cost, and the measure’s effect on reducing global carbon emissions is at best very negligible.

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To read the full policy brief by the European Centre for International Political Economy, please click here. 

US-China phase one tracker: China’s purchases of US goods

On February 14, 2020, the Economic and Trade Agreement Between the United States of America and the People’s Republic of China: Phase One went into effect. China agreed to expand purchases of certain US goods and services by a combined $200 billion for the two-year period from January 1, 2020, through December 31, 2021, above the 2017 baseline levels. This PIIE Chart tracks China’s monthly purchases of US goods covered by the deal, relying on data from both Chinese customs (China’s imports) and the US Census Bureau (US exports). It then compares those purchases with the legal agreement’s annual commitments, prorated on a monthly basis based on seasonal adjustments, above two baseline scenarios (see methodology below). As set out in the legal agreement, one 2017 baseline scenario allows for use of US export statistics and the other allows for Chinese import statistics.

By the end of 2020, China committed to purchase no less than an additional $63.9 billion of covered goods from the United States relative to these 2017 baselines. Defining the 2017 baseline using Chinese import statistics implied a 2020 purchase commitment of $173.1 billion. In 2020, China’s total imports of covered products from the United States were only $99.9 billion, reaching only 58 percent of the commitment. Defining the 2017 baseline using US export statistics implied a 2020 commitment of $159.0 billion. In 2020, US exports to China of covered products were $94.0 billion, reaching only 59 percent of the commitment. (More detail on 2020 is provided below.)

For 2021, China has committed to purchase no less than an additional $98.2 billion of covered goods from the United States relative to these 2017 baselines. Defining the 2017 baseline using US export statistics implies a 2021 target of $193.3 billion (blue in panel a). Defining the 2017 baseline using Chinese import statistics implies a 2021 purchase commitment of $207.4 billion (red in panel a).

THE LATEST NUMBERS FOR 2021

Through March 2021, China’s total imports of covered products from the United States were $36.7 billion, compared with a year-to-date target of $49.0 billion. Over the same period, US exports to China of covered products were $26.3 billion, compared with a year-to-date target of $43.1 billion. Through March 2021, China’s purchases of all covered products reached 75 percent (Chinese imports) or 61 percent (US exports) of the year-to-date target.

For covered agricultural products, China committed to an additional $19.5 billion of purchases in 2021 above 2017 levels, implying an annual commitment of $43.6 billion (Chinese imports, panel b) and $40.4 billion (US exports, panel c). Through March 2021, China’s imports of covered agricultural products from the United States were $13.9 billion, compared with a year-to-date target of $16.4 billion. Over the same period, US exports to China of covered agricultural products were $7.8 billion, compared with a year-to-date target of $10.8 billion. Through March 2021, China’s purchases of covered agricultural products reached 85 percent (Chinese imports) or 72 percent (US exports) of the year-to-date target.

For covered manufactured products, China committed to an additional $44.8 billion of purchases in 2021 above 2017 levels, implying an annual commitment of $123.1 billion (Chinese imports) and $111.3 billion (US exports). Through March 2021, China’s imports of covered manufactured products from the United States were $18.3 billion, compared with a year-to-date target of $25.9 billion. Over the same period, US exports to China of covered manufactured products were $15.3 billion, compared with a year-to-date target of $23.0 billion. Through March 2021, China’s purchases of covered manufactured products reached 71 percent (Chinese imports) or 66 percent (US exports) of the year-to-date target.

For covered energy products, China committed to an additional $33.9 billion of purchases in 2021 above 2017 levels, implying an annual commitment of $40.7 billion (Chinese imports) and $41.5 billion (US exports). Through March 2021, China’s imports of covered energy products from the United States were $4.5 billion, compared with a year-to-date target of $6.7 billion. Over the same period, US exports to China of covered energy products were $3.2 billion, compared with a year-to-date target of $9.3 billion. Through March 2021, China’s purchases of covered energy products reached 67 percent (Chinese imports) or 34 percent (US exports) of the year-to-date target.

For all uncovered products—making up 29 percent of China’s total goods imports from the United States and 27 percent of US total goods exports to China in 2017—the phase one agreement does not include a legal target. Through March 2021, China’s imports of all uncovered products from the United States were $9.8 billion, 17 percent lower than in 2017. US exports of all uncovered products to China through February 2021 were $5.1 billion, 4 percent lower than over the same period in 2017. (The March US export data for uncovered products will be available on May 4, 2021.)

Though the agreement also sets commitments for China’s purchases of certain traded services from the United States, those data are not reported on a monthly basis and are not covered here.

Note on Data Release: This update is based on March 2021 data released by US Census (April 26, 2021) and Chinese customs (April 20, 2021).

THE NUMBERS FOR 2020

Through 2020, China’s total imports of covered products from the United States were $99.9 billion, compared with the commitment of $173.1 billion (red in panel a). Over the same period, US exports to China of covered products were $94.0 billion, compared with a commitment of $159.0 billion (blue in panel a). In the first year of the agreement, China’s purchases of all covered products only reached 59 percent (US exports) or 58 percent (Chinese imports) of the commitment.

For covered agricultural products, China committed to an additional $12.5 billion of purchases in 2020 above 2017 levels, implying an annual commitment of $36.6 billion (Chinese imports, panel b) and $33.4 billion (US exports, panel c). Through 2020, China’s imports of covered agricultural products were $23.6 billion. Over the same period, US exports to China of covered agricultural products were only $27.3 billion. In the first year of the agreement, China’s purchases of covered agricultural products only reached 82 percent (US exports) or 64 percent (Chinese imports) of the commitment.

For covered manufactured products, China committed to an additional $32.9 billion of purchases in 2020 above 2017 levels, implying an annual commitment of $111.2 billion (Chinese imports) and $99.4 billion (US exports). Through 2020, China’s imports of covered manufactured products were $66.5 billion. Over the same period, US exports to China of covered manufactured products were only $57.0 billion. In the first year of the agreement, China’s purchases of covered manufactured products only reached 57 percent (US exports) or 60 percent (Chinese imports) of the commitment.

For covered energy products, China committed to an additional $18.5 billion of purchases in 2020 above 2017 levels, implying an annual commitment of $25.3 billion (Chinese imports) and $26.1 billion (US exports). Through 2020, China’s imports of covered energy products were $9.8 billion. Over the same period, US exports to China of covered energy products were only $9.7 billion. In the first year of the agreement, China’s purchases of covered energy products only reached 37 percent (US exports) or 39 percent (Chinese imports) of the commitment.

For all uncovered products—making up 29 percent of China’s total goods imports from the United States and 27 percent of US total goods exports to China in 2017—the phase one agreement does not include a legal commitment. In 2020, China’s imports of all uncovered products from the United States were $35.0 billion, 23.3 percent lower than in 2017. Over the same period, US exports of all uncovered products to China were $30.7 billion, 11.7 percent lower than in 2017.

METHODOLOGICAL APPROACH

Assessing progress toward meeting the phase one commitments for goods trade requires information from both US export statistics and Chinese import statistics, given that the agreement’s Chapter 6, Article 6.2.6 states “Official Chinese trade data and official US trade data shall be used to determine whether this Chapter has been implemented.” One implication is that there are two sets of monthly data to track (Chinese imports and US exports). A second is that there are two different annual, and hence monthly, targets, since the 2017 baseline level of Chinese imports differs from the 2017 baseline level of US exports. Finally, the products covered by the purchase commitments are set out at the 4-, 6-, 8-, or 10-digit level in the agreement’s Attachment to Annex 6.1; these are then mapped to the US or Chinese trade statistics for 2017 and for 2020 and 2021. Starting with our update of this PIIE Chart on October 26, 2020, we have included US export product 8800 (in addition to 8802, aircraft) in “covered manufacturing” and the total, shifting it out of the “uncovered” category.

Each month’s purchase target is seasonally adjusted to reflect that month’s relative weight for those products in the 2017 trade data. Note that prorating the year-end commitment to a monthly target is for illustrative purposes only. Nothing in the text of the agreement indicates China must meet anything other than the year-end commitments.

For US goods exports, the agreement is estimated to cover products that made up $95.1 billion, or 73 percent, of total US goods exports to China ($129.8 billion) in 2017. Of the 2017 total exports of covered products, exports worth $20.9 billion were in agriculture, $66.5 billion were in manufacturing, and $7.6 billion were in energy. Products uncovered by the agreement—and thus with no targets for 2020 or 2021—made up 27 percent ($34.7 billion) of total US goods exports to China in 2017.

For Chinese goods imports, the deal is estimated to cover products that made up $109.2 billion, or 71 percent, of total Chinese goods imports from the United States ($154.9 billion) in 2017. Of the 2017 total imports of covered products, imports worth $24.1 billion were in agriculture, $78.3 billion were in manufacturing, and $6.8 billion were in energy. Uncovered products made up 29 percent ($45.6 billion) of total Chinese goods imports from the United States in 2017.

For both the US export data and the Chinese import data, the 2020 phase one commitments of additional trade (on top of 2017 baseline) are $12.5 billion (agriculture), $32.9 billion (manufactured goods), and $18.5 billion (energy). The 2021 phase one commitments of additionaltrade (on top of 2017 baseline) are $19.5 billion (agriculture), $44.8 billion (manufactured goods), and $33.9 billion (energy). These commitments are found in the agreement’s Annex 6.1.

To view the original tracker by PIIE, please click here. 

The EU’s Carbon Border Adjustment Mechanism: How to Make it Work for Developing Countries

The EU intends to introduce a carbon border adjustment mechanism (CBAM) by the end of 2021. While the exact design is not yet known, the CBAM would see a charge levied at the border, proportionate to the carbon emitted during the production of imported goods. From the EU’s perspective, a CBAM is necessary to ensure that its efforts to combat climate change are effective: that is, they do not result in carbon leakage, as energy-intensive industries relocate outside the EU’s regulatory jurisdiction and European production is outcompeted by cheaper, carbon- intensive imports.

However, the EU’s proposed CBAM risks unfairly penalising the exports of developing countries. While all countries should accept responsibility for tackling a shared global threat such as climate change, it is unreasonable to expect poorer countries to shoulder the same burden as those that are richer and have historically contributed a larger share of cumulative carbon emissions. This principle, termed ‘common but differentiated responsibilities and respective capabilities’, has guided the international climate negotiations so far. Under the Paris Agreement, for example, a country’s national circumstances can be taken into account when making its climate commitments. Furthermore, concerns about the CBAM’s impact on developing countries have already been raised in the WTO’s market access committee – with a particular focus on the EU’s public framing of its CBAM as a revenue raising tool, and a contributor towards the EU’s ‘own resources’ (as the EU institutions’ revenues are called), rather than as a means of addressing climate change.

The EU’s CBAM must be designed with developing countries in mind. Goods imported into the EU from the 46 least developed countries (LDCs), as defined by the UN, should be exempt from any CBAM levy. Such an approach would complement the EU’s existing unilateral preference scheme for LDCs, which offers duty and quota-free access to all goods imported from LDCs other than weapons – the ‘Everything But Arms’ (EBA) scheme. Excluding LDCs from the CBAM should not prove controversial with member-states, and is consistent with existing EU approaches to trade, as well as the EU’s broader development objectives.

For lower-middle-income countries such as India, Indonesia and Nigeria, which are much bigger contributors to global carbon emissions, the EU faces a tougher decision. Here the EU should build its approach on its existing unilateral preference schemes covering select lower-middle income countries: the standard Generalised Scheme of Preferences (GSP), which fully

or partially removes tariffs on two-thirds of tariff lines; and GSP+, which offers additional trade benefits to economically vulnerable countries if they implement 27 international conventions relating to the environment, human rights, labour rights and good governance. In line with existing GSP and GSP+ conditions, imported goods could be exempted from the EU’s CBAM only until they account for a significant share of the EU’s total imports. This would avoid penalising nascent industries in lower- middle-income countries, while ensuring that sectors that are already internationally competitive are treated as such.

The exemptions proposed in this paper should not compromise the CBAM’s raison d’être. Emissions from developing countries account for a small proportion of the CO2 embodied in final EU demand. As such, exempting their exporters from the CBAM would not undermine the EU’s attempts to prevent carbon leakage. Equally, even with exemptions, developing countries will still have incentives to transition away from polluting energy sources and processes. As countries and industries develop, they will graduate from exemptions. They would then have two options to remain exempt from the CBAM: either governments could put in place their own internal carbon pricing scheme, equivalent to the EU’s; or industries could use more carbon-efficient means of production than for equivalent goods made in the EU.

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To read the original policy brief from the Centre for European Reform, please click here 

China – Tariff Rate Quotas for Certain Agricultural Products: Against the Grain: Can the WTO Open Chinese Markets? A Contaminated Experiment

The US complaint about Chinese tariff-rate quotas (TRQs) on certain grain products helps illustrate several key issues in US–China trade relations and the effectiveness of WTO disputes. First, do international obligations based on transparency and fairness work in relation to an authoritarian country not known for the rule of law domestically? Second, can there be a disconnect between the legal aspects of a dispute and the underlying economic interests, with a DSB ruling sometimes not leading to improved trade flows? And third, given the bilateral trade war and ‘phase one’ trade deal between the United States and China, has the WTO been superseded in this trade relationship? This paper summarizes the facts and law of the China–TRQs dispute, and examines each of these questions in that context.

In the midst of the US–China trade war that has emerged over the last couple years, the prevailing view in Washington, DC policy circles is that WTO dispute settlement is only of limited value in addressing Chinese trade barriers. The US Trade Representative’s Office (USTR), the agency in charge of deciding whether to file WTO complaints, seems skeptical of the prospects: ‘The notion that our problems with China can be solved by bringing more cases at the WTO alone is naïve at best, and at its worst distracts policymakers from facing the gravity of the challenge presented by China’s non–market policies’ (US Trade Representative, 2018, p. 5). Part of the reason for this doubt is that in a non–transparent, authoritarian regime, eliminating a particular barrier may not lead to additional export sales, as it is easy for the Chinese government to put in place an alternative barrier (Groombridge and Barfield, 1999, p. 2; The Economist, 2020).

But conventional wisdom is not always correct. Surveys of WTO complaints against China show that the Chinese reaction to complaints and adverse rulings have been reasonably good (Bacchus et al., 2018; Zhou, 2019). At the same time, WTO disputes can be complex, and a superficial overview of the cases only tells you so much. In this paper, we dig deep into one particular case, in order to evaluate the impact of a US complaint about Chinese trade restrictions on certain agricultural products. As part of its accession to the WTO, China agreed to open its market to wheat, corn, and rice through a tariff-rate quota (TRQ). But 15 years later, US producers felt they were not getting what had been promised, as the TRQ was being administered in a way that left it unfilled. At the end of the Obama administration, US producers convinced USTR to file a consultations request with the WTO Dispute Settlement Body (Caporal, 2016). The complaint was pursued by the Trump administration, and a panel ruling was issued and adopted in 2019.

Beyond the issue of whether China complies with WTO rulings, there are several features of this dispute worth considering as part of the discussion of the legal and economic aspects of the case. First, do international obligations based on transparency and fairness work for an authoritarian country not known for the rule of law domestically? If China does not follow these principles internally, what can we realistically expect externally?

Second, is there a disconnect between the legal aspects and the underlying economic aims? The purpose of the complaint was to generate an increase in the quantity of US exports. But the legal provisions invoked do not refer to specific figures for exports, but rather to some abstract legal provisions about transparency and fairness. Could a finding of violation of such provisions lead to the export increases that the US producers were seeking?

Third, given the bilateral trade war and trade deal the United States and China are engaged in, has the WTO been superseded? Which set of rules – multilateral or bilateral – are most relevant here?

china-tariff-rate-quotas-for-certain-agricultural-products-against-the-grain-can-the-wto-open-chinese-markets-a-contaminated-experiment

To read the full article by the World Trade Review, please click here. 

 

The US Proposals On Digital Services Taxes And Minimum Tax Rates: How The EU Should Respond

OECD members are negotiating a global digital services tax and a global minimum corporate tax. EU member-states should support recent US proposals to conclude the talks.

Globalisation and digitalisation allow customers to use foreign digital services or purchase directly from foreign producers more easily, but current international tax rules mean that these producers can often escape paying corporate tax in countries where they make sales. As a result of their frustration about this situation, many countries, including large EU member-states such as France and Italy, have introduced digital services taxes (DSTs), setting them at odds with the US.

Under international tax treaties, a customer’s or user’s home country (referred to as the ‘market jurisdiction’) can generally only tax a foreign producer’s profits if the producer has a permanent establishment in that country, such as a fixed place of business. DSTs depart from this norm. But DSTs suffer from design flaws. They are typically a tax based on revenues, rather than profits, which can harm firms which are not yet profitable. DSTs generally apply only to digital services (DSTs define this differently), disadvantaging the digital economy over the offline economy. Finally, DSTs often include certain revenue thresholds that effectively single out large tech giants based in the US, rather than taxing domestic businesses. This causes friction with the US – the Office of the US Trade Representative has concluded that various countries’ DSTs discriminate against US firms, which may be a precursor to imposing retaliatory tariffs.

The 37 member-states of the Organisation for Economic Co-operation and Development (OECD) are currently negotiating a global replacement for national DSTs, aiming for a mid-2021 agreement. The OECD countries that already have DSTs have generally promised to revoke them in the event of an OECD agreement.

DSTs have been disparaged by many economists and raise relatively little income: for example, the French government estimated its DST would raise €400 million in 2020, which (based on 2019 corporate tax revenues) would amount to less than 1 per cent of corporate profit taxes. Nevertheless, DSTs have become totemic. Many governments believe – probably correctly – that the increase in the number of countries imposing DSTs makes the US more likely to change international tax rules to agree to a global replacement (and less likely to impose retaliatory tariffs). The EU member-states with DSTs generally want the global replacement to be a ‘market jurisdiction tax’, which would give the jurisdiction where a customer or user is located an agreed right to tax a share of a foreign producer’s profits.

The Biden administration has its own agenda in the OECD negotiations: the US is pushing a proposal for a global minimum corporate tax rate that could be applied in addition to a market jurisdiction tax. The minimum tax rate proposal would entitle countries to increase taxation on firms’ profits, if those profits were only taxed elsewhere below the global minimum rate. The intention is to reduce incentives for US firms to shift profits to low-tax countries.

On both these issues, a deal based broadly around the current US proposal is a realistic possibility and is in the EU’s interests.

On the DST issue, the US recently began supporting the principle of a market jurisdiction tax as a substitute for DSTs. But if the OECD negotiations fail to reach an agreement, DSTs will remain in place and their number will probably increase. Then the Biden administration would probably impose tariffs, triggering a new round of damaging trade wars. The design of the US proposal suits EU member-states: it allocates taxing rights between jurisdictions based on sales generated in that jurisdiction, which benefits countries with wealthy consumer bases. The proposal will probably only result in a minimal reallocation of the tax base away from those EU member-states in which the tech giants currently book profits (such as Ireland and Luxembourg). The proposal also corrects many of the defects of DSTs – for example, it would tax a share of producers’ profits, mitigating the impact on firms which are yet to achieve profitability. Most importantly, the proposal provides a face-saving path for EU member-states to remove their own DSTs.

US Proposals On Digital Services Taxes

To read the full insight piece by the Centre for European Reform, please click here. 

 

THE US PROPOSALS ON DIGITAL SERVICES TAXES AND MINIMUM TAX RATES: HOW THE EU SHOULD RESPOND

OECD members are negotiating a global digital services tax and a global minimum corporate tax. EU member-states should support recent US proposals to conclude the talks.

Globalisation and digitalisation allow customers to use foreign digital services or purchase directly from foreign producers more easily, but current international tax rules mean that these producers can often escape paying corporate tax in countries where they make sales. As a result of their frustration about this situation, many countries, including large EU member-states such as France and Italy, have introduced digital services taxes (DSTs), setting them at odds with the US.

Under international tax treaties, a customer’s or user’s home country (referred to as the ‘market jurisdiction’) can generally only tax a foreign producer’s profits if the producer has a permanent establishment in that country, such as a fixed place of business. DSTs depart from this norm. But DSTs suffer from design flaws. They are typically a tax based on revenues, rather than profits, which can harm firms which are not yet profitable. DSTs generally apply only to digital services (DSTs define this differently), disadvantaging the digital economy over the offline economy. Finally, DSTs often include certain revenue thresholds that effectively single out large tech giants based in the US, rather than taxing domestic businesses. This causes friction with the US – the Office of the US Trade Representative has concluded that various countries’ DSTs discriminate against US firms, which may be a precursor to imposing retaliatory tariffs.

The 37 member-states of the Organisation for Economic Co-operation and Development (OECD) are currently negotiating a global replacement for national DSTs, aiming for a mid-2021 agreement. The OECD countries that already have DSTs have generally promised to revoke them in the event of an OECD agreement.

DSTs have been disparaged by many economists and raise relatively little income: for example, the French government estimated its DST would raise €400 million in 2020, which (based on 2019 corporate tax revenues) would amount to less than 1 per cent of corporate profit taxes. Nevertheless, DSTs have become totemic. Many governments believe – probably correctly – that the increase in the number of countries imposing DSTs makes the US more likely to change international tax rules to agree to a global replacement (and less likely to impose retaliatory tariffs). The EU member-states with DSTs generally want the global replacement to be a ‘market jurisdiction tax’, which would give the jurisdiction where a customer or user is located an agreed right to tax a share of a foreign producer’s profits.

The Biden administration has its own agenda in the OECD negotiations: the US is pushing a proposal for a global minimum corporate tax rate that could be applied in addition to a market jurisdiction tax. The minimum tax rate proposal would entitle countries to increase taxation on firms’ profits, if those profits were only taxed elsewhere below the global minimum rate. The intention is to reduce incentives for US firms to shift profits to low-tax countries.

On both these issues, a deal based broadly around the current US proposal is a realistic possibility and is in the EU’s interests.

On the DST issue, the US recently began supporting the principle of a market jurisdiction tax as a substitute for DSTs. But if the OECD negotiations fail to reach an agreement, DSTs will remain in place and their number will probably increase. Then the Biden administration would probably impose tariffs, triggering a new round of damaging trade wars. The design of the US proposal suits EU member-states: it allocates taxing rights between jurisdictions based on sales generated in that jurisdiction, which benefits countries with wealthy consumer bases. The proposal will probably only result in a minimal reallocation of the tax base away from those EU member-states in which the tech giants currently book profits (such as Ireland and Luxembourg). The proposal also corrects many of the defects of DSTs – for example, it would tax a share of producers’ profits, mitigating the impact on firms which are yet to achieve profitability. Most importantly, the proposal provides a face-saving path for EU member-states to remove their own DSTs.

US Proposals On Digital Services Taxes

To read the full insight piece by the Centre for European Reform, please click here. 

 

Mapping policies affecting digital trade

Digital technologies are transforming economies, social discourse, and political dynamics around the world. Commercial activity can be coordinated over much greater distances, allowing for much more fine-grained specialisation of tasks and spurring the development of cross-border supply chains. Opportunities to source from a wider range of suppliers have enhanced choice and created opportunities for entrepreneurs at home and abroad, widening the base of those gaining from international trade.

The social consequences of the spread of digital technologies have been profound too, a fact that has also influenced trade policy deliberation. Individuals and families can maintain ties much more easily than before, but some would argue at the cost of their privacy. New avenues for influencing and disrupting political campaigns have raised hard questions about the robustness of democratic processes. In many respects, these developments have been accelerated by the reactions to the COVID-19 pandemic, where digital technologies have fostered human interaction at a time when physical proximity has been strongly discouraged.

That the success of business models based on digital technologies is so uneven has inevitably linked the governance of digital technologies – at home, regionally, and globally – to national rivalries. Cross-border commerce facilitated by digital technologies has taken off while traditional trade and investment flows remains in the doldrums, further reinforcing the sense that some nations are winners and others losers from the spread of these general-purpose technologies. That a small number of large, high-profile firms are associated with these technologies combined with the perception that they operate in winner-takes-all markets motivates calls for a new round of regulation.

Unsurprisingly, then, these developments have not escaped the notice of policymakers, who seek to shape both the outcomes of such sustained and pervasive technological change as well as the organisations – both private and public sector – that are taking these developments forward (WTO 2020). With so many areas of law and regulation capable of influencing different aspects of digital technologies, government ministries and national and sub-national regulatory agencies often move at different speeds to enact and implement initiatives. It is far from evident that these initiatives have been coordinated, that much thinking beyond silos has occurred, and that policy is being grounded in the best available information.

A major problem in this respect is the lack of comprehensive accounts of the range of policies that affect the digital economy which can be meaningfully compared across jurisdictions. There are no accepted measures of digital trade policy stance, as there are in monetary policy for instance. Nor are there widely accepted outcome measures upon which to judge policy. It would be incorrect to assert that all policy towards the digital economy is being made ‘on the hoof’, or that policy deliberation is taking place in an empirical vacuum. However, when compared to the important task of macroeconomic management, policymakers seeking to shape the future course of the digital economy have little by way of qualitative and quantitative evidence to go on.

The past decade has seen industry associations,2 international organisations,3 research institutions and think tanks,4 analysts,5 and indeed some governments6 assemble pertinent information on policies affecting the digital economy and, in a few cases, analyse their consequences. However, little by way of structured comparison of policy stance can be found to inform policymaking, and this largely reflects the large upfront and recurring costs of collecting information on the many different types of what are often referred to collectively as digital trade policies.

Officials often bemoan the lack of empirical evidence to guide and prioritise decision making but they rarely reflect on why this unsatisfactory situation has come to pass. That digital trade policies implicate many areas of economic law raises the entry barrier to data collection, in particular for individual scholars. In an era when datasets can be readily downloaded, unless there is the prospect of a massive academic breakthrough, few – if any – researchers have an incentive to devote the time to collecting large datasets. The opportunity cost is simply too great.

The career incentives of officials at international organisations tend to value quick wins over undertaking multi-year investments in forensic data collection. Many governments also withhold cooperation from the few information collection initiatives that public sector international organisations try to pull off. That many governments fail to back their fine words about the importance of policy transparency with resources to assemble information on digital trade policy choice also contributes to the dearth of reliable data. There are very good reasons for the under-supply of the global public good of transparency in digital trade policy.

The Digital Trade Estimates (DTE) project of the European Centre for International Political Economy (ECIPE) and the OECD’s Digital Services Trade Restrictive Index (D-STRI) are notable exceptions although, as we argue later, their focus should be expanded to better meet the needs articulated by policymakers, civil society, and the business community. Indeed, in our view, some existing approaches to evidence collection on digital trade policies may have rushed too quickly to quantification before reflecting sufficiently on the very purpose of such information collection.

As is so often the case, the absence of a weak empirical base has not deterred trade negotiators from including provisions on electronic commerce in regional trading agreements. The Comprehensive Economic Partnership Agreement (CEPA) recently negotiated between Japan and the United Kingdom is a case in point.7 Moreover, one of the so-called Joint Statement Initiatives being negotiated among a subset of the WTO membership relates to certain aspects of public policy that implicate electronic commerce.8 Whether the provisions negotiated address the most important obstacles to digital trade is not a question that appears to faze trade negotiators.

The growing number of inter-governmental disputes over digital taxes and the like do not appear to be grounded in comprehensive assessments of what is at stake. In this respect, digital trade policymaking is probably no worse than other areas of trade policy – admittedly a weak test. Still, it is a far-cry from the gold standard of evidence-based policymaking, especially for commercial activities upon which many persons’ livelihoods increasingly depend.

The premise of this chapter is that policymaking towards the digital economy, and towards digital trade in particular, would be improved if it were better grounded in evidence. Given many governments around the world are devising and revising policies towards the digital economy, an important part of that evidence base involves structured and meaningful comparisons of relevant public policies across jurisdictions. To that end, a cross-country mapping of pertinent laws, regulations, and their implementation needs to be developed and implemented in a rigorous and sustained manner. The central purpose of this chapter is to outline what such a mapping could involve, drawing upon the strengths and weaknesses of three high-profile attempts to track relevant policies that were, by and large, devised for other purposes.  

The remainder of the chapter is organised as follows. The next section discusses why bother at all mapping policies affecting the digital economy. We argue that there are ten distinct compelling reasons, each of which can inform different aspects of policymaking. Then, in the third section, we discuss three high-profile initiatives to assemble information on policies affecting digital trade. We argue in the fourth section that attribute-based mappings will generate more policy-relevant information than the form-based mappings assembled to date. The fifth section of the chapter explains how such an attribute-based mapping could be implemented. Concluding remarks are presented in the final section of the chapter.

Mapping Policies Affecting Digital Trade

To read the full paper by Global Trade Alert, please click here.