The digital tax brawl that Joe Biden must resolve

Hello from Brussels. It would be an exaggeration to say that EU trade policy is the talk of the town here at the moment rather than the extraordinary events in Washington DC. But now that Joe Biden has been certified president, at least the preparations for trying to put together a constructive plan with his administration are that little bit more concrete.

Today’s main piece is on how the digital services tax, so disliked by the Trump administration, is a very good test case of whether some combination of multilateral agreements, bilateral talks and even measured litigation-as-negotiation can be used to prevent a dispute spiralling into a trade war. Charted waters examines how the souring of relations between Washington and Beijing has led Taiwanese companies to reshore their Chinese operations, while Tit for tat asks Cambridge university’s Lorand Bartels what the next steps are for the UK and the EU.

Trump bequeaths Biden a trade row over tech

Last week, understandably overshadowed by a violent insurrection in the nation’s legislature, the Trump administration took an unusual decision on trade. It decided not to hammer the EU — specifically France — with tariffs because of its digital services tax (DST) even though it had given itself the power to do so.

This might look like US trade representative Robert Lighthizer improbably going all squidgy and genial in his last few weeks in the job, but to us it seems more likely to be tactical. The decision defers the tariffs only until the US can work up similar hit lists for a bunch of different countries that have also imposed or considered tech taxes — a list that includes several EU member states.

That decision will now pass to the Biden administration, part of a series of ongoing or upcoming trade battles with the EU bequeathed by Trump. These will, at the very least, complicate the new White House’s ability to construct a common rules-based, China-focused position on trade with Brussels.

The conventional wisdom used to be that Trump cared a lot more about steel than tech, but as far as his administration was concerned, a fight with Europe was usually a fight worth having. And the assault on the DST was a Lighthizer special — aggressively litigious but of doubtful World Trade Organization legality, and of course entirely unilateralist. In 2019 he appeared to ambush even his own Treasury secretary, Steven Mnuchin, who was trying to negotiate with his fellow finance ministers an international version of the tax at the OECD, with the results of a “Section 301” investigation into whether the French DST was unreasonable or discriminatory.

Robert Lighthizer, US trade representative, speaks during a Senate finance committee hearing in June 2020 © Bloomberg

To no one’s amazement, the US found that the DST did indeed discriminate against American companies, and the USTR prepared a list of handbags, cheese, champagne and other notoriously French products to hit with 25 per cent tariffs. Those were the duties it last week deferred.

This chalice has now been handed on to Biden. He may not be Mark Zuckerberg’s biggest fan, but pulling out of the DST case looks weak, especially since France resumed collecting the tax in December. Obviously the US can try to make progress in talks at the OECD, showing that multilateralism can work, but there are never any guarantees of success there.

If negotiation fails and the US imposes Section 301 tariffs, the EU’s burgeoning collection of trade defence instruments may well get put to use. If Brussels brings a WTO case (it will) and the US loses and appeals to a WTO appellate body it hasn’t got around to reviving, the EU can use its new enforcement tool to hit back with tariffs anyway. If this or subsequent Section 301 cases drag on long enough for the EU to get a new anti-coercion instrument up and running (probably next year), Brussels can hit back unilaterally without bringing a WTO case at all. But that anti-coercion action will itself probably be met by US WTO litigation, maybe immediate retaliation, and the whole thing could escalate.

Neither side wants it to get that far. They’d rather be concentrating on a joint effort to constrain China. This case will probably test whether the Biden administration and EU can take one or more off-ramps — multilateral talks, a negotiated bilateral agreement between Washington and Brussels, the normal process of WTO litigation — rather than the US feeling itself compelled by domestic pressure to go full Lighthizer, whack on unilateral tariffs and damn the consequences.

It’s only one of the actual or potential trade conflicts with Brussels that Biden will inherit.

Jake Sullivan, Biden’s forthcoming national security adviser, gave no guarantees in a recent interview even that the administration would immediately lift the patently absurd (Trade Secrets’ words, not his) steel and aluminium tariffs on the EU. Brussels’ plans for carbon border taxes, which we’ll come back to, are another potential point of friction. In his previous incarnation as policy planning director to then secretary of state Hillary Clinton, Sullivan was all about a move towards “economic statecraft”, combining economic and geostrategic policy. Well, now’s his shot at making it work, and the DST is just one of the big challenges involved.

Charted waters

Kathrin Hille, our Taiwan correspondent, has an interesting read out today on how trade tensions between the US and China have led to reshoring by Taiwanese companies.

Kathrin writes that their default strategy of manufacturing in China has been undermined by Washington’s trade war with Beijing and efforts to pry the country out of global supply chains. Add to that higher labour costs and the removal of some incentives by Beijing and most of Taiwan’s leading contract electronics manufacturers are now relocating parts of their supply chains to south-east Asia and India, as well as back home.

The chart illustrates the scale of the fall in investment by Taiwanese groups and the sharp drop-off in remittances from China to Taiwan.

Tit for tat

Lorand Bartels has no doubt that the UK will conclude many new agreements with countries around the world but says the question is how valuable they will be

Lorand Bartels, reader in international law in the faculty of law, University of Cambridge, joins us to answer three quick questions about Brexit.

1. Brexit will not end with the deal. Arrangements in other areas not covered by the terms of the deal will need to be revisited. Which of these arrangements are the most important? 

I would focus first on making sure that the various headings in the TCA (the EU-UK trade and cooperation agreement) are followed up with solid content. Too often, they are not. Partly, this is because of raw protectionism, especially in services, perhaps inevitably. But trade under the TCA is also limited because the UK and EU have not yet agreed on mutually acceptable standards. Financial services, digital services and agricultural imports — these can be traded only if they meet accepted standards, which can mean that they cannot be traded at all. This should be fixable.

2. Even if standards can be agreed, they need to be enforced. How will that work? 

The EU prizes its tools for ensuring that its member states are able to trust each other (which is not to say these tools never fail). But now these tools are largely gone for the UK. This makes a difference. For example, the EU says that it can no longer trust UK quality control for products, even when testing is against EU standards. This is not because UK quality control is unreliable, but because the EU feels that it cannot do enough about it if it becomes unreliable. The same applies in other areas, including services. Again, this should be fixable, but for many sectors this requires some original thinking.

It is not only about any given missing sector, but also about finding new institutional mechanisms to give effect to goodwill, flexibility and trust between the UK and the EU so that they can trade more freely in all of them. 

3. Some in the UK believe that, post-Brexit, deals can be struck farther afield, in Asia-Pacific for instance, how likely do you think this strategy is to bear fruit?

I have no doubt that the UK will conclude many new agreements with countries around the world. The question is how valuable they will be. It is no accident that most of the important target markets were already covered by EU agreements, and the UK’s work in replicating these is accordingly of paramount importance.

What remains, in terms of maximum value, are agreements with Australia, and above all with the US. An agreement with Australia should be relatively straightforward (famous last words)! But an agreement with the US is politically much trickier. It will depend — at a minimum — on a politically acceptable compromise on agricultural market access (for the US) and agricultural standards (for the UK). There may be a workaround, if both the UK and the US join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, but this has its own challenges — not least within the US.

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Source: Economy - ft.com