By Greg Ip
The rise of technology giants such as Amazon.com Inc. and
Facebook Inc., like the rise of Chinese state capitalism, is
disrupting national economies in ways that international tax and
trade rules were never designed to handle.
Ideally, like-minded nations would join and rewrite the rules to
handle these new forces. Events this week, however, suggest that
individual nations are choosing to go it alone, further undermining
the world-trading system.
On Monday, the Trump administration threatened steep tariffs on
France in retaliation for its digital-services tax. It complained
France imposed a unilateral, legally dubious remedy on a global
problem requiring a global solution.
That is more than a bit ironic. Last year President Trump
enacted his own unilateral, legally dubious solution to a global
problem: tariffs on imported steel in response to a global supply
glut originating in China. On Monday he said those tariffs would
extend to Brazil and Argentina.
Whoever "wins" the showdowns over digital tax or steel is beside
the point. The proliferation of unilateral remedies pushes the
world closer to a "power-based, rule-of-the-jungle
might-makes-right system," said Jennifer Hillman, a trade expert at
the Council on Foreign Relations.
As far back as 2015 a task force operating under the auspices of
the Organization for Economic Cooperation and Development, an
association of 36 mostly developed countries, identified
digitization as an important source of multinational company tax
avoidance.
Currently, a company typically needs a physical presence to owe
the host country corporate or value-added taxes. That means a U.S.
social media site can accumulate millions of French users who
supply it with data and content, then sell ads to French companies,
without setting foot in France or paying taxes to it.
So in 2016 a new OECD task force representing more than 100
countries, including France and the U.S., began working on
proposals to update international standards for taxing electronic
commerce. At France's urging, the European Union in 2018 proposed a
tax on revenue of cross-border digital-service providers. But the
proposal didn't draw the necessary unanimity among members. So this
year France enacted its own 3% tax.
"These giants use your personal data and make significant profit
from it, without paying their fair share of tax," Finance Minister
Bruno Le Maire said. He made it clear the intent was to pressure
the rest of the world, including the U.S., to adopt a common
solution: "When France shows its will, that's when things
change."
Lilian Faulhaber, a Georgetown University law professor who has
advised the OECD's international tax initiatives, said the Trump
administration and Congress are supportive of the OECD task force.
But she said the OECD didn't appear to be moving fast enough for
France, which faced domestic pressure to act, including from the
yellow-vest street protesters.
U.S. Trade Representative Robert Lighthizer launched an
investigation under the "Section 301" trade law, which targets
other countries' unfair trade practices. This week the U.S.
concluded the tax was designed to hit only U.S. companies such as
Alphabet Inc.'s Google, Apple Inc., Amazon and Facebook while
sparing French companies -- and was therefore discriminatory. It
also accused France of undermining the OECD's effort.
Ms. Hillman, who was previously a judge for the World Trade
Organization, said the French tax is really a tariff, and if the
U.S. had brought a case against France at the WTO, it probably
would have won. "But this administration prefers tariffs. They
prefer the 301 unilateral approach."
In France's defense, the country has usually championed
multilateralism. By contrast, unilateralism is the hallmark of Mr.
Trump's approach, in steel, cars and his trade war with China.
Meanwhile, he has blocked the appointment of new judges to the
WTO's appeals panel. In a few days that could leave the countries
who win their cases at the WTO unable to enforce them.
Like the French tax on digital services, U.S. tariffs on steel
and China are rooted in legitimate grievances. For example, China's
largely state-owned steel sector went from 14% of global capacity
in 2000 to 50% in 2015. A flood of cheap Chinese steel pushed down
prices globally and sent many countries' steel into the U.S. The
OECD convened a committee that included China to resolve the
problem. Until recently, there was little apparent success on the
issue.
Mr. Trump, intent on propping up U.S. steelmakers, imposed
tariffs on almost all imports under a law meant to safeguard
national security. Canada and the EU retaliated without waiting for
the WTO to act, betting, like France with its digital tax, it would
get the U.S. to listen.
But Canadian trade attorney Mark Warner said, "In responding to
Trump's muscular unilateralism with muscular unilateralism of their
own, they undercut the rules-based multilateral system that they
say they believe in."
France, the U.S., Brazil and Argentina may yet reach some sort
of truce to avoid the type of trade war now raging between the U.S.
and China. Ms. Faulhaber said unilateral measures such as France's
may push more countries to the table to reach an international
solution.
But they won't be the last challenges. Climate change, cyber
hacking and technology-enabled espionage are all disruptive forces
that transcend borders -- and individual nations will be sorely
tempted to pursue their own solutions if international cooperation
fails.
"Whatever else comes from living under this law of the jungle
system, it's total chaos," said Ms. Hillman. "It's very bad for
world-wide growth to be living under all this chaos. You used to be
able to count on the rule of law, and now you can't."
Write to Greg Ip at greg.ip@wsj.com
(END) Dow Jones Newswires
December 04, 2019 09:38 ET (14:38 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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