Chrysa K. Kazakou

Does Leaving the WTO Achieve U.S. Trade Objectives?

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Posted by Philip Thompson, Chrysa K. Kazakou on Thursday, June 4th, 2020, 3:11 PM PERMALINK

Ronald Reagan paved the path to the WTO. Motivated by an ambition to counter unfair trade, Reagan declared “if trade is not fair for all, then trade is free in name only. I will not stand by and watch American businesses fail because of unfair trading practices abroad.

I will not stand by and watch American workers lose their jobs because other nations do not play by the rules.” Later Reagan launch the Uruguay round GATT negotiations that eventually concluded with the forming of the WTO in 1995 charged with guarding a rules-based trading system with a focus on reducing barriers to trade. Through his insistence negotiating objectives included dramatic lowering of global tariff rates, ensuring national treatment of traded goods, and protection of intellectual property.

By no means has the WTO achieved free-trade or eradicated all unfair trade practices. Recently, Senator Josh Hawley raised some common shortcomings of the WTO in a NYT op-ed, and concluded that it should be abolished. His concerns center on the fact that China, which acceded to the WTO, continues to violate the international trade system's norms without making expected market or democratic reforms. He notes that China uses forced labor and theft of intellectual property with impunity. In return, he claims, the U.S. has seen a flight of jobs overseas, and U.S. agriculture has been undercut at home due to imports.

This contrasts with what Trump’s chief trade negotiator, Robert Lighthizer, testified to the Senate Finance Committee that “if we did not have the WTO, we would need to invent it” as it “offers many opportunities for the United States to advance our interests on trade.” It is also not legally possible to abolish the WTO unilaterally. Instead, a few days later, Hawley introduced a bill to take the U.S. out of the WTO. Such a joint resolution is unamendable, does not require committee approval, and cannot be delayed. In other words, if Hawley’s resolution reaches the Senate floor within 90 legislative days after the submission of USTR’s February 28 report, it will force a Senate referendum on the merits of the United States remaining in the WTO.

Hawley’s concerns are legitimate. It’s worth considering if leaving the WTO would resolve the issues he raises while avoiding harmful unintentional consequences.

Overall, since the founding of the WTO, global tariffs have been cut in half, global trade increased from $58 billion in 1948 to above $20 trillion today. Global trade openness, the sum of imports and exports as a share of global GDP increased from 5 percent to 22 percent (peaking just before the financial crisis). U.S. has reaped the most economic value from membership adding $87 billion to the economy. While those left outside the WTO have seen their exports decrease and GDP contract.  

Inside the WTO, U.S. exports benefit from a relatively low Most-Favored Nation tariff rate imposed by partners and U.S. importers from a very low average 3.3% MFN tariff rate imposed by Washington D.C. Outside the WTO, imports to the U.S. will face an average 32% tariff rate. U.S. exports will also face discriminatory tariff rates imposed by other countries and designed with same goal in mind- to encourage membership in the trade organization. 

Inside the WTO the U.S. benefits from lower trade barriers with all 164 country members, allowing our market-based economy to concentrate on working to its comparative advantage. Since joining the WTO, industrial output increased 50%, 32 million jobs have been added, and nonfarm compensation has risen 32%.

As a member of the WTO the U.S. has access to a predictable process-oriented dispute resolution system. The U.S. wins 85.4 percent of its WTO dispute cases. In particular, the United States gets good results, when defending its own policies towards China. Between 2002-2018 the US had won 11of out 24 cases against China.

Indeed, the system could be improved to further restrain bad actors, reform appellate panel decisions, and address unresolved trade barriers such as subsidies and e-commerce. Outside the WTO, the U.S. will be immediately hit with higher tariffs and be exposed to an even more illiberal trade order. It would create radical uncertainty in the markets undermining our comparative advantage and provide little certainty towards resolving trade disputes.  

Persistent, illicit trade practices and stalled reforms at the WTO seriously hinder American importers and exporters from experiencing the full benefits of a free market. However, it is not clear that withdrawal from or abolishment of the WTO will resolve these issues or avoid creating new barriers.

Photo Credit: Tom Fisk

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Brazil Is Entering The Digital Tariff War

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Posted by Chrysa K. Kazakou on Wednesday, May 20th, 2020, 1:36 PM PERMALINK

On May 4, the Bill 2358/2020 was introduced to Brazil’s House of Representatives for creating a federal digital revenue tax, called the Contribution for Intervention in the Economic Domain – Digital “CIDE-digital.” Both chambers of the National Congress composed of the Federal Senate and the Chamber of Deputies, still need to discuss and approve the bill, in different voting rounds. A global push to tax the digital services of Silicon Valley tech companies is giving the impression of a new tariff war.

Brazil’s digital tax would apply to entities domiciled in Brazil or abroad earned in the previous-year global revenues, exceeding approximately $600 million. “CIDE-Digital” also would be levied to the sale of advertising on a digital platform to users located in Brazil. The digital tax would be imposed progressively on gross revenue from taxable supplies as follows: zero to BRL 150 million: 1.0%, BRL 150 million to BRL 300 million: 3.0%,over BRL 300 million:5.0%.

The Brazilian tax system is globally known for its enormous complexity. This tax reform will affect how the world’s largest economies tax all multilateral businesses. The tax framework needs new approaches that could be found by close consultations with the companies themselves, recognizing the complexity of the digital economy.

According to  International Trade Barrier Index that ranks a total of 86 countries on their use of trade barriers, Brazil has a score of 5.02 with 10 indicating the highest use of trade barriers. Data reveal that Brazil is the most isolated economy in the G-20 Group.

The European Commission had also proposed a turnover tax rate of 3 percent on revenues derived from online advertising services, online marketplaces to businesses with annual worldwide revenues of $868 million, and total EU revenues of $58 million. However, the proposal was laid aside in early 2019, because several EU member states opposed the tax. The new European Commission has announced that if the OECD does not reach an international agreement on the taxation of the digital economy in 2020, it will restart its work on the DST.  Similar to the EU proposal, France’s DST is levied at a rate of 3 percent and applies to online marketplaces and online advertising services.

The UK proposed a 2 percent tax on revenues thresholds set at $638 million globally and $32 million domestically. The tax went into effect in April 2020. In Chile also services provided in digital form will be subject to 19% VAT starting in June. Chileans will have to start paying almost a fifth more for video streaming service Netflix in June.

The revenue-based taxes on large digital corporations can reduce international trade and commerce. The progress from physical to digital domains requires creative taxation, which complies with bilateral tax treaties. Applying a tax to revenues unconnected to economic value creation violates prevailing international tax fundamentals.

Photo Credit: Sergio Souza

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