Wednesday, June 3, 2020

GAFA tax in the news again - USTR initiates investigation on a host of countries

I had blogged earlier about the tax on digital technologies that several countries are imposing and the possible impact it could have on international commitments.

The USTR in a press release today has decided to have a Section 301 investigation on digital taxes by its trading partners including Austria, Brazil, India, Turkey, Indonesia, Italy and Spain. The press release says this:

The United States Trade Representative announced today that his office is beginning investigations into digital services taxes that have been adopted or are being considered by a number of our trading partners. The investigations will be conducted under Section 301 of the 1974 Trade Act. This provision gives the USTR broad authority to investigate and respond to a foreign country's action which may be unfair or discriminatory and negatively affect U.S. Commerce. A Federal Register notice is being issued today providing details of the investigations as well as information on how members of the public can provide their views through written submissions.

The Federal Notice register is out here and a request for public comments has been made.

The main purpose of the investigation on Digital Services Tax (DST):
The investigation initially will focus on the following concerns with DSTs: discrimination against U.S. companies; retroactivity; and possibly unreasonable tax policy. With respect to tax policy, the DSTs may diverge from norms reflected in the U.S. tax system and the international tax system in several respects. These departures may include: extraterritoriality; taxing revenue not income; and a purpose of penalizing particular technology companies for their commercial success.

And the WTO angle for public comments in the Federal notice:
Whether one or more of the covered DSTs is inconsistent with obligations under the WTO Agreement or any other international agreement.
Currency manipulation was a likely cause for friction in the last decade in international economic relations. Are digital taxes the new friction point?  

Tuesday, June 2, 2020

What attracts FDI actually?

Attracting Foreign Direct Investment (FDI) has been the focus and continues to be a priority for many national and sub-national governments the world over. Providing the right incentives to attract FDI has also been part of the policy debate. What are the right bouquet of incentives to boost FDI? What actually attracts FDI? Should incentives be sector specific or across the board? How do we evaluate their impact? Do incentives really matter?

Hania Kronfol in this blogpost in the Columbia FDI Perspectives explains that tax incentives to attract FDI should be crafted intelligently and with a purpose.

On the need to use tax incentives sparingly and not as a general policy tool:
Use tax incentives sparingly to address identified market failures. The purpose of granting tax incentives should be clearly defined. Is the primary objective to create more jobs, promote the absorption of foreign technology or diversify the economy through investment in new sectors? Once the objective is articulated, policymakers should identify the underlying barriers and market failures (e.g., underinvestment in public goods, skills mismatch or incomplete information to link foreign firms and domestic firms); evaluate whether tax incentives can effectively change investors’ behavior to address these barriers and failures; and assess whether tax incentives are optimal, considering other measures 2 (e.g., legal or regulatory changes, broader reform of the tax system or direct government investment in public goods)....
On using merit based incentives rather than non-performance linked tax incentives:
 Directly link incentives to defined policy objectives. Developing countries, in particular, rely on profit-based tax incentives, such as tax holidays and corporate income tax reductions, for FDI promotion. These instruments generally do not result in cost-efficient outcomes as they confer a blanket benefit, often based on upfront granting mechanisms, rather than actual investor performance. Instead, governments should consider shifting to merit-based incentive instruments, such as investment allowances, tax credits and accelerated depreciation. These tools have the advantage of directly tying incentives to targeted outcomes, e.g., by providing allowances for R&D expenditures or tax credits for staff training programs. 
On strategic targeting of investors rather than spreading oneself too thin:
Target investors strategically. Policymakers first need to prioritize the type and quality of FDI they seek to attract, and then identify the subset of investors that are most responsive to incentives. Developing cost-efficient incentive schemes largely rests on identifying which type of investors ultimately decide to invest in one country over another because of tax incentives. Globally, incentives are more influential in attracting efficiency-seeking FDI, which is export-oriented, since such investors are mainly driven by competitive cost advantages in host countries, as opposed to natural resource- or market-seeking FDI....
FDI incentivisation ahs been at the centre of industrial policy for a long time in many developing countries for a long time now. But what exactly ensure FDI incentivisation - a good Bilateral Investment Treaty, stable political environment, a transparent regulatory atmosphere, an encouraging market, value chain advantage or just good schools and social environment?

Monday, June 1, 2020

Technology, protectionism and a debate in Europe

Protectionism in the world of technology is a raging topic. Should countries strive for technological "independence"? Should reliance on foreign technology providers be viewed as economic dependence and a threat to sovereignty? Is autonomy truly served by being the originators of technology rather than beng mere users? Should countries develop national players in technology to compete with foreign technology bigwigs?

The above questions plague many national governments. What should an appropriate national industrial, technology policy espouse - openness or protectionism or a mix? How should that translate into international trade agreements and national negotiating positions?

An informative policy paper on technology sovereignty in the context of Europe's debates on data protection, privacy, sovereignty can be found here on the ECIPE website.

On rising global powers like India and China:
There are three important takeaways for Europe as policy-makers consider their options. First, neither Europe nor the US will be able to rely on their own market size as the main source of maintaining autonomy, sovereignty and influence in the global economy. Other countries, e.g. Japan, are confronted with the same reality. Rising powers like China and India may gain tremendously in market clout and increase political pressure on others to conform to their laws, rules and norms, but none of them will come close to the same dominance in global rulemaking that the US and Europe had in the period that followed the Second World War. Global economic power will be rather more distributed.
 On having independent, national payment gateways to challenge the Visa and Mastercards of the world (I was reminded of the WTO dispute on payment systems):
Launched in November 2019, around 20 European banks from eight Eurozone countries are now supporting a new European payment system to challenge leading non-European payment services providers such as Visa, MasterCard, AliPay, Apple, Google and WeChat Pay. Banks headquartered in Germany and France make up a large share of this “European Payment Initiative” (EPI) project membership. A decision on whether or not to pursue the EPI is expected at the earliest in mid-2020.
On how foreign technology is not bad after all: 
However, the Covid-19 crisis has shown that reliance on foreign technologies is not a threat to European autonomy. First, during the confinement period technologies and tech companies made Europeans – and their governments – stronger. Technology kept Europe open for business despite the lock-down by enabling Europeans to work from home, access to computing power via cloud solutions, receive essential home deliveries, home schooling, online banking, etc. Europe’s citizens became more sovereign with respect to accessing information and authorities used data to track and contain the spread of the virus. 
On the inevitable aspect of retaliation of trade wars: 
Protectionist approaches like taxes on digital services or AI licensing obligations would generate negative market responses from other parts of the world. European firms – beyond those that provide technology and digital services – would be at risk of losing market access abroad simply because foreign governments would retaliate. European firms that sell goods and services abroad are at risk of being confronted with market-access restrictions because they have used inputs that are derived from a market that has been regulated to shut foreign firms out. 

 A great read to understand Europe's data dilemma! But it has lessons for national governments the world over. Atleast a debate should start.

Sunday, May 31, 2020

Role of the State - back to the same question

The debate between the roles of the State and the Market is a long standing one. How much of State intervention one regards as optimum varies depending on the economic philosophy one espouses. There is also examples of different types of state intervention ranging from monopoly to ownership to regulation to facilitation.

Do countries with more state intervention handle emergencies better? Is state capacity better in market oriented economies?

Meijun Qian argues in this piece that countries with stronger state presence are handling the pandemic better whether in procurement of medicines/equipment or enforcing social distancing.  We need a balance when talking about the role of States and market in managing crisis and this what she offers:

China and the United States are on opposite ends of the spectrum when it comes to state capitalism versus the free market. Scandinavian countries and other Asian countries like Singapore and South Korea are relatively more balanced. These countries also responded to COVID-19 more effectively than the United States. 
The optimal performance of an economic system might require a balance between state and private ownership. This balance could be especially crucial for sectors that are vital to social stability.
Sound slike the middle path in the debate between the State and the market. I think there s no doubt about the important roles the state and markets play in economies. The question is how much of what and where! 

Wednesday, May 27, 2020

Of saviours, survivors and running the system

This para from the ECIPE website piece on who next as the WTO DG perhaps epitomises the state we are in, in term sof international trade governance:
The challenges are everywhere. The Organization lacks political leadership amongst its membership. Trade wars look like they could easily get out of hand. The Appellate Body has become defunct, threatening the WTO’s dispute settlement function. Trade negotiations are largely at an impasse. Calls for reform of the WTO have fallen on largely deaf ears. Countries are distracted by the Covid-19 pandemic which, in the trade sphere, has uncovered the fragility of global supply chains, led to increases in export restrictions and spawned massive subsidisation. There are even calls in the United States, the historical progenitor of the GATT and the WTO, to withdraw from the organization. International economic cooperation has reached a nadir.
The ECIPE website summarises this when discussing what kind of person can lead the WTO next. A saviour or a survivor? 

A saviour would be high-profile, carrying political weight, being able to talk to world leaders on the state of affairs, a political leader herself/himself and one who can take the fight to the next level to maintain the interests of the international organisation.

A survivor would probably be a diplomat/technocrat who can carry on with the day to day running of the institution, implement the existing agreements amidst the gloom and attempt to move the slow ship of negotiation at the proverbial glacial pace.

Whether a saviour or survivor - it is going to be a challenging one to keep the momentum going.

By the way, the WIPO has a new DG elect - Daren Tang from SIngapore will be the new DG in WIPO from October 2020.

Change of guard all around.

Tuesday, May 26, 2020

International Trade 101 - The Rushford Report

Need some basic classes in international trade - here it is the Rushford Report lays it out in a 3 part series - 

Chapter I - Introduction to International Political Economy

Chapter 2 - Class 2 

Chapter 3 - Class 3 

Easy flowing talk, with practical examples of international trade impacting ordinary lives and the importance of remaining open. One may not agree with all the assumptions made, but the sheer depth of variety on US trade policy is enlightening.

A good international trade 101 exercise!

Monday, May 25, 2020

TradeRx Report - A new blog on IP and international trade

Came across this interesting new blog on international trade and intellectual property. Called the TradeRxReport it offers a look at the intersection of IP, international trade and trade agreements.

Run by Doris Estelle Long and Srividhya Raghavan, it is one of the few blogs that seeks to explore the IP-trade link. 

Looking forward to more nuanced discussion on the various agreements that the blog intends to cover from TPP to RCEP! 

With TRIPS plus provisions the centre of debate in various plurilateral and multilateral agreements, the area is ripe for a discussion!