Most governments, hating low taxes, have just endorsed the Biden-Yellen proposal to create a world minimum tax cartel of at least 15%. Meanwhile, the Biden administration hasn’t bothered to renew Trade Promotion Authority, underlining its indifference to expanding US trade abroad. Nor, in a policy that benefits China, has it stopped knee-capping the World Trade Organization’s Appelate Body. But in two modest signs of rationality in Washington, seven Republican senators are calling for scrapping the Section 232 tariffs on US allies, and the Biden administration is at least now talking of increased trade with Taiwan, if otherwise doing nothing concrete yet.
The June 28th to July 4th, 2021 roundup of major trade developments, with L.C.
The president’s Trade Promotion Authority expired on June 30th. TPA gives a president the power use fast-track procedures to submit a trade agreement to Congress. Under fast-track, a free-trade agreement (FTA) has a better chance of being approved because (1) it can’t be amended and (2) debate is limited, which means it can’t be filibustered.
If TPA isn’t in place, other countries are less eager to negotiate a trade deal with the US since it is less likely to pass Congress and so might be a futile effort.
TPA doesn’t entirely cut Congress out of trade negotiations. TPA legislation sets out conditions Congress wants the administration to meet in negotiating new trade agreements, such as requirements for consultations with Congress, goals for the talks, what sectors will be included, and what the administration can’t do – for example, weaken US unfair-trade laws.
Origin of fast-track authority
Congress first approved fast-track authority in the 1974 Trade Act, and since then it has been in effect whenever a president sent a trade agreement to Congress. After lapsing in 2007, it was last renewed in 2015 with bipartisan support – except that most Democrats voted against it. The main reason it was renewed was so that it could cover the implementing bill for the Trans-Pacific Partnership, which was never submitted, and the Trans-Atlantic Trade and Investment Partnership (T-TIP), which was never concluded.
The only trade deal that was passed under the 2015 TPA was the US-Mexico-Canada (USMCA), which had so much bipartisan support that it would probably have passed without fast-track treatment.
The Biden administration just let the TPA expire, neither asking for renewal nor indicating that it planned to do so later. It would be needed if the administration decides to actively pursue and conclude the already-begun negotiations for a US-UK FTA or a US-Kenya FTA. What to do about those negotiations is still being considered under the administration’s foot-dragging “top-to-bottom” trade policy review.
Capitulation to trade unions
There is speculation that the White House won’t want to seek TPA or conclude any new trade deals until after the 2022 congressional elections, since there are key senate races in states where organized labor is strong. The unions oppose new trade agreements. That suggests that the White House will focus instead on stronger enforcement of existing FTAs and trade laws, as well as its “worker-centered” initiatives aimed at re-shoring manufacturing (e.g., its Buy American and supply-chain resilience plans).
US Trade Representative Kathleen Tai, when asked in earlier congressional hearings if she would seek TPA, said the administration would do so when ready to enter negotiations if it can be assured of bipartisan support. It would likely get that, but that still wouldn’t assure passage in both chambers. She also indicated that if the Biden administration were to seek TPA, it would probably want to change the goals it sets for new agreements, presumably to tighten labor and environment provisions and include more demands on trading partners that would ostensibly benefit US workers and manufacturing.
ITC report
Separately, the US International Trade Commission released a report assessing the impact of trade agreements passed under TPA. Released on June 19th, the report (titled “Economic Impact of Trade Agreements Implemented Under Trade Authorities Procedures”) assesses the impact of trade agreements enacted under Trade Promotion Authority.
The report concludes that “US bilateral, regional, and multilateral trade agreements have had a small, positive effect on US output, income, exports and imports, and employment.” But “the employment gains were not distributed evenly, with the biggest gains estimated for college-educated male workers.”
The ITC says it used a variety of sources and “a variety of quantitative and qualitative approaches to analyze the impacts of these agreements, and specific provisions within them, on US industry and workers.” According to the report, “The trade agreements covered include the multilateral Uruguay Round Agreements as well as 16 US bilateral and regional trade agreements.” There are strong reasons, however, for believing that the gains from trade were much stronger than those captured by the static methodology employed by the ITC. That methodology fails to capture the gains from innovation fostered by trade competition. Without innovation, a work force faces stagnation in real earnings and even an eventual decline.
Republican senators call for ending Section 232 tariffs
Meanwhile, seven Republican senators are calling on President Biden to remove the obstacles to trade imposed by President Trump and to begin by ending the additional tariffs – e.g., the Section 232 steel and aluminum tariffs – on US allies. In a June 30th letter to the current president, the senators said, “An important first step would be to reduce the barriers to trade with our allies.” In making its case, the letter points to Biden’s own statements during the campaign and in office criticizing the negative impact that Trump’s tariffs and trade war had on work with allies. Lifting trade barriers on allies, the senators write, will help keep China accountable.
The letter was signed by Sens. Joni Ernst (IA), Chuck Grassley (IA), Ron Johnson (WI), Pat Toomey (PA), Thom Tillis (NC), Mike Lee (UT) and Deb Fischer (NE). The letter has particular political heft because the signers are considered conservatives. Biden hasn’t indicated he is about to undertake such a reversal, but this kind of political pressure might help sway the “top-to-bottom” trade policy review his administration is currently undertaking and lift at least the Section 232 tariffs on allies. Knowing he won’t face unified Republican opposition if he ends the tariffs should give Biden some breathing room.
Global minimum tax endorsed at OECD-sponsored event
The OECD-hosted “Inclusive Framework” talks on “Base Erosion and Profit Shifting” that aimed for a global agreement on taxation was approved by 130 of the 139 participating countries. The nine dissenting countries were Barbados, Estonia, Hungary, Ireland, Kenya, Nigeria, Peru, Saint Vincent and the Grenadines, and Sri Lanka. The deal includes agreement on both setting a minimum corporate tax rate of 15% (“Pillar 2”) and how and where to tax the giant tech/Internet companies – the digital services tax issue (“Pillar 1”).
But the prosperity of dissenting Ireland has been strongly based on its competitive 12.5% corporate tax. And dissenting Estonia has the most competitive tax regime in the world, according to the Tax Foundation. Conversely, the US is ranked way down at #21 in the Tax Foundation’s tally and will doubtless plunge further after the Biden administration has finished with its tax hikes and spending spree.
The approval of the “Inclusive Framework” talks was hailed as a major breakthrough that should forestall the threat of different digital services taxes (DSTs) around the world to which the US was poised to retaliate. It also – if countries actually implement the minimum corporate tax – would supposedly give the Biden administration breathing room to raise US corporate taxes and weaken the incentive for companies to off-shore their operations. But when US state and local taxes are taken into consideration, the Biden tax burden on US corporations, despite the OECD-brokered agreement, will still be among the highest in the world, resulting in investment flight and US job loss. Rep. Kevin Brady (R-TX), ranking Republican on the House Ways and Means Committee, said the agreement is “a dangerous economic surrender that sends US jobs overseas, undermines our economy, and strips away our US tax base.”
Global implementation is expected to take time – and difficulty – as each country has sovereign jurisdiction over its own tax regime and each government would have to enact at least the minimum rate. Some countries may also have to change the tax treaties they entered with other countries. EU disunity – three countries rejected the tax deal – could make it hard for the EU to implement the minimum tax bloc-wide since taxes are under the authority of individual EU members-states.
US “contribution”: make others suffer too
US tech giants welcomed the agreement for promising to bring consistency to the foreign taxes they face. But countries still have to remove their planned or imposed DSTs to seal the deal. G7 countries had already accepted a US compromise that would mean that DSTs would not hit only the huge US online companies. Now, the new tax will supposedly be imposed on all multinationals having an annual revenue of at least $20 billion and profits above $10%.
President Biden and Treasury Secretary Janet Yellen released statements welcoming the agreement – and not hiding the fact that their eagerness for the deal was to facilitate a hike in the US corporate tax rate. According to the president, the deal “With a global minimum tax in place, multinational corporations will no longer be able to pit countries against one another in a bid to push tax rates down and protect their profits at the expense of public revenue. We must adopt the global minimum tax, among other measures I have proposed, to make sure corporations pay their fair share.”
US Appelate Body freeze helps China
Meanwhile, the Biden administration is continuing the Trump administration’s refusal to allow the appointment of new members to the WTO’s Appellate Body, resulting in its continued suspension. This has worked especially to the benefit of the Chinese, as pointed out sharply by James Bacchus of Cato Institute in an op ed piece in The Hill. He writes:
It is almost entirely the fault of the United States of America…. The sad historical irony is that it was the United States that most insisted on creating a binding dispute settlement system when the WTO was established. We Americans knew then — on a bipartisan basis — that, as the leading trading nation in the world, we benefit more than any other single country from having a global underpinning of agreed and binding rules of trade to ease and enhance the flow of trade worldwide. Somehow, we have forgotten this.
The US wins almost all the WTO cases in which it is the plaintiff – and that means that trading partners are forced to remove unfair foreign barriers. This is more valuable to the US economy than are the unfair trade laws that the US is trying to protect by undermining the WTO.
US and Taiwan discuss increased trade despite China threats
The US and Taiwan held the 11th meeting (virtually) under their bilateral Trade & Investment Framework Agreement. One concrete outcome was agreement to hold regular talks through working groups to be established on key topics. The most important dimension of the meeting might be simply that it was held – the first TIFA Council talks since 2016. Any such official engagement with Taiwan angers China. President Xi Jinping made that clear again in his July 1st speech commemorating the founding of the Chinese Communist Party. “Resolving the Taiwan question and realizing China’s complete reunification,” he declared, “is a historic mission and an unshakable commitment of the Communist Party of China.”
Congress’s support for a full bilateral free trade agreement re-surfaced again right after the TIFA meeting. On June 30th a group of 42 senators of both parties, led by Sens. Marco Rubio (R-FL) and Mark Warner (D-VA), wrote to USTR Tai welcoming resumption of TIFA talks and urging consideration of launching US-Taiwan FTA negotiations. The senators, who are China hawks eager to see more US engagement in Asia, wrote that “Maintaining US economic influence in the region and reducing Taiwan’s dependence on China is essential to ensuring that the region remains free and open.”
But formal FTA talks won’t begin any time soon since the administration has yet to set its policy even for negotiations already under way with the UK and Kenya, and the President’s Trade Promotion Authority has lapsed.
L.C. reports on trade matters for business as well as Founders Broadsheet.
Error correction, 7/19/2021: Issue date corrected.
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