How industrialized nations skew global trade policy

Concepts advanced by major industrialized countries eventually pave the way for concluding “asymmetrical” agreements


Photo: Bloomberg
Photo: Bloomberg

When elephants fight, it is the grass that suffers. That is invariably the case with trade wars. The US and the EU, currently negotiating the Transatlantic Trade and Investment Partnership agreement, are constantly at loggerheads. They have fought fierce battles over the past 20 years on a range of trade issues—from bananas to tax treatment for foreign sales corporations (special tax treatment granted by the US for such corporations), controversial trademark provisions to copyright provisions, and illegal anti-dumping measures to civil aircraft subsidies, there is never a moment when these two elephants are not clashing.

The US, for example, is mounting pressure on the EU to back off from imposing a huge tax penalty running into billions of euros on Apple. The company is one of the biggest beneficiaries of a sweetheart tax agreement with Ireland. Brussels is expected to issue a definitive ruling on Apple that could force the American tech giant to cough up billions of euros in unpaid taxes. Washington is threatening Brussels with damaging consequences if it presses ahead with punitive tax-related penalties against Apple.

Over the years, US companies—Apple, Google, Microsoft and Cisco—have perfected a stratagem called ‘transfer pricing’ involving cross-border transactions such as product sales, services, loans and licences. The stratagem enables them to shift their earnings to low-tax jurisdictions, thereby avoiding taxes in their home country.

Apple has reportedly maintained an offshore cash pile of about $200 billion. Outside the financial sector, American companies have reportedly retained around $1.2 trillion in cash overseas at the end of 2015. In addition to Apple, companies such as Microsoft, Cisco, Google and Oracle retain billions of dollars in offshore tax havens such as Ireland and Luxembourg.

According to Sam Fleming and Barney Jopson of the Financial Times, “The EU has become a favoured destination for American companies seeking to reduce their US tax bills, either by striking Apple-style tax deals with national governments or by moving their addresses to Europe via tax ‘inversion’ (a practice of relocating a corporation’s legal domicile to a lower-tax nation) mergers.”

Earlier this year, the US treasury stopped Pfizer’s tax inversion scheme involving a $160 billion agreement to acquire Botox maker Allergan, which would have enabled the pharma giant to slash its tax bill by re-domiciling to Ireland, where Allergan is registered.

The pervasive globalization of such questionable business practices by leading corporate titans, who are also the movers and shakers of the world economy, remain a source of grave concern. Such business practices continue to undergird the ‘rent-seeking’ efforts that dominate certain industries such as global finance, computer and Internet-dominated industries, and pharmaceuticals, according to Nobel laureate Joseph Stiglitz.

The US is also not going to let the matter rest if Brussels persists with its radical copyright reforms. The EU is considering granting European news publishers the right to levy fees on Internet platforms such as Google if search engines show snippets of their stories. Clearly, these proposals, which are expected to be published next month, “will dilute the power of big online operators, whose market share in areas such as search leads to unbalanced commercial negotiations between search engines and content creators”, says Duncan Robinson of the Financial Times.

Despite these imminent trade frictions, the US and the EU along with other industrialized countries such as Japan seldom let go an opportunity when it comes to targeting China, the world’s second biggest economy. For example, major business groups from the US, EU, Japan and other advanced countries are preparing the ground to target China over its proposed cyber security law and insurance regulations. China wants to enact new rules to force global Internet leaders—Google, Microsoft, Amazon and Oracle among others—to build physical infrastructure and store data in China.

In a letter to Chinese Premier Li Keqiang some time ago, several powerful business lobbies such as the US Chamber of Commerce, Business Europe and Japan’s Keidanren among others warned that provisions in the proposed cyber security law and insurance regulations would “impede economic growth and create barriers to entry for both foreign and Chinese companies”.

The backdrop to this letter reveals several interesting facets of the negotiating strategies that industrialized countries, occasionally referred to as the ‘dirty dozen’, pursue to further their global trade agenda. For some time now, the US along with the EU, Japan, Australia, Canada, Switzerland, Singapore, South Korea and other countries have floated proposals to liberalize trade via electronic commerce. For example, the US circulated a non-paper on 1 July at the World Trade Organization (WTO), setting out a work programme on e-commerce.

Although the US has emphasized that “it is advancing no specific negotiating proposals at this time”, it has maintained that the “concepts” presented in the non-paper are intended solely to contribute to constructive discussion among members. The paper contained 15 concepts such as “prohibiting digital customs duties”, “enabling cross-border data flows”, “promoting a free and open Internet”, “preventing localization barriers”, “barring forced technology transfers”, “protecting critical source code” and so on.

The concept of “preventing localization barriers”, for example, states that “companies and digital entrepreneurs relying on cloud computing and delivering Internet-based products and services should not need to build physical infrastructure and expensive data centres in every country they seek to serve. Such localization requirements can add unnecessary costs and burdens on providers and consumers alike. Trade rules can help to promote access to networks and efficient data processing”.

The non-paper, according to several developing countries and analysts, primarily intends to bring rules framed on e-commerce in the Trans-Pacific Partnership to the WTO through the back door. Effectively, such concepts advanced by major industrialized countries eventually pave the way for concluding “asymmetrical” agreements. In a way, they are emblematic of the WTO’s accords since the Uruguay round of trade negotiations. Small wonder then that such agreements have only resulted in alienation and growing anti-trade sentiments across the world because they continue to perpetuate “developmental” disparities and global inequalities.

READ MORE