Beware the next Trade War

After more than two years of trade tensions which threatened the entire global economy, the United States (US) and China announced a phase one trade deal in late December 2019. The deal officially entered into force on February 14, 2020 and this was largely welcomed by the global business community and governments around the world due to its potential to provide some relief to both the US and Chinese economies which had undoubtedly been hurt by the trade war. Now that trade tensions have eased between the US and China, we now need to turn our attention to what has the potential to be another trade war, but this time one between the US and Europe over taxing the digital economy.

Collectively, the Big Five US tech companies, notably Facebook, Apple, Amazon, Microsoft and Alphabet (the parent company of Google), generate over $800 billion in revenue each year. To put that in perspective, that is more that the Gross Domestic Product (GDP) of wealthy countries such as Saudi Arabia and Switzerland. China also has a thriving tech industry and nine of the world’s 20 largest tech companies are based there, including companies such as Alibaba and Tencent.

A big concern is that several of the global tech giants are not paying their fair share of taxes to governments. An equally big concern is that many governments are yet to figure out a way to tax these companies because they do not operate in the traditional way that companies have been known to do for hundreds of years. For example, it is much easier to tax a company that has a physical presence in a country since such a company would be established under the relevant company laws in that jurisdiction. However, most of the tech companies operate cross-border through cyberspace without the need to be physically domiciled in any particular jurisdiction. Facebook for example, can collect data on its members and sell advertisements in any market where it is accessible without the need for a physical presence. Meanwhile, a marketing firm that has an actual physical presence in a country would in all likelihood be required to pay corporation and consumption taxes which invariably places it in a less competitive position compared to an online firm which pays no taxes in that jurisdiction.

Given these disparities in taxation between many of the world’s technology companies which predominantly operate online and more traditional businesses which operate physically, world leaders have started discussions about how to create some semblance of balance. France for instance, announced a digital levy of 3 percent on the total annual revenues of the largest technology firms providing services to French consumers. President Macron has referred to the levy as a “fairer” response to internet giants who are currently able to book profits in low-tax countries irrespective of where the revenue originates. At Davos 2020 where world leaders and business executives gathered, France agreed to postpone the imposition of the levy in light of US threats to impose tariffs on French products.

However, the battle is far from over. Both the US and France agreed to develop an international framework for digital taxation under the umbrella of the Organisation for Economic Cooperation and Development (OECD). If Europe, the U.S. and much of the world fail to agree on new digital tax rules by December 2020, there is likely to be a host of mostly European countries imposing levies on mainly US tech giants. For its part, the US has threatened to retaliate with measures of its own, chiefly through tariffs on billions of dollars of French and European goods. This will likely set in motion a trade war, the consequences of which would be even more far reaching than the US-China trade war, especially for Caribbean countries since the US and Europe have traditionally been the region’s dominant trading partners.

Finally, beyond the threat of a trade war, the world must seriously address the issue of digital taxation. My next article will focus on what is currently being done in this area as well as the options available to Caribbean countries.