Trade Cases

Leibowitz on Trade: The Globalization of Process—Promise and Danger

Written by Lewis Leibowitz

The Biden administration took office not only in the midst of a pandemic, but a global rethink of economic opportunity and outcomes. It’s one reason that global institutions, such as the WTO and the International Monetary Fund, are suffering from a lack of respect and influence, not only among general populations but opinion leaders and governments as well.

Let me open the bidding with three developments of interest in gauging the changing opinions: (1) defining “equity” as a measure of outcome by race or ethnic group; (2) a border tax on carbon; and (3) international agreement on minimum corporate tax rates. These developments portend changes in our economy and our culture that will impact international trade, foreign relations and our global future.

Consider first the issue of “equity.” This word is different from our traditional measure of fairness, by which we often meant “equality.” Most people understood “equality” as “equality of opportunity” rather than “equality of outcome.” More recently it is understood as some of each. Now 150 years after the end of slavery in this country, there are increasing frustrations over the traditional measure of excellence in performance in education, and the working world, because too few people with a history as victims of discrimination succeed under those rules. Increasingly, employers, school and university officials and government regulators are demanding changes in outcome that may or may not reflect traditional measures of excellence. The controversy about the cost of childcare for working parents, access to broadband internet, single payer health care and clean energy revolves around this issue.

Whether capitalism and individual initiative results in enjoying the finer things in life, the list of life’s necessities, by which I mean such things as those listed above, grows longer. Add to that a minimum “living wage” of $15 per hour, and it’s easy to see that the country’s employers are being asked to absorb more costs for the same quality of worker, or maybe a little lower quality. That will be a very hard sell for many people—but the lines are being drawn for a big battle on these issues.

Second, on July 14 the European Union announced a proposal called “Fit for 55” to enact a “border tax” (a fancy term for “tariff”) on products whose production sends carbon into the atmosphere and pollutants into the water. This would impose a tariff on imports from foreign countries that had a lower standard of environmental performance than the EU proposes to develop. This is designed to encourage the world’s exporters to align their environmental policies to those of the EU, such that the EU will achieve its new goal of reducing its “carbon footprint” by 55% by 2030, compared to levels of 1990.

This is not the first example of using tariffs as a tool to influence the behavior of trading partners. The Trump tariffs on steel, aluminum and China were basically designed to encourage the shuttering of “excess capacity” overseas, freeing up American producers to take more of the market. It remains to be seen whether these new tariff proposals will be more effective than the Trump tariffs in that regard.

Third, corporate income tax rates have frustrated the United States government, which relies on corporate taxation for a high percentage of federal revenues. In 2017, Congress passed President Trump’s tax bill, which slashed corporate income tax rates 14 percentage points, from 35% to 21%. President Biden has proposed recapturing half that amount, a proposal that does not appear to have much momentum now.

One of the key arguments for the corporate tax cut was to increase the competitiveness of the United States as a place for foreigners to invest. Corporate taxes were higher in the U.S. than almost any other country before 2017; now, corporate rates are closer to the middle of the pack. Investments are growing but, like almost every issue these days, the argument is heavily politicized, meaning that facts don’t matter to either side very much.

Responding to the competitiveness argument, the United States persuaded the Group of 20 nations last month to adopt a recommended approach that all countries tax corporate profits at least 15%. This does not seem like much. But the only way to make that work in tax havens such as the Cayman Islands or the Irish Republic is to impose consequences on “bad behavior” by governments that impose lower tax rates than the leading economies would like. One consequence could well be import tariffs on goods from those countries.

The ideas being floated right now would change dramatically the core principles governing global trade since World War II. In the GATT and later the WTO rules, it was thought that imports should not be taxed at different rates from different countries (the “most favored nation” principle) and production at home should not be treated differently from imports (the “national treatment” principle. There were exceptions, to be sure (antidumping and subsidies, for example).

The new outlook promises to blow away these principles. I think that is one reason the WTO is no longer the primary locus for international economic policy. These issues will be debated bilaterally and in groups like ASEAN and the G20, but not the WTO.

How the world’s countries determine to proceed on these major issues will affect how all of us do business and earn livings in the next generation or so. We are just at the beginning of these major decisions.

The Biden administration is already looking at border adjustments regarding greenhouse gas emissions. The Democratically controlled House of Representatives has already begun consideration. Steel, aluminum, autos and trucks and other greenhouse-gas rich industries are most likely to be affected. But others will be put in the mix.

It comes down to whether opposing sides can agree on strategies that do not ignore the basic principles of the other. Is the planet headed for catastrophe if we don’t change our ways radically? Is the only way to achieve more equitable social outcomes to destroy capitalism and rely on government to enforce social change? Is compromise possible?

We’ll see.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz

1400 16th Street, NW, Suite 350

Washington, D.C. 20036

Phone:  (202) 776-1142

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Lewis Leibowitz, SMU Contributor

Lewis Leibowitz

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