The COVID-19 pandemic has revealed the fault lines of the globalized economy and triggered a rise of protectionist trade policies. The latest chapter in this trend away from a multilateralism is the U.S. withdrawal from OECD negotiations over the tax challenges of the digitalisation of the economy, which in turn has provoked European nations to retreat to unilateral solutions.
The Globalized Economy and COVID-19
In the period between the end of the Second World War and the on-set of the COVID-19 pandemic, the globalization of production created deep economic interdependencies, binding domestic economies to a global supply chain. Consequently, when the COVID-19 pandemic broke, the structure of global trade was such that a disruption in one link of the supply chain created effects all down the line.
In March 2020, the six nations hit hardest by COVID-19 were the U.S., China, Korea, Italy, Japan, and Germany. At the time, these six nations accounted for 55 percent of world supply and demand, 60 percent of world manufacturing and 50 percent of world manufacturing exports.[1] China, where the virus first emerged, was largest contributor to global trade, the “workshop of the world,” making up 41 percent of world manufacturing exports and 20 percent of global trade in manufacturing intermediate products.[2] Due to the globalization of production, when the pandemic decreased production in these six nations, and China in particular, the effects reverberated globally.
By way of example, factory shutdowns in China resulted in a shortage of automobile parts, which led to global slowdowns in car manufacturing. The Korean car maker Hyundai completely shut down all of its Korean car production plants for three days.[3] Similarly the Japanese car manufacturer Nissan slowed production in Japan, and Fiat Chrysler announced that it was temporarily halting production at a car factory in Serbia because it couldn’t get parts from China.[4]
COVID-19 and Trade Restrictions
As supply chains broke down and as COVID-19 introduced increased demands for certain traded goods, many countries imposed trade restrictions to manage – sometimes legitimately and in other instances illegitimately[5] – critical supply shortages at a national level.
The World Trade Organization reported that, as of April 23, 2020, 72 WTO members and 8 non-members had introduced export prohibitions or restrictions, most of which concerned products that the World Health Organization and the World Customs Organization had jointly designated as essential in combatting the COVID-19 pandemic – in particular, face and eye protection devices, protective garments, sanitizers and disinfectants.[6]
Several countries banned exports on food: Kazakhstan, one of the world’s most important exporters of wheat flour, banned all exports of wheat flour, carrots, sugar and potatoes; Vietnam suspended all exports of rice;[7] El Salvador and Honduras adopted temporary export bans on dried legumes like red beans;[8] and Romania issued an export ban on wheat, corn, rice, sunflower seeds, grains, vegetable oils, sugar and various bakery products. In some cases, the export bans represented a legitimate effort to ensure domestic availability, though in other cases, the measures were characterized as disproportionate.[9]
Other countries adopted export restrictions on certain medical supplies. At the beginning of March 2020, certain European Union “EU” Member States – notably France and Germany – imposed restrictions on exports of protective medical equipment, such as face masks and subsequently the EU restricted exports of such products to destinations outside the EU;[10] Likewise, Indonesia placed an export ban on face masks, sanitizers and medical equipment;[11] and, India banned exports of similar products as well as all types of ventilators and anti-malarial medicines.[12]
U.S. Impasse on the Unified Approach
Building on the disruptions to global supply chains and the increase of trade restrictions, the COVID-19 pandemic has provided the rationale for a further retreat into protectionism and unilateralism.
On June 12, 2020, citing the priority of addressing the economic impact of COVID-19, U.S. Treasury Secretary Steven Mnuchin in a letter to the finance ministers of France, Italy, Spain and the United Kingdom and to the OECD, declared an impasse on trade talks related to Pillar One of BEPS Action 1.[13]
The letter stated that the U.S. cannot agree to tax changes that would have the most substantial impact on U.S.-based companies. From the U.S. perspective, the move to develop a new taxing right for market jurisdictions is a move to “tax somebody else’s companies.”[14] For this reason, the U.S. has predicated its participation in the Unified Approach on the requirement that a safe harbour system be adopted, pursuant to which a given multi-national enterprise group would be subject to the Unified Approach only upon electing-in. However, since the safe harbour proposal has not been taken up, the U.S. has found itself at an impasse.
Mnuchin’s letter initiated a cross-Atlantic dispute over the Unified Approach to Pillar One, revealing the fragility of the OECD’s plans for a consensus based solution by the end of 2020. Reacting to the U.S. declaration, France and the EU independently announced that – with or without a multilateral solution – digital giants will be subjected to a tax in 2020.
Stepping into the fray, the OECD Secretary-General Angel Gurría encouraged all countries to remain engaged in the negotiations on the Unified Approach, warning that without a multilateral solution unilateral measures will develop, trigger tax disputes and heighten trade tensions. Gurría further stated that the OECD will maintain its schedule, meeting to discuss the two pillar approach in October 2020 and working to deliver a consensus based solution by the end of 2020.[15]
Conclusion
We have a global economy which requires global cooperation. However, the COVID-19 pandemic has revealed the risks of trade interdependency and in doing so added momentum to protectionist and unilateral trade policies.
In this protectionist climate, will the Inclusive Framework be able to build the required consensus to produce a global solution for the digitalisation of the economy, and do so in time to keep unilateral measures off the table? Or, will the Unified Approach be another a casualty of the COVID-19 pandemic?
[1] Richard Baldwin and Eiichi Tomiura, “Thinking ahead about the trade impact of COVID-19,” in Baldwin, Richard and Beatrice Weder di Mauro. Economics in the Time Of COVID-19. 1st ed. London: CEPR Press. 2020, at 59. [“Baldwin”].
[2] Baldwin.
[3] Automakers dodged parts shortage, but COVID-19 poses new threat?, March 17, 2020
[4] Byron Gangnes, Ari Van Assche, “Trade is among the casualties of the COVID-19 pandemic”, Policy Options, March 27, 2020
[5] EU Objects to Romania’s Move to Ban Agriculture Exports, Bloomberg, 11 April 2020
[6] World Trade Organization, “Export Prohibitions and Restrictions – Information Note”, April 23, 2020
See also World Customs Organization, Joint WCO/WHO HS classification list for COVID-19 medical supplies issued”, April 9, 2020
WTO, Trade in Medical Goods in the Context of Tackling COVID-19”, April 3, 2020
[7] Countries Starting to Hoard Food, Threatening Global Trade, Bloomberg, 25 March 2020
[8] World Trade Organization, “WTO Members’ notifications on COVID-19, April 2020
[9] EU Objects to Romania’s Move to Ban Agriculture Exports, Bloomberg, 11 April 2020
[10] Commission Implementing Regulation (EU) 2020/402 of 14 March 2020 making the exportation of certain products subject to the production of an export authorisation
E.U. Seeks Solidarity as Nations Restrict Medical Exports, New York Times, 7 March 2020
[11] Indonesia to ban face mask exports to ensure domestic supply, Reuters, 13 March 2020
[12] WTO asks members to share information on trade measures related to COVID-19
[13] “Mnuchin Declares Global Corporate-Tax Talks at an Impasse,” The Wall Street Journal, June 17, 2020
[14] Robert Lighthizer, U..S trade representative, quoted in “U.S. has pulled out of global digital tax talks: Lighthizer, BNN Bloomberg, June 17, 2020
[15] OECD Secretary-General Angel Gurría has reacted to recent statements and exchanges regarding the ongoing negotiations to address the tax challenges of the digitalisation of the economy, June 18, 2020
