US economy

Collateral trade benefit of Biden’s tax reform

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OK, so let’s get this Covid vaccine trade war stuff straight. A while back the EU accused the UK of having an outright export vaccine ban. On closer examination that seemed to be a domestic supply agreement that pressed AstraZeneca not to export. Brussels has a formal export restriction regime, now being revised, which has blocked a vaccine consignment to Australia.

However, the Sydney Morning Herald reported an Australian government spokesman accusing the EU of further deterring sales by informally letting AstraZeneca know that future export licences would not be granted. The same newspaper also reported that the UK had stepped into the breach by secretly exporting to Australia itself. Meanwhile India, where AstraZeneca’s partner company is based and is supposed to supply much of the developing world, is also restricting sales abroad.

And AstraZeneca has more supply problems in the EU. This is all a bit of a mess, isn’t it? This week there’s a closed-door vaccines meeting hosted by the World Trade Organization including officials, campaigners, academics, pharmaceutical companies and the like to try to sort out global production and supply. Seems to us they have some work to do.

Today’s main piece expands on the US’s announcement last week that it would seek a minimum global corporate tax rate, which is aimed at economic efficiency and fairness but might also solve a few trade problems along the way. For Tit for Tat, we talked to Citi’s Ahmet Bekce about how export credit agencies and other multilateral agencies responded to the pandemic. Charted Waters looks at the impact of the weakness of Brazil’s currency on one important import: rice.

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How a perverse tax code distorts US trade

International trade and tax have more to do with each other than you might expect from the degree of attention given to the latter in discussion of the former. (Today’s Trade Secrets author, even though he’s had to write about international tax issues in his time, is as guilty as anyone.)

Last week Trade Secrets examined what the Joe Biden administration’s corporate tax plan is supposed to achieve and where it goes from here. Today we’ll have a look at potential collateral benefits to trade if the US pulls it off. 

There are two parts to the plan: a minimum global corporate tax rate, designed to prevent multinational corporations from shifting profits to low-tax jurisdictions, and a proposal to allow countries to charge corporation tax to the biggest multinationals based on sales in that country.

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On the first of these, the present tax differentials between economies have unfortunate effects, particularly for the US. One is that profit-shifting to avoid tax makes US services exports look smaller than they are. Measured services trade sometimes tells you more about tax strategies than actual commerce. As well laid out here, if US tech companies routinely underprice high-end services such as the intellectual property they transfer to their subsidiaries in low-tax countries such as Ireland, it reduces measured American exports in that sector.

And it’s pretty clear that US tech companies do just that: it’s a bit improbable that the US exports something like ten times the R&D services to the European low-tax trio of Ireland, the Netherlands and Switzerland than it does to Italy, Germany, France and Spain combined. Fixing this, even if only from the presentational point of view, might go a bit of the way to convincing Americans that it’s not just manufacturing exports that matter.

Another distortion, described here, affects trade in goods. The tax differential between the US and, say, Switzerland, can mean it’s more profitable for pharmaceutical companies to move their manufacturing operations to the shadow of the Alps and export the medications back to the high-priced US market. That means US production is lower and its goods imports higher than otherwise.

Meanwhile, the other aspect of the plan, to base some corporation taxes on sales in a particular country, might help defuse one of the transatlantic trade conflicts Biden inherited — the proliferation of digital services taxes (DST) from governments irritated about US tech giants selling products in their market without paying tax there. The US has threatened unilateral trade sanctions on countries in retaliation, to which the EU is preparing its own response.

The knock-on effects for trade aren’t the main aim of the corporation tax policy, but the administration is certainly not unconscious of them. Keen footnote-readers will note the two linked explanations of tax and trade above are from Brad Setser of the Council on Foreign Relations, one of the gurus in this area. Where is Setser now? He’s been recruited to Biden’s US Trade Representative’s office. Another expert in the field is the academic Kimberly Clausing. And what’s she up to? She’s just become deputy assistant secretary for tax at the US Treasury, and recently argued before Congress that fixing corporate tax distortions would help build support for a globally integrated economy. “Those left behind by economic disruption are looking for answers,” she said. “Multinational corporations can reasonably be asked to pay their fair share.”

The big question is whether the tax changes Biden is proposing are big enough to affect these trade issues. Jane McCormick, former head of tax at KPMG, told us: “For a sector like pharmaceuticals, countries outside the US will have built up enough expertise that investment in the short run won’t necessarily be affected much by a levelling of corporate tax rates. But in the longer run, there should certainly be an impact as some companies repatriate activity.”

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On the sales-in-country issue, though, it’s not clear whether the revenues being offered, which only affect a subset of companies, are big enough to persuade countries to drop their digital services taxes. McCormick, who thinks that heavy DSTs would be distorting and counterproductive, says: “You would hope that everyone sees sense, but my fear is that other governments won’t feel they are getting enough tax revenue to give up on DSTs.”

We’ll be watching developments with interest. As we say, addressing trade problems isn’t mainly what the proposed Biden tax reforms are about. But if they go even some way to de-escalating conflict over digital services taxes and giving American operations more credit and opportunities for exports, they’ll have done a pretty good job.

Charted waters

Inflation in Brazil is soaring, in part due to the real’s weakness — it has fallen more than 10 per cent against the dollar over the past 12 months. That, along with domestic factors, has meant higher prices for staples. Including rice.

While Brazil is also a rice producer, it imports a fair amount too. As the chart below shows, the price of rice has risen 64 per cent in the year to March. That has left poor Brazilians, already hard hit by the country’s response to the pandemic, struggling to feed themselves.

Line chart of percentage increase over past 12 months showing the price of rice in Brazil is soaring

Tit for tat

We talked to Ahmet Bekce — head of export and agency finance, treasury and trade solutions at Citi — about how export credit agencies and other multilateral agencies helped alleviate the strains caused by the pandemic.

Export credit agencies become an important part of any response to a crisis that affects global trade. How did the response to the pandemic differ from that of the years that followed the great financial crisis?

Export credit agencies (ECAs) have always been very supportive credit capacity providers, particularly during periods of stress. However, every crisis requires a different response from governments and other policymaking bodies, including ECAs as well as multilateral agencies. What was remarkable during the pandemic was the broad scope of counter measures and the speed with which agencies provided support to where it was most needed. Sectors such as aviation, the cruise industry, as well as emerging market countries severely impacted at a grassroots level due to the challenges posed by lockdowns, all received help. There was also cover for loss of revenues, increased healthcare spending, among many other things.

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What were the characteristics of the response by ECAs and other multilateral and bilateral sovereign agencies?

Within a couple of months all major agencies were rolling out a wide range of rapid response measures and new programmes. These took various forms. I’ll mention three here. Firstly, ECAs co-ordinated debt repayment holidays for impacted industries, offering short-term liquidity relief to aviation and cruise sectors. Secondly, ECAs rolled out new programmes or enhanced existing programmes to provide short to medium-term working capital financing support to important companies and related supply chains in their own jurisdictions. Lastly, multilateral agencies rolled out fast-track guarantee programmes to support EM countries and critical entities within these EM economies.

If we see another shock that roils trade, are there any lessons to be learned here in terms of how the response could improve further?

The response has been impressive on multiple levels. The key lessons learned are: act fast, be decisive and ensure measures are not incremental but holistic and effective. Immediate engagement with all market participants — companies, borrowers, banks and investors, industry organisations and regulators — is critical to designing counter measures which address all pain points quickly and in totality. Another critical aspect is co-ordination within and across jurisdictions among all relevant government departments, agencies (including ECAs) and regulators to afford regulatory forbearance to banks and investors. Forbearance enables funding to continue to flow to where it is needed and where the impact is greatest.

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