As outlined in the recommended reads below, all sides are gearing up for this fight, which is likely to play out over the next several months and pose a serious further threat to global economic growth and stability. The imminent prospect of a twin escalatory cycle of tit-for-tat measures involving both tariffs and taxes impacting dozens of countries makes one wonder whether the Cold War nuclear doctrine of Mutually Assured Destruction (MAD) is madly in the process of being applied to the world economy, whether by design or default. Or is the Trump Administration thinking more along the lines of the equally controversial Kissingerian doctrine of “limited war”, if it has an underlying strategy and endgame in mind at all (see last week’s post)?
Specifically:
First, the Trump Administration has pulled the rug from under the OECD Base Erosion and Profits Shifting Pillar 2 arrangement setting a 15% corporate minimum tax within countries for large multinationals. By indicating last month that it will retaliate against countries which top up their taxation of US firms in line with this multilateral accord, the Administration is likely to set in motion a ripple effect of responses and counter-responses across a substantial share of the world economy. See this analysis by leading international investment expert James Zhan:
Second, the Administration also has Pillar 1 of the agreement in its cross-hairs relating to the taxation of digital services in countries in which the big digital firms have substantial revenues but little to no physical presence and thus tax liability. Six countries with such taxes have been targeted for investigation under an Executive Order signed last month, but some of them and others around the world are proceeding apace with implementation of their levies in the absence of US participation in this multilateral compromise, which the Biden Administration had previously supported. See:
Third, the President is also on the warpath about value-added taxes, which under longstanding GATT/WTO rules are imposed on imports and rebated on exports. The US is an outlier among nations in not levying an indirect tax on production like a VAT, which typically ranges from 15% to 20% in other countries. Moreover, many countries use their VAT revenue to lower other taxes on production (e.g., taxes on corporate profits and/or labor income), with several of them having doubled down on this strategy in the past decade or so. Economists have long argued that in theory exchange rates should ultimately adjust and compensate, but currencies are influenced by many other factors, often for prolonged periods. See:
Trump right about discriminatory VAT for wrong reason?
Fourth, the EU is planning to impose carbon border adjustment taxes at the beginning of next year, a unilateral act that is destined to add further fuel to the f(ire) of accumulated Trump trade grievances as well as provoke numerous other countries that export aluminum, steel, fertilizer, cement and electricity to Europe:
https://www.cer.eu/publications/archive/policy-brief/2024/learning-cbams-transitional-impacts-trade
Finally, here’s a bonus recommendation regarding the nuclear security analogy, a late 1950s interview by Mike Wallace of a young Professor Henry Kissinger speaking about his misgivings about the MAD doctrine and explaining his alternative “limited war” view, which in later years elicited plenty of misgivings of its own: