As US Retrenches, Regional Economic Pacts Show the Way Forward

With the changes in both tax and trade policy from the Trump administration—including the US declining to endorse previous commitments on the global tax governance overhaul known as the Inclusive Framework—many have wondered how the world can make progress toward practical solutions in both areas.

International Monetary Fund official Marnix van Rij recently urged continued progress on the Inclusive Framework “as long as we can keep it separate” from trade negotiations and to keep the talks “as technical as possible” to avoid political disputes. His concern is understandable.

Meanwhile, the Trump administration has termed value-added tax a non-tariff barrier, called for a review of other nations’ digital services taxes, and specifically called for a review of the US–China 1984 bilateral tax treaty as well as other bilateral tax treaties. And tariffs continue to upend the global trading system.

Can tax and trade really be kept separate—and should they be? More urgently, how can tax be regarded as a crucial issue for economic growth as trade tensions rise?

These questions are difficult, but the good news is that progress is happening all over the world. Even in the effective absence of the US from multilateral tax and trade discussions, regional economic cooperation is thriving.

In Southeast Asia, regional coordination expands. In Africa, political will grows for the African Continental Free Trade Area, even as some African countries face significant tariffs on their exports. The Middle Corridor—the trade route from Southeast Asia and China to Europe—is enjoying a renewed prominence as China and Europe increase their economic links, offering competition to a longer (and sometimes more dangerous) sea route for trade.

In early April, more than 100 representatives from ministries of finance, tax administrations, and investors attended the Silk Road Tax Forum sponsored by International Tax and Investment Center and hosted by the government of Georgia.

This matters. Tax, customs, and trade policy and administration are the key components of the requisite soft infrastructure of regional cooperation that accompanies the hard infrastructure of railroads, airports, and seaports.

The Middle Corridor isn’t just making progress because of upgrades in hard infrastructure that offer attractive alternatives but also because of cooperation in both types of infrastructure. Similar progress is happening in other regions, now accelerated by dramatic changes in the global trading system.

The Trump administration will likely demand that countries address both formal trade barriers and non-tariff barriers, including tax as a part of bilateral negotiations to reduce tariffs. They can’t really be separated. But regional cooperation brings a new reality to the table.

Can negotiations on tax and trade be combined in innovative ways? Yes, and the hope is that trade barriers can be reduced, and bilateral tax treaties preserved. But right now, throughout the developing world, progress on tax cooperation and administration is serving as a catalyst for increased trade. And that is a positive development.

A few years ago, this fragmentation and focus on regional cooperation was thought to hinder globalization. Today, it’s likely a sensible way forward—a way for countries to increase trade on a foundation of greater cooperation in tax and other forms of soft infrastructure that will benefit investors and promote trade, whatever the US’ position may be.

That’s why increased regional cooperation expands the field and changes the game. Regional cooperation promises tax coordination of the type that the OECD encourages to avoid base erosion and profit shifting. Another US criticism of the global minimum tax is compliance burdens; regional cooperation promotes investment by reducing compliance burdens for investors.

What of the Inclusive Framework itself? I agree with van Rij that the Organization for Economic Cooperation and Development still plays a crucial role in international tax negotiations. But these have become more difficult when the US is considering protective measures against countries that, in the Trump administration’s view, are applying the minimum tax unfairly against US companies.

The international community will need to do a better job of showing why these negotiations are in US interests. For instance, why not make US global intangible low-taxed income—a measure designed specifically to provide a minimum tax—a legacy as a qualified income inclusion rule, to avoid US companies being subject to the undertaxed profits rule when they’re already being taxed?

If the undertaxed profits rule threatens current bilateral tax treaties, and if investors are concerned about preserving bilateral tax treaties, shouldn’t that issue be solved now, before the safe harbor expires in 2026? In a time of rising debt and deficits, the US simply can’t afford the levels of revenue loss the current undertaxed profits rule implies.

As the Trump administration assesses the dangers of absence from regional and multilateral forums, and as those groupings work to achieve sensible compromises with the US, developing countries have an opportunity to turn the highly volatile situation into a race to the top.

Globalization is stumbling, but it’s far from dead. Regional cooperation may help revive it. Tax policies that drive economic growth are even more urgent in this environment.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Daniel A. Witt is president of the International Tax and Investment Center headquartered in Washington, D.C., and has worked on tax policy and administration reforms in transition and developing countries since 1993.

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