An attempt to reform the World Trade Organisation failed last weekend after the more than 160 delegates to its annual meeting in Cameroon failed to agree on extending a global ban on taxing e-commerce.
With the US trying to push the dysfunctional organisation towards – if not a permanent extension of a moratorium on taxing digital trade that has been in place for 28 years – at least a 10-year extension, it isn’t surprising that the unanimity required under WTO voting rules wasn’t achieved.
Probably the bigger surprise than that the WTO members couldn’t agree was that the US was there in the first place. Donald Trump’s disdain for, and hostility towards, multilateral organisations and multilateralism is well known.
He’s signalled his intention to withdraw from more than 60 of them, has withheld the $US4 billion ($5.8 billion) of fees it owes the United Nations and, in his first term, gutted the WTO’s dispute resolution and appeals processes and tried to block the appointment of its director-general.
He also doesn’t like global trade rules, as his punitive tariffs and trade war on the rest of the world have clearly and painfully demonstrated.
Yet, while many countries sent lesser trade officials to the meeting – including Australia, which was represented by the assistant minister for foreign affairs and trade, Matt Thistlethwaite – America sent its most senior trade official, US Trade Representative Jamieson Greer. Late last year it also, without any fanfare, paid the $US25 million in overdue membership fees it owed the WTO.
That shows the Trump administration saw either a substantial opportunity or a substantial threat at the meeting, or perhaps both.
The opportunities were obvious.
America is the dominant force in e-commerce and, with digital transactions accounting for about 60 per cent of global GDP, had a lot at stake if the moratorium on taxing digital trade were allowed to lapse and countries started taxing American companies’ digital products income streams. After all, the administration is close to the tech billionaires and big Trump and Republican Party donors driving digital trade globally.
The potential for reform of the WTO also represented a plethora of possibilities for the US.
Among the changes it was pushing in the lead-up to the meeting was an end to decision-making by consensus, which gives the smallest country the same voting power as America, as well as a broader process for reforming the way the WTO operates.
It wanted changes to the rules of special treatment for developing countries and their ability to determine their own status. China – an obvious target for the US, which has complained about its status for a decade and a half – self-designates as a developing country, although last year it said it would forego any special treatment.
It also sought a review of the “most favoured nation” principle, which prohibits discrimination between trading partners – if the customs duties on one country’s exports to the US were 10 per cent, for instance, all trading partners would face that same tariff. If only.
The most pressing issue for the US, however, was the extension of the moratorium on the taxation of digital trade.
It sought a permanent extension, but was prepared to compromise with one of 10 years.
Other countries wanted either much shorter periods, or no extension at all. There are some developing countries, like India, who see digital trade as a potentially significant revenue source to fund their own digital infrastructure. There were others who tried to use their vote on the tax holiday as leverage for other issues, such as the treatment of agriculture.
The failure to obtain an agreement means the moratorium has expired – which, in theory at least, means countries can legally start charging for digital transmissions, including downloads, software updates and the streaming of video and music.
In practice, the US – ignoring the WTO’s rules with its barrage of differentiated tariffs and coercive approach to trade deals – can probably achieve most of what it wants through sheer economic force.
As it happens, 66 of the WTO’s members, mostly developed economies that account for about 70 per cent of global trade, have agreed to develop a set of global digital trade rules of their own, with the ambition of subsequently having them adopted by the wider WTO membership.
Interestingly, the US is not one of them, saying it wants to review the agreement. Australia did sign up to what’s described as a “plurilateral” agreement.
Greer, who called the end of the moratorium “particularly frustrating,” did say, however, that the US would work with like-minded countries and had secured commitments from “dozens” of countries to reject e-commerce tariffs.
The countries that rejected the moratorium, unsurprisingly, were developing economies, with Brazil and India prominent within the opposition.
Any detailed bi-lateral deal with the US on digital taxes could of course, be expected to come with strings/coercion attached, so that the terms favour America’s tech giants.
The US is already wielding the threat of increased tariffs as a weapon to try to force countries to change the way they regulate or tax US tech companies. (It particularly dislikes Australia’s social media ban for under-16s, local content rules for streaming companies, detailed tax reports and efforts to force social media companies – and, perhaps, artificial intelligence companies in future – to pay Australian news media for exploiting their content).
A global agreement and a level playing field would be preferable to negotiations where the balance of power is so lop-sided. But in the context of the current world trade and geopolitical order, that’s a pipe dream.
Greer, who had threatened “consequences” ahead of the meeting if there were no extension of the moratorium, said he had always been sceptical of the WTO’s value and that the conference had confirmed the organisation would play only a limited role in future global trade policy efforts.
The rest of the members could, of course, retort that is already the case, thanks to Trump’s trade wars and his emasculation of the WTO’s ability to police its rules.
The WTO may have hoped that its members would agree at least on a process for broader reform of world trade rules that are being torn up by China’s mercantilism and America’s protectionism.
China’s $US1 trillion-trade surplus last year, driven by a flood of exports, was built on the legacy of a quarter of a century or more of subsidies, technology transfers (including outright intellectual property theft) and protection of its domestic markets.
A weak domestic economy in China and demand and significant surplus industrial capacity is swelling that tide of cheap exports and threatening industries and employment elsewhere.
America’s Trump-inspired protectionism and its own subsidies and coercive use of tariffs to force foreign investment are also distorting and diverting trade flows and supply chains, penalising economies for their competitive advantages and damaging its own economy in the process.
If the WTO were able to operate as was originally envisaged, with the ability to respond to – and, if necessary, discipline countries for – breaches of its trade rules, global trade and the global economy would function more predictably and efficiently and developing economies would have a better prospect of improving their peoples’ standards of living.
With the US and China pursuing their self-interests so aggressively, however, the WTO and the old global trade order it once presided over have increasingly become anachronisms.
The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.
Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.
