The World of International Organizations Explained

G-20 focus on trade wars and tax loopholes

Japan's Prime Minister Shinzo Abe and the Yoshimoto Shinkigeki comedy troupe publicize the G20 meetings (ARÊTE/Official website of Japan's Prime Minister and Cabinet)

Trade disputes overshadowed a meeting of G-20 finance ministers and central bank chiefs that ended on Sunday with pledges to protect growth and close tax loopholes used by large tech companies.

Finance leaders from the world’s 20 biggest economies issued a final communiqué that projected moderate global growth and recovery later this year and into 2020, but warned of intensifying risks.

“This recovery is supported by the continuation of accommodative financial conditions, stimulus measures taking effect in some countries, and one-off factors dissipating,” the G-20 statement said.

“However, growth remains low and risks remain tilted to the downside,” it said. “Most importantly, trade and geopolitical tensions have intensified. We will continue to address these risks, and stand ready to take further action.

The two-day meeting began on Saturday in the Japanese port city of Fukuoka, where officials voiced fears of a global downturn from the prolonged trade war between the United States and China — which U.S. Treasury Secretary Steven Mnuchin said did not appear to be letting up anytime soon. It was the first time that Japan, the world’s third-largest economy, hosted the G-20 since its founding in 1999.

They agreed to keep forging new rules aimed at cracking down on multinational businesses such as Amazon, Facebook and Google that book huge profits but avoid or evade paying their fair share of taxes. The new rules are also meant to make it harder for countries to offer rock-bottom tax rates.

The revamped global rules for corporate taxes are based on a plan developed and approved in late May by the Organization for Economic Cooperation and Development, or OECD. They are intended to address the digital commerce of global tech companies, but they also apply to multinational corporations worldwide.

“Due to public frustration surrounding the lower effective tax rates faced by some digital companies in particular, several countries have decided to act unilaterally, by putting temporary measures in place,” Taro Aso, Japan’s finance minister, said in a speech to promote a fairer tax system. “Obviously, multilateralism is better than unilateralism; a common approach is always better than fragmentation.”

U.S. President Donald Trump’s penchant for deploying tariffs inflamed G-2o tensions over the merits of free trade versus protectionism. Just a day earlier, Trump announced he had suspended plans to impose tariffs on Mexico, averting another trade war. But his threat still hung over the European Union to impose U.S. tariffs on imports of European cars if the E.U. does not open up its markets to American farmers.

The G-20 includes Argentina, Australia, Brazil, Britain, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey and the United States.

A two-pronged approach

The G-20 focus on changing corporate taxes revolves around clarifying where tax burdens should be paid — in the place where a business is located, or in the place where goods and services are bought and sold.

The plan would provide for a minimum level of tax that multinational businesses would pay to discourage them from reaping profits in countries such as Ireland that offer low-tax havens because their economies are export-driven.

The use of such “digital taxes” reflect the increasing dominance of internet-driven sales. More details of the new rules are expected to be worked out at G-20 meetings later this year.

Last month, the E.U. made public its proposal for creating new global rules on electronic commerce through the World Trade Organization, in a bid to give consumers more confidence. The E.U. said it hoped to establish new WTO multilateral rules for e-commerce to help industrialized and developing nations make it easier and safer for businesses to conduct online transactions.

Global e-commerce sales grew by 13 percent in 2017 to reach an estimated $29 trillion, the United Nations Conference on Trade and Development reported in late March. A similar surge was seen in the number of online shoppers, which jumped 12 percent to include 1.3 billion people, or a quarter of the world’s population, the Geneva-based United Nations agency, known as UNCTAD, said in a statement.

Politics and trade

Christine Lagarde, the International Monetary Fund’s managing director, warned that the tariff hikes and other tit-for-tat trade measures between the United States and China could lower global GDP by 0.5 percent in 2020, costing nations an estimated $455 billion.

“We met at a time when the global economy is showing tentative signs of stabilizing and growth is projected to strengthen. While this is good news, the road ahead remains precarious and subject to several downside risks,” she said in a statement after the G-2o meeting had concluded.

“The principal threat stems from continuing trade tensions,” she said. “A second risk is that, with interest rates very low, debt levels are rising in many advanced economies, and emerging markets remain vulnerable to a sudden shift in financial conditions. And all this at a moment when monetary and fiscal policy space is more limited than in the past.”

Lagarde recommended that nations cut the trade tensions by eliminating tariffs and avoiding new ones, while working to modernize the international trade system to give markets more certainty and confidence.

The G-20 communiqué pledged to work towards better cooperation.

“We reaffirm our commitment to use all policy tools to achieve strong, sustainable, balanced and inclusive growth, and safeguard against downside risks, by stepping up our dialogue and actions to enhance confidence,” the statement said.

Fiscal policy should be flexible and growth-friendly while rebuilding buffers where needed and ensuring debt as a share of GDP is on a sustainable path,” it said. “We reemphasize that international trade and investment are important engines of growth, productivity, innovation, job creation and development.”

The world of international organizations explained.

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