C Gopinath

Global trade slugfest

C Gopinath | Updated on December 16, 2019

The rules to international engagement are getting hazy, as the US-France face-off suggests

We saw another spat between France and the US recently, when France announced a 3 per cent tax targeting about 30 large companies engaged in ‘digital activities.’ The US retaliated, announcing a 100 per cent tariff on champagne, handbags, cosmetics and other French goods imported into the country. The US complained that France’s action seemed to be targeted at US companies like Alphabet, Apple, Amazon and Facebook.

This is not another trade war, but it certainly indicates that our rules-based system needs fixing.

A rules-based order (RBO), a term prominent in defence and strategic studies, signifies that there are set rules that guide international engagement. RBOs in several areas are said to have guided and allowed the expansion of globalisation. Ironically, while they can serve as a euphemism to mean that the powerful cannot do what they want and are guided by the same rules as everybody else, RBOs seem to work only when they assist the rich and powerful.

Let’s see an earlier effort at an RBO. The Treaty of Westphalia — really, a series of treaties in 1648 — is praised in many standard history textbooks as the forerunner of a new international system. It ended series of wars between European powers by creating the idea of sovereignty, which included non-interference in each other’s domestic affairs. Sure, but it did not prevent those same countries from invading and colonising territories in Asia, Africa and Latin America.

The OECD, for some years now, has pointed out how digitisation is a source of tax avoidance by multinational companies. A company pays taxes only where it is located, even though it may digitally be serving clients or selling ads in another. Since 2016, about 135 countries have been engaged in drawing up rules to govern global taxation of such activities. France got tired of the delay in approving the new rules and decided to act. It promised to repeal its digital services tax once a global agreement is reached.

Meanwhile, the US is sore at another RBO where it wants major reform. The WTO’s dispute settlement mechanism is expected to gradually grind to a halt, since the US has blocked appointments to its Appellate Body. The US hopes intransigence will push the WTO to fix aspects of its operations the former does not like. Thus, unilateral action seems to be a new strategy to get others to pay attention and revise rules. But this cannot work for those who do not have the leverage to back their unilateral action.

Companies are trying it too. Huawei, the Chinese telecom giant, has been subjected to a series of pressures by the US. Its Chief Financial Officer is awaiting extradition from Canada to the US on charges that the company violated US sanctions on Iran. US telecom companies were warned not to use Huawei equipment out of concerns that it may be used by the Chinese government to spy. The company has denied this, and offered its technology as open source for others to use, but there were no takers. The government then restricted the company’s ability to buy important components from the US. Now, Huawei has decided not to wait for an RBO. It has begun filing defamation lawsuits in the US and France against those whose statements and actions it says have harmed its reputation and ability to do business. Meanwhile, it has also found alternate suppliers for the components it was getting from the US.

Huawei has the global size and muscle to act unilaterally. So, the next time someone talks about a rules based system, think about what rules and for whom.

The writer is a professor at Suffolk University, Boston

Published on December 16, 2019

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