By Greg Ip
The rise of technology giants such as Amazon.com Inc. and Facebook Inc., like the rise of Chinese state capitalism, is disrupting national economies in ways that international tax and trade rules were never designed to handle.
Ideally, like-minded nations would join and rewrite the rules to handle these new forces. Events this week, however, suggest that individual nations are choosing to go it alone, further undermining the world-trading system.
On Monday, the Trump administration threatened steep tariffs on France in retaliation for its digital-services tax. The U.S. Trade Representative complained France imposed a unilateral, legally dubious remedy on a global problem requiring a global solution. On Tuesday Treasury Secretary Steven Mnuchin echoed that. "We urge all countries to suspend digital services tax initiatives, in order to allow for the OECD to successfully reach a multilateral agreement," he said in a letter to the 36-nation Organization for Economic Cooperation and Development.
That is more than a bit ironic. Last year President Trump enacted his own unilateral, legally dubious solution to a global problem: tariffs on imported steel in response to a global supply glut originating in China. On Monday he said those tariffs would extend to Brazil and Argentina.
Whoever "wins" the showdowns over digital tax or steel is beside the point. The proliferation of unilateral remedies pushes the world closer to a "power-based, rule-of-the-jungle might-makes-right system," said Jennifer Hillman, a trade expert at the Council on Foreign Relations.
As far back as 2015 a task force operating under the auspices of the OECD identified digitization as an important source of multinational company tax avoidance.
Currently, a company typically needs a physical presence to owe the host country corporate or value-added taxes. That means a U.S. social media site can accumulate millions of French users who supply it with data and content, then sell ads to French companies, without setting foot in France or paying taxes to it.
So in 2016 a new OECD task force representing more than 100 countries, including France and the U.S., began working on proposals to update international standards for taxing electronic commerce. At France's urging, the European Union in 2018 proposed a tax on revenue of cross-border digital-service providers. But the proposal didn't draw the necessary unanimity among members. So this year France enacted its own 3% tax.
"These giants use your personal data and make significant profit from it, without paying their fair share of tax," Finance Minister Bruno Le Maire said. He made it clear the intent was to pressure the rest of the world, including the U.S., to adopt a common solution: "When France shows its will, that's when things change."
Lilian Faulhaber, a Georgetown University law professor who has advised the OECD's international tax initiatives, said the Trump administration and Congress are supportive of the OECD task force. But she said the OECD didn't appear to be moving fast enough for France, which faced domestic pressure to act, including from the yellow-vest street protesters.
U.S. Trade Representative Robert Lighthizer launched an investigation under the "Section 301" trade law, which targets other countries' unfair trade practices. This week the U.S. concluded the tax was designed to hit only U.S. companies such as Alphabet Inc.'s Google, Apple Inc., Amazon and Facebook while sparing French companies -- and was therefore discriminatory. It also accused France of undermining the OECD's effort.
Ms. Hillman, who was previously a judge for the World Trade Organization, said the French tax is really a tariff, and if the U.S. had brought a case against France at the WTO, it probably would have won. "But this administration prefers tariffs. They prefer the 301 unilateral approach."
In France's defense, the country has usually championed multilateralism. By contrast, unilateralism is the hallmark of Mr. Trump's approach, in steel, cars and his trade war with China. Meanwhile, he has blocked the appointment of new judges to the WTO's appeals panel. In a few days that could leave the countries who win their cases at the WTO unable to enforce them.
Like the French tax on digital services, U.S. tariffs on steel and China are rooted in legitimate grievances. For example, China's largely state-owned steel sector went from 14% of global capacity in 2000 to 50% in 2015. A flood of cheap Chinese steel pushed down prices globally and sent many countries' steel into the U.S. The OECD convened a committee that included China to resolve the problem. Until recently, there was little apparent success on the issue.
Mr. Trump, intent on propping up U.S. steelmakers, imposed tariffs on almost all imports under a law meant to safeguard national security. Canada and the EU retaliated without waiting for the WTO to act, betting, like France with its digital tax, it would get the U.S. to listen.
But Canadian trade attorney Mark Warner said, "In responding to Trump's muscular unilateralism with muscular unilateralism of their own, they undercut the rules-based multilateral system that they say they believe in."
France, the U.S., Brazil and Argentina may yet reach some sort of truce to avoid the type of trade war now raging between the U.S. and China. Ms. Faulhaber said unilateral measures such as France's may push more countries to the table to reach an international solution.
But they won't be the last challenges. Climate change, cyber hacking and technology-enabled espionage are all disruptive forces that transcend borders -- and individual nations will be sorely tempted to pursue their own solutions if international cooperation fails.
"Whatever else comes from living under this law of the jungle system, it's total chaos," said Ms. Hillman. "It's very bad for world-wide growth to be living under all this chaos. You used to be able to count on the rule of law, and now you can't."
Write to Greg Ip at email@example.com