| 22 August 2010
Almost every day there is a news story about a free trade agreement between
two countries or between groups of countries, or on really good days there is
news about the Doha Round. In just the last few days the countries mentioned
include Australia, Indonesia, India, Japan, Canada, Panama, South Korea, the
European Union, Taiwan and China; but no mention of Doha.
Needless to say, free trade is a Good Thing. It increases the prosperity of
the countries that engage in it, and the economic opportunities on offer to
the citizens of both parties. Since the Second World War we have witnessed an
unparallelled boom in world-wide trade in goods, which exploded by a factor
of 217 times between 1948 and 2005, due evidently in large part to the reduction
in tariff barriers brought about by the successive 'Rounds' of the GATT (General
Agreement on Trade and Tariffs) which became the World Trade Organization.
Since free trade is so beneficial, why isn't there more of it? Because of the
protectionism of producers, in six words, and to a much lesser extent because
governments are reluctant to give up tariff revenues. A producer of shoes in
Italy cannot be expected to welcome the tariff-free importation of finished
shoes from China, much as he may be happy to buy tariff-free leather from Brazil.
Also, in the modern world, various 'social' agendas have attached themselves
to free trade, particularly in the USA, slowing down the signing of free trade
agreements in the name of progress. This is mis-conceived: trade itself will
do the job of improving the lot of poor people in partner countries, without
any help from do-goodery. But try telling that to the delicate left-wing flowers
blooming in Washington or the proponents of 'fair' trade.
Lack of progress on the WTO's Doha Round is due more to recalcitrance on the
part of member countries than to political sloganeering, however. After the
comparatively easy low-hanging fruit of manufactured goods, the WTO is now trying
to get agreement on agricultural products, still the political third rail in
many countries, despite the ever-lower proportion of national output formed
by agriculture, and also on services, which formed a comparatively small part
of previous Rounds.
Unlike goods, the taxation of services is a significant factor for many countries.
Obviously they are 'invisible', non-tangible, so that there is no physical crossing
of borders which can be the point of taxation. Instead, countries mostly tax
cross-border services with the little devils called 'withholding taxes'. If
you, owner of a German construction company, buy in labour from Ireland, you
will have to withhold a certain percentage of the money you pay out. Withholding
taxes apply to a vast range of types of service, from intellectual property
royalties to bank interest. Global statistics on cross-border services are hard
to come by, but it is reasonable to suppose that in our increasingly post-industrial
society they match or exceed trade in goods.
One approach to controlling the taxation of cross-border services is through
Double Tax Treaties, which ensure at least that payment flows are taxed in only
one of the two partner countries. And withholding taxes in one country are also
often creditable against tax in the other country, in any event. One of the
more disgraceful and negative actions of the Obama administration has been to
limit the availability of tax credits to US firms as part of a generalized 'anti
tax haven' agenda, something that will be damaging to the US firms themselves,
to the interests of the USA as a whole, and to world trade.
So let's raise a cheer for the Doha Round, and hope that it is loud enough
to be heard in the Oval Office, No 10 Downing Street, Canberra, Brazilia, the
Kremlin and of course the Berlaymont. It will have to be mighty loud!
You have been reading an entry on the following blog:
Jeremy Hetherington-Gore Unleashed
Jeremy tackles the difficult issues head on!
Contact: jeremy@lowtax.net
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