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Don't Forget Doha, And I Don't Mean The Tennis

Jeremy Hetherington-Gore Unleashed
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!


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Jeremy Hetherington-Gore Unleashed

Jeremy tackles the difficult issues head on!

 

 

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