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Perhaps the WTO will become the new OECD

Kitty Miv, Editor
26 July, 2018

Kitty's Country Rankings are below, with a description of how they are compiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

Europe and the United States aren't just separated physically by 3,000 miles of ocean. Often, the divides are economic, political, social, and cultural. Put it this way, Paris, France, is a very different place to Paris, Texas.

There is also a widening gap to be bridged between these two economic superpowers on trade matters. Indeed, it is striking how the US's and the EU's trade policies are moving in different directions. President Trump's first act was to pull the US out of the Trans-Pacific Partnership. He has also shown his disliking for the existing NATFA text. Meanwhile, the EU is negotiating and signing free trade agreements like they're going out of fashion.

Given rising concerns about a looming trade war (perhaps it has already begun?), the signing of an FTA between the EU and Japan flew in under the radar somewhat last week, even though this is one of Europe's most significant bilateral trade agreements to date. But that's far from the only item on the EU's negotiating agenda.

Last month, it launched trade talks with both Australia and New Zealand, and negotiations are already underway with several other key economies, including with the Mercosur trade bloc (Argentina, Brazil, Paraguay, Uruguay, and Venezuela, although the latter is currently suspended), with Singapore, and with Mexico (to update the existing FTA). Furthermore, last month, the EU and Vietnam agreed on the final text of a new free trade agreement that will eliminate 99 percent of taxes on cross-border trade, while 2016 saw the EU-Canada FTA sealed amid great fanfare.

The merits or drawbacks of either policy could be debated at great length, so intricate is the global trading framework. However, it is clear that, for businesses, tariffs are a major concern, so much so that iconic motorbike manufacturer Harley Davidson is shifting production in order to mitigate against them. And surely it won't be the only manufacturer that will re-examine its supply chain in the coming months and years, depending on how long any trade war rolls on, especially if they are importers of metallic components. So, just as BEPS has forced multinational companies to rethink where and how they are structured and where and how they operate, perhaps global trade policy will be the next major area of concern at board level. Perhaps the WTO will become the new OECD.

Before I leave this topic, there is one other important item on the EU's trade agenda, of course: Brexit. And it is anomalous that while the EU is making trade negotiations look relatively easy, a trade deal with the United Kingdom is being made very hard work indeed, especially since the UK and the EU already have a trade deal in place. It's a bit like knocking down the house you built because you fancy something a bit different. But then forgetting how you built it in the first place. And now you've got two sets of architects arguing over two very different specifications: open plan, light, and airy with easy access to the vegetable garden versus all partitioned and walled off with a gated entrance. They haven't even decided whether the gate will be an automatic affair, or whether you have to present your credentials to be let in. Let's just hope the new roof is in place before winter sets in.

Not that I'm taking sides here, but it's obvious the clock is ticking, that the situation is becoming increasingly urgent, and that the British aren't helping their own cause with the Government seemingly incapable of showing a united front. Indeed, if the internal Brexit debate were set to music, it would surely have to be the hokey pokey. "You put your left hand in (the customs union), your right hand out (the common VAT area), in, out, in, out..." Little wonder, then, that the Government is shaking all about. Will it turn itself around? We certainly don't know what it's all about yet.

The lack of clarity over Brexit policy on the UK side should come as no surprise really, given that the Government depends on the support of opposition parties in parliament to pass fundamental constitutional changes. But delicately poised coalition and minority governments are fast becoming commonplace with voters unsure these days whether to go left, right, or do the hokey pokey. However, none are in quite as precarious a parliamentary position as Spain's newly appointed Prime Minister, Pedro Sanchez, whose Socialist Party has just 84 seats in the 350-seat lower house. Those sorts of odds make Theresa May's position look, as the Brits sometimes say, "safe as houses." Although, given my former analogy, perhaps another British idiom would have been preferable.

Nevertheless, with the numbers stacked against him, Sanchez has proposed a pretty ambitious economic agenda, including in the area of taxation, where he wants to make it so that companies pay an effective rate of no lower than 15 percent by removing the few deductions that are left to companies in Spain.

With the finer details lacking, this is a policy that still needs to be fleshed out, leaving a certain amount of tax uncertainty dangling in the air as a result. However, before we can even entertain the idea that Sanchez will get his agenda through the legislature, surely his own party needs to be fleshed out too. For sure, he's got nowhere near enough bodies on his side of parliament to carry the day yet.

The likelihood is that, at some point, the Spanish parliament will be dissolved, and new elections called to achieve some sort of functioning government. Sanchez has said as much, although, since taking the reins almost two months ago, he has rather gone off the idea. That's probably because, by all accounts, he will lose. The trouble is, against the backdrop of Spain's current political melting pot, it's anybody's guess what will come next.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as - 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to - 1, and another one in week six, dropping to - 2; finally in week 13 it got something right, so it went back up to - 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums

European Union FTA

Kitty's Execrations

United Kingdom hokey

Spain melting



Tags: Euro | Government | Trade

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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