Bafflement

Basically, think tanks are explainers. We take complicated subjects, study them, and then make our (modest) contribution to society by explaining them—how they work, what they do, what they mean, and what the policy implications are. Hopefully, by doing so, we add a bit of clarity to policy debates. So, it is frustrating when something comes along that we can’t explain. That has happened twice recently, and I want to mention both issues. If anyone can explain them, feel free to let me know.

The first is Canada’s announcement that it intends to proceed with imposing a digital services tax. This is the latest in a complicated series of events that requires some context. Some years ago, a number of nations, mostly in Europe, decided they wanted to tax digital services offered in their countries, including by companies not located there. These attempts generated a good bit of controversy, both from affected companies which, to no one’s surprise, objected to new taxes, and from the United States, since most of the targeted companies were American. As these proposed taxes began to move through various countries’ legislative processes, the United States threatened to retaliate. The result was a request from the G7 to the Organization for Economic Cooperation and Development (OECD) to see if it could develop an equitable way of dealing with the problem. Fast forward, or more accurately, slow forward, a few years, and the OECD has produced two pillars. Pillar 1 is a set of rules for allocating revenue and tax liability among countries where a digital service is provided, rather than simply leaving it to the country where the company is headquartered to collect all the taxes. Pillar 2 would establish a minimum corporate tax rate of 15 percent and set up rules for determining what countries can do if a company’s tax liability in their country falls below that rate.

As you might imagine, both pillars are controversial, and the OECD is still revising and fleshing them out. Meanwhile, countries considering imposing a digital services tax agreed to postpone implementing it pending agreement on the OECD’s work. As the OECD’s work has progressed more slowly than expected, 138 of the 140 participating countries agreed to further postpone acting unilaterally for another year. Canada, to the surprise of everyone, did not agree. This has struck most observers as profoundly un-Canadian, as the country has long been a reliable and articulate supporter of the international rules-based system and has often played a constructive role in helping broker international agreements. (Plus, the general consensus is that Canadians are genuinely nice people—which I can testify to, since my mother was Canadian—who normally would not obstruct an international negotiation that was already incredibly difficult to conclude.)

Nevertheless, Canada appears determined to go forward, despite many people pointing out that doing so would violate both its World Trade Organization obligations and its obligations under the United States-Mexico-Canada Trade Agreement. So, I am baffled as to why they are persisting and would welcome anyone explaining what is going on.

The second case is the apparently diminishing Americas Partnership for Economic Prosperity (APEP). Launched with some fanfare by President Biden at the Summit of Americas in June 2022, APEP appeared intended to be a Western hemisphere version of the Indo-Pacific Economic Framework (IPEF). However, while the latter has moved on with an active series of monthly negotiating rounds, the conclusion of one of its four pillars and the expected conclusion of at least two more next month on the margins of the annual Asia Pacific Economic Cooperation forum (APEC) the United States is hosting in San Francisco, APEP has languished with few meetings and no visible progress.

In the view of many observers and most of the business community in all the IPEF countries, IPEF looks like it will be at best a very modest agreement, with market access off the table from the beginning and the likelihood of very weak provisions on digital trade. Now it appears that APEP is not even going to be an agreement but rather will be a “forum.” Senator Tim Kaine (D-VA), who chairs the Senate Foreign Relations Subcommittee on the Western Hemisphere, has written the State Department to express concern about this “revamped” approach. It is not clear exactly what a “forum” would mean, but it seems it will not be anything that involves binding commitments or probably even nonbinding commitments. In other words, it was always going to be small cheese at best, but now it looks like it won’t be cheese at all. Cynics will suggest that this apparent downgrade is related to the fact that the State Department appears to be the lead agency, but the real blame, as with most things in this administration, belongs in the White House, where all the important decisions are made.

Regardless of the reason, however, an APEP downgrade represents another missed opportunity in our trade policy, in this case the chance to make some needed improvements in relations with our neighbors to the south. If anyone can explain this development, I would also like to hear about it.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.