Taxes and Taiwan

Two significant things happened last week that deserve brief comment. The Organization for Economic Cooperation and Development (OECD) reached an agreement on global tax rules, and the United States and Taiwan met formally to discuss trade for the first time since 2016. Aside from the fact that both events begin with “T,” they are otherwise unrelated.

The OECD process has been a long one. Reaching an agreement on a global minimum corporate tax and on how to allocate the right to tax income on digital enterprises among countries where the enterprise might not have a physical presence has not been easy. Treasury Secretary Yellen jump-started the negotiations earlier this year with new U.S. proposals on both issues, and the G7 agreed on a framework for both pillars of the agreement at its meeting in Cornwall in early June.

Last week, the OECD, which has been tasked by the G20 leaders with doing the hard work of developing a detailed plan, reached an agreement as well. The next step will be for the G20 finance ministers to take up the agreement at their meeting in Venice July 9-10. If they agree as expected, the OECD will proceed to fill in the many gaps in the agreement and get it ready for the G20 leaders to review at their summit at the end of October.

While this recent announcement reveals a few more details than the G7 agreement, there are many gaps to be filled in. One is what will become of the various digital services taxes some countries have threatened or imposed. The United States view has been that those have to go away, and the agreement seems to imply that, but the United States will be expecting more clarity. Another issue is exemptions. The parade of countries demanding that various sectors or companies be excluded has begun, with the United Kingdom leading the way in proposing to exclude its financial sector.

The exemption issue, in turn, is related to who is actually going to climb on board this train. Of the 139 countries participating in the OECD process, 130 signed off, representing more than 90 percent of global GDP. Notable holdouts include Ireland, Hungary, and Estonia, which will complicate producing an EU endorsement. Some countries may propose concessions to bring them in; others, including the United States, may prefer the “stick” approach mentioned in a previous column—taxing the gap between a country’s lower rate and the globally agreed upon rate, set at a minimum of 15 percent. That would remove the advantage a country would hope to gain from a lower rate by making sure that the full amount of the global minimum tax is paid.

Finally, even if the G20 leaders reach an agreement, each country must also embed the new rules in their domestic tax laws. With a closely divided Congress in the United States, that could turn out to be a bigger problem for the Biden administration than getting the G20 to agree. Nevertheless, the agreement was an important step forward, and it made me more optimistic than ever that this is going to get across the finish line.

More problematic, at least as far as finish lines are concerned, is progress on U.S.-Taiwan trade relations. Readers of this column know by now that one of the ironies of trade agreements is that they are often not about trade but are about geopolitics. That is certainly true in the case of Taiwan, where it is impossible to discuss a trade agreement without taking into account U.S.-China and China-Taiwan relationships and the implications of a trade agreement for both.

Around 20 years ago, in the wake of both China and Taiwan joining the World Trade Organization and putting in place the “one country, two systems” policy in Hong Kong, things seemed to be moving in a direction that might eventually permit the long-standing dispute over Taiwan’s status to be resolved. That hope turned out to be misplaced. China’s actions in Hong Kong squashed the one country, two systems policy and removed any lingering hopes that the same arrangement might be worked out with Taiwan. Recently, China’s increasingly belligerent attitude toward Taiwan, and U.S. support for Taiwan, has renewed fears of military conflict that had been quiescent for a long time.

Those increased threats have prompted growing enthusiasm in the United States for more support for Taiwan, and that has manifested itself in a growing interest in a trade agreement. In the past, the United States has fended off that interest by pointing to a number of serious trade disputes with Taiwan and arguing that those needed to be resolved first. The biggest one has been on ractopamine, a growth additive given to pigs in the United States that Taiwan had banned. The Tsai administration in Taiwan has attempted to remove that excuse by ending the ban, although it is not clear they will be able to make that stick in a referendum this August.

That, of course, was just an excuse. The point of a trade agreement is to negotiate solutions to problems like that. Insisting that the problems be solved before the negotiation can occur is simply a polite way of saying we’re not interested. Now it appears the United States may be interested, both as a response to congressional pressures and to signal China the United States’ continued commitment to Taiwan, proving once again that trade agreements are not just about trade.

There are legitimate trade issues between the United States and Taiwan that a trade agreement could resolve to the benefit of both parties, but a decision to go forward will not be based on a burning desire to sell Taiwan more pork. It will depend on how the United States wants to position itself with respect to China, and that is a policy, like so many others, that remains “under review.”

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

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