The top issues were taxation of high-tech companies and the economic impact of COVID-19. Both issues will have implications for trade policies. High tech taxes could be a significant point of contention between the U.S. and Europe and COVID-19 not only threatens economic growth but brings into question the efficacy of global supply chains dependent on China. Meanwhile, bilateral talks between the U.S. and Saudi Arabia, and comments by Secretary of State, Pompeo, hint at perhaps a ratcheting up of “maximum” pressure on Iran. The potential snapback of U.N. sanctions bears watching.
Finance ministers and central bankers from the G20 met in Riyadh over the weekend amidst the ongoing coronavirus (COVID-19) crisis. This is one of a series of meetings designed to both coordinate policies and to set the agenda for the G20 summit that will take place in Saudi Arabia in November of 2020. Two narrow questions and one broader question dominated the discussions. The first narrow question was whether nations would be able to come to some type of agreement on coordinating the taxation of high technology companies that do business across the globe. The second narrow question was how much the coronavirus, and the response of states to its spread, will affect overall global growth, and if growth slows significantly, what might be done about it at the level of the G20. The broader question, brought on by the coronavirus, is about the current state of globalization, in particular the reliance on China for large portions of supply chains for critical industries. China was absent from the meeting due to the urgency of coping with the coronavirus.
The issue of digital service taxes on largely American-based global technology companies is primarily between the United States and Europe, but the implications are global. If an agreement is not reached soon, there is a chance that Europe will start imposing levies, risking retaliatory tariffs by the United States, exacerbating an already escalating trade war across the Atlantic and building on the ongoing trade imbroglio between Washington and Beijing. U.S. Treasury Secretary Stephen Mnuchin stated that the issue is complex and may require Congressional approval for some aspects – assuming a deal could be struck. Congressional approve in a U.S. election year on an issue that has garnered the notice of President Trump may be difficult. The deadline for agreement set by the states is the end of 2020, but this deadline could be extended if either the issue proves too difficult and/or other economic dislocations threaten global growth. The imposition of these taxes, and threatened U.S. retaliatory action, have already been postponed once this past December.
COVID-19 may be the issue that causes enough economic dislocation to overshadow other economic disputes and may indeed lead either to their solution or postponement. The finance ministers and central bankers stated that there was still great uncertainty about the economic impact of the disease, but that there was a shared understanding that action may be needed to counter its economic impact. Japanese Finance Minister Taro Aso said that he would advocate for economic stimulus measures if needed and that he expected states with “big fiscal space” to make “a bold policy decision.” The issue, of course, is whether states are in agreement about who has that requisite fiscal space and whether the domestic politics of the states involved are in a place where bold policy decisions – meaning some sort of fiscal stimulus – are politically possible. Underlying this, of course, is that the scope of the virus is still very much unknown, and therefore the economic impact is even more uncertain.
The longer-term issue is the centrality of China to certain industry supply chains. The French Finance Minister spoke about this publicly – saying that it was not protectionism but merely a question of sovereignty and independence, a historic and strong theme of French foreign and security policy. Depending on how the virus and Chinese response plays out, this may be one more reason for both states and companies to further diversify supply sources, something that may slow an already sluggish Chinese economy even more. This, combined with domestic and international criticism about how the Chinese government handled the outbreak particularly at its outset, could have political consequences in China.