Tax or Be Taxed: the Reality of EU-USA trade negotiations
How EU Corporate Tax Unity Can Counter Intrafirm Trade Distortions and U.S. Pressure
Tax or Be Taxed: the Reality of EU-USA trade negotiations
How EU Corporate Tax Unity Can Counter Intrafirm Trade Distortions and U.S. Pressure
Pasquale Lucio Scandizzo
Economists are often internally divided and uncertain about the best way to spread their ideas. In many other scientific disciplines, the problem of dissemination arises in a dualistic way: on the one hand there is professional communication with one's colleagues, on the other there are dissemination activities. For economists, however, the situation is much less clear, because there is rather a continuum that goes from one's colleagues, more or less academic, to the general public. Especially with regard to the debate on economic policy, the problem is not whether to do science or scientific dissemination, but how to theorize, argue, persuade the greatest possible number of people, without abandoning one's scientific and professional capacity.
The tradition of the involvement of economists in economic information can be traced back to distant times at will. Biblical times, for example, can easily be invoked: were not many of those prophets who predicted cyclical disasters, famines following wars of conquest, collapses of civilizations caused by foolish economic policies, economists at least in spirit? The more recent specific tradition, however, must be ascribed to the founder of modern economics, the author of the only revolution that economists recognize as such, John Maynard Keynes. It is in this tradition that it is important to reflect today, in my opinion, because of its specificity and its timeliness.
In April 1922, J.M. Keynes began his activity as director of the Supplements for Reconstruction of Manchester Guardian Commercial. This journalistic adventure of one of the greatest economists of the century began in a period that would prove critical for the history of Europe. It would demonstrate to Keynes, as well as to many economists and men of culture in England and Europe, the importance of information in fueling the debate on economic policy issues, and, at the same time, the ambiguity of its effectiveness both in communicating and in convincing.
The Supplements were described as an "exhaustive survey of financial, economic and industrial conditions, written by the major European authorities". In the twelve issues that were published, they reflect a web of relationships between intellectuals, bankers and businessmen. This happened in an elite Europe that, in the irrepressible involution of politics and civil society of the time, began to identify the fundamental long-term issues of economic development. The Supplements’ focus was the impact of economic policies on full employment, and the need to avoid blunt economic measures as a crude and dangerous tool. Keynes especially warned against economic nationalism that provoked retaliation and beggar-thy-neighbor dynamics (as in his earlier work on “ The Economic Consequences of Peace”).
While Keynes’ legacy persists in economic theory, the impact of the Supplements on information seems to have faded away. The abstract conversation of trade deficits and surplus is still framed in simple, at times nationalist, terms: country A exports more goods to country B than it imports, and therefore "wins" at trade. That argument dominates headlines and policymaking, especially in the United States, where long-term trade deficits with major trading partners as large as the European Union have been asserted repeatedly as evidence of economic imbalance or loss. It is, however, shallow at best, and highly misleading at worst, since it fails to consider how trade in this modern age of globalization is actually conducted.
This argument is also part of the massive “inaccurate information” in present politics and social media beliefs. Those who still marvel about it, should be advised that it replays, perhaps in a somewhat more naïve and yet effective way, the classical American pragmatist definition of truth. Looking at truth as a performative category that creates reality rather than interpreting it, William James opined that truth is that which is of “cash value in experiential terms,” John Dewey that which allows us to “get around in experience.” While pragmatism, though, founded this functionality on research for social improvement, memetic economy today detaches functionality from reasoning deliberation. In social media, truth is effective on a long-time scale, because it is validated by going viral on a short time scale.
In our contemporary-day multinational corporation economy, trade across borders is not primarily conducted between independent companies in rival markets. Instead, as much as a 50 percent of U.S. imports and as high as one third of its exports is intrafirm trade: trade between units of one multinational corporation. When Apple ships software code from California to Ireland, or when Pfizer licenses a formula of one of its drugs from its research facility in New Jersey to its plant in Belgium, such transactions aren't struck in markets but in internal account decisions. The technical term is: transfer pricing, and it is at the center of multinational corporation global tax planning.
These intrafirm prices are virtually never neutral. Firms have strong incentives to lower tax liabilities, thus underpricing exports out of high-tax countries like the U.S. and overpricing imports into them. An American firm would therefore export intellectual property to its German or British arm at a low announced price, with the German or British arm in turn using such IP as a foundation upon which it builds large revenues in EU markets. That registers as a small U.S. export of a service and a large EU export of a good or service, when in fact most of the underlying economic value of such good/services (e.g., research in a pharmaceutical or design in a phone) is created in the U.S.
This effect has two major consequences. First, it systematically underestimates U.S. value-added exports. Second, it overestimates EU value-added, especially in low-tax centers like Ireland or Holland, where U.S. companies centralize their intra-EU revenues. The final effect is a distorted bilateral trade picture in which the U.S. is shown as suffering a massive deficit with the EU, when economically, most of this value assigned Europe in fact has its origins in America.
Even advanced trade statistics designed as a correction of conventional double-counting, such as those estimated on the basis of value-added accounting (such as OECD TiVA or the World Input-Output Database), are unable to measure this issue. These databases will typically also not disentangle arm’s-length trade and intrafirm flows. Their measures rely on national accounts and company reports already affected by manipulated transfer prices. Even "refined" value-added trade balances can thus be misled depending on where companies choose to book profits, as opposed to where value is really being generated. Take pharmaceuticals. An American pharmaceutical company develops a lifesaving product but licenses it out of a Belgian affiliate at low royalty rates. That Belgian affiliate manufactures it and distributes it across the EU. Most of the profits, and with them recorded value added,remain in Europe. An Irish subsidiary of an American tech firm might sell ads or cloud services, routing revenues out of the U.S. even as software developed in Seattle or Palo Alto underpins them.
Such strategies are completely legal as they go, but they render bilateral trade balances a dubious indicator of economic strength or fairness. Even accepting to compare the rather meaningless bilateral trade deficits and surpluses, it is possible for the U.S. to appear to be at competitive disadvantage at trade with the EU, not because Europe produces better or superior products, but because U.S. businesses underprice final exports deliberately and overstate costs of imports. If anything, there is greater value being shipped out of the U.S. than trade statistics would reflect, but at the same time the US iis shipping its profits out with it.
That is why the discussion of trade deficits on the part of the US tariff advocates tends to be shallow, disoriented and often plainly wrong. It dismisses structural realities of capitalist globalism: dominant multinational power, manipulation of profit flows, disconnection between value creation and value reporting. Trade balances aren't national report sheets of good or bad performance. The accountancy decisions of corporate boardrooms, not shop floor or trading port, serve them better. Unless politicians and commentators grasp these currents underlying trade imbalance discussions, they will once again be chasing shadows, supplying populism grist but limited economic insight. It is no longer a matter of how much we export or import, but where value is created, captured, and taxed in an increasingly globalized world.
When the world economic order is being redrafted as a result of geopolitical conflicts, digital disruption, as well as resistance to globalization, the European Union stands at a watershed in its relations with the United States. Pressurized on one side by US authorities, multinational companies, as well as some of its rank and file, to scrap intentions of harmonizing corporate taxation across member countries, it has in its hand at the bargaining table the most potent weapon it could ever have: a common corporate tax in Europe.
Ironically, it is only the threat of this tax, not its relinquishment, that gives the EU its most potent leverage in bargaining with Washington. The Biden administration's declaration of support for a global minimum tax and OECD efforts at harmonized rules in taxing digital giants opened up a window of transatlantic convergence. But it has closed significantly. As the US lapses into its familiar traditions of protectionism and bilateral horse trading under the guise of tariffs, subsidy, and “fair competition”, the EU has appeared hesitant, divided. Some of its member states, lured by short-term competitiveness advantage, are against harmonization. Others fear backlash. And so, in theory, a united front has begun to appear a reluctant withdrawal.
But it is precisely this time in which Europe must stand its ground—and go one step further. As opposed to maintaining the idea of a corporate tax levied at a minimum, the EU must make it core to its bargaining arsenal with America.
Why? Because a single policy would not as effectively counterbalance present imbalance of transatlantic trade and investment flows. US multinationals have shifted profits into low-tax EU member-states like Ireland, Luxembourg, or the Netherlands over several decades—reducing their home-country as well as foreign-region tax liabilities while bending trade statistics as well as draining fiscal strength of European countries. These tactics swell the US trade deficit with the EU in nominal as well as in value-added measures, not because Europe is exploiting America, but because the Americans’ companies are exploiting Europe’s lack of unity.
With a corporate tax floor in Europe, as proposed, the EU would turn around the narrative. It would be saying in effect, “We’re no longer your tax haven.” That would inhibit not only intra-Europe tax arbitrage, but it would also reduce artificial trade imbalances and elevate the substance of bilateral trade statistics. It would demonstrate just how much of the so-called U.S. trade deficit is caused by profit shifting, as opposed to a genuine imbalance of consumption or production.
And whereas retaliatory trade levies or protectionist handouts would be aggressive by nature, a European corporate tax is non-aggressive by design. It is a piece of national policy because of internal cohesion, yet would summon a reckoning in Washington. Either Washington accepts that its corporations pay their fair share of tax in Europe, or it must explain why it is in favor of a regime under which its own companies drain out European tax bases while hiding behind a veil of trade objections.
This approach is both economically sound and politically asserting Europe’s independence. In recent years, Republican as well as Democratic US administrations have repeatedly cautioned Brussels against levying digital services taxes or harmonizing taxes. But can Europe be asked to seek clearance before taxing income earned in it? Should it abandon fiscal reform in order to please the same powers being benefited out of its present divisions?
Its credentials as a global regulator hang on being prepared to be one. That is, not pulling back from the European corporate tax plan, but instead doubling down, not only as a fiscal tool, but as a foundation of more balanced transatlantic economic relations.
Yes, there will be pressure. Yes, there will be threats. But there is a worse option: a Europe bending before negotiation begins, giving up its most powerful hand before playing it. That is not strategy, it is surrender. With this new era of economic realism, Europe must realize that negotiating power is not won through blind agreement, but through strength of institutions. A universal European corporate tax is good economics, but it is also smart diplomacy. It is built on the foundation of a more balanced, fairer transatlantic relationship. It is Europe’s greatest chance of speaking to the U.S. as an equal, rather than as a splinter bloc.