By Simon J Evenett, professor of international trade and economic development, University of St Gallen
Cross-border supply chains and digital services were instrumental in protecting people and economies during the pandemic. G20 leaders must commit to maintaining their free flow.
Although many are loathe to admit it, cross-border trade in goods and services have played a vital role in national strategies to cope with the COVID-19 pandemic. By the third quarter of 2020, exports of personal protective gear had surged, reflecting the private sector’s expeditious ramp-up of production. Dozens of governments facilitated this by suspending or abolishing import taxes and local sales taxes on medical goods. Cross-border supply chains for medical equipment also mitigated risks. When domestic production was curtailed due to lockdowns and other COVID-19–related disruption, hospitals and national health systems could source from abroad. G20 leaders should ponder how many more of their citizens would have died if they relied solely on domestic producers of medical goods. Food supplies remained plentiful too.
When shortages arose, they did not last long – an outcome facilitated by the fact that not every country faced the peak waves of COVID-19 infection at the same time. International trade ensured that sales could be redirected quickly across export destinations, so long as governments were shrewd enough to keep ports and airports open.
To the extent that medical supply chains were disrupted, all too open misguided government imposed export curbs were the root cause. Many governments that succumbed to such export curbs reversed themselves. G20 trade ministers made a virtue out of necessity by declaring that any trade restrictions should be “targeted, proportionate, transparent, temporary, reject our interest in protecting the most vulnerable, do not create unnecessary barriers to trade or disruption to global supply chains, and are consistent with [World Trade Organization] rules.”
A digital lifeline
It was not just cross-border supply chains in food and medical goods that were delivered during the COVID-19 pandemic. Digital services proved to be a lifeline for many companies and their employees. Sales lost through face-to-face purchases were replaced by online transactions and shipments within and across borders. Productivity and the quality of life at home were made more tolerable by the availability of digitally delivered services, many provided by foreign firms.
The surge in demand for digitally delivered services adored the opportunity for many small and medium-sized enterprises to break into new markets and to establish reputations for reliability. There is a welcome important inclusion dimension to this development, as many successful micro enterprises that benefitted were led by women, minorities, and persons from disadvantaged regions.
The latter success story is now at risk – thanks in large part to members of the G20. Every few years WTO members have to renew a moratorium on imposing import taxes on electronic commerce, a ban that goes back to the end of the last century. This year divisions have arisen among G20 members as to the merits of doing so.
Some G20 members do not just want to renew the ban – they want to make it permanent. Others want an extension, and a few want to scrap the ban entirely. Advocates of scrapping the ban have not put forward an alternative, even though there are legitimate questions about the appropriate way to tax digitally delivered services. No compelling reason has been advanced for why these services should be treated differently from other goods and services (especially as many imported goods face zero tariffs as well).
“Some of the G20’s trade ministries need to be reminded of the central economic mission of the G20, namely, promoting economic recovery”
Abandoning the moratorium will have two significant adverse effects for national economies. First, it will open the door for a tax hike on one of the few vibrant sectors of the economy. Second, scrapping the ban will create significant uncertainty over tax treatment and potential tax liabilities. One important lesson from ratcheting up taxes and regulations is that the compliance costs are – compared with the revenue streams – higher for small and medium-sized firms, putting at risk the inclusion gains of the past year.
Focusing on recovery
G20 leaders probably do not realise that some of their trade ministers are playing with fire. Fortunately, this year’s G20 summit comes before the WTO’s ministerial conference. The leaders at Rome should instruct their trade ministers to support renewing the moratorium. To the extent that some G20 governments have questions about how best to tax the digital economy, these technocratic matters should be addressed in a working group composed of finance and trade ministry officials.
Given the uneven global economic recovery, now is not the time to threaten a tax hike on the cross-border supply of vital digital services. Some of the G20’s trade ministries need to be reminded of the central economic mission of the G20, namely, promoting economic recovery. Policy coherence applies to trade policy.