Recent declarations from the White House risk souring the long-standing economic friendship between Europe and the United States, writes Ilaria Maselli.
Ilaria Maselli is a senior economist for Europe at The Conference Board, a global, independent business membership and research association.
While no longer fashionable in the popular discourse, trade has been a key engine of prosperity. Relations across the Atlantic have been solid and deep but recent recommendations from the White House risk souring that economic friendship.
Admittedly, TTIP has never been really popular on both sides of the Atlantic, and the Trump Administration might well put the nail in the coffin. Today, maintaining the status quo looks like the best case scenario as a result of the following three Trump proposals. If they’re enacted, they look all but certain to keep Europe’s business and policymakers up at night.
#1: The border adjustment tax
While still under consideration, the proposed border adjustment tax calls for goods and services entering America to face a price adjustment. It would resemble a VAT but a crucial difference is that it would apply only to imports. The Trump Administration and others in Washington suggest the idea as a way of collecting revenue to accommodate for the resulting shortfall from steep tax cuts, and to promote a protectionist agenda focused on “Buy American”.
Moving from a production to a destination-based tax system in the world’s leading economy can have gigantic consequences for business worldwide. Even though economic theory suggests that the tax could be entirely offset by an equivalent appreciation of the dollar, it is difficult to imagine that this happens entirely and fast enough to avoid adaptation measures.
The border adjustment tax could force European companies to cut costs to stay competitive and to reorganise their supply chains to source locally to serve the North American market. While there may be some advantages to that, such as being more environmentally friendly, local sourcing faces constraints of various kinds: availability of natural resources as well as capabilities and know-how that goes into the production of goods and services. As a result of the adjustments that the tax would engineer, business in the US and Europe will face higher costs. That will inevitably translate into higher prices for consumers.
#2: TTIP is out; new tariffs may be in
Once upon a time, there were talks to harmonise regulations between America and the EU to strengthen trade and prepare the rules for the 21st century. Now discussions centre on complicating and increasing them. While TTIP remains in a deep freeze, talk of new fines coming out of the Trump White House are alive and well.
If the border adjustment tax does not go through, an increase in tariffs could be the other barrier to trade. One proposal under consideration – as an example – is to slap 100% tariffs on European meats and Vespa scooters. Tariffs would translate into much higher prices for American consumers and higher costs for American companies that use European products as intermediate input. Moreover, they are rarely unilateral: Since the border adjustment tax and ad-hoc tariffs are not compliant with the World Trade Organisation rules, these measures are likely to trigger retaliation.
A trade war would harm Europeans exporters that contribute to a surplus worth €100 billion with the US. This surplus derives from the export of goods divided between 11% of agricultural products and 88% manufacturers in 2016.
#3: Corporate tax wars
It may surprise Europeans that the US corporate income tax rate ranks highest among mature economies, at 35%. To put that in perspective, the Finns pay 20%, the French pay 34%, the Irish pay 13%, and the Italians pay 28%. At the same time, revenue from corporate taxes as a percentage of GDP is among the lowest, because of loops in the tax law and profit shifting.
Corporate taxation (a national competence in the EU) is a delicate issue for Europeans – just consider the irritation from the $13 billion fine the Commission issued to Apple in 2016. Well-paid lawyers have engineered dizzying tax arrangements to take advantage of the lack of harmonisation in Europe and the loopholes created by the existence of a single market without a single taxation.
The risk of new tax competition from the US will likely exacerbate this tension among EU member states that use tax rates to compete amongst each other for business. Not only that: it would blow the new attempt by the European Commission to create a common tax base for large companies that operate in the single market (i.e., firms with a global turnover of over €750 million per year).
As a result, trust in the EU is damaged, fueled by eurosceptics who use the case of taxation to argue that the EU serves the purposes of multinationals better than its citizens. In the midst of this eternal contention, proving that large companies are willing to pay their fair share of taxes is left to individual will and stewardship.