By Yong Kwon
Fourth in a series of policy briefs laying out clear steps to re-think and re-orient US foreign policy.
Key Takeaway: Build a durable political coalition around trade by promoting profit sharing in domestic industries; ending global tax avoidance through international cooperation; and rolling back austerity measures imposed on heavily indebted countries.
The period of growing international trade, punctuated by the formation of the World Trade Organization (WTO) in 1995, coincided with the accelerated displacement of manufacturing jobs in the United States. Although U.S. export of goods and services grew during this period, many people began associating U.S. participation in trade agreements with rising economic insecurity at home. As a consequence, ratification of agreements like the Trans-Pacific Partnership became politically untenable.
The Underlying Problem: Unequal Gains
The less-discussed effect of globalization that significantly contributes to this sense of dislocation is the shifting of corporate profits to offshore tax havens. As a consequence, corporate income tax revenue as a share of the national tax income has fallen by 30% between 1995 and 2017. This has placed a greater burden on ordinary Americans who pay an increasingly larger share of the national tax income.
Simultaneously, many emerging economies distrust multilateral trade agreements because they face significant barriers to exporting goods despite their commitments to the WTO. In particular, negotiators from the Global South cited the overprotection of U.S. and European intellectual property and agricultural markets in their rejection of further multilateral trade liberalization at the 2001 Doha Development Round. Many nationals in these emerging economies see their country’s growing debt burden as a consequence of an unequal international economic order.
In both the United States and emerging economies, the unequal gains to economic growth are at the root of the discontent.
The Way Forward: Worker Empowerment, Fair Taxation, And Debt Relief
Given the challenges created by inequality, the aims of the new Biden administration should focus on restoring confidence in trade’s capacity to deliver real and tangible gains to the economy. Three interlocking policies can help deliver this outcome.
Strengthening Labor’s Voice: A fairer trade policy begins at home. The federal government must prohibit states from enacting so-called “right to work” laws, which prevent unions from mobilizing resources to organize new workers and engage in collective bargaining. When unions ensure that firms maintain an explicit commitment to share trade gains with their employees, the country will not only be more conscious of the tangible benefits of trade, but also more accurately assess public sentiments towards new trade agreements as the interests of management and labor align.
International Tax Coordination: Profit-sharing at home may be undercut if gains from trade are accounted for in offshore tax shelters. Building on the 2010 Foreign Account Tax Compliance Act, the U.S. government should advance a multilateral tax agreement that sets a minimum tax rate on multinational companies. This agreement would ensure that a firm’s global profits that are uncollected in tax shelters would be collected by governments where a share of those gains originated. This can be modeled on how most U.S. states collect their corporate tax revenue.
Debt Relief: Even when a fairer global corporate tax regime directs gains from trade to the public, onerous debt repayments may prevent emerging economies from utilizing these resources to improve socio-economic conditions. This dynamic amplifies domestic resentments and prevents indebted countries from deepening relations with nations that they perceive as predatory. The U.S. government is uniquely positioned to coordinate debt relief and should lead this effort because an emerging economy that invests more heavily in its own economy will invariably strengthen trade ties with suppliers of vital goods and services like the United States.
Looking to the Future
The aim of this policy recommendation is to find a pathway to rebuilding trust in multilateral trade negotiations and international financial institutions by delivering tangible benefits to the most important stakeholders in the global community: its people. The popular mandate for governments to collaborate on trade will facilitate the coordination of joint policies in response to more complex shared challenges. Climate change sits at the top of that list, but also includes the eradication of poverty and better preparation against future pandemics.
Yong Kwon studied economic history at the London School of Economics and moderates the subreddit r/EconomicHistory. He is currently the Director of Communications at the Korea Economic Institute of America. Views in this post are his own and do not represent the official position of the Korea Economic Institute of America.