The CPTPP Expansion Challenge for America

The CPTPP Expansion Challenge for America

This now puts the US in a particularly awkward position with Chinese entry to the CPTPP on the table. The easiest solution would be for the US to quickly come back to the revised deal. All the schedules have been maintained and could be reactivated. The 20 provisions that were “frozen” in the transition from TPP to CPTPP could be addressed. However, politically in the US, this is viewed as a “non-starter.” If the US were to return at this point, there would need to be additional adjustments made and, even then, it is not clear whether there might be sufficient votes in Congress to approve entry. The US, under the Biden Administration, continues to work on its trade policy dimensions. There is a review of policy with China, specifically, that has been underway for months. Until these are both clarified and supported by Congress, it’s not clear what sort of forward-looking offensive trade items might be possible. It could be something on digital or perhaps on climate. Since the US is neither likely to return to the CPTPP in the near term or have a comprehensive trade strategy in place, the US is in a pickle.

China Applies to Join the CPTPP

China Applies to Join the CPTPP

China has submitted a formal letter of application to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Now, after years of speculation, it’s decision time. Will the current members of the CPTPP agree to allow China to start accession or not? As readers may recall, a CPTPP accession process has started already. Members have formed accession working parties to manage the addition of the UK. With China’s request, members will need to hold formal bilateral consultations. Then, they will convene to decide on what to do with the application request. If the current members decide to allow it, China will proceed to the accession stage and start working on their own country-specific schedules for market access in goods, services, investment, movement of business persons, state-owned enterprise (SOE) exceptions, and government procurement commitments. The text of the agreement and all existing member schedules are not intended to be adjusted in the wake of new accession discussions. The key question of concern for current members will be whether or not they judge China to be ready, willing and able to uphold the existing rules in the agreement?

Crafting a Climate Trade Agreement (CTA)

Crafting a Climate Trade Agreement (CTA)

Part of the problem is that the entire policy landscape for managing sustainable trade with a focus on climate or environment remains at an early stage. Climate has been managed by officials through the UN Framework Convention on Climate Change (UNFCCC). Trade officials, agencies or ministries may participate, but are not driving the agenda. Many of the ideas circulating to address climate and trade are quite new as well. It isn’t entirely clear, as an example, what sort of trade implications will come from the growing use of carbon border adjustment taxes. The trade consequences of green subsidies are likely to be significant, but uncertain. There are some elements of a trade and climate agenda with more consensus, including the potential inclusion of clauses on pollution or managing endangered species. Some trade agreements include commitments to sign on and implement a variety of climate-related international treaties and conventions. The critical importance of the “climate and trade” agenda is clearly crying out for a suitable response. Yet existing mechanisms for delivering results seem limited. Adding climate to trade agreements, as noted above, tends to be unsatisfactory. Asking global or regional institutions to manage any possible trade-related fallout from climate actions taken by the UNFCCC or others is also problematic. One solution that seems achievable is to create a new style of trade agreement, the CTA. It could pull out the most useful and innovative element of a digital counterpart, the DEPA.

An American Digital Trade Agreement?

An American Digital Trade Agreement?

In short, there are some sensible reasons for pushing the US to pick up and lead a new digital agreement. However, the Americans are not—to use a sporting metaphor—stepping onto a clean pitch. The game has already been underway for some time, particularly with important American trading partners and likely participants in any digital arrangements. The US will have to operate within an increasingly crowded landscape. More than 80 WTO members have been working on e-commerce through a Joint Statement Initiative (JSI) for some time. Other ongoing digital activities include the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), the Regional Comprehensive Economic Partnership (RCEP) and also, as noted, upgraded commitments in AANZFTA or Japan’s various trade deals, as well as ASEAN’s E-Commerce Agreement which is entering into force this year. There are also two types of digital-only trade deals already in place. The Digital Economy Partnership Agreement (DEPA) is a stand-alone deal. It builds on the CPTPP commitments and included three original members of the agreement: Chile, New Zealand and Singapore. It is currently in force for the latter two countries and is likely to undergo expansion with the addition of new members shortly. There are also growing a number of Digital Economy Agreements (DEA) in place for Singapore. One is already in force with Australia with two more nearing the finish line: with South Korea and the UK. The DEAs are designed to build on existing bilateral free trade agreements. This means that they need not replicate all the features of a comprehensive agreement, including dispute settlement or the agreement management infrastructure, but compliment existing policies and procedures. If the US shows up and is prepared to work on a digital economy agreement, the first question will be what is to be included in such an arrangement that is not already covered under the JSI, CPTPP, RCEP, AANZFTA, DEPA, DEAs or other e-commerce and digital trade chapters in bilateral trade agreements?

Trade and Tax in a Digital World

Trade and Tax in a Digital World

Neither trade nor tax are new issues. What is new are the types of challenges that digital trade poses to revenue collection. As the digital economy has grown significantly, governments have watched with increasing dismay as taxes have not been collected from a steeply growing volume of transactions. Fiscal pressures in the wake of pandemic spending have accelerated the quest to appropriately tax companies and purchases made in the digital or online environment. The rise of the digital economy has complicated the traditional tax environment. Firms can be located anywhere and provide goods and services online to suppliers, vendors and customers in places without any need for a physical presence. The digital economy allows firms to scale up substantially at often minimal direct costs, creating a small set of super firms generating outsized profits. Such technology or digital firms present tempting targets for cash-strapped governments looking for revenue. However, it is not just large firms that can take advantage of new ways to find customers. A vital aspect of the digital economy is how it enables even the smallest companies to engage in cross-border trade. Firms that might never have been tempted to trade outside their own villages are increasingly finding key markets halfway around the globe. In short, there are at least four important ways that the digital economy has affected traditional tax systems: by allowing firms to compete in markets without a physical presence; by the proliferation of approaches, mostly used by large firms, to more carefully manage tax; companies that can operate with no or minimal presence; and by the participation in cross-border trade by companies previously not engaged in such transactions. Our latest paper, published this week with the Hinrich Foundation as part of the ongoing series on digital trade issues in Asia, highlights some of the current and upcoming issues of digital tax under both direct and indirect tax collection schemes.