The US tax reform package that has been sold as a strategy ‘to make America great again’ will have global ramifications. In an interconnected world, large changes in one country’s fiscal policy affect others. As the US administration ignored the usual consultation and coordination mechanism, partner countries can either protest or retaliate. The latter will be a return to beggar-thy-neighbour policies with unforeseen consequences.
There is no clear international mandate for dealing with violations involving monetary and fiscal measures. The International Monetary Fund has been called upon in cases of exchange rate manipulation. The World Trade Organisation deals with matters regarding exports and imports of goods and services.
The monetary stimulus packages of the Bank of Japan, US Federal Reserve, the Bank of England and the European Central Bank were a case in point. Rather than coordinating quantitative easing (some consultation happened at the Bank for International Settlements), central banks just followed each other’s aggressive QE. Thus, central bank balance sheet expansion became the accepted monetary policy after the global financial crisis.
Regarding the impact of massive fiscal stimulus, the international community is at a loss. When Japan adopted a number of fiscal stimulus measures under the Abe government, the most overt reaction was from Germany, quoting the impact on trading partners.
In a letter EU finance ministers sent to Steven Mnuchin, the US Treasury secretary, following the adoption of the US tax package, they mentioned that the US had violated WTO principles and regulations.
Christine Lagarde, the managing director of the IMF, declared that ‘overly aggressive tax competition among countries amounts to a beggar-my-neighbour policy which hurts everybody’ in February 2017. This was followed up by William Murray, deputy spokesman at the IMF, who said the new US tax law will be discussed during Article IV consultations with the US in early 2018 and the result would be published in July 2018.
The Organisation for Economic Co-operation and Development has beefed up its work on fiscal coordination. Its global relations programme in taxation provides a platform for dialogue between officials on standards, guidelines and best practice in international tax. The OECD/G20 base erosion and profit shifting project helps governments to close the gaps in rules that allow corporate profits to ‘disappear’ or be shifted to low- or no-tax jurisdictions.
The crucial issue at this juncture is whether this international coordination mechanism is strong and practical enough to be called upon by member countries that feel unilateral actions have created a competitive environment.
If not, there is real danger the world will disintegrate into national policies that ‘make some countries great again’ at the expense of others. The economic progress of the 20th century was due to consultation and coordination of policies.
In the absence of a global government, the G20, the closest approximation, has the responsibility to carry out this task. The G20 lacks a permanent secretariat and the hosting nation, Argentina, has been quiet on this issue. The world risks disintegration into chaos, where national interests prevail over the common good.
Herbert Poenisch is a Member of the International Committee of the International Monetary Institute at Renmin University of China, and former Senior Economist at the Bank for International Settlements.