by Alex Nnamchi
Blog Post: G20 Ministers meet in Japan ahead of Osaka’s Leaders Summit
Over the weekend, Ministers from the G20 countries met in the Japanese cities of Fukuoka and Tsukuba. The meetings were a prelude to the Osaka Leaders’ Summit which will be held at the end of the month. Fukuoka hosted the Finance Ministers and Central Bank Governors meeting, which focused on discussing international economic issues and sustainable global economic growth. Meanwhile, the ministers of trade and digital economy met in Tsukuba to seek solutions to further strengthen economic policy cooperation within their fields of expertise.
To improve global relations, the two-day meetings attempted to address the following ongoing issues:
- Mitigating exploited tax loopholes
- Intensified trade and geopolitical tensions
- Reforming the World Trade Organization
Mitigating exploited tax loopholes
While trade tensions dominated the weekend meetings, the G20 ministers in Fukuoka pledged to close loopholes that had enabled multinational companies to shift their profits to low-tax jurisdictions and minimize their corporate tax bills. As big corporations across the world have enjoyed an earnings boom in recent years, the amount of tax paid on pretax profits by the world’s top 100 companies in terms of market capitalization declined to 23 percent in 2018 from just over 30 percent in 2000. Britain and France have been among the most vocal proponents of proposals to tax big tech companies that focus on making it more difficult to shift profits to low-tax jurisdictions, and to introduce a minimum corporate tax worldwide. The new rules would mean that companies widely seen to abuse existing loopholes would find it harder to shift to countries such as Ireland or Singapore. The ministers enforced their pledge by announcing to double their efforts for a solid solution with a final report by 2020. As hopeful as this pledge appears to be, the current challenge would be obtaining a consensus from a large group, which includes countries like China, India and South Africa in addition to G8 mainstays like the US and Russia. The US, in particular, has objected to British and French efforts to increase taxes on tech, arguing that American companies are unfairly singled out.
If followed through, the new set of tax guidelines could lead to significantly larger payouts from corporations used to paying relatively little in taxes. This potential change in policy can help relations between the tech companies and the residents of the economies they are stationed in. The guidelines can change the notion that tech firms are profiting from their residents while contributing very little to their local economies.
Intensified trade and geopolitical tension at the global scale
In a communique statement made following the Fukuoka meeting’s conclusion, the G20 finance leaders declared that trade and geopolitical tensions have intensified. Not specifying the deepening US-China trade conflict, they emphasized the tensions’ risks to the improvement of global growth. Yet, in the same statement, the G20 ministers asserted that
global growth remains stable and is projected to increase later in the year and into 2020.
In reality, the credibility of the latter statement must be questioned. As trade and geopolitical tensions have intensified, overall growth remains low and risks decreasing. The World Trade Organization (WTO) has projected the global trade will only grow 2.6 percent this year compared to 4.0 percent in 2017 and 3.6 percent in 2018. This slowdown comes at the same time as the ongoing US-China trade dispute. In May, President Trump had increased tariffs for US$200 billion of Chinese goods and will be ready to impose similar tariffs of 25 percent on a remaining US$300 billion list of goods around the time of the Osaka summit. The recent dispute between two of the largest economies continues to create uncertainty in the global stage.
In addition to trade, the Fukuoka statement also addressed the role of domestic and multilateral infrastructure projects as drivers of economic growth. The ministers reinforced the notion that the quality of the infrastructure remains an essential part of global efforts to improve relations. Without directly referencing to China’s Belt and Road Initiative, the group said it was important to preserve the sustainability of public finances while raising economic efficiency and strengthening infrastructure governance in general. This comes at a time when China’s trade and infrastructure scheme has led to strains with other countries after creating unsustainable high levels of debt in some developing countries for projects of marginal economic benefit.
Reforming the World Trade Organization (WTO)
In Tsukuba, the G20 ministers enforced their pledge to constructively work with other WTO members to undertake necessary organizational reform and bring it more in line with the digital economy realities of the 21st century. Formed in 1995, the WTO had come under scrutiny as its guidelines and principles have been deemed archaic for today’s increasingly digital economy. In particular, the WTO has been heavily criticized for its inability to use its judicial branch to effectively resolve trade disputes. The WTO’s apparent absence of power could be seen with its lack of response to the ongoing US-China trade tensions. The two largest economies were also absent when Canada had hosted a meeting to discuss possible reforms for the WTO back in October 2018. In addition to calling for a change for the WTO’s judicial system, the G20 members acknowledged a need to enhance investment in infrastructure focusing on ICT, notably for developing countries, to facilitate their participation in the digital economy.
As the ministerial meetings for finance, trade and digital economy have now concluded, their relevance has only further been questioned. With the exception of the global tax loophole issue, the meetings have failed to create an impact on confidence, as demonstrated in the stock market on Monday. Displaying a surge in the Mexican Peso, the market moved in response to President Trump’s suspension against Mexico, not in response to the G20 meeting. US President Trump has already warned Chinese President Xi Jinping that a new round of tariffs would be levied on the country’s goods if the two leaders failed to meet at the G20 summit in Japan. This statement comes after the meetings were held over the weekend. At the end of the day, the power to resolve the world’s most immediate economic challenge, will not depend on the meetings in Fukuoka or Tsukuba, but solely on the leaders who are behind these hurdles.