2019-08-24 The Economist Latin America

The EconomistAugust 24th 2019 Finance & economics 59

1

“D

on’t taxyou, don’t tax me, tax that

fellow behind the tree.” Historically,

this rhyme has poked fun at the tax-shy

American public. Today it reflects com-

plaints against the French government,

which on July 25th introduced a tax on digi-

tal services. American companies such as

Amazon, Facebook and Google are protest-

ing that they are being treated like the fel-

low behind the tree. President Donald

Trump is itching to hit back. Unilateralism

is a language he can understand.

At the heart of the dispute lies a mis-

match between where companies make

their profits and where those profits are

booked for tax purposes. Governments

wail that as data and ideas can zip across

borders, taxable profits can slip between

their tax-collectors’ fingers. The solution

requires international co-ordination, to

avoid everyone trying to tax the same stuff

at once. But negotiations overseen by the

oecd, a club of mostly rich countries, are

taking too long for the French.

Hence their levy of 3% on the revenues

generated from French users of online plat-

forms and digital advertising. The tax is

blunt, but that is part of the point. It is

meant as an interim measure, to be ditched

once an international agreement is

reached. It could even make a deal more

likely. Affected companies may prefer that

to unilateral taxes, and lobby for it.

Not surprisingly, the Trump adminis-

tration has taken umbrage. It has begun an

investigation into the French tax under

Section 301 of the Trade Act of 1974 (the

same law by which it justifies tariffs on

China). On August 19th eight officials heard

the companies’ formal complaints. “We

cannot absorb this expense,” claimed Ama-

zon’s representative.

No one likes new taxes, of course. But

the companies do have a point. Interna-

tional trade rules are supposed to stop gov-

ernments treating foreign companies dif-

ferently from their own. And the French

seem to have singled out America’s big

technology firms. The tax will only hit

companies with at least €750m ($830m) in

global revenue from the relevant digital

services and at least €25m derived from

French users. Those thresholds conve-

niently exclude most French companies.

Further clues lie in the French nickname

for the levy, “the gafatax”—a reference to

Google, Apple, Facebook and Amazon.

The French appear to have defined the

taxed services selectively too. Subscrip-

tion-based digital services are spared,

along with crowdfunding websites and

digital payment services. More broadly,

Hosuk Lee Makiyama of the European Cen-

tre for International Political Economy, a

think-tank in Brussels, notes the inconsis-

tency of the French position. France is keen

to grab a slice of America’s digitally derived

corporate profits, but is loth to agree to new

rules that would allow the Chinese tax au-

thorities to share in the spoils from

French-owned luxury brands.

The administration seems almost cer-

tain to end up finding fault with the

French. America could then complain to

the World Trade Organisation. But Mr

Trump is more likely to fight unilateralism

with unilateralism, by raising taxes on

French individuals or firms, or by impos-

ing tariffs. The president appears particu-

larly keen to raise duties on French wine.

If this happens, free-traders will surely

grumble that Mr Trump has again chosen

commercial conflict over co-operation. But

the irony is that behind closed doors, his

officials had been acting constructively in

the multilateral talks at the oecd. Whereas

Barack Obama’s administration had resist-

ed further reforms, particularly those that

could affect America’s technology compa-

nies, Steven Mnuchin, Mr Trump’s treasury

secretary, was much more open to them.

It may seem that the French are giving

Mr Trump a taste of his own medicine—us-

ing unilateral action to put pressure on a

negotiating partner. But they may have

made tricky discussions more difficult. Ad-

mittedly, Mr Mnuchin might not have been

able to get Mr Trump’s approval for any

oecdreform. But now the dispute is play-

ing out on the presidential Twitter feed.

And for once, Mr Trump will be able to deny

that he started it. 7

WASHINGTON, DC

France has borrowed a tactic from

America’s president. Expect fireworks

International tax

Trading blows

F

or a casestudy in the complexity of

transitions from central planning, con-

sider the knotty mess that is China’s inter-

est-rate system. More than 40 years after

Mao Zedong died, the country is an eco-

nomic superpower, yet it still struggles to

manage bank lending using interest rates,

rather than through heavy-handed inter-

ventions such as credit quotas. To make

this shift, the central bank has created a

dizzying array of instruments. s&pGlobal,

a rating agency, counts 20 separate mone-

tary-policy tools in China, from newfan-

gled liquidity-injection facilities to old-

fashioned instructions to banks; America,

by contrast, has just six main instruments.

Now China has modernised its arsenal

with a new benchmark interest rate, un-

veiled on August 16th. The Loan Prime Rate

(lpr), as it is known, will become the refer-

ence rate for banks pricing corporate loans.

Announced monthly, it will be the average

of what 18 designated commercial banks

charge their best corporate clients, ex-

pressed as a spread over the banks’ own

cost of borrowing from the central bank.

In theory this should make Chinese

lending rates more responsive to financial

conditions. Under the previous system,

banks priced loans from a one-year lending

rate set by the central bank. It has refrained

from changing that rate since 2015, con-

cerned, in part, that investors would over-

react. It does, however, regularly tweak li-

quidity levels, and has bemoaned the fact

that its cautious easing in recent months

has not translated into lower borrowing

costs in the private sector.

For industrial firms real (ie, inflation-

adjusted) interest rates have instead

SHANGHAI

China revamps its interest-rate system

but also adds to its muddle

Chinese monetary policy

At any rate

Shifting base

Sources: The People’s Bank of China;

National Bureau of Statistics

China, one-year lending rates, %

*Deflated by PPI

2009 11 13 15 17 19

-5

0

5

10

15

Benchmark

Real benchmark*