Originally published by Cayman Financial Review on February 4, 2019.
The global trade system is under assault thanks in large part due to the election of Donald Trump as U.S. president. His pledge to “put America first” has been carried out through tariff hikes, U.S. withdrawal from the Trans-Pacific Partnership (TPP), an attempt to replace NAFTA with a new agreement featuring added protectionism, particularly on the automotive industry, and threats to withdraw from the World Trade Organization.
The danger is exacerbated by the concurrent global rise of illiberal populism, along with its distrust of foreigners and skepticism of multilateral trade agreements. It would be beneficial for there to exist a global body focused on responding to these anti-trade headwinds.
Unfortunately, the most obvious choice – the Organization for Economic Cooperation and Development (OECD) – has drifted so far from its original mission as to no longer be up to the task.
Future of global trade uncertain
It is possible that the Trump administration represents an aberration, both within the U.S. and globally. It is likely, for instance, that the next U.S. president will be more favorable toward trade, which opinion polling shows has gained popularity among the American electorate under Trump, though whether Democrats maintain their newfound appreciation for free trade after Trump remains to be seen.
And perhaps the rest of the world will continue making progress on economic liberalization without the U.S., as happened when the other nations involved in the TPP negotiations formed their own pact after the U.S. withdrew its signature.
But other more concerning possibilities exist. Populist movements are spreading, particularly in Europe where support for populist parties has been steadily growing for 20 years, well before the emergence of Trump. Should they gather enough momentum, the liberal global order may be in real trouble.
The yellow vest protest in France have turned violent, and while hard to pin down ideologically, appear increasingly hostile to “globalism.” Populist candidates have also recently won elections in Brazil, Italy, and Hungary, among others. Trade has not played a significant role in all these cases, with cultural or other domestic issues often proving more salient, but the very rise of illiberalism is inherently threatening to open trade.
The OECD response to these developments, unfortunately, has proven disappointing. Instead of returning to its roots by refocusing on its core mission to foster economic cooperation and open global markets, the OECD has gotten only more ideological and doubled-down on its misguided commitment to expansive government.
The OECD became tax bullies
Pervasive mission creep at the OECD began in earnest with its efforts to limit what it considers “harmful tax practices.” In Cartelizing Taxes: Understanding the OECD’s Campaign against “Harmful Tax Competition,” published by the Columbia Journal of Tax Law, Andrew Morris and Lotta Moberg trace how the OECD’s involvement in tax policy evolved from an “initial focus on finding solutions to problems that impeded international economic activity to a focus on protecting a few states’ abilities to collect revenues at the expense of other states.”
The shift from primarily reducing the friction between the different trade and tax policies of member nations to actively pressuring non-OECD members – in particular, low-tax jurisdictions and offshore financial centers – into adopting policies favorable to the high-tax membership of the OECD has proven consequential. For global tax policy, it has meant a steady erosion of financial privacy rights and the proliferation of intergovernmental information sharing, first on demand but more recently on an automatic basis.
It has also produced a massive global undertaking on corporate taxation through the Base Erosion and Profit Shifting (BEPS) project. Even though global corporate tax revenues had not declined, the OECD insisted BEPS was urgently needed and for years now has devoted considerable resources to the project, with no letup in sight. And the newest tax-related obsession of the OECD is digitalization, itself an outgrowth of BEPS, as the OECD is deeply concerned with the prospect that any future economic activity might occur unimpeded by the frantic grasping of tax collectors.
Expanding well beyond tax
Since Morris and Moberg published their study in 2012, the OECD’s ideologically-motivated drift has only accelerated. That same year, the OECD started its “Inclusive Growth” project in partnership with the left-wing Ford Foundation. Inclusive Growth, which prioritizes relative measures of prosperity like inequality over absolute welfare, has become a top focus of OECD activity, providing the framework through which a growing number of policy analyses and recommendations are delivered. This in turn has allowed the organization to expand into all manner of policy areas, such as climate change, gender politics, healthcare and diversity.
Its work on tax policy has also degraded, with it increasingly recommending destructive changes. The Framework for Policy Action on Inclusive Growth, for instance, lauds “redistributive fiscal policy,” and calls for higher death, gift, and capital gains taxes. Such recommendations often place the OECD’s increasingly prominent political arm at odds with its own economists.
Conclusion
Morris and Moberg concluded that the OECD “offers an arena for networking and informal opportunities for changing sentiments without media scrutiny,” and noted the convenience offered by an organization incorrectly considered to consist solely of “technocrats not under the political influences that many of their peers in other organizations are.” They predicted, “as long as politicians show a willingness to pursue policies through the OECD, the people of the organization will seek to expand the mission of the organization and form it to an even more attractive arena for making policies.”
Boy, were they right. In blowing past the boundaries of its founding mission and diving into contentious domestic policy debates, the OECD has undermined its authority on trade. While it has by no means dropped trade from its agenda, the OECD today lacks the focus and drive necessary to face the growing challenges to globalization. As a result, there is a gaping void in the space the OECD once occupied at a time when the world desperately needs a force capable and willing to fight to preserve and strengthen real economic cooperation.
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Image credit: Presidencia de la República Mexicana | CC BY 2.0.
