• When Tax Collectors Try to Herd Cats

    One of the most complicated aspects of globalization is just how to treat the incomes of multinational firms that operate in many different countries around the world. Multinational Corporations (MNC’s) operate global supply chains and manage global brands, but how should national governments treat them? This issue crashes back to the forefront of global economic issues as the European Union (EU) rules that tax benefits offered by some of its member states are illegal, throwing the entire EU tax system into confusion.

    MNC’s operate across borders and they face incredibly complex tax problems. Just how much do you owe, under what conditions, and to which governments are part of the strange world of the global corporation. Economic power often means that MNC’s can get special deals from host governments, giving them tax advantages that local companies cannot match. In other cases, MNC’s can move profits around their global operations and “book” them in the countries with the most favorable corporate tax rules. EU leaders, looking to find new sources of revenue in the face of continuing crisis and stagnation are turning to the tax system as an area of potential reform.

    New tax rules could simplify the system, meaning tax rates would be more transparent and potentially fairer as national companies and MNC’s would face the same rates. Rules harmonizing the treatment of cross-border transfers of money (such as when the local Starbucks in Amsterdam buys its coffee supplies from the global Starbucks) would also simplify the system, if constructed in the right way.

    At the heart of the matter is a conflict of the global nature of markets, the national nature of sovereign law, and the incomplete global governance of tax systems. While markets (and MNC’s) may be global, our tax laws are mostly national. While a few regional organizations (the EU being one of them) have some tax rules, taxes remain mainly in the hands of national governments.

    Tax rules are one of the most precious pieces of national sovereignty and nation-states are reluctant to allow outside interference in them. But in a globalized world, the advantages of tax harmonization are many, if the system is designed properly. Thus far, sovereignty has won out. But the EU’s ruling shows that there may be some cracks in the traditional way of doing business. At least where strong regional institutions have a history of cooperation on other issues.

  • Commitments without Enforcement: The TPP and the problems of global governance

    A dozen countries agree to a landmark trade deal that opens markets throughout Asia. Or a group of major business and government organizations has conspired to promote their interests at the expense of individuals across the globe. Or a new agreement opens trade and creates opportunities for over a billion people to experience greater economic prosperity.

    Depending on which article you read, the Trans-Pacific Partnership (TPP) may be a great benefit to the Pacific Rim or it is a boondoggle designed to promote narrow interests (just which interests varies) at the expense of the average citizen.

    While the good and bad of the TPP may depend on your perspective, the landmark agreement is a victory for global governance. It shows the positives and negatives of global agreements and raises questions about how you enforce an agreement when no one has the legitimate power to coerce the signatories to do what they have promised.

    Love it or hate it, the TPP is a classic example of contemporary global governance. A dozen countries have negotiated for over a decade to come to a complex agreement that all agree with advance their interests enough to bind themselves to global rules. The compromises in the agreement are many, and no state is fully satisfied. But in global governance, this is the normal course of affairs.

    Sovereign states cannot be forced into agreements, so they have to volunteer to bind themselves. To make this happen, the other states in the discussions have to make concessions. At the end of the day, the TPP shows how a dozen states can arrive at an agreement even when none of them get all of what they wanted. The agreement gives them all enough of what they want at a low enough cost to make the deal worthwhile.

    And how to enforce a deal that crosses borders in a world with no global government? The details are still secret, but it is widely reported that disputes will be settled by mixed panels of professional arbitrators. Their decisions will bind the member states to enforce their decisions. While Americans may be worried that appointed arbitrators may control public policies in some areas, American businesses also get international arbitrators instead of local courts stacked in favor of local interests. Even in America, this tension means that some companies love the TPP’s dispute settlement while others fear it. How will it work out? Only time will tell.

    The TPP shows the difficulty in agreeing on rules that bind sovereign states. A complex agreement took over ten years to negotiate. Even after that, we still need a system for resolving disputes that arise when states disagree on what the terms of the treaty are and how they should be enforced. At the same time, it shows how states can come together to solve the problems of governance in an anarchic international system. Agreements can still resolve problems of coordination.

     

    Just don’t expect it to be simple.

  • The Fog of Civil War: Danger and Hope from Russian Military Intervention in Syria

    Civil wars can be complex, involving many sides whose grievances can drive sustained conflict over many years. Foreign intervention can add even more complexity as the civil war becomes internationalized and the interests of foreign intervenors become part of the calculus of conflict. The Syrian Civil War exemplifies the complexity of foreign intervention as both regional and global powers have now intervened on opposite sides in the conflict. In a multi-side conflict like the Syrian Civil War, the presence of intervenors on opposite sides raises the danger of escalation, but also the potential for a more rapid end to an enduring conflict.

    The Syrian Civil War is a multi-sided conflict with the Assad government fighting against a variety of rebel forces that are also in conflict with each other. Various outside powers back an assortment of groups within the country to differing degrees. The result has been a conflict that has displaced more than half the population of the country, created a massive humanitarian crisis, and torn the country into a complex web of opposing factions. The conflict is made more complex by the presence of ISIS, the group claiming to have founded a new Islamic caliphate in territory that includes parts of Syria and Iraq.

    Direct Russian military action targeting both ISIS and other opponents of the Assad government has significantly escalated outside military intervention. While the United States and others have been attacking ISIS targets for over a year, the Russian attacks are more frequent and have tended to be of larger size. The targeting of ISIS is rather uncontroversial since most of the global community has supported anti-ISIS efforts. The targeting of other rebel groups, including the killing of one of the secular nationalist leaders supported by the US, has raised much more serious concerns.

    By attacking the rebel groups backed by the US, Turkey, and the various Gulf states, Russia has placed itself in direct opposition to the outcomes preferred by these states: the removal of the Assad government. This creates the potential for direct conflict between Russia and these states in the complex environment of the conflict. With little coordination of activity thus far, the danger of an incident involving the Russian military and one of the other militaries in the area (particularly the American and Turkish militaries) is high. Tensions were raised as a Russian fighter jet strayed into Turkish airspace over the weekend, leading to concerns of accidental escalation of the conflict.

    The complex web of actions and interests that are unfolding in Syria shows the complexity of internationalized conflicts. Nation-states with competing interests apply military force to achieve their ends, but do so at the risk of unintended outcomes. The risk of accidental expansion of the conflict grows as the number of parties to the conflict grows and as their military commitments rise. This raises the potential for an expansion of the conflict. At the same time, as the influence of outside powers grows, their incentive to avoid an expansion of the conflict also means that these powers are more likely to press for a solution to the Civil War itself. The US, Russia, Turkey, and others have no desire to see an escalation that involves fighting between the major powers over the outcome in Syria. The cost of military hostilities between major powers is much higher than that of the benefits to be gained in Syria. This situation opens the door for the major powers to exert their influence to help force a settlement on their local allies. The greater degree of intervention provides additional leverage for the outside forces, even as it raises the risk of the conflict.

    Only time will tell what will happen in Syria, but the recent increase in outside intervention raises the political stakes of the conflict for all parties.