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The G-7 Nations Seek to Tax Technology and Coordinate Against China

Leaders of the G-7 nations met this week. There are disputes on China but some agreements on taxes. Beware of the agreements.
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G-7 Leaders Meet Face-to-Face

G-7 Nations

  1. US
  2. Germany
  3. Italy
  4. France
  5. Canada
  6. Japan
  7. United Kingdom

The EU is over-represented in these meetings because the EU Commission President and EU Council President are both at the table. 

That gives the EU a disproportionate 5 of 9 seats at the table, down from 6 of 9 following Brexit. 

Standing Up To China

It's rare to get any G-Group to agree on anything, but we may see a statement on China as Biden Pushes G-7 to Criticize China Over Forced-Labor Allegations

Mr. Biden joined leaders of Canada, France, Germany, Italy, Japan and the U.K. for a session focused on China on the second day of the G-7 summit. The issue of how aggressively to address China has divided world leaders, with Mr. Biden urging democratic nations to jointly confront Beijing and French President Emmanuel Macron calling for a more cautious approach.

While all of the G-7 members harbor worries about China, their concerns aren’t uniform, officials said. German Chancellor Angela Merkel is among the European Union leaders pushing for a more positive approach to be taken toward China. Mr. Biden, Mr. Johnson and Canadian Prime Minister Justin Trudeau called on the G-7 leaders to confront China about human-rights abuses, according to one official. The Japanese government also wants a more hard-line stance to be taken against Beijing.

A senior Biden administration official said the U.S. was pushing to name China in the communiqué. “It’s an expression of our shared values to make clear what we won’t tolerate as the United States and as a G-7, so we think it’s critical to call out the use of forced labor,” the official said.

Some European leaders such as Mr. Macron have warned against antagonizing China, arguing that it is counterproductive and could complicate their efforts to seek Beijing’s cooperation on issues like climate change, trade and finance. Messrs. Biden and Macron met on Saturday.

G-7 countries also said they would align their short- and long-term climate-change goals with the United Nations’ target of limiting global warming to 1.5 degrees Celsius, or 2.7 degrees Fahrenheit, above preindustrial levels, the White House said.

Hard Statement or Not?

An official statement is due Sunday. 

Normally G-Group statements are watered down to the least common denominator, in this case Germany and France. 

In general, the bigger the group, the more watered down the statements. But statements never change anything anyway, especially against authoritarian regimes.

Thus, the whole exercise is a big waste of time, the primary rule being the bigger the group the bigger the waste of time.

Live Update

The New York Times has a Live Update of the Group Photo Op. 

The White House cited no financial commitments, and there is sharp disagreement among the United States and its allies about how to respond to China’s rising power.

It is far from clear that the wealthy democracies will be able to muster a comprehensive response like the one proposed by Mr. Biden, which the White House gave a name with roots in his presidential campaign theme — “Build Back Better for the World,’’ shortened to B3W, a play on China’s BRI. 

[Mish Note: BRI is China' Belt and Road Initiative. China has a slogan so the G-7 needs a slogan too.]

Instead, the plan appeared to stitch together existing projects in the United States, Europe and Japan, along with an encouragement of private financing, with an emphasis on the environment, anti-corruption efforts, the free flow of information and the avoidance of future debt crises.

[Mish Question:  How likely is that to accomplish anything?]

Germany, for which China has become the No. 1 market for Volkswagens and BMWs, remains committed to engagement and is deeply resistant to a new Cold War. 

Italy became the first member of the G7 to sign up to Belt and Road in 2019. It then had to back away, in part, under pressure from NATO allies who feared that Italian infrastructure, including the telecommunications network, would be dependent on Chinese technology.

Internet Squabble

Highlighting the squabble over exact wordage of taking on China, please consider the CNN report Internet Reportedly Shut Off as G7 Leaders Squabble With Biden Over China.

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The disagreements at one point became so sensitive that all internet was shut off to the room, pitted European nations against the United States, Britain and Canada, who urged stronger action against China for its authoritarian practices, including forced labor practices in western Xinjiang province.

At one point, Biden made a forceful call to other leaders about vocally calling out China's anti-democratic practices, officials said, emphasizing the need to take action.

Global Minimum Tax

On April 5, I noted Yellen Seeks a Global Minimum Tax to Support Biden's Massive Spending Plans

On June 6, I noted G-7 Nations Agree to Biden's 15% Minimum Corporate Tax Proposal

The G-7 nations agreed that businesses should pay a minimum tax rate of at least 15% in each of the countries in which they operate 

Yes, It’s a Global Tax on American Tech

Don't let the Global Minimum Tax fool you. It's really a Tax on Select American Technology

The communiqué from Treasury Secretary Janet Yellen and other G-7 finance ministers carefully skirts around the main targets of their proposal. 

“We commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profits exceeding a 10% margin for the largest and most profitable multinational enterprises.”

But Ms. Yellen and her peers didn’t devise this idea in a vacuum. Their proposal builds on negotiations underway at the Organization for Economic Cooperation and Development (OECD) for taxes that would apply specifically to digital companies. That remains the clear intent.

One step is Ms. Yellen’s offer this spring to limit the new tax to companies with revenue above $20 billion, which captures most American tech firms and excludes the vast majority of the world’s other multinational companies. 

Meanwhile, Ms. Yellen’s peers have lost no time demanding exemptions for other industries vulnerable to the 10% profit threshold. U.K. Chancellor Rishi Sunak insists on a carve-out for banks and financial-services firms. Expect French Finance Minister Bruno Le Maire to be along shortly explaining why high-margin luxury companies such as LVMH should be exempt.

So why not call this thing the tech tax that European officials freely admit it is? Because Ms. Yellen and her G-7 colleagues understand truth in advertising could kill this measure on Capitol Hill. 

Beware of Agreements!

If the G-7 actually agrees to do anything of substance, it's highly likely to be damaging. 

That's also true of climate change nonsense. 

The saving grace, for now, is that US Congress would have to approve these agreements and Senate passage is more than a bit suspect.

Summit Conclusion Update

From the WSJ.

U.S. officials depicted the decision to name China in the joint statement following the summit as a victory for American diplomacy. But it isn’t immediately clear what, if any, practical difference the statement will make. The final communique released on Sunday named Beijing despite some initial concerns from several European leaders that forceful language might antagonize China, and the U.S. didn’t succeed in naming China in a statement condemning forced labor practices.

French President Emmanuel Macron said that he was eager to continue to engage with China on issues such as climate change. “That is unchanged,” he said, adding that nations needed to treat China with respect. 

"America is back at the table," said Biden following the conference. A plan to expand the G-7 to a D-10 of democracies was tossed due to questions about which countries should join.

The main achievement appears to be an agreement to donate a billion doses of vaccine to developing nations but Biden had already agreed to donate half that and the WHO seeks 11 billion. 

It isn’t immediately clear what, if any, practical difference the entire G-7 summit will make.

Mish

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