Published daily by the Lowy Institute

G20 Brisbane: Can Australia do the 'vision thing'?

G20 Brisbane: Can Australia do the 'vision thing'?
Published 31 Jul 2013 

Mike Callaghan is Director of the Lowy Institute's G20 Studies Centre.

Tax and trade will be two high profile issues on the G20 agenda when Australia chairs the forum in 2014. These two topics have a common driver: can policy keep up with a rapidly changing global production landscape?

On trade, Mark Thirlwell said in a recent paper that the issue confronting the G20 in 2014 is whether it can save the multilateral trading system in a post-Doha world. And as outlined in the Lowy Institute's G20 Monitor, trade policy has to adapt to the reality that value chains are increasingly driving international trade. Goods are being made 'in the world' rather than solely in one country.

On the tax front, the focus of the recent meeting of G20 finance ministers and central bank governors was a commitment to crack down on tax avoidance by large companies. In particular, they endorsed an OECD action plan aimed at addressing base erosion and profit shifting.

The core issue confronting tax policy is the same as that confronting trade policy, namely the inability to keep up with global and technological developments, including the rise of the digital economy. [fold]

The OECD, WTO and UNCTAD recently released a report for the G20 summit in St Petersburg on the implications of global value chains. It notes that global value chains have become the dominant feature of world trade and investment and in this new landscape of global production networks, policymakers have to 'close the gap between traditional rule making and the reality of business'.

In such a world, the mercantilist view that exports are good and imports are bad, and the traditional trade negotiating stance that market access can only be granted as a concession for access to another country's market, are out of date and counterproductive.

The rise of global value chains has been facilitated by technological developments, particularly the digital age. And these forces have transformed the traditional approach to corporate taxation. Goods are no longer produced in a single location in a single country, but are widely dispersed across jurisdictions. In such an environment it is increasingly difficult to determine in which jurisdiction value-adding occurs and where tax can be applied. This is even more challenging with digital services delivered over the internet.

Moreover, multinational companies do not organise their operations as discrete entities in specific countries who engage in arms-length transactions; they adopt a global approach. In such a world it is very difficult for a jurisdiction to identify where its taxing rights exist and very easy for corporations to ensure that profits are only declared in low-tax centres.

Trade and tax policy are playing catch-up to changes that have been underway in the global economy for some time. And technological change will not stop. The advent of the 3D printer will likely further diffuse production and value-adding activities across many jurisdictions.

These developments are increasing integration between countries and in turn, the need for international cooperation. This should be at the forefront of the minds of G20 leaders and ministers. Moreover, if it really is to be the premier forum for international cooperation, the G20 should get on the front foot in terms of likely future developments and challenges from a changing global marketplace (the 'vision' thing).

So instead of just looking at tax and trade as discreet policy issues, as chair of the G20 in 2014 Australia should initiate a more holistic and forward-looking consideration of the implications of corporate and technological developments on economic management.

Photo by Flickr user Konabish — Greg Bishop.

You may also be interested in