issue: Trade

PRESS RELEASE: New PPI Report Highlights Benefits of TPP, Freer Trade for Vietnam

Posted on by The Progressive Policy Institute

HANOI—The Progressive Policy Institute (PPI) today released a new policy report highlighting how key reforms Vietnam would need to implement under the Trans Pacific Partnership (TPP) could ultimately provide important benefits for Vietnam itself. The report was made public at an American Chamber of Commerce event in Hanoi attended by influential U.S. and Vietnamese business leaders, as well as leading Vietnamese economic experts and proponents of economic reform.

“Vietnam is poised to benefit significantly from the Trans Pacific Partnership agreement,” said Ed Gerwin, PPI Senior Fellow for Trade and Global Opportunity and author of the report. “But TPP will also require Vietnam to undertake significant legal and regulatory changes in areas including transparency, the rule of law, labor and environmental rules, the digital economy, and rules for state-owned enterprises. These reforms in Vietnam will play a critical role in driving increased U.S. trade and commerce with a growing and vibrant Vietnamese economy.

“Those of us who believe strong trade agreements can promote inclusive growth and positive change need to continue to remind Vietnam that adopting these necessary reforms—and sticking to them—will also deliver tangible benefits for Vietnam and its people. PPI looks forward to continuing to be a constructive voice in this effort.”

In “TPP and the Benefits of Freer Trade for Vietnam: Some Lessons from U.S. Free Trade Agreements,” Gerwin uses the experience of past high-standard U.S. trade agreements to illustrate why undertaking these often-difficult reforms would also be in Vietnam’s self interest. Gerwin notes, “the adjustments required by high-standard [trade deals] can also promote foreign investment, technological advancement, innovation, broader participation in trade, and other key developments that—together with additional reforms—can drive stronger and more broadly shared economic development.”

###

TPP and the Benefits of Freer Trade for Vietnam: Some Lessons from U.S. Free Trade Agreements

Posted on by The Progressive Policy Institute

Countries trade because trade delivers mutual benefits. New market-opening trade agreements like the Trans Pacific Partnership (TPP) can enhance the shared benefits of trade by eliminating barriers to expanded international commerce and deepening economic cooperation between partners. It’s not surprising, therefore, that a detailed economic simulation of freer commerce under the TPP finds that each of the 12 TPP countries would see aggregate income gains and increased ex- ports under a comprehensive TPP. A strong TPP agreement, in short, could be a win—times 12.

But governments and their leaders don’t simply operate in the aggregate. Despite trade’s undeniable overall benefits, not everyone benefits from trade—and beneficial agreements that increase trade and open markets can require sometimes- difficult economic adjustments.

For the United States, for example, the TPP could support more good-paying jobs for U.S. workers who produce and sell American goods and services to growing Pacific Rim economies that should see even stronger growth under TPP. At the same time, however, growing trade can lead to lost jobs and lower wages for some American workers, and will require a renewed U.S. focus on comprehensive solutions, including assistance and better training for lower-skilled workers.

Other countries will need to adjust as well. Japan, for instance, will require reforms to its farm sector, while Canada will need to upgrade its intellectual property rules to comply with global standards.

Download “TPP and the Benefits of Freer Trade for Vietnam: Some Lessons from U.S. Free Trade Agreements”

PRESS RELEASE: PPI Statement On Significant Progress of TPP Negotiations

Posted on by The Progressive Policy Institute

WASHINGTON— Ed Gerwin, Senior Fellow for Trade and Global Opportunity at the Progressive Policy Institute, today released the following statement after top trade officials from the 12 Trans-Pacific Partnership countries on Friday announced significant progress on the historic trade agreement:

“PPI welcomes Friday’s announcement that the United States and its 11 negotiating partners have made significant progress on the substance of the Trans Pacific Partnership (TPP) trade agreement.

“Modern trade agreements like TPP have significant potential to boost inclusive growth here in America, while also setting high standards for a broad swath of the global economy in such key areas as open rulemaking, environmental protection, labor rights and digital commerce. But to achieve these results and other important benefits for the United States, it is critical that these agreements are done right.

“We appreciate the continuing efforts of U.S. negotiators, the Administration, and trade supporters in Congress in working towards the conclusion of an agreement that is the best possible deal for America. We look forward to reviewing a completed agreement. And we are particularly grateful to Senator Ron Wyden (D-Ore.), Congressman Ron Kind (D-Wisc.), and other pro-trade Democrats for their leadership in writing unprecedented new rules that will assure an extensive, informed and transparent debate on an eventual TPP deal.”

Financial Times: US income inequality rises up political agenda

Posted on by The Progressive Policy Institute

PPI President, Will Marshall, was quoted in a piece by Financial Times addressing how 2016 Presidential candidates are approaching strengthening the middle class and reducing income inequality:

Will Marshall, founder of the Progressive Policy Institute, says that Democrats too need to recognise the centrality of growth to any programme aimed at lifting middle class incomes. “Americans are aware that the private economy is ailing. Democrats don’t have a plausible theory for how they will unleash private sector growth,” he said. “Growth is the best antidote to inequality.”

Read the article in its entirety at Financial Times.

PRESS RELEASE: PPI Applauds Congress on Trade Votes

Posted on by The Progressive Policy Institute

Ed Gerwin, Senior Fellow for Trade and Global Opportunity at the Progressive Policy Institute, today released the following statement after passage of Trade Promotion Authority and Trade Adjustment Assistance legislation in Congress:

PPI applauds Congress for voting this week to advance a forward-looking trade agenda that will help grow America’s economy and support good jobs—while also upholding important progressive values.

Passage of Trade Promotion Authority (TPA) will enable the Obama Administration to complete negotiations of a vital market-opening trade agreement with countries in the fast-growing Asia-Pacific region, and will jumpstart significant trade talks with our allies in Europe, as well.

TPA will do this while requiring that all U.S. trade pacts advance progressive goals in critical areas like labor rights, environmental protection, and open digital trade. And TPA will help ‘democratize’ trade through rules to enable small businesses, entrepreneurs, and consumers to more directly participate in and benefit from global trade.

Trade Adjustment Assistance (TAA) has been a progressive priority since the Kennedy Administration. In voting to extend and expand TAA, Congress will assure that those American workers whose jobs are impacted by trade can obtain the support and training they need to succeed in an increasingly knowledge-based global economy.

PPI particularly acknowledges those pro-trade House and Senate Democrats—especially Senator Ron Wyden (D-Ore.), Representative Ron Kind (D-Wis.), and key members of the House New Democrat Coalition—whose support was decisive in advancing the trade agenda. These pro-growth progressives understand that trading with a growing global middle class can power more inclusive growth for Americans, and they wisely used their influence to assure that the trade process is significantly more open and transparent. As we continue an important debate on trade and its benefits, Americans should listen closely to these thoughtful leaders.

LeBron James and the Do-Something Democrats: Support for Democrats In the Arena on Trade

Posted on by The Progressive Policy Institute

In this year’s NBA Finals, LeBron James cemented his reputation as one of the greatest basketball players of all time­—becoming the first player in Finals history to lead both teams in points, rebounds, and assists in every game, and averaging an astounding 35.8 points, 13.3 rebounds, and 8.8 assists for the six-game series.

In addition to his basketball prowess, Lebron is also a student of oratory and leadership. When faced with criticism and second-guessing, he’s frequently cited Theodore Roosevelt’s 1910 address on “Citizenship in a Republic,” popularly known as the “Man in the Arena” speech. Like Roosevelt, LeBron believes that:

“The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, and comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds. . . . “

In Washington’s ongoing trade battles, there’s a group of Democratic House Members and Senators who are displaying the type of grit and determination that both TR and LBJ would almost certainly admire. These are the 28 House Democrats and 14 Democratic Senators who’ve voted to advance Trade Promotion Authority (TPA) legislation, often in the face of intense criticism from anti-trade forces.

These Democrats support a forward-looking trade agenda that includes critical priorities for progressives, including strong and enforceable labor and environmental standards, and new rules to protect innovation, to assure open digital commerce, and to “democratize” trade for small business and consumers. As pro-growth Democrats, they understand that increased trade can tap a burgeoning global middle class and help power more inclusive economic growth for middle class Americans.

These Democrats are also realists—and doers. They understand that writing modern rules for liberal trade is a messy and often-thankless task that requires hard work and perseverance. They appreciate that trade is always a negotiation and recognize the need for principled compromise among Congressional colleagues, the Administration, foreign governments, and the many and varied interests that make up America’s economic and social fabric.

While these Democrats know that they won’t achieve everything they seek, they also believe that it is vital to stand with the long line of Democrats—from FDR and Truman to JFK and Bill Clinton—who have progressively built an increasingly effective rules-based trading system that has fostered global peace and prosperity, lifted millions worldwide out of poverty, and continues to deliver substantial benefits to all Americans.

Many Democrats who have opposed TPA say that they support increased trade and stronger trade rules, and that they want to achieve the best deal for America. These TPA critics may be sincere, but they often offer only nebulous ideas on how to achieve these important ends.

Pragmatic, do-something Democrats, on the other hand, recognize the Trade Promotion Authority offers the only realistic, near-term means of achieving the outcomes that so many Democrats claim to want.  They know that our negotiating partners will never table their best and final offers to open markets or raise standards without TPA. And they understand that the United States will never achieve anything meaningful in trade if our trading partners must effectively negotiate with 535 members of Congress. This is especially so after last’s week’s spectacle in which labor and anti-trade groups prevailed on House Democrats to kill worker adjustment assistance—a six-decade Democratic priority—in a cynical bid to scuttle TPA and the overall trade agenda.

Pro-trade Democratic Members understand that key portions of the progressive coalition, including Democrats (58%), millennials (69%), Hispanics (71%), and mayors, believe that trade deals are good for the United States. But they’re not asking Americans to sign a blank check for new agreements. Under the leadership of Senator Ron Wyden, Congressman Ron Kind, and others, they’ve worked hard to assure that TPA includes unprecedented new transparency provisions, including the requirement that the text of any new trade deal be posted on the Internet for months before it is ever brought to a vote.

In a news conference before the NBA Finals, LeBron offered a pithy addendum to his favorite Roosevelt quote. When asked to guarantee a championship, LeBron said that he could only guarantee that “we will play our asses off.”

It’s time for Democrats who say they support expanded trade and progressive rules to get off of the sidelines—and to join the do-something Democrats who are “in the arena” sweating and striving towards those vital goals.

PRESS RELEASE: A Moment of Truth for Pro-Growth Progressives on Trade

Posted on by The Progressive Policy Institute

WASHINGTON–Ed Gerwin, Senior Fellow for Trade and Opportunity at the Progressive Policy Institute, today released the following statement prior to a vote on Trade Promotion Authority in the House of Representatives:

“Opening overseas markets to U.S. exports is integral to putting America back on a high-growth trajectory. PPI therefore urges pro-growth progressives to support President Obama’s major trade initiatives. To conclude trade agreements that advance U.S. interests, this President, like any president, needs Trade Promotion Authority (TPA). What’s more, TPA enables Congress to identify its key objectives for U.S. trade policy.

“As PPI has detailed in recent reports on the Obama Administration’s trade agenda and open digital trade, new U.S. trade agreements can make vital progress on issues that are important to Democrats and progressives. They can, for example, tap a growing global middle class to fuel more inclusive American economic growth, strengthen and expand the reach of rules on labor rights and environment protection, and ‘democratize’ trade by empowering entrepreneurs, small businesses, and consumers to more directly participate in and benefit from global commerce.

“TPA would provide a fairer and considerably more open process for considering new trade agreements, and would obligate future administrations—both Democrat and Republican—to pursue other progressive priorities in future trade agreements, as well. Without TPA and the important new trade initiatives that it would enable, other countries—particularly China—would have much greater influence in setting global trade norms that fail to reflect high standards or progressive goals.

“Key Democratic and progressive constituencies support TPA and new trade agreements. In endorsing TPA, the U.S. Conference of Mayors has emphasized that expanding trade is critical for good jobs in America’s metro areas, which depend on exports for fully one-third of their economic growth. And, according to recent opinion surveys, Democrats (58 percent), millennials (69 percent), and Hispanics (71 percent) all believe that free trade agreements are, on balance, good for the United States.

“PPI applauds those House Democrats who have stood up forthrightly for liberal trade and TPA. As the House takes up TPA tomorrow, we hope others also will reject the spurious arguments and bullying of anti-trade activists who yearn for the industrial landscape of the 1970s and imagine that Americans can prosper in isolation from the rest of the world.”

###

 

PPI Applauds Senate Passage of TPA

Posted on by The Progressive Policy Institute

PPI applauds the Senate for passing Trade Promotion Authority and taking a key step in assuring that America continues to be a global leader in crafting strong, progressive trade rules that will help grow our economy and support good jobs—while also advancing important American values.

As PPI has detailed in recent reports on the Administration’s trade agenda and open digital trade, new U.S. trade agreements can make vital progress on issues that are important to Democrats and progressives. They can, for example, tap a growing global middle class to power more inclusive American economic growth, expand the reach of strong rules on labor rights and environment protection, reform past agreements like NAFTA, and “democratize” trade by empowering entrepreneurs, small businesses, and consumers to more directly participate in and benefit from global commerce.

TPA would provide a fair and more open process for considering new trade agreements, and would obligate future Administrations—both Democrat and Republican—to pursue these and other progressive provisions in future trade agreements, as well.

Finally, today’s vote illustrates the leverage that pro-growth, pro-trade Democrats can exercise in trade debates. As trade legislation moves to the House, PPI urges Democrats to continue to work constructively to build smart, progressive policies that enhance America’s global competitiveness. In addition to support for TPA, these efforts should include a comprehensive program of reform—in education, training, innovation, infrastructure, and more—like that proposed in the New Democrat Coalition’s American Prosperity Agenda. Unlike reflexive opposition to new trade initiatives, this approach will assure that America—and more Americans—can share in the significant benefits of global growth.

PPI Statement on Senate Trade Vote: Don’t Misread Vote as Repudiation of TPA

Posted on by The Progressive Policy Institute

It would be a huge mistake to misread today’s Senate trade vote as a repudiation of Trade Promotion Authority and the U.S. trade agenda. The pro-trade Democrats who provided the decisive votes today were not voting against TPA, but were seeking to include other trade measures—including those on trade enforcement and trade with Africa—in the debate. There are various ways to address concerns about these important issues and we hope that trade supporters in the Senate can work together to craft a solution that allows the vital debate on trade to proceed.

As PPI has explained in recent reports on the Obama Administration’s trade agenda and on open digital trade, new U.S. trade agreements have the potential to advance goals that are important to Democrats and progressives. These new initiatives can, for example, tap a growing global middle class to help power American economic growth, expand the reach of strong rules on labor rights and environment protections, update past agreements like NAFTA, and “democratize” trade by empowering entrepreneurs, small businesses and consumers to more directly participate in and benefit from global commerce. TPA would provide a fair and considered process for considering new trade deals, and would obligate future Administrations—both Democrat and Republican—to seek these and other progressive provisions in future trade agreements, as well.

Today’s developments illustrate the leverage that pro-trade Democrats can exercise in trade debates. PPI hopes that more Democrats will engage in constructive efforts to build and support a progressive pro-trade agenda. Simply working to kill TPA legislation, and other reflexive opposition to new trade initiatives, does little to advance important progressive goals.

Gerwin for Republic 3.0: The Digital Economy, Trade Agreements and the 99 Percent

Posted on by The Progressive Policy Institute

Who benefits from trade deals like the Trans-Pacific Partnership (TPP)?

Critics—like Joseph Stiglitz and Senator Elizabeth Warren—charge that these agreements would primarily help the world’s one percent. Stiglitz, for example, claims there’s a real risk that TPP will “benefit the wealthiest sliver of the American and global elite at the expense of everyone else.”

But a rapidly growing segment of the 99 percent—entrepreneurs, small businesses, and consumers who trade globally on the Internet—likely sees things differently. For these newly empowered traders, the TPP—and pacts like the Transatlantic Trade and Investment Partnership (TTIP) and the Trade in Services Agreement (TiSA)—can play a critical role in supporting their businesses by writing new rules that promote and protect electronic trade.

Continue Reading at Republic 3.0.

The Digital Opportunity: Democratizing Trade for the 99 Percent

Posted on by The Progressive Policy Institute

Trade critics often charge that proposed trade agreements like the Trans Pacific Partnership (TPP) essentially serve the one percent—while harming virtually everyone else. But new trade pacts actually present a significant opportunity to drive more inclusive trade—especially by supporting the revolution in digitally enabled global commerce.

In this policy brief, we explain why it is critical for America to lead in writing modern trade rules that promote the free flow of data and open digital commerce. And we highlight some of the many ways in which the 99 percent—from entrepreneurs and small businesses to consumers and communities—benefit from “democratized” trade in a global digital economy that is both open and fair.

Who Benefits from New Trade Deals?
Over the past three decades, America’s trade agreements have become increasingly complex. While early trade agreements were focused on eliminating high tariffs, modern trade pacts also address non-tariff and “behind the border” barriers, like standards that discriminate against imported products or rules that discourage foreign investment.

To President Obama and supporters of trade promotion authority (TPA) legislation, addressing “21st Century” issues in the TPP and other new trade pacts would enable America to benefit broadly from expanding trade with a growing global economy.

Download “2015.05-Gerwin_The-Digital-Economy-Trade-Agreements-and-the-99-Percent”

The Hill: Pelosi’s choice: Obama or left?

Posted on by The Progressive Policy Institute

Ed Gerwin, PPI Senior Fellow for Trade and Global Opportunity, was quoted in the The Hill on how Nancy Pelosi is confronting a conundrum on trade as she walks a delicate line between the president she champions and the caucus she leads:

Ed Gerwin, a trade expert with the Progressive Policy Institute, a rare liberal group that supports the fast-track bill, said Pelosi’s reticence is bolstering Obama’s hand.

“Whether or not she ends up as a supporter, what she has been doing is very helpful in trying to get to yes, on trade,” Gerwin said. “What Pelosi has been doing, combined with the significant efforts by Wyden in the Senate, may allow Democrats to put more of a stamp on trade and may help some members keep an open mind on TPA and eventual trade deals.”

Read the piece in its entirety at The Hill.

CNN: Why trade is in the national interest

Posted on by The Progressive Policy Institute

Withstanding intense pressure from anti-trade “progressives” — an oxymoron if ever there was one — Sen. Ron Wyden, D-Oregon, has struck a deal with Congressional Republicans to move a bipartisan trade promotion authority bill.

Wyden’s display of grit is good news for the cooling U.S. economy, which needs a lift from export-led growth; for American workers, who need the jobs and rising pay that come with rising exports and stronger growth; and for President Barack Obama, who needs the authority to complete negotiations over three major trade pacts and get them through Congress.

Wyden is a staunch liberal, but one with an independent streak who’d rather solve problems than strike poses. But committing acts of political leadership is dangerous in Washington these days, and Wyden can expect more abuse from “populists” within his own party. That’s a shame, because the Oregon Democrat has actually moved trade promotion authority (TPA) in a more progressive direction.

Continue Reading at CNN

PPI Returns from 2015 Digital Trade Mission to Europe

Posted on by The Progressive Policy Institute

Dear Friend,

We’re just back from Europe, where last week PPI led a bipartisan delegation of Congressional staff on a four-day swing through three capitals: London, Brussels and Berlin. Our goal was twofold: 1) to learn more about the European Union’s ambitious plan to create a “digital single market” and, 2) to press PPI’s case for moving digital trade from the periphery to the center of the transatlantic agenda.

Why is this so important? Consider these facts:

  • The free movement of data raises the productivity of businesses and reduces trade costs, creating jobs and growth on both sides of the Atlantic.
  • US/EU cross-border data flows are by far the highest in the world, 50 percent more than between the United States and Asia.
  • America runs a large trade surplus in services, of which 61 percent are delivered digitally.
  • The Internet is becoming a powerful export platform for small enterprises, connecting them to global customers at low cost.

As PPI has documented in a series of groundbreaking reports, digital innovation and commerce are increasingly driving economic investment and growth in America and Europe. We believe the transatlantic partners share a common interest in ensuring that digital trade enjoys the same legal protections as trade in physical goods and services. Instead of joining forces to extend free trade principles to digital commerce, however, Europe and America are embroiled in a raft of disputes that threaten to erect barriers to cross-border data flows.   

Such disputes, for example, involve calls for data localization, for national or European clouds, for taxing data flows and for imposing stringent privacy or data protection rules on businesses. Right now, the European Court of Justice is considering a challenge to the “safe harbor” rules that have allowed US tech companies to operate in Europe. In addition, new tensions have arisen around issues of copyright protection, “platform competition,” tax avoidance and many core provisions of the proposed Transatlantic Trade and Investment Partnership (T-TIP).

As you probably know, PPI has long been a catalyst for transatlantic dialogue, going back to the Clinton-Blair “Third Way” conversations we helped to launch in the 1990s. Over the last four years, our work in Europe  has focused on reviving transatlantic economic cooperation, with a particular emphasis on the rise of data-driven innovation and growth. At a time when authoritarian countries seek to limit the free flow of information, we think it’s crucial that the Western democracies work together to prevent the balkanization of the Internet and defend free digital trade.

That’s why we organized this second “Digital Trade Study Group”—a bipartisan group of 12 senior House and Senate staffers, whose bosses have oversight of issues related to trade, digital commerce, copyright, intellectual property, privacy, cyber security, and communications and technology. (We took the first such group to Europe in April 2014). Last week’s trip featured a productive round of high-level talks with prominent political, business, policy and media leaders.

Here are the highlights: 

  • In London, our traveling party met with Daniel Korski, Special Advisor to Prime Minister David Cameron, and Guy Levin, formerly special advisor to Chancellor of the Exchequer George Osborne, to discuss UK technology policy. As Michael Mandel, PPI’s chief economic strategist, has documented, London has emerged as one of the world’s premier centers for tech entrepreneurship.
  • Vanessa Houlder, who covers economics for the Financial Times, briefed our group on the Cameron government’s controversial new “diverted profits tax.” Aimed ostensibly at discouraging tax avoidance, it slaps a 25 percent tax on the local profits of U.S. and other foreign companies operating in the UK, and has been dubbed the “Google tax” by detractors. 
  • Also in London, PPI released a new policy brief by Mandel, Taxing Intangibles: The Law of Unintended Consequences. It notes that digitized information differs from physical goods and services in that it can be duplicated at negligible cost and used by different consumers at once. As such, Mandel argues, it makes little sense to tax this intangible knowledge as one would a car or the provision of a unique service. In fact, new proposals for taxing intangibles will undermine global growth and thus be self-defeating, the report argues.
  • In Brussels, two officials of the European Commission’s DG Connect unit, Eric Peters, Deputy Head of the Single Market Unit and Tamas Kenessey, Legal Officer, briefed the group. The Digital Single Market, they stressed, is the EU’s top priority. It would enable tech companies that start in one of the Union’s 28 countries to grow to continental scale, and speed the onset of what we call the “Internet of Things.”
  • Over dinner, the Digital Trade Study Group heard from Ken Propp, Legal Counsel with the US Mission to the EU, and Paul Hofheinz, President of the Lisbon Council, PPI’s think tank partner in Brussels. The discussion centered on the headwinds T-TIP has encountered and political differences within the EU on digital policy.
  • Then it was on to Berlin, for lunch with two leading Green Party officials, Konstantin von Notz, a Member of the German Bundestag, and Dieter Janacek, the party’s spokesman on economic issues. The Greens are strong backers of Europe’s Data Protection Regulation, which our speakers noted reflects Germany’s unhappy experience with secret police agencies of the past. Joining us for dinner was Torsten Riecke, an international correspondent for Handelsblatt, who gave our group an insider’s perspective of German domestic politics, as well as its increasingly central role in European politics. The next morning, we drilled deeper into German concerns about data protection and privacy with Marcus Loning of the Stiftung Neue Verantwortung and former Free Democratic Party Member of the German Bundestag.
  • Our group received an insightful briefing on Industrie 4.0—Germany’s equivalent of the “Internet of Things.” As explained by Boris Petschulat, Deputy Director General at the German Federal Ministry for Economic Affairs & Energy, Industrie 4.0 seeks to digitize production without disrupting its finely honed industrial export machine. 
  • We paid a visit to the Federal Association of German Newspaper and Magazine Publishers, which has been battling tech companies, especially Google, over copyrightand content issues. A lively debate ensued with Managing Director Christoph Fiedler and Christoph Keese, Vice President of the Axel Springer publishing empire. For more on this important subject, check out another just-released policy brief by Mandel, Copyright in the Digital Age: Key Economic Issues.
  • Thomas Jarzombek, a member of the German Bundestag, who sits on the committee responsible for the digital agenda, elaborated on the German government’s efforts to build a digital infrastructure and nurture a more entrepreneurial, start-up culture.
  • We finished our mission at the US Embassy in Berlin, where Ambassador John Emerson, a longtime PPI friend, offered a wide-ranging and insightful perspective on US-German relations.

PPI’s Digital Trade Study Group excursions to Europe serve two important purposes. First, they enable key Congressional staff from both parties to get a better understanding of European views on innovation policy, T-TIP, digital trade, privacy, copyright and other interests of mutual concern and transmit that knowledge to Members of Congress.  Second, they underscore to our European friends the importance Congress attaches to transatlantic commerce in general and to data trade specifically.

This year’s mission advanced both of these goals. And it added important new dimensions to the extensive network of European political leaders, industry professionals, and policy analysts that PPI has built over the years. As always, I welcome any feedback you may have. 

Sincerely,

Will Marshall
PPI President

Should the US consider a patent box?

Posted on by The Progressive Policy Institute

Who will write the new rules of the global tax system? Right now risk-averse bureaucrats at the OECD’s Paris headquarters are busily constructing a new set of tax principles–known as the ‘BEPS project’–that could accidentally squash global growth, as we warned in our recently released policy brief, “Taxing Intangibles: The Law of Unintended Consequences.”*

Instead, the rulebook for 21st century global tax policy must be written by those policymakers, in the US and elsewhere,  who understand the importance of risk-taking and investment in innovation.  This imperative drives the United States to consider concepts such as the “patent box,” a tax instrument that discourages tax avoidance by large corporations while encouraging the creation of growth-enhancing knowledge.

The “patent box”—or as it is sometimes called, the  “IP box” or “innovation box”—is already in use by countries such as the United Kingdom and the Netherlands. It gets its name from the idea that companies invest in research and development that leads to patents.  These patents are metaphorically put into the patent box, where they are taxed at a lower rate. Sometimes the preferential rates are broadened to other types of intangible investments, which is why it sometimes goes by a different name.

The underlying economic insight behind the ‘patent box’ is the indisputable fact that global growth is increasingly driven by knowledge, in the form of patents, copyrights, data, and other intangibles.  Unfortunately, the rising importance of intangibles means current tax rules are simultaneously too strong in some aspects and too weak.  On the one hand, statutory tax rates on intangibles is almost certainly too high. Remember that the investment in knowledge by one company or country spills over to other companies and countries, creating a positive externality for the whole global economy.  As a result, many economists agree that intangibles should be taxed at a lower rate to acknowledge their benefits.

On the other hand, under the current rules, the same virtues of intangibles that enable global growth also enable knowledge companies to easily transfer nominal ownership of intangibles to subsidiaries in low-tax countries. The combination of high statutory tax rates and easy transfers means that corporations have both an incentive and the means to legally and dramatically cut their taxes.

This state of affairs cannot persist.  Faced with political and fiscal pressure, governments will take aggressive steps to bring in more tax revenues.  Indeed, the BEPS project is advocating that governments  give up long-held notions of tax sovereignty to “capture” the income from intangibles, even if these measures end up hurting global growth.  Unfortunately, as we showed in our paper, the tax approach advocated by the BEPS project is ultimately self-defeating, requiring enforcement of a tortuous set of transfer pricing rules every time an intangible crosses national borders—an approach that only a bureaucrat could love.

For US policymakers looking to spur growth, one better solution to this dilemma—though not the only one—is the patent or innovation box. In simple terms, the patent box offers corporations much lower tax rates on income from investment in intangibles such as R&D.  In return, this lower tax rate is only available to intangible investments made in that country—what tax experts call a ‘nexus.’

A patent box offers corporations both a carrot and a stick.  The carrot is the lower tax rate on the income from domestic investments in intangibles made in the United States. The stick is that this lower rate would not be available to companies that moved nominal ownership of intangibles to other countries, thus reducing the avenues for legal tax avoidance.

Many countries in Europe have already adopted varieties of the patent box approach, including the United Kingdom.  However, the patent box in the UK and elsewhere has come under pressure from supporters of the BEPS approach, who believe that such “preferential regimes” should be eliminated or greatly restricted.

By contrast, we believe that the patent box should be seriously explored in the United States as a means of encouraging growth while discouraging corporate tax avoidance.  It may not be the ultimate solution, but it’s one step in the right direction.

*BEPS stands for Base Erosion and Profit-Shifting. It’s a major OECD project for reworking the global tax system for the digital age. The BEPS project has many good points, in terms of reducing the opportunities for tax avoidance, but it may have a negative impact on global growth.