US tax Bill may inspire cuts globally, fuelling trade tensions

To President Trump and congressional Republicans, the overhaul of the tax code that became law on Friday will make the United States a better place to do business. To the rest of the world, it has the potential to challenge the global economic order, creating an uneven playing field and setting off a race among countries to cut corporate taxes.

The overhaul is already threatening economic relations, adding to concerns that Mr. Trump is advancing a nationalistic agenda at the expense of other countries.

European leaders this week raised the prospect of a trade battle, implying that they may fight the new tax rules before the World Trade Organization. Chinese officials are readying defensive measures to protect the country’s economy and its competitiveness.

On Friday, Trump again emphasised his “America First” mantra, saying at a signing ceremony that the tax bill would mean more jobs and investment in the United States. “A lot of things are going to be happening in the USA,” the president said. “We’re going to bring back our companies. They’ve already started coming back.”

It all starts with the corporate tax rate. The new rate — down to 21 per cent, from 35 per cent — takes the United States from the top of the global tax spectrum to the lower end. Countries like Australia, France, Germany and Japan, all of which have effective corporate tax rates of at least 30 per cent, will be under pressure to follow.

 “It’s a huge incentive to governments around the world who want to see more investment to be part of that,” said Andrew Mackenzie, the chief executive of the mining giant BHP Billiton, which has its headquarters in Australia and major operations in North and South America. “They will have to follow suit.”

Corporate rates were already on a downward trajectory. Many countries have used low taxes as an advantage over the US, which offers a huge domestic market, plentiful venture capital and relatively light workplace regulation.

“There will be pressure for a new round of lowering corporate taxes,” said Stefano Micossi, the director general of Assonime, an Italian association of publicly listed companies.

China, a frequent target of Trump’s for its trade practices, may also be forced to play the tax game. For all of its appeal as a manufacturing hub thanks to its skilled work force, solid infrastructure and other benefits, China charges high taxes. On top of a standard corporate rate of 25 per cent, companies are required to make social security contributions and other payments that push their tax burden higher there than it is in many other countries.

© 2017 The New York Times News Service