Digital Taxes + Brexit + Trade = Geopolitical Realignment

Updated: Jan 27, 2020

Three times this month, the United Kingdom has sided with the European Union against the United States regarding trade policy issues: aircraft subsidies, digital taxes, and FTA negotiation priorities.

The moves suggest two counterintuitive and positive possible outcomes from Brexit:

(i) that London could voluntarily choose policy alignment with Brussels (at least on selected issues) rather than the United States; and

(ii) that a redefinition of trade relationships in Europe could serve as a catalyst for significant forward motion not just on trade but on critical digital economy policy issues.

Potential shifts in the transatlantic relationship hold global implications not only for geopolitical alignment but also for the outcome of major cross-border policies. Digital economy issues are emerging as the core focus of 2020 policymaking, from bilateral transatlantic trade negotiations to the G20 agenda.

Last week we made the case that geopolitics has not disappeared and that managing exposure to cross-border policy risks requires distinguishing between geopolitics and headline risk. This week’s Davos sessions illustrate the point. 2020 is going to be a very interesting year indeed.

Concrete Facts First – It’s Been A Busy Week So Far

  • This week in Davos, the Chancellor of the Exchequer announced that the UK would prioritize trade talks with the EU over the United States (as reported by Bloomberg) and in remarks covered by The Guardian announced that the UK would move forward quickly in the spring with the imposition of a digital tax. This places the UK in opposition to the newly announced cease fire between France and the US regarding digital taxes.

  • Also in Davos, the Chancellor’s US counterpart (the Secretary of the Treasury) announced that any efforts to implement digital taxes would be met with automobile tariffs.

  • Finally, in Davos, the FT reports today that President Trump and Commission President Van Der Leyen each announced significant progress regarding bilateral trade talks with a spring season agreement on “trade, technology and energy” and a November full trade deal.

Veterans of the transatlantic policy dialogue will view with a jaundiced eye the targeted November 2020 date for a bilateral free trade agreement. However, Brexit is a game changer that requires all parties to shift bargaining stances.

The Expanding Digital Trade Dispute

While a clear opening exists for breakthroughs, delivering on this rhetoric will not be easy. Policymakers in Europe and the United States agree on a range of geostrategic issues regarding the digital economy, which places China in the cross-hairs and as a bystander in the discussions (except at the G20 table). But on a number of technical issues, wide divides exist across the Atlantic particularly with respect to data privacy and digital taxation.

The United States enters the negotiations with a fully developed set of policy priorities that have been hard-wired into free trade agreements over the last two decades across multiple Administrations. If the United States pursues a Digital Chapter that mirrors the commitments provided in the USMCA (analyzed here in this Atlantic Council post) and other trade agreements (analyzed here in this WITA post), then agreement will be difficult to achieve.

On the other side of the planet, documents released throughout this week by the United States Trade Representative (USTR) indicate a solid cross-border consensus was crafted in December 2019 within APEC on policy priorities that stand in stark contrast to the policy trajectories on display in Europe. Specifically, APEC nations have reached consensus on making permanent the 1998 WTO moratorium which forbids nations from imposing customs duties on electronic transmissions, “including content transmitted electronically.”

Slim but important differences exist between customs duties, tariffs, and domestic taxes. How policymakers choose to characterize efforts to generate fiscal revenues from digital services will matter and could be decided this year amid the three-way transatlantic but bilateral trade talks. If the initiatives announced in Davos succeed, the last eight weeks of 2020 will see at least three major new trade agreements (US/EU; UK/EU; US/UK) and a major G20 communique with the digital economy at its core.

Why It Matters

The policy clashes on display in Davos are not a short-term skirmish. Nor are they shallow political moves. Significant geopolitical repositioning regarding the rules governing cross-border electronic commerce and data is only just getting warmed up. The digital tax dramas are just the first act. If the initiatives announced in Davos succeed, the last eight weeks of 2020 will see at least three major new trade agreements (US/EU; UK/EU; US/UK) and a major G20 communique with the digital economy at its core.

This is more than just a set of bilateral discussions. Consistent with the shift towards a Distributed Age, the bilateral but three-way transatlantic trade negotiations potentially sideline or pre-determine outcomes at various multilateral entities including the OECD (where digital taxation details are being discussed in parallel with the goal of generating a substantive agreement by December 2020), the WTO (where negotiations regarding the Trade in Services Agreement remain dormant).

It is true that policymakers in general talk about trade wars and tariffs far more than they act. Our time series for these terms in our patented platform visually illustrate the delta in 2019 between rhetoric and action on these issues.

But it would be a mistake to ignore rhetoric altogether. Rhetoric and action have a complicated, sometimes causal, relationship. In this specific case, how American and European (including UK) policymakers rhetorically position themselves regarding the digital economy can provide profoundly predictive signals regarding policy trajectories long before year-end decisions are due.

We are just beginning to explore how best to measure sovereign language, but even this early stage data delivers significant insights. Among other things, the data above tells us that focusing on headline-grabbing words ("trade war") may not be as useful as focusing on words that have a more direct impact on policy (like "tariff"). Transforming the language of public policy into structured data increases the ability of investors and strategists to make better decisions based on concrete, objective, and transparent data.

The road will be bumpy and full of policy volatility throughout 2020 regarding the digital economy which is on track to become the core engine for economic growth by the end of the decade (if not before). The 2019 World Trade Report (published this month) indicates the growth in IT services trade over the last decade has been dramatic and it shows no sign of deceleration. In fact, rapid advances in blockchain and analytical automation (including machine learning and artificial intelligence) suggest we are on the cusp of another rapid wave of innovation and growth which will change much of what we know about supply and demand functions even as they facilitate more inclusive opportunities for employment and innovation globally.

This short video from the WTO summarizes the 232-page report, highlighting macrotrends and opportunities which as of this week are now at the forefront of transatlantic trade negotiations.

BCMstrategy, Inc. will be using our patented platform to assess dynamically the evolution of these negotiations– as well as parallel Brexit negotiations and the evolution of FinTech, Cryptocurrency, and CBDC policy – throughout the year for early indicators of evolving policy trajectories and geopolitical realignments. Stay tuned!


Interested in joining our Pilot Program with direct access to platform data, time series generation, and daily momentum measurements for Trade, Brexit, FinTech, Cryptocurrency, and other issues? Then please reach out to us through THIS FORM.