US needs strong EU to contain expanding China

Joe Biden offers a carrot after the ugly relations under Donald Trump

Photo: AP Joe Biden

US President Joe Biden arrives in Europe in a complicated and risky mission to summon allies and put pressure on enemies. And here comes the time for him to prove that he is more than “not another Trump”. Biden's visits, to NATO on 14 June and then the European Union for brief summits, following his attendance at the G7 in Britain, will be more than symbolic.

The meetings are synchronised so that he can arrive in Geneva on 16 June with allied consultation and support for his first meeting as US president with Russian President Vladimir. Ahead of the trip, the largest EU economy received a strong boost as the White House waived the sanctions targeted at the construction of the Nord Stream 2 gas pipeline which links Germany and Russia.

Biden comes out of the Trump era's shadows trying to embrace Germany as key partner. Unlike him, Trump has a long history of offending the Germans. It started with allegations of improper market behaviour, including excessively low tariffs, going through “too much of German imports with too many German cars”, and ending with Trump's criticisms of Berlin's too low financial contribution to the NATO budget. Furthermore, Trump initiated the relocation of some of the American troops based in Europe from Germany to Poland. All that time, Germany waited patiently and in the end was offered a carrot from the Biden administration - Nord Stream 2 may go ahead, something Trump aggressively opposed. The second bonus for the EU ahead of the G7 summit was the quiet US agreement on the EU estimate of the minimum global corporate tax. The 15% level is far below the US intention of 21%.

“America is back,” European Council President Charles Michel said, referring to the end of an era of confrontation during the term of President Donald Trump. If we talk numbers - a 15% global corporate tax rate could reap the EU €50bn a year, and earn the UK nearly €200m extra from the British multinational BP alone, according to research. Should the tax rate be set higher, at 25% - the lowest current rate within the seven largest world economies - the EU would earn nearly €170bn extra a year, which is more than 50% of the current corporate tax revenue and 12% of the total health spending in the bloc.

The retreat from the original position of Biden raised a lot of issues on domestic American soil. Analysts reckon the expected revenue due to the change of the tax regime is very far from covering the huge costs related to the pandemic recession and missing all targets linked to the ambitious plans to revive the US infrastructure.

“It's wrong for the United States,” Republican Senator John Barrasso said of the tax deal struck by finance ministers from the wealthy G7 democracies. “I think it's going to be anti-competitive, anti-US, harmful for us as we try to continue to grow the economy and certainly at a time when we're coming out of a pandemic,” Barrasso, who chairs the Senate Republican Conference, told reporters at the US Capitol.

In exchange, G7 countries agreed to end digital services taxes, but the timing for that is dependent on the new rules being implemented.

The agreement is not the best for US but it will face serious challenges in the EU as the new taxation rules will need unanimous approval even by countries like Ireland and Cyprus, which are benefiting from the present situation and are expected to lose hundreds of millions of euros. Ireland's finance ministry watched last year as the US tech firm Microsoft assigned $315bn of profits to its Irish subsidiary, only to see it all disappear to Bermuda, where the business is “resident” for tax purposes.

The brass-plate subsidiary in Dublin, which has zero employees, sent the profit to Bermuda as part of a three-decade-old tax planning scheme to benefit Microsoft shareholders. Ireland's finance minister, Paschal Donohoe, said he had “significant reservations” over the Biden plan and predicted that Ireland would maintain its 12.5% corporate tax rate for years to come.

And if taxation stays a European problem, for Biden remains to address the Russian issue. His predecessor Trump flirted with Russia, expressing high praise for Vladimir Putin. The cordial dance with the Russians had a devastating effect on Trump's reputation and contributed to his loss in the last US presidential elections. Now, with Biden in charge, the US has to be more aggressive to Russia with its annexation of parts of Ukraine and the activity of Russian trolls and hackers being only the tip of the iceberg. Biden will face the biggest challenge, however, in summoning all allies against a growing China. Trump failed to raise key support from allies as the Western countries were reluctant to unite under the slogan “America first”. Now Biden has managed to extend Trump's economic sanctions against China, but he will have to step them up. Provided everything in Europe goes smoothly, of course.

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