Protectionism isn’t the path to economic recovery
Perhaps the most overused term of the entire COVID-19 crisis is “unprecedented.” Is it unparalleled from a healthcare standpoint? Of course. How about environmental? Yes. But from a business perspective? Absolutely not. Not only have we been here before multiple times, but we will almost certainly be here again. Economic downturns have always been part of the cycle, and they all have the same unintended consequence: a rise in protectionism with trade.
Even with the current economic strife, as most global economies still remain struggling with prolonged shutdowns and business closures, new tariffs and retaliations are popping up from the US, most recently with a 10% tariff on Canadian aluminum and a potential increase on European alcohol, hurting an already struggling hospitality sector. Such moves of course prompt retaliatory tariffs, leading to a frustrating – and costly – cycle.
On the surface, it’s quite understandable. As the virus first began to shut down trade in Asia and Europe, it directly affected importers across the ocean. A whopping 94% of Fortune 1000 companies experienced disruption in their supplies. As more operations grinded to a halt, there was an outcry to halt overseas manufacturing and sourcing, particularly as COVID-19 cases increased in North America. Now, as recovery lags, most leaders are staunchly focused on rebuilding their own economies.
Protectionism is the worst way forward
While protectionism is expected, it could be one of the worst moves the global economy can make. During the past few months, many comparisons have been drawn to the Great Depression in terms of unemployment rates and market volatility. One forgotten factor of this era is the Smoot-Hawley Tariff Act, enacted nearly a century ago after the 1929 market crash. The US law increased tariffs, causing a domino effect which saw dozens of other countries retaliate, resulting in a catastrophic decline in global trade and a prolonged depression.
In more recent history, the 2008 Financial Crisis saw its own devastating crash. Though whispers of protectionist regulations were heard, cooler heads ultimately prevailed, and the global economy recovered with relative swiftness.
Unfortunately, we’re unlikely to see a repeat of this as today’s crisis is chiefly a human one. Unlike previous recessions, this disaster shuttered everyday life including schools, religious institutions, businesses and transit. It’s much more difficult to remain logical when the consequences are deeply personal.
The hidden majority of international trade
What many fail to realize is that the largest part of global trade is in fact not the movement of goods, materials and other physical pieces – it’s services. When considering imports and exports, it’s easy to picture massive shipping containers and cross-Atlantic carriers but most trade – we estimate 55%– is made up of services like licensing, banking, travel and other non-material transactions. Additionally, this is the fastest growing sector as it expanded at double the rate of merchandise over the past decade.
Much of this expansion is a product of increasing technology, which allows for the flow of data and information across borders with ease. Because such practices are relatively new in comparison to traditional trade, they are often ignored in place of goods.
Why international partnerships exist in the first place
For the public, there is often the perception that international ties within a business – for both goods and service trade – exist only to save money and that foreign materials, workers and products are significantly cheaper. Though this may have been a major driver in the past, it is largely untrue today. A combination of rising wages in emerging markets and lower employee benefits in the developed world has led to a smaller gap in labour fees.
Perhaps more important for North American businesses, these foreign partnerships allow for growth in ways that are not available locally including sourcing international talent and scaling operations to increase output. The workforce in China alone is well over 770 million, a number more than double the entire population of the US and 20 times greater than Canada.
It is simply not feasible to maintain both production levels and pricing without foreign participation, regardless of whether the trade is physical goods or services. Of course, there is financial savings, even if it’s less significant than in previous decades. If this were to disappear, the increased cost would almost undoubtedly fall on the consumer – a scenario that would make the current downturn much worse.
The right move for businesses
Businesses are likely not going to exit this crisis without change, nor should they. Adjustments need to be made with both sides of trade: goods and services. Instead of seeking to reduce global relationships, they should consider diversifying their partners and customers. Interestingly, the US-China trade war unintentionally gave some businesses a jump start, as some who relied solely on China struggled to manage with increased costs. Though no strategy will protect from another global shutdown, the ability to access multiple regions will prevent stoppage from any issues that might appear locally.
Since service trade is outpacing merchandise, governments should consider liberalizing their policies to better support growth. We estimate that such a multilateral move could increase the value of this trade by 11% by 2025, to the tune of an additional $890 billion.
The past financial crisis has shown that international partnerships are a vital part to reinvigorating the global economy. Once all local markets are fully open, businesses should aim to work with more overseas partners – not fewer.
Six issues at the top of tax and finance leaders’ agenda
New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.
According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.
And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.
Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.
Trend 1: Businesses seek more strategic counsel from tax
Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.
According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”
Trend 2: Tipping point for resourcing models
Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.
Trend 3: Digital tax administration is moving faster than expected
in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.
"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."
Trend 4: Data simplification and lower-cost resourcing are top priorities
Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.
At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”
Trend 5: Skillsets are shifting
Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.
Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact
Trend 6: 2020 brought productivity improvements
Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.