How the U.S. Can Mitigate the Pandemic’s Global Economic Impact
By Julie McCarthy
After decades of historic progress in the fight against extreme poverty, the COVID-19 pandemic has resulted in the first increase in extreme poverty in Africa in 20 years. Countries across the Global South are suffering from not only the economic impacts of prolonged shutdowns, but also exponentially increased debt distress.
What does this mean for a new Biden administration, facing its own economic challenges at home? Washington’s international reputation suffered under President Trump, but thankfully the United States still has good relationships in the areas where low-income countries most urgently need its leadership now.
First and foremost, there is the brutal debt crisis in the Global South, particularly in Africa, where governments have faced increased spending on relief efforts as revenue-producing exports have collapsed. The global community’s response to debt relief during COVID-19 to date has been piecemeal and wholly insufficient. Only some G20 countries are agreeing to a debt service moratorium through the end of 2020. Private creditors (who hold the majority of low- and middle-income country debt) are actively opposing any action on debt relief, and the United States is opposing the issue of new Special Drawing Rights (a kind of International Monetary Fund reserve currency that can help bail out countries suffering from liquidity crises).
Via the U.S. Treasury, the Biden administration can immediately issue up to $650 billion in new Special Drawing Rights (without needing congressional approval). This would not only provide much needed liquidity to help poor countries but would also shame others in Europe into doing the same. Efforts currently underway in the 116th Congress indicate an appetite for a much more significant allocation, which the Biden administration should not only encourage but actively support. It will be critical for the Biden administration to build in provisions ensuring that new SDRs actually go to the neediest countries—and not the rich countries, which hold the most shares.
A Biden administration can also immediately extend bilateral debt moratoria for low and middle-income countries through at least 2022, and work with the International Monetary Fund, World Bank, and others to negotiate longer-term debt restructuring and forgiveness efforts. It can organize a global summit to support distressed countries during COVID-19, and critically, can bring private creditors to the table in a way the Trump administration had no interest in doing. Finally, a Biden administration can also use its leverage with the World Bank and International Monetary Fund to ensure that debt relief does not impose painful and counterproductive fiscal austerity measures, which undermine public spending on essential services at a time when vulnerable populations need them the most.
The second area where a Biden administration’s foreign policy can help address the pandemic’s economic toll is workers’ rights. Two billion [PDF] workers, mainly in the Global South, are in precarious jobs with low wages and no benefits or safety net as a result of globalization. Following the pandemic, some U.S.-based companies summarily cancelled orders from factories abroad, even when workers had already finished making their products. Kohls, the U.S. retailer, notoriously cancelled $150 million of garment orders last June, while at the same time issuing $109 million in dividends to shareholders. Estimates suggest that garment workers in low-income countries have been deprived of at least $40 billion in wages from large U.S. and European retailers that cancelled orders or withheld payment in bad faith.
The Biden administration’s new trade representative and attorney general can help. First, they should help countries like Bangladesh to resolve legal claims surrounding U.S. brands and retailers that have refused to pay for already completed work and raw materials procured under existing contracts. The Biden administration also can commit to exploring new regulations that would ban the kind of abusive contract terms currently exacerbating the economic plight of low-income workers in U.S. supply chains during the pandemic. In the longer term, the administration can elevate the right to organize and access to basic social protection (like sick pay and insurance) as a central condition of all future trade and procurement agreements. They should also speak out through public and bilateral diplomacy where those rights are under threat. This will be critical to a Biden administration helping hundreds of millions of low wage workers around the world in the months and years to come.
The third area where a Biden administration can take immediate action to help poorer countries navigate COVID-19-driven economic crisis is taxation. As noted elsewhere, many U.S. multinational companies pay a pittance in domestic taxes, despite generating billions in revenue at home. Multinational corporate tax avoidance in poorer countries is even more egregious, given how routinely international companies abuse international tax loopholes to withhold desperately needed revenue. According to the International Monetary Fund [PDF], low-income countries lose at least $200 billion per annum from tax avoidance by U.S.-based multinationals alone.
G20 countries have increasingly tasked the Organization for Economic Cooperation and Development with cracking down on global tax avoidance, and the Organization for Economic Cooperation and Development recently began pursuing the idea of a global minimum corporate income tax. Such a tax would specifically help low-income countries to begin to generate more sustainable income as they recover from the COVID-19 crisis (and begin to pay back debts). A Biden administration does not need legislative action to begin supporting the Organization for Economic Cooperation and Development’s efforts. Biden can signal a departure from Trump’s dismissal of the initiative by publicly stating his commitment to it. Importantly, a minimum corporate tax will also potentially increase the U.S. Government’s ability to collect more of what it is legally owed by its own companies. Given that Amazon paid $0 in U.S. federal taxes for 2017 and 2018, and just over one percent tax on income in 2019, a minimum corporate tax of, say, five percent would offer U.S. taxpayers a significant upgrade.
The Biden administration faces a daunting battle to curtail a raging pandemic and a sinking economy at home. At the same time, many countries with fewer resources are relying on the United States to deploy our still significant political power to help them weather the most significant economic crisis in decades. Helping poorer countries avoid COVID-19-driven debt defaults and political instability, protect vulnerable workers in U.S. supply chains, and address rampant corporate tax avoidance is a win-win for everyone.