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Trade uncertainty to continue
A clear theme of the past year has been trading disruption. The war in Ukraine has contributed significantly to the levels of disruption, but it has not been the only factor. Trade disputes, new trade agreements and alliances, a rapidly changing regulatory environment and the ongoing effects of the COVID-19 pandemic have all contributed to creating high levels of trade uncertainty. These factors create new challenges and opportunities for companies worldwide, elevate trade and supply chain issues to the boardroom, and put the trade function in the spotlight as never before.
Trade can significantly impact global indirect tax policy in several ways. That can be done through trade liberalization; as countries open their borders to trade, they often reduce tariffs and other indirect taxes on imported goods. It can reduce indirect tax revenues for the importing country, increase economic efficiency and stimulate economic growth. Trade disputes, such as the trade dispute between the United States (US) and China, can significantly impact global indirect tax policy. When the US imposed tariffs on imported goods from China, it had a ripple effect on international indirect tax policy, as other countries responded with their own tariffs on imported goods.
Trade continues to be hindered by an increase in geopolitical instability and the ongoing war in Ukraine, widening export controls and sanctions, and increasing the focus on compliance among the US, UK and European Union. The expanded scope of sanctions to the professional services sector and IT-related services means that more companies must be aware of these regulations when working with their clients. Governments across the world are increasing sanctions and trade protection measures. In the US, for example, it is expected that the government will continue to focus on the series of significant updates to the Export Administration Regulations¹ it made in 2022 focused on export controls around semiconductors, integrated circuits, related manufacturing equipment, advanced computing and supercomputers.
This year, supply chain pressure is expected to ease somewhat. Shipping prices and other critical supply chain indicators have started to alleviate. However, a combination of US-China decoupling, governmental incentives for onshoring and regulatory requirements for companies to have greater visibility over their supply chains will mean continued broad shifts in procurement and sourcing decisions made by companies.
"We've seen a significant shift in models, whether because of the war in Ukraine or post-pandemic realignment of supply chains. From just-in-time to just-in-case supply chains, much work is going into that. If you adjust your supply chains, that significantly impacts your indirect tax accounting, both from a compliance and a cash flow perspective. Disrupted supply chains are also adding to costs," says Kevin MacAuley, EY Global Indirect Tax Leader.
Long-term trends and short-term shocks
There are two separate trends for trade happening at the moment, according to Sally Jones, UK Trade Strategy and Brexit Leader, Ernst & Young LLP. The crisis, such as COVID-19 and the war in Ukraine, that are creating relatively short, sharp shocks to the trading system but from which the trading system responds and recovers quite quickly. The second trend is a much more long-term, sustained change from a world in which the global consensus was one of reducing trade barriers. And that trend of lowering trade barriers started after World War II and continued for seven or eight decades. But it has now reversed.