A New Axis of Stability: Pakistan, Türkiye and Sa…

By Ali Haider In a statement, former FBR Chairman Shabbar Zaidi said that Pakistan’s economy would improve if it severed trade ties with China. He asserted that China has inflicted more damage on the Pakistani economy than the United States ever did. He further stated that he had opposed CPEC from day one, noting that the public was misled by the “game changer” narrative while the country was driven to ruin through the implementation of exorbitantly expensive power projects. The total trade volume between Pakistan and China during the 2024-25 fiscal year stood at approximately $25.23 billion. Of this, Pakistan imported goods worth $20.43 billion from China and exported products valued at $2.84 billion. Additionally, Pakistan makes annual payments of around $1 billion to China for services, loan repayments, and profit repatriations related to CPEC projects. Consequently, Pakistan’s overall trade deficit with China stands at approximately $18 to $19 billion, a figure exceeding the total funding Pakistan receives under a full IMF program. Since over 90 percent of trade between Pakistan and China is conducted in US dollars, this deficit has a direct impact on the country’s foreign exchange reserves. Pakistan sources approximately 28 percent of its total imports from China. In 2025, China remained Pakistan’s largest trading partner. Major imports from China include machinery, electrical machinery, organic chemicals, textile raw materials , and solar panels. Conversely, just four items account for 60 percent of Pakistan’s exports to China: cotton yarn, rice, seafood, and leather products. In other words, our exports are not only limited in scope but also consist primarily of raw materials and agricultural commodities. Trade with any country is beneficial only when exports exceed imports, or at the very least, match them. However, in Pakistan’s case, for every dollar of exports, we are importing goods worth 7.2 dollars from China. This trade imbalance becomes even more critical when Pakistan imports goods from China that are already being manufactured domestically. The textile and garment sector serves as the prime example of this; although Pakistan is among the world’s major cotton producing nations, a large portion its clothing imports, including both summer and winter garments, comes from China. This situation is primarily driven by the exorbitant rise in electricity tariffs in Pakistan. Currently, the cost of a single commercial electricity unit exceeds 60 rupees, and high gas prices further exacerbate the situation; consequently, the production cost of a standard jacket made in Pakistan reaches 10,000 rupees. In contrast, a Chinese made jacket of comparable quality is sold in the market at or even below that production cost. Due to this uneven playing field, dozens of garment units in Karachi, Lahore, and Faisalabad have shut down. Between 800 and 1,200 textile mills have closed over the last decade; Kasur, which was Asia’s largest leather industry hub in 2001, now lies desolate, as 40 percent of its tanneries have completely shut down and another 30 percent have become seasonal operations. The footwear industry has also suffered severe damage; in Punjab alone, there were over 350 large shoe manufacturing factories, of which 20 percent have shut down and 15 percent have seen a decline in production. This is largely because Chinese shoes, slippers, and sandals available in the market are not only cheaper but also more appealing to young generation in terms of design. Consequently, local manufacturers report that their production has dropped by 40 percent over the past three years. The steel sector is also grappling with this same challenge. Following the closure of Pakistan Steel Mills, the country imports 70 percent of its steel requirements. In 2025, steel and iron products worth $1.5 billion were imported from China alone; these included construction rebar, sheets, and pipes. Although Pakistan possesses reserves of iron and coal, high electricity costs prevent local production from competing effectively in this tough market. Another concerning aspect is the import of machinery. In 2025, Pakistan imported industrial machinery worth $2.6 billion from China; however, this import was not accompanied by investment. Chinese companies profit from selling the machinery and then leave, without opting to set up manufacturing plants within Pakistan. If the government were to mandate that every major machinery import be coupled with a requirement for the Chinese company to establish a factory in Pakistan with a 30 percent equity stake, it would generate employment and enable Pakistan to achieve self-reliance in technology. It is simply not possible for Pakistan to completely halt trade, as a significant portion of solar panels, mobile phone components, pharmaceutical raw materials, and agricultural machinery is imported from China. If these imports were halted tomorrow, many factories would shut down, and inflation could surge by 30 to 40 percent. It would take the economy at least ten years to fully recover from such a shock. The solution lies in “smart protection.” The first step is to impose phased regulatory duties on goods currently being manufactured in Pakistan. Protection can be immediately extended to three sectors: clothing, footwear, and certain types of construction steel. The second step is to make the import of machinery conditional upon investment. The third and most critical step is to reduce production costs; until electricity and gas become cheaper, “Made in Pakistan” products will not be able to compete with Chinese goods. On the other hand, the government must also work on boosting exports. Pakistan’s total exports increased by 48.7 percent during the first five months of 2026, with copper, rice, and halal meat playing a significant role. Access to the Chinese market can be expanded by incorporating agriculture, IT, and minerals into the second phase of CPEC. The target should be to increase exports to China from $3 billion to $10 billion over the next three years. Amidst all these issues, it is crucial to understand that China is not Pakistan’s enemy; it is the world’s largest manufacturing hub, producing goods tailored to the purchasing power of every nation. The real problem lies in imbalanced trade and high production costs. Pressure on foreign exchange reserves

Pakistan has entered a crucial phase in its constitutional and administrative journey. With a population exceeding 250 million, the governance model that served the country decades ago is increasingly being questioned. Recent public discussions, including remarks by Interior Minister Mohsin Naqvi advocating a debate on administrative reforms in light of Pakistan’s growing population, have reignited an important national conversation: Is it time to rethink how Pakistan is governed? In my view, the answer is yes. The real challenge is not simply whether Pakistan should create more provinces. The real challenge is how governance can be brought closer to the people. A modern state cannot be effectively administered through excessive centralization when its population, economy, and urban centers have expanded dramatically over the past several decades. The first and most important reform should be the empowerment of local governments. District administrations, metropolitan authorities, and municipal governments should be given genuine constitutional authority, financial autonomy, and administrative independence. Citizens interact with government primarily through local institutions. Therefore, healthcare, education, sanitation, water supply, transport, municipal planning, and public safety should be managed by empowered local governments rather than through an overly centralized administrative structure. Karachi represents the strongest example of why governance reform has become a necessity rather than a choice. As Pakistan’s largest city and economic engine, Karachi deserves a governance model specifically designed for a modern global megacity. Despite its enormous contribution to the national economy, the city continues to face serious challenges in urban planning, infrastructure, traffic management, public transport, water supply, waste management, and municipal administration. In my opinion, simply placing Karachi under direct federal control would not automatically solve these problems. The federal government already carries enormous national responsibilities, and transferring administrative authority without structural reforms may simply relocate existing governance challenges. Instead, Karachi requires a metropolitan governance model comparable to internationally recognized cities such as New York, where professional city administration, clearly defined institutional responsibilities, strong municipal leadership, effective policing coordination, urban planning, and financial autonomy work together under a comprehensive metropolitan framework. Such a model could improve service delivery while ensuring greater accountability and long-term planning. Governance reform should not stop at strengthening local governments. Pakistan should also seriously consider creating additional provinces wherever there is genuine administrative need, broad public consultation, and constitutional consensus. Smaller provinces can improve administrative efficiency, strengthen regional representation, and make governments more responsive to local communities. More representative provincial structures can also help ensure that the concerns of both urban and rural populations receive greater attention at the national level. Equally important is the devolution of administrative authority to districts and local institutions. Excessive concentration of political and administrative power often limits opportunities for ordinary citizens to influence decisions that directly affect their lives. A stronger local government system would enable communities to participate more effectively in governance while improving transparency, accountability, and public service delivery. This debate should never be viewed as an attempt to weaken Sindh or divide its people. On the contrary, I believe these reforms would strengthen Sindh by ensuring that development and decision-making reach every corner of the province. Whether someone lives in Kandhkot, Larkana, Mithi, Islamkot, Mirpurkhas, Badin, Hyderabad, Thatta, or Karachi, every citizen deserves equal access to quality healthcare, education, infrastructure, clean drinking water, municipal services, and economic opportunities. An equally important aspect of this reform process is public awareness and civic education. Pakistan needs a network of credible academics, constitutional experts, economists, retired civil servants, educationists, and respected members of civil society who can engage directly with communities across Sindh, particularly in rural and underserved areas where access to balanced political information may be limited. Their role should be to explain, in Sindhi and other local languages, the constitutional, administrative, and economic implications of decentralization, stronger local governments, and, where appropriate, the creation of additional provinces. Many citizens hear conflicting political narratives about these proposals. In my view, people should be encouraged to evaluate reforms on the basis of evidence, administrative efficiency, and public welfare rather than fear or political rhetoric. If these reforms genuinely improve representation, accountability, and service delivery, they should be supported regardless of political interests. Ultimately, the objective should not be to benefit any political party but to empower every citizen and ensure that governance serves the people instead of entrenched centers of power. Unfortunately, discussions about administrative reform are often overshadowed by political narratives that generate fear and misunderstanding. In my opinion, governance reforms should be evaluated on their administrative merits rather than through the lens of partisan politics. Citizens should be encouraged to examine whether decentralisation would improve their quality of life instead of viewing every proposal as a political contest. Meaningful reform also requires strengthening independent institutions, ensuring merit-based appointments, improving accountability, and modernising public administration. Whether Pakistan ultimately retains its parliamentary system or chooses another constitutional framework, lasting success will depend upon transparent institutions, professional governance, and effective local administration. Pakistan’s future does not depend merely on drawing new boundaries on a map. It depends upon building a governance system that places citizens—not bureaucracy or political centralization, at the center of public administration. Strong local governments, empowered districts, efficient metropolitan administrations, and, where constitutionally appropriate, additional provinces can together create a stronger federation, a more prosperous Sindh, and a better future for every Pakistani. A prosperous Pakistan will be built not through the concentration of power, but through the fair and effective distribution of power to the people.

The first part of this series argued that Pakistan’s recurring fiscal crises cannot be understood through conventional economic analysis alone. The distinction between public finance and Constitutional Political Economy (CPE) must now be explained. Both examine the role of the state in economic life, but they begin from different assumptions and ask fundamentally different questions. Traditional public finance is primarily concerned with what governments ought to do. In the classical framework associated with Richard Musgrave, fiscal policy performs three principal functions: allocation of resources, redistribution of income and macroeconomic stabilisation. Governments provide public goods, correct market failures, reduce unacceptable inequalities and use taxation and expenditure to promote stability and growth. This framework remains indispensable for analysing budgets, taxes and public expenditure. The International Monetary Fund’s discussion of Musgrave’s framework confirms its enduring influence on fiscal analysis. The difficulty arises when the state is treated as a single, impartial institution pursuing social welfare. In the real world, governments consist of politicians, bureaucrats, legislators, judges, regulators and numerous organised interests. Each operates under incentives and constraints. Political actors do not cease to pursue power, institutional advantage or personal interest merely because they enter public office. A tax system may therefore be inefficient not because its designers misunderstood economic theory, but because inefficiency benefits influential constituencies. An exemption may survive not because it promotes investment, but because its beneficiaries possess political power. Public expenditure may be allocated not according to social need, but according to the ability of institutions and groups to influence the budgetary process. Public finance generally asks: what tax would be efficient, equitable and productive? CPE asks a prior question: what political and constitutional arrangements will cause those in authority to adopt and administer such a tax fairly? This difference emerged most clearly in the work of James M. Buchanan, who was awarded the 1986 Nobel Prize for developing the contractual and constitutional foundations of economic and political decision-making. Buchanan argued that economists must specify their model of politics before recommending policies. They should examine the “constitution of economic polity”—the rules and constraints within which political actors make decisions—rather than assuming that government automatically acts as a benevolent guardian of collective welfare. In The Calculus of Consent, Buchanan and Gordon Tullock applied economic reasoning to collective decision-making. They distinguished between choices made within existing rules and choices concerning the rules themselves. Ordinary politics concerns decisions taken under established constitutional arrangements. Constitutional political economy examines how those arrangements should be designed, whose consent they require and what incentives they create. The distinction may be understood through the analogy of a game. Public finance often studies the moves made by players: whether a tax rate should be increased, expenditure reduced, subsidies withdrawn or borrowing limited. CPE examines the rules of the game: who may impose a tax, who may approve expenditure, how revenues are distributed, what majorities are required, which institutions are accountable and what remedies exist when power is abused. The rules determine the range of possible outcomes. Replacing one finance minister, tax administrator or economic adviser cannot fundamentally alter results if the institutional incentives remain unchanged. Buchanan and Geoffrey Brennan developed this insight further in The Reason of Rules. Their focus was not merely upon particular policy choices but upon the rules governing political and market interaction. CPE therefore does not ask only whether a government policy appears desirable. It asks whether the institutional process through which it is adopted protects citizens against arbitrary, discriminatory or predatory use of power. This approach does not imply hostility towards the state. A capable state is essential for education, healthcare, infrastructure, environmental protection, social security and economic development. CPE merely refuses to assume that state power will automatically be exercised for these purposes. A strong state without constitutional restraints may become strong against ordinary citizens while remaining weak before powerful interests. These insights are neither exclusively modern nor exclusively Western. Centuries before the emergence of public choice theory, Ibn Khaldun analysed taxation as part of the broader rise and decline of states. He observed that governments in their earlier stages could obtain substantial revenues from relatively moderate assessments, whereas later rulers frequently imposed heavier burdens but collected less as incentives weakened, production contracted and coercive expenditure expanded. Arthur B. Laffer subsequently acknowledged that the proposition associated with the Laffer Curve was not his invention and specifically identified Ibn Khaldun as an important precursor. Ibn Khaldun’s contribution, however, went far beyond a relationship between tax rates and revenue: he connected fiscal policy with political legitimacy, administrative expansion, elite consumption and institutional decline. The Constitution of Pakistan itself demonstrates that taxation is not merely an economic instrument. Article 77 provides that no federal tax may be levied except by or under the authority of an Act of Parliament. The provision embodies the constitutional principle that taxation requires lawful legislative authority; it is not simply an administrative technique for raising revenue. Article 160 creates the National Finance Commission and provides the framework for distributing specified revenues between the Federation and the provinces. Article 160(3A) further protects the provincial share by declaring that it cannot be lower than that provided under the preceding Award. These provisions represent a constitutional bargain concerning political authority, federalism and access to public resources. Revenue distribution is consequently not just an accounting exercise. It forms part of the structure of the federation itself. Article 140A requires the provinces to establish elected local governments and devolve political, administrative and financial responsibility to them. Fiscal policy cannot produce accountable public services when decision-making remains remote from citizens and constitutionally required devolution is treated as optional. Articles 37 and 38 contain important commitments regarding social justice, education, economic well-being, reduction of inequality and provision of basic necessities. They are Principles of Policy rather than directly enforceable Fundamental Rights, and Article 30 limits their judicial enforceability. Their inclusion nevertheless demonstrates that the constitutional purposes of revenue collection extend beyond achievement of numerical tax targets. The state collects resources to fulfil social and economic obligations, not

A society does not collapse the day corruption is discovered; it begins to decay the day corruption becomes ordinary. The Sindh Public Service Commission (SPSC), established to uphold merit and provide equal opportunities to the youth of Sindh, has repeatedly found itself at the center of controversy. Allegations of paper leaks, irregularities, and lack of transparency have steadily eroded public confidence, leading thousands of young aspirants to raise their voices in protest. Reports of demonstrations against SPSC over recruitment and examination concerns, as well as past official action following examination irregularities, reflect the depth of this mistrust. The title, “Cockroaches Approaching the Granary,” is symbolic. A granary stores the food that sustains a nation, while cockroaches represent decay, contamination, and silent destruction. Public institutions responsible for selecting the brightest minds are the granaries of governance. If corruption, negligence, or manipulation infiltrates these institutions, they contaminate not merely examinations but the very future of society. The protests by the youth of Sindh are not simply demonstrations against one institution. They are a cry for justice, transparency, and dignity. Behind every candidate stands a family that has invested years of sacrifice, countless hours of preparation, and unwavering hope. When the credibility of competitive examinations is questioned, it is not only individual dreams that are shattered; public trust in the state’s promise of equal opportunity is weakened. This struggle echoes a wider regional concern. Across South Asia, young people have repeatedly taken to the streets whenever examination systems were perceived to have failed them. In India, nationwide protests over alleged examination paper leaks became a powerful reminder that education and public recruitment derive their legitimacy from public trust. Whether in India or Pakistan, the message from the youth remains remarkably similar: merit cannot survive where examination integrity is compromised. The issue transcends politics. It is fundamentally about governance. Every leaked paper, every allegation of favoritism, and every unexplained irregularity diminishes the value of honest effort. When deserving candidates begin to believe that influence outweighs competence, a dangerous message spreads across society: hard work is no longer enough. The consequences extend far beyond recruitment. Civil servants, lecturers, engineers, doctors, and administrators selected through questionable processes ultimately shape the institutions that govern millions. Weak recruitment today becomes weak governance tomorrow. A nation that compromises on merit ultimately compromises on its future. Yet this moment also presents an opportunity. The protests of Sindh’s youth should not be viewed merely as expressions of anger but as demands for institutional reform. Transparent examination procedures, secure digital systems, independent oversight, prompt investigations into alleged irregularities, and public accountability can restore confidence. Institutions earn respect not by claiming perfection but by responding credibly to legitimate concerns. History reminds us that nations progress when their institutions are stronger than individual interests. The youth of Sindh are asking for nothing extraordinary. They seek only a level playing field where success is determined by knowledge, ability, and perseverance rather than by connections or corruption. The metaphor of cockroaches approaching the granary serves as a warning. If the guardians of merit fail to protect the granary, decay will eventually consume the harvest. But if institutions choose transparency over secrecy and accountability over complacency, the granary can once again nourish hope instead of despair. The future of Sindh depends not merely on educating its youth but on convincing them that their honesty, talent, and hard work will always be rewarded. Merit is the foundation of every successful society. Once that foundation cracks, the entire structure stands in peril.

A great game changer, the China-Pakistan Economic Corridor (CPEC), which was launched in its first phase in 2013, has since emerged as a flagship initiative of strategic significance, fostering regional connectivity, economic growth and socio-economic development while reinforcing the enduring partnership between Pakistan and China. Over the past decade, CPEC has transitioned from a vision of connectivity into a comprehensive development framework, delivering tangible progress across key sectors and contributing to Pakistan’s economic transformation. After the quite successful completion of the first phase, brisk preparations are underway in Beijing and Islamabad at the appropriate high levels, under the leadership of Chinese President Xi Jinping and Pakistani Prime Minister Muhammad Shehbaz Sharif, for formally launching CPEC 2.0 during 2026. According to the information gathered from the official sources concerned, on the Long-Term Plan, the 14th ICC formally agreed to review the CPEC Long-Term Plan (2017-30) in the light of the Memorandum of Understanding (MoU) on alignment of the CPEC five corridors with the National Economic Transformation Plan (URAAN Pakistan) and the action plan to foster an even closer China-Pakistan community. The 14th ICC had further directed the adoption of the action plan for fostering an even closer China-Pakistan community with a shared future in the new era (2025-2029), signed in September 2025. The 14th ICC had also further directed the adoption of the action plan as the guiding document for CPEC 2.0, and an action matrix accordingly has been prepared by the official quarters concerned and shared with the ministries and divisions of the Federal Government. Inter-agency consultations on the revised Long-Term Plan (LTP) were underway. As regards socio-economic development, about 15 out of 17 approved projects have since been quite successfully completed, while two remaining projects were reported to be at an advanced stage of execution and were expected to be finalized soon. Furthermore, seven new development initiatives have been proposed under the third batch and submitted to the China International Development Cooperation Agency for consideration and approval. These projects include the provision of modern agricultural machinery and equipment for agro-mechanization, the supply of fiberglass fishing boats to coastal communities, the construction of a fish-landing jetty at Gwadar to strengthen the fisheries value chain, the establishment of integrated cold-chain systems for horticulture and perishable products, and other livelihood-oriented interventions aimed at enhancing local productivity, food security, employment generation, and export potential in underserved regions. During the year, efficiency improvement measures were taken in the power sector for enhancing operational performance, improving grid stability, and optimizing the utilization of existing generation and transmission infrastructure. Stakeholder consultations were also conducted for addressing issues related to bulk electricity supply for Special Economic Zones (SEZs), aimed at facilitating industrialization and investment under CPEC 2.0. A major achievement of the sector was the continued utilization of indigenous Thar coal resources, which contributed towards reducing dependence on imported fuels, strengthening energy security, conserving foreign exchange reserves, and ensuring reliable base-load electricity supply for industrial and domestic consumers. As regards transport infrastructure, the upgradation of the Main Line-1 (ML-1) railway project, spanning approximately 1,872 km from Karachi to Peshawar, remained a strategic priority under bilateral cooperation. During the reporting period, third-party financing discussions by the Asian Development Bank (ADB) and Asian Infrastructure Investment Bank (AIIB) advanced for the Karachi-Rohri section, while detailed financing and implementation proposals were also developed for the remaining sections up to Peshawar in close coordination with the Chinese side. Once completed, ML-1 was expected to substantially enhance Pakistan Railways’ operational efficiency by increasing train speeds from 65-105 km/h to nearly 160 km/h, improving freight-handling capacity, reducing transit times, and strengthening north-south economic connectivity across the country. Significant headway was also achieved on the Realignment of Karakoram Highway (KKH-Phase II) Project under the Government-to-Government (G2G) framework. Both sides have operationalized a phased implementation strategy and reached broad consensus on an 85:15 financing ratio. In Gwadar, the operationalization and consolidation of strategic infrastructure projects continued to gain momentum. The East Bay Expressway, a 19-kilometre, six-lane corridor connecting Gwadar Port with the Makran Coastal Highway, continued to improve port accessibility, reduce cargo transit time, and enhance logistics efficiency for commercial and port-related traffic. Further progress has also been achieved on Phase-II initiatives aimed at connecting Gwadar Port with the New Gwadar International Airport, including discussions on grant financing modalities and finalization of the draft Framework Agreement to strengthen integrated sea-air connectivity among Gwadar Port, Gwadar Free Zones, and the airport. Gwadar Port and the Free Zones have made further progress toward operational maturity through improved infrastructure provision, enhanced utilities connectivity, investor-friendly fiscal incentives, and continued policy facilitation measures by the Pakistan Government. Increased focus has also been placed on attracting industrial relocation, export-oriented manufacturing, warehousing, fisheries processing, and logistics-related investments in Gwadar Free Zone. Parallel progress has also been achieved on multiple road infrastructure projects, including strategic expressways and motorways, through the mechanisms of the Joint Working Group (JWG) on Transport Infrastructure and the Joint Technical Working Group (JTWG), thereby reinforcing Pakistan’s long-term objective of developing an integrated multimodal transport and logistics network under CPEC. Mining cooperation has also emerged as a major new pillar of CPEC 2.0, thereby reflecting the shared commitment of both countries to unlock Pakistan’s vast untapped mineral potential through bilateral cooperation, technology transfer, industrial cooperation, and investment partnership. During the period under review, both sides agreed to undertake a joint feasibility study for the proposed Mining Corridor connecting Nokundi with Gwadar Port. The proposed initiative was expected to substantially reduce transportation costs, improve supply-chain efficiency, and facilitate large-scale movement of copper, gold, rare earth elements, chromite, and other strategic minerals. The corridor would also complement ongoing developments in Reko Diq and other mining regions, while also laying the foundation for transforming Balochistan into a major mining, processing, and export-oriented economic hub. The last year has also witnessed quite significant progress in industrial cooperation under CPEC, with continuous development of Special Economic Zones (SEZs) and expeditious provision of basic utilities, especially electricity. Phase-1 of Rashakai SEZ has been successfully operationalized, while

When France first levied a 3% tax on the domestic revenues of large technology companies in 2019, the move was presented as a modest, temporary fix. Five years later, the temporary fix has become a global patchwork. More than 20 countries now operate some form of digital services tax, the United States has threatened retaliatory tariffs, and the multilateral replacement intended to tidy it all up remains unsigned.   The question at the heart of the scramble is disarmingly simple and technically complex: where should a company that sells everywhere but is physically located almost nowhere pay its taxes?   For most of the last century, international tax rules rested on physical presence. A company was taxed where it had offices, factories, or personnel. That principle struggled as companies like Google, Amazon, and Meta built business models in which value is derived from users, data, and online advertising in one country, while profits are booked in another, often lower-tax, jurisdiction.   The scale of the mismatch sharpened after the 2008 financial crisis. The Organisation for Economic Co-operation and Development (OECD) launched its Base Erosion and Profit Shifting (BEPS) project in 2013, estimating that profit-shifting cost governments $100 billion to $240 billion annually in lost revenue. By 2018, public pressure to act on highly visible technology firms accelerated political timelines faster than the OECD process could move.   The result was the rise of the unilateral digital services tax, or DST.   Unlike corporate income taxes, DSTs are typically levied on gross revenues, not profits, generated from specific digital activities online marketplaces, search engines, social media platforms, and targeted advertising within a country’s borders. Rates are low, generally 2% to 5%, but they apply broadly. The United Kingdom’s 2% DST raised over £800 million in 2024-25. France, Italy, Spain, Austria, India, Turkey and others adopted similar measures, each with slightly different thresholds, definitions, and scopes.   Proponents argue DSTs restore a basic link between economic activity and taxation. “If a platform earns substantial revenue from French users watching French ads, the French tax base should reflect that,” a senior official at the French Ministry of Finance said in 2023. For many developing economies, where consumption of digital services is large but physical presence of providers is minimal, DSTs are also a matter of fiscal sovereignty.   Critics, including the technology companies themselves and the U.S. government, point to three problems. First, taxing revenue rather than profit can penalize low-margin businesses and be passed on to small businesses and consumers who use the platforms. Second, the proliferation of different rules creates compliance complexity and the risk of double taxation, where the same income is taxed in multiple jurisdictions. Third, Washington has long argued DSTs are discriminatory by design, targeting predominantly American firms.   That third argument carried trade consequences. Under Section 301 of the U.S. Trade Act, the Office of the U.S. Trade Representative (USTR) investigated DSTs adopted by France, India, Italy, and others, concluding that several did discriminate against U.S. companies. Tariffs of up to 25% on selected imports were prepared, then suspended pending a global deal.   That deal was meant to be Pillar One.   In October 2021, 136 countries and jurisdictions representing more than 90% of global GDP agreed to a two-pillar framework brokered by the OECD/G20 Inclusive Framework. Pillar Two, a 15% global minimum corporate tax, has largely moved forward and is now in force in dozens of countries. Pillar One is the more ambitious and more fragile.   Under Pillar One’s Amount A, a portion of the residual profits of the world’s largest and most profitable multinationals  those with global turnover above €20 billion and profitability above 10% would be reallocated to market jurisdictions where their customers and users are located, regardless of physical presence. The scope was deliberately expanded beyond tech; excluding extractive industries and regulated financial services, it would cover roughly 100 multinationals across sectors.   In exchange, countries would be required to withdraw DSTs and similar measures and commit not to introduce new ones. A Multilateral Convention (MLC) would implement the rules, replacing a web of unilateral taxes with a single, coordinated mechanism. The OECD estimated in 2023 that Pillar One would reallocate $200 billion in profits and generate $13 billion to $36 billion in additional global tax revenue annually, a figure comparable in aggregate to existing DST receipts, though distribution would differ markedly by country.   Negotiations have since slowed. The original goal of signing the MLC in 2023 was missed. A target for 2024 was also missed. In 2025 and early 2026, several governments, including the UK, revised their internal planning assumptions to 2027, while confirming that their DSTs “remain in operation” until a convention enters into force.   Several factors explain the delay. The convention requires ratification, including in the United States, where any tax treaty must secure a two-thirds majority in the Senate. Bipartisan skepticism about ceding taxing rights and concerns about revenue impacts have made ratification uncertain. Some emerging economies have argued that the thresholds for Pillar One are too high and the reallocation too small to benefit them meaningfully, preferring instead to retain DSTs or pursue a parallel negotiation at the United Nations on international tax cooperation that could run until 2027. In Washington, meanwhile, successive administrations have maintained that any acceptable deal must include robust DST withdrawal provisions.   The result is a holding pattern with real costs. In October 2021, Austria, France, Italy, Spain, the UK and the United States announced a transitional agreement: as long as Pillar One progressed, the U.S. would not impose retaliatory tariffs, and European DST liabilities would be creditable against future Pillar One obligations. That truce has largely held, but it depends on continued progress.   For businesses, the uncertainty complicates planning. A multinational may face a DST in India, a diverted profits tax in the UK, a Pillar Two top-up in the EU, and the prospect of Pillar One reallocation all with different calculation bases and documentation requirements.