Another trade war is brewing, this time between France and the US

Like the Big Bad Wolf of childhood tales, Donald Trump threatens to huff and puff and blow the house down. Sometimes he relents, sometimes he does not. Trade tariffs are his favourite weapon.

At the beginning of the week, US trade representative Robert Lighthizer announced he had completed the first segment of his investigation of France's digital services tax (DST).

The Office of the US Trade Representative began the investigation last July, when Paris enacted a 3 per cent tax on revenue in France from online advertising, the sale of data for advertising purposes, and connections between users via internet platforms.

The French tax concerns only companies with €25 million of revenue in France and €750 million worldwide. It is based on the belief that tech giants should be required to pay tax where they do business, rather than shift profits to tax havens.

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The tax has been a constant demand of President Emmanuel Macron, and is a popular measure.

Lighthizer concluded the French DST “discriminates against US companies, is inconsistent with prevailing principles of international tax policy, and is unusually burdensome for affected US companies”.

The US counter-attack on French imports was "unacceptable", finance minister Bruno Le Maire insisted. "My message is clear. We will never, never, never abandon our just determination to tax the internet giants . . . the French tax is not discriminatory . . . it includes US companies, but also French, European and Chinese."

Sanctions

The fact that the DST is widely known as the GAFA tax, after Google, Apple, Facebook and Amazon, undermines French claims of non-discrimination. The logos of the four tech giants appeared on the government website that announced the tax.

Based on Lighthizer’s report, Trump announced he will double tariffs on 63 categories of French imports, to $2.4 billion (€2.2 billion). Lighthizer will hold one week of public hearings on the French tariffs from January 7th. He did not say when the sanctions will take effect.

The US wants to make an example of France, to discourage other countries from enacting their own digital tax. France did its utmost to persuade the EU to levy a similar tax, but because fiscal matters require unanimity, four dissenters – Ireland, Cyprus, Denmark, and Malta – were able to scupper the plan, and Germany was unconvinced.

Though France is the first to impose a unilateral tax, the UK, Austria, the Czech Republic, Hungary, Italy, Spain and Turkey (which is not in the EU) intend to follow suit. UK prime minister Boris Johnson reconfirmed his intention to go ahead with a British DST.

Lighthizer said he “focused on countering the growing protectionism of EU member states, which unfairly target US companies”. He is considering “whether to open section 301 investigations into the digital services taxes of Austria, Italy and Turkey”.

France expects to collect €500 million annually from the DST, so the Franco-American trade war is to its detriment. The US would strike at the very heart of France’s trade balance, with a 100 per cent tax on French sparkling wine and Champagne, cheese, leather goods and cosmetics.

The US is the leading export market for French Champagne, at €577 million last year; €700 million including sparkling wine. The tariffs would make French yoghurt, butter, dairy fats and cheese prohibitively expensive in the US. “Don’t take us hostage!” the farmers’ union FNSEA pleaded.

France sent 306 tonnes of Roquefort cheese to the US last year, 10 per cent of global exports. “We will definitively lose the US market,” Jean-François Boyer, chief executive of Gabriel-Coulet Roquefort, plaintively told France Info radio.

At a joint press conference with Macron at the beginning of the Nato summit in London, Trump dismissed the trade row as "a minor dispute", adding: "I think we'll probably be able to work it out."

But a few minutes later, asked to outline the process for imposing tariffs on French products, he appeared to flip-flop. “I think we’ll be able to work something out, I hope. And maybe not. Maybe we’ll do it through taxing. You know, we could work it out easily through taxing. But the techs – you know, they’re American companies . . . we want to tax them. That’s not for somebody else to tax them.”

Trump twice brandished the trade weapon against Nato slackers, saying: “There are some countries that aren’t fulfilling their commitment, and those countries are going to be dealt with. Maybe I’ll deal with them from a trade standpoint . . .we have a lot of power with respect to trade. They make a fortune with the US, and then they don’t pay their bills. That’s no good.”

The newspaper columnist Philippe Escande, writing in Le Monde, called Trump "a one-trick pony" who believes he can regulate world trade through tariffs. Trump's trade wars are widely blamed for stagnation in global manufacturing and the past 10 months of economic contraction.

Economic crises

Sanctions against Europe pale by comparison with Trump's trade war on China, which he  blames for the failure of US factories. His statement that he may not conclude a truce with China before next year's presidential election sent jitters through stock markets this week. Trump has promised new, 15 per cent tariffs totalling $160 billion on Chinese goods from December 15th, including electronics.

Also this week, Trump announced new tariffs on steel and aluminium from Argentina and Brazil, who were exempted until now because of their economic crises. These tariffs illustrate the destabilising, vicious circle of trade wars.

The steel and aluminium tariffs originally targeted China, which retaliated by taxing US soybeans and by shifting to Brazilian and Argentinian soybean suppliers. Brazilian president Jair Bolsonaro was "the Trump of the Tropics". After Macron, Shinzo Abe and Justin Trudeau, the Brazilian has seen his bromance with Trump destroyed by the US president's trade obsession.

Trump's punishment of France follows a long-running dispute over EU subsidies of the Airbus consortium, which has deep roots in France. The US already charges tariffs on EU steel and aluminium.

On October 18th, the US established a 25 per cent tax on 150 products from the EU totalling €7.5 billion, including Irish butter and cheese. French wine and cheese were already included in that list, as were civilian aircraft built in France, Germany, Spain and the the UK.

At Tuesday’s press conference, Trump delivered a long monologue that revealed his perception of the EU as an organisation bent on fleecing American consumers.

The EU “was formed . . . partially to make better or take advantage of the US,” Trump said. “And they’ve done that very brilliantly. And, frankly, it’s not right. So I’ve exposed it . . . the US can’t continue to lose the kind of money that they’ve lost . . . since the formation of the EU . . . we have a very unfair trade situation, where the US loses a lot of money for many, many years with the EU. Billions and billions of dollars. I mean, to be specific, over $150 billion a year.”

An EU spokesman said it would “seek immediate discussions” with the US over Trump’s plans to impose new tariffs on France.

"We are happy to be able to count on the total support of the European Commission in the face of this threat of sanctions," Le Maire told journalists after meeting Phil Hogan, the Irish commissioner for trade, in Brussels on Wednesday.

Confrontation

Hogan “confirmed to me that the EU is united behind France”, Le Maire said. “Digital taxation is not a French issue. It’s a European issue.”

Macron’s European partners would doubtless have preferred to avoid confrontation, but now have little choice but to stand with France. The EU takes action on trade issues by qualified majority voting, not unanimity.

The US, like Ireland, has long insisted that the Beps (base erosion and profit sharing) project at the Organisation for Economic Cooperation and Development was the only way to arrive at a fair, global tax for multinational corporations.

A compromise proposed by the OECD in October, and endorsed by the finance ministers of the Group of 20 largest economies, incorporated the US demand that internet companies not be singled out. The tax would nonetheless give greater weight to the countries where services are consumed in determining the tax base.

France has promised to abolish its own DST and retroactively reimburse any difference between its tax and the OECD levy, once it comes into force, in theory next summer.

But the French believe that the US is trying to wriggle out of the OECD solution. “After demanding an international solution at the OECD, Washington isn’t sure it wants it,” Le Maire said.

France’s critics say it has been cack-handed in resorting to the “nuclear option” of a DST that threatens attempts to achieve the world’s first ever global tax regime. Paris ought to have waited for the BEPS process to bear fruit, instead of waving a red flag in Trump’s face, critics say.

Without the pressure of national levies on tech giants, the US would have stalled forever, the French respond.

“Both sides act like bold children,” says a source involved in the process. “You want to grab them by the collar and scream: ‘Stop. This is dangerous. Come back from the brink’.”