The US is hurtling toward another trade war – but this time it isn’t with China

(SCMP) – Europe and the United States are hurtling toward a trade war over who has the right to tax Google, Facebook and Amazon.

After Washington confirmed Wednesday that it had pulled out of talks on global rules for taxing the digital economy, officials including Bruno Le Maire, the French finance minister, and Paolo Gentiloni, the European economy commissioner, threw their weight behind national or EU-wide digital levies – plans that would likely bring retaliation from the US.

“We need an understanding in the global negotiations,” Gentiloni tweeted. “If the American stop makes it impossible, a new European proposal will be put on the Commission’s table.”

The stand-off is expected to reignite a transatlantic trade dispute that has been simmering for more than a year.

At stake is which country has the right to tax digital companies whose operations now span the world. The looming spat also may sour an already tense relationship between the US and EU at a time of deepening wariness, while also potentially exposing divisions within Europe as countries remain split over how to force companies like Google and Amazon to pay more into national coffers.

“There’s a real prospect we end up with a trade war,” said Dan Neidle, a tax partner at Clifford Chance, a law firm in London.

Much now depends on how countries respond.

Over the past year, governments in France, Italy and the United Kingdom have all passed digital tax rules that aim to collect hundreds of millions in revenue from tech giants, many of them US-based companies with big operations in Europe.

Some of those levies have been on hold pending the outcome of discussions on a global taxation overhaul at the Organisation for Economic Cooperation and Development.

After Washington’s move, France said it would move ahead with plans to impose digital taxes at the national level, while Italy and the UK said they remained committed to finding a “global solution.”

“This letter is a provocation, a provocation to all OECD partners,” Le Maire told a local radio on Thursday, adding that Paris, London, Rome and Madrid had sent a joint response to US Treasury Secretary Steve Mnuchin. “There will indeed be, as I have always promised, a digital tax in 2020 in France.”

At the EU level, the European Commission said it would revive plans for a bloc-wide tax if the US withdrawal from OECD talks killed off the prospect of a global reform.

Drums of war

US officials have pushed back at EU claims that digital companies are not fairly taxed, saying national or EU levies represent unfair treatment of American companies, as well as illegal tariffs under global trade rules.

Earlier this month, President Donald Trump’s administration launched a series of trade investigations that could lead to tariffs on countries in Europe, Asia and South America if they adopt digital service taxes.

In 2019, Washington had threatened to slap tariffs on US$2.4 billion of French goods like wine and cheese in retaliation for the country’s digital taxes. Both sides eventually agreed to postpone such actions until an agreement could be reached within the OECD over how to tax the digital economy.

“What they’re doing is fundamentally unfair to American companies,” US Trade Representative Robert Lighthizer told Congress on Wednesday. “They’re picking on them because they’re the best and they’re American companies.”

Both sides will now have to decide how far they want to push their claims.

In Europe, most countries and the Commission are eager to restart discussions about an EU-level tax, though many still hope that a global reform is within reach, according to a Commission spokesperson.

“We want to encourage the US to come back to the negotiating table,” the spokesperson told reporters Thursday. “We continue to support the global approach, and we are willing to come up with a European proposal if the OECD discussions were to fail, or if they are not conclusive.”

Narrowing window

Yet the prospect of an EU-wide deal looks slim.

Despite support from many EU countries, Ireland and some Nordic countries stopped previous efforts to create an EU-wide tax which they argued would have put their export-led economies at a disadvantage.

Europe’s trade chief Phil Hogan – who previously said the EU would respond as one to any retaliatory tariffs imposed by the US because of national digital taxes – also is interested in the top job at the World Trade Organisation.

That could force the Irish politician to recuse himself from any trade talks with Lighthizer because of a potential conflict of interest as he would need support from Washington to land the WTO role.

Brussels on Thursday said Hogan is still the EU’s point man for trade talks with the Trump administration, despite having muzzled him on Tuesday to prevent him from speaking about his interest in the top job at the WTO.

Asked who would be Lighthizer’s counterpart in Brussels in talks to diffuse a trade war, Commission spokesperson Eric Mamer said the interlocutor “remains” Hogan.

For the US, retaliatory tariffs are not likely before mid-July because the USTR is still taking public comments on its new investigations into countries that have either passed, or are likely to pass, digital tax rules.

It is unclear whether Washington will renew its threat to impose tariffs against France, whose planned digital tax was expected to raise roughly €500 million each year.

For now, Angel Gurría, the OECD’s secretary general, urged countries to remain at the negotiating table with the aim of reaching a global digital tax deal by year-end.

But, he added, failing to agree on a global solution would eventually ramp up trade disputes just as governments worldwide were struggling economically because of the Covid-19 public health crisis.

“Absent a multilateral solution, more countries will take unilateral measures and those that have them already may no longer continue to hold them back,” he said. “A trade war, especially at this point in time, where the world economy is going through a historical downturn, would hurt the economy, jobs and confidence even further.”