The long list of differences between Europe and the current US administration became even longer on July 11, when France approved a tax on global internet and digital firms dubbed the GAFA tax, an acronym for Google, Apple, Facebook and Amazon. The new law imposes a 3% tax on the French revenues of the largest IT firms with worldwide digital revenue of at least 750 million and French revenue of more than 25 million euros.
Officially, the law targets companies from many countries, including Britain, Germany and China, but it is mostly directed at the US giants. US President Donald Trump has ordered an investigation into the measure and a possible US response, such as putting steep tariffs on French wine and products of the French aircraft and automobile industries.
This exchange of openly negative decisions has increased the probability of an EU-US trade war.
The GAFA tax suits French President Emmanuel Macron for several reasons.
First, imposing a tax on tech companies is a way to replenish the budget. According to preliminary estimates, the tax could yield between 400 and 500 million euros in 2019. This may not be much in absolute terms, but the French government needs every cent to finance the increased social obligations following the yellow vest protests, as well as the traditional expenses, such as support for the French digital industry, technology and startups.
Second, the GAFA tax offers an opportunity to play the social justice card. When the government attempted to take the funds it needed from the people’s wallets, this provoked a huge public outcry. By adopting the tech tax, President Macron has demonstrated his resolve to bring the uncontrollable rich firms to heel, especially the non-French ones. Speaking at a conference held to mark the 100th anniversary of the UN’s International Labor Organization a month ago, the French president denounced “capitalism gone mad” and the “law of the jungle” it has created.
Third, the French government will use the GAFA tax to dissuade the United States from terminating the multilateral talks on harmonizing the national fiscal policies in the digital sphere. The French Finance Ministry has hinted that the tax could be cancelled if a similar measure were agreed with the United States at the G7 and OECD level. (The next G7 summit is scheduled to be held in August in Biarritz.) In other words, France expects Washington to negotiate a compromise so as to minimize the expenses of US tech giants in France and other European countries should they adopt similar legislation.
The problem is, though, that Trump is a tough guy. The idea of protecting the interests of American business everywhere, which brought him to power in 2016 and with which he will run for reelection in 2020, is still valid. Even when the US administration finds fault with its digital giants, it sees them as “our SOBs” who must be protected from foreign rivals at all costs. This is exactly what Donald Trump did when he promised to mount pressure on the industries that are especially important for France and, through it, for the EU.
Like China, the EU will have to join the endless war of words with the US president. Nobody knows how it may end, but the EU definitely does not want to wage a very real and large trade war. Unlike China, the Old World has limited combat capabilities in trade and the economy due to the slow economic growth of the majority of European states, including France. Although forced to respond to Washington’s policy contextually, Europe would like to preserve the predictability and the regulated nature of global trade without which it would feel extremely uncomfortable compared to the US or China.
As in many other cases, the situation has been compounded by Europe’s disunity. France’s GAFA tax has not appeared out of the blue, but it is certainly the worst possible scenario that has been considered in Paris. Initially, the French government advocated a common EU tech tax, but the idea was blackballed by the Scandinavian countries and Ireland, which offer the most favorable conditions for digital business. Next France attempted to negotiate a bilateral agreement with Germany, but Berlin refused, wary of a US response. Only after both attempts failed did France opt for setting the pace. The other countries willing to adopt a similar tax, including Britain, Italy and Austria, will now have to adjust their pace to France. On the other hand, the French economy will be the first to feel the reaction of the US digital giants and the challenge of Washington’s official response.
