US Trade War with France on the Horizon

“All taxes, and an the revenue which is founded upon them, 

all salaries, pensions, and annuities of every kind, 

are ultimately derived from some one or other of those three original sources of revenue, 

and are paid either immediately or mediately from the wages of labour, the profits of stock, or the rent of land.” 

Adam Smith, “An Inquiry into the Nature and Causes of the Wealth of Nations,” 1776. 

In the era of the information technology boom, the global economy is building a new hierarchy where control over the information flow will determine the future of material production and the service sector, and information itself becomes an important production factor. At the same time, all the major powers, by virtue of their position and the interests of their own elites, business and capital, attempt in various ways to protect the domestic market or at least levy a tax on the enormous profits of the transnational corporations operating within their national territories.

Since international taxation rules were created almost a hundred years ago, when production was material in nature, the obligation to pay taxes arose when companies had factories and conducted business. In the digital era, much has changed: the IT business operates globally, and if it happens to be tied to individual jurisdictions, it is done in a way to minimize taxes. For example, Google Inc., one of the largest IT companies, for 10 years paid taxes outside the United States at a rate of 6%, using European rules, and Yahoo! Inc. managed to reduce its taxes to the level of 1.35%. At the same time, in the Netherlands alone, the volume of payments that passed through the subsidiaries of multinational corporations was $12-13 trillion annually.

Given these circumstances, France and the United Kingdom began to promote new tax initiatives designed to partially redistribute the profits of the IT oligopolies of Silicon Valley and global high-tech corporations.

On July 11, 2019, The French Parliament officially approved a 3% income tax on technology companies, primarily Google, Amazon, Facebook, Apple (known as ‘GAFA’), arguing for the fiscal measures by noting the fact that large American corporations operating in the French market paid too little taxes to the budget of the Republic. This bill got the conditional name “GAFA tax”, although more than 30 companies, including Chinese ones, stand to be affected. The economic effect for France from the introduction of GAFA tax will be 500 million more euros for the national budget, annually.

The UK is going to impose a 2% tax on incomes received by social networking services, search engines and online stores. Following France and Britain, several other European countries (Austria, Italy, Poland and the Czech Republic) may move to introduce such taxes; Austria is considering introducing a 5% tax rate.

This trend opens up a new front in the struggle for digital taxation and the rent redistribution of hi-tech companies, but at the same time may launch a new phase of trade wars. For the United States, there are two ways American corporation may respond to the GAFA tax: legally, where they would attempt to abolish the tax in European courts; or diplomatically, by compelling the US federal government to launch trade wars. So far, everything indicates that the United States will retaliate by imposing duties.

The Trump administration has already attempted to prevent the GAFA tax from being accepted by the French parliament. Even before the final vote on the bill, it began investigating France’s alleged unfair trade practices in accordance with Section 301 of the Trade Act of 1974, which could ultimately lead to a US response, citing threats to national security as in the case of China. Practical experience is already available. “Economic security is military security,” said US Secretary of Commerce Wilbur Ross last year, justifying the imposition of import duties on steel and aluminum.

Since the United States cannot respond symmetrically to France due to the fact that American corporations dominate the global IT market, we should expect import duties on French goods and later on goods from other European countries, by analogy with steel and aluminum duties. The duties may primarily affect companies in the chemical industry and the engineering sector, which export products to the United States.

The European front of the trade war is, in fact, open, although France still hopes to avoid the consequences of the digital tax’s introduction. “I deeply believe that being allies, we can and should solve our differences in other ways, not through threats,” said Finance Minister Bruno Le Maire, speaking in the Senate.

But if politically, the countries of the European Union are still formal allies of the United States, then on the global market, the Europeans are no longer partners with whom Washington needs to cooperate, but rivals with whom it has to compete. The growth rates of most European economies are now extremely low; a new round of trade confrontation can put the EU on the verge of recession, which will have a negative impact on the entire global economy and international trade.

Sooner or later, the US trade war with allies will cause serious political differences, especially if power in Europe passes into the hands of populist or nationalist forces. The immediate consequence of the US response may be the expansion of cooperation between European companies and China, which is now facing unprecedented pressure from the Americans in its high-tech sector.

For some period of time the American corporations will try to compensate for European digital taxes by increasing the cost of their software products and digital services for users, so that it could be almost imperceptible. But if the technological confrontation in the world, caused by the US trade wars, eventually destroys the oligopoly of Silicon Valley, and several other technological megaclusters emerge on the planet, the American IT giants will lose much more than the amount siphoned off by digital taxes.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.