A trade dispute between the Trump administration and France intensified on both sides of the Atlantic on Tuesday, with U.S. tech giants backing tariffs to retaliate against a new French digital services tax and a top EU official warning the bloc would stand behind its member country.
The dustup could complicate efforts to strike an international agreement on taxation of the tech sector and other multinational businesses. And it could suck in other countries that have imposed similar taxes or are contemplating doing so.
Amazon, Google and Facebook endorsed the administration’s plan to slap tariffs on $2.4 billion worth of French cheese, Champagne, handbags and other goods if a negotiated solution can't be reached over the tax, which applies to such things as targeted advertising and providing platforms to connect buyers and sellers.
The Computer and Communications Industry Association, which represents the three internet giants, urged “USTR to use remedial tools at its disposal to deter France and to send a strong message to other countries who are finalizing or have proposed a similar national digital tax,” as Rachael Stelly, policy counsel at the CCIA, testified before a Trump administration hearing chaired by the Office of the U.S. Trade Representative.
The head of the office, Robert Lighthizer, has threatened to open additional investigations against other countries that adopt a digital services tax.
The United States is home to many of the world's biggest tech companies, which have operations all over the world. Countries such as France want to be able to collect tax revenue on those business activities within their borders, but there is no international consensus yet on how to do that.
Talks on how to tax digital services are now underway at the Organization for Economic Cooperation and Development, a club of developed nations based in Paris. However, expectations of reaching a deal soon are dim, despite a pledge by senior U.S. and French officials on Tuesday to step up discussions ahead of the World Economic Forum meeting in Davos, Switzerland, later this month.
French Economy Minister Bruno Le Maire told reporters in Paris that he and U.S. Treasury Secretary Steven Mnuchin had agreed to double their “efforts in the coming days to try and reach a compromise on digital taxation at the OECD.”
“We gave ourselves 15 days, until our next meeting in Davos in end-January. We want to try all options to reach an agreement at the OECD in the next 15 days,” Le Maire said.
At the same time, European Commissioner for Trade Phil Hogan said the EU's executive arm would back Paris in its dispute with Washington.
“The European Commission will stand together with France and all of the member states who wish to have the sovereign right to impose digital taxation on companies in a fair way,” Hogan said during a joint news conference with Le Maire. “We will look at all possibilities if any tariffs and measures are imposed by the United States."
Hogan is scheduled to meet with Lighthizer in Washington next week to discuss digital taxes and other trade irritants.
Stelly's support for the tariffs clashed with testimony at the USTR hearing from other groups, whose businesses would be severely harmed by duties on the French goods.
Those included approximately two dozen wine wholesalers and retailers who have already been hurt by Trump's retaliatory duties on wine in a separate dispute over European government support for aerospace giant Airbus. Trump has imposed a 25 percent duty on European wine in that trade spat, but Lighthizer has proposed increasing it to 100 percent.
An additional 100 percent duty on French sparkling wine would increase the cost to importers by $718 million and cause the loss of more than 17,000 jobs throughout the distribution chain, a coalition of ten wine and alcohol groups said in a letter to USTR. A tariff of just 25 percent would boost costs by $179 million and jeopardize an estimated 6,000 jobs, the groups said.
“We strongly urge the U.S. and France to reach a negotiated settlement in this dispute and avoid the implementation of new tariffs,” said Barkley Stuart, executive director of Southern Glazer’s Wine and Spirits, as well as the immediate past chairman of the Wine and Spirits Wholesalers of America.
Mary Taylor, the 42-year-old head of a small business that specializes in importing and selling European wines, said the threatened tariffs on French champagne risked destroying her company, coming on top of the existing wine duties.
"We find ourselves suddenly under water. Should tariffs reach 100 percent as currently proposed, I will surely have to give up my young business and find another line of work or depend on welfare," Taylor said. "My question to you is: how can you just gut my family business?"
Stelly said CCIA was sensitive to the negative impact that Trump’s proposed duties could have on companies outside the tech sector, but she argued a strong response was needed to France’s tax because of the unfair burden it imposes on American internet companies.
Tariffs “should only be used in limited circumstances, in a targeted manner and where there is a clear strategy in place designed to change the behavior of a trading partner,” Stelly said. “USTR’s proposed action in this particular investigation appears to meet that standard.”
The French tax is effectively a unilateral tariff on imports of U.S. technology, she said.
The levy imposes a 3 percent digital services tax on firms with more 750 million euros in global revenue, and 25 million euros in revenue in France.
The Trump administration argues the way the tax is structured unfairly targets dominant American internet companies, while sparing French firms. USTR outlined its findings in a report released in early December, and also announced plans to impose 100 percent retaliatory duties on as much as $2.4 billion worth of French goods.
However, USTR's report does not explain how it arrived at the $2.4 billion figure for retaliation, an amount that France has called "highly disproportionate" to the amount of revenue it expects to raise.
The action comes as the Organization for Economic Cooperation and Development is hoping to reach a global agreement this year on digital services taxes. Those negotiations are led for the United States by the Treasury Department, rather than USTR.
A second technology association, the Information Technology Industry Council, less explicitly endorsed the Trump administration’s plan to impose retaliatory duties. But Sam Rizzo, policy director at ITI, said it was important that the United States send a strong signal to discourage other countries from adopting similar revenue schemes.
“Today’s hearing … is about more than the French digital services tax,” Rizzo said. “It is about preventing the wide scale application of targeted, unilateral taxes, which stand to undermine a functioning international tax system and compromise the predictability it has afforded to companies to conduct business globally.”
Spain, the Czech Republic, Poland, the U.K., Canada and Turkey have either proposed or enacted digital services taxes, with Turkey’s poised to take effect in early 2020. “Even worse, Italy’s and Austria’s DST measures went into effect on January 1,” Rizzo said.
A senior Republican lawmakers urged France and other countries contemplating a digital services tax to get serious about negotiating a solution.
“Europe better wake up to the fact they’re going to suffer a lot if we don’t get some agreement through” the OECD, Senate Finance Chairman Chuck Grassley (R-Iowa) told reporters on Capitol Hill. “We shouldn’t have to put these tariffs on. We shouldn’t have 20 different countries in 20 different ways working with our digital platforms to have complicated systems of taxation that’s probably very unrealistic to what business they do in that country. A global agreement is the only thing that’s going to satisfy them.”
The Trump administration is threatening to impose duties on France using authority under Section 301 of the 1974 Trade Act. That law allows USTR to take unilateral action against unfair trade barriers. However, prior to the Trump administration, the United States had largely stopped using the measure.
USTR's hearing was cut short on Tuesday by a forecast for snow and will resume on Wednesday with testimony from two more panels of witnesses.
Adam Behsudi and Melissa Heikkilä contributed to this report.