Via Financial Times

The US does not want the rest of the world to tax the monopoly profits of its tech companies. The Germans want to press ahead with a sordid gas pipeline deal with Russia. The EU protects its car industry from foreign competition, but hyperventilates when US President Donald Trump threatens the same for European car imports. These are some of the main signs of a fast approaching transatlantic trade conflict.

Last week, events took a turn for the worse when the US walked out on multilateral talks to agree a global framework for a digital tax. The OECD has been co-ordinating efforts to seek a global consensus on how to tax the effervescent profits of global digital companies. Agreement would have forestalled a trade conflict. But the US walkout makes it more likely.

The US commerce department has already completed an investigation, in December, of France’s digital tax, under Section 301 of the 1974 Trade Act. This concluded that the tax constitutes discrimination against US tech companies. Washington has threatened tariffs on French cheese and champagne in retaliation. Earlier this month, the US commerce department also launched a separate investigation into the digital taxes being considered by, among others, the UK, Italy and Brazil. The conclusion will almost certainly be the same as the report on the French.

Meanwhile, a parallel transatlantic dispute is raging over Nordstream 2, the not-yet-completed Baltic Sea pipeline to deliver Russian gas to western Europe. A bipartisan group of US senators has proposed legislation to expand sanctions to a wider net of companies, under the strangely named Protecting Europe’s Energy Security Clarification Act. (I try to imagine what would happen if the EU were to pass a law to clarify that US policy).

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To top it all, Mr Trump is threatening to cut the number of US troops stationed in Germany, in protest over Berlin’s refusal to increase defence spending to previously agreed Nato targets. And then there is the ever-present threat of US car tariffs. All this is coming to a head in the next few months.

Europeans tend to associate the deterioration in the bilateral US-EU relationship with Mr Trump personally. But whatever tariffs, duties or sanctions Mr Trump might impose on Europe, most are likely to survive even if he is not re-elected. And, if he does remain in the White House, it is reasonable to expect the relationship to deteriorate further. So no matter what happens, the damage to the transatlantic alliance will persist. 

If the pandemic had been a truly symmetric global shock, the story of deteriorating trade relations might have taken another turn. Countries would have had a greater incentive to align their policies. But the US may well come out of the slump faster than the EU — just as it did after the global financial crisis. Despite a higher number of cases and coronavirus-related deaths, it has a more robust economy and is less dependent on global supply chains than Europe. 

I think EU countries are right to press ahead with a digital tax. The digital economy is one of the few sectors to have performed well during the pandemic. There is no reason why this profitable sector should not pay its fair share.

Tax avoidance by large companies has also become a big political issue in France, Germany and the UK. Emmanuel Macron would endanger his chances of remaining president in 2022 if he caved in to the interest of US tech giants. London is also planning a digital tax — another obstacle to a UK-US trade deal. Robert Lighthizer, the US trade representative, said last week that the US would not agree to a UK deal without market access for US goods — the infamous chlorinated chicken. But the US position on digital tax is unreasonable.

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I am more sympathetic when it comes to cars. The EU discriminates against importers through a 10 per cent tariff and by imposing standards that protect the domestic industry. I think the US is also right to criticise Europe’s dependency on Russian gas and the impact of Nordstream 2 on eastern European countries.

My advice for the EU is to pick the right fight — the one on digital tax — and compromise on others. But that would be a triumph of hope over experience. Germany shows no signs of compromising on Nordstream 2, France will not agree to the elimination of car tariffs, and the US has walked out of talks to achieve fair global taxation regime for digital services.

Everybody is behaving unreasonably. So this is a conflict that will play out. Henry Kissinger famously quipped about the Iraq-Iran war: “It’s a pity they can’t both lose.” I feel the same here.

munchau@eurointelligence.com