Trump is threatening retaliation if the UK plan becomes law. But taking a tough line may be the key to a global deal.
When US treasury secretary Steven Mnuchin threatens to impose tariffs on a country’s car industry if it taxes American tech giants, you are inclined to believe that he means it. “If people want to just arbitrarily put taxes on our digital companies,” he said, “we will consider arbitrarily putting taxes on car companies.”
A trigger-happy White House, steeped in trade disputes with various economic competitors, needs little excuse for retaliation. So the British government’s plan to impose a 2% sales tax on the largest digital companies – ensnaring the likes of Google, Amazon, Facebook and Apple – provides all the excuse President Donald Trump needs.
With Trump fresh from a bloody fight with the Chinese over import tariffs that had escalated to the point of plunging US manufacturing into recession, it is understandable that many trade economists believe his appetite is satiated, at least for the moment. But this may be to underestimate Trump on the issue of the tech giants, even if an America First view of trade often means clobbering one’s own side as much as the opposition.
US soya growers and livestock farmers suffered steep declines in export sales after they were effectively locked out of China. A moratorium last year was only partially observed, and Trump was forced to pour much of the money earned from import tariffs into Treasury coffers for compensation payments in the agricultural sector.
An import tariff is effectively a tax on goods entering the country and is supposed to give a boost to domestic firms, whose goods become relatively cheaper. But the tariff is paid by the importer, so increases costs for domestic manufacturers that use foreign-made parts.
Mnuchin has been Trump’s loyal lieutenant through all these battles. The former Goldman Sachs partner and Yale University graduate knows the art of the deal, probably better than his boss. It was Mnuchin who travelled to Beijing in 2017 with trade negotiator Robert Lighthizer to kick off the battle with China’s president, Xi Jinping, starting with a 30% tariff on Chinese solar panels imported into the US.
Mnuchin is understood to have been the one who reined in Lighthizer’s demands that Beijing open its markets wider to the west and crack down further on state subsidies. He could see how much US firms that relied on imports from China were hurting.
Yet it was only this month that the administration agreed to ease off and work on a phase one peace deal, and this happened only after some tangible concessions from the other side had been agreed.
British firms are already paying punitive US tariffs following a spat between the US and Brussels over subsidies for aeroplane maker Airbus. A scattergun approach by the White House in the wake of the Airbus ruling saw the Scotch whisky industry punished last year with a 25% import tariff on bottles of single malt.
In threatening to slap tariffs on the UK car industry, Mnuchin is well aware that it is in a difficult bind, with Brexit threatening exports and the need for hefty investment in electric and hybrid vehicles. The US accounts for around £8bn a year of the UK’s automotive exports.
There is honour in not being bullied by the US. But when the French have told Mnuchin they are prepared to delay a similar digital tax, the argument for the UK to delay begins to strengthen.
Mnuchin has conceded that the US should fall into line with the Paris-based Organisation for Economic Co-operation and Development when it puts forward proposals for a global digital tax. If the US honours this promise, a delay in imposing a UK tax will seem wise. If the US backtracks on backing the OECD plan, then, as the French have also threatened, the UK can revive the tax and backdate it.
One way or another, the tax avoidance techniques of the major digital firms need to be tackled. If the threat of going it alone will help spur the US into accepting the OECD tax, then all the better.
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