First France went after Google and Amazon with a fresh set of taxes. On Monday, President Donald Trump threatened to retaliate against two beloved French exports: Champagne and cheese.
This latest global trade dispute pits Trump against a long-standing ally, months after France approved a “digital services tax” aimed at making major U.S.-based tech companies like Google, Apple, Facebook and Amazon fork over more revenue.
The issue had been on the backburner since August, after Trump and French President Emmanuel Macron agreed to a 90-day truce while they tried to reach a long-term agreement on how tech companies should be taxed. That deadline passed last week without a deal.
On Monday, the Office of the U.S. Trade Representative released results of an investigation that determined that France’s tax unfairly discriminates against big U.S. tech companies.
If another solution isn’t worked out, tech companies could pay hundreds of millions of more dollars in taxes and U.S. consumers would have have to pay double for Dom Pérignon, Le Creuset cookware and Roquefort cheese.
U.S officials also indicated they could investigate other European countries contemplating digital tax plans, putting them in cross-hairs of future tariff action if they follow through. They also said they were prepared to counter Europe’s broader regulatory clampdown on American tech firms.
The latest salvo threatens to further strain relations with France and other European countries during this week’s NATO meeting in London, which Trump is attending. With tensions rising, here’s what you need to know about the tussle:
Why would the French start a tax war with tech companies?
Some European countries have been moaning for years about missed tax revenue from tech giants, many of which have hundreds of millions of users across the region but pay almost nothing into national coffers. Broader, digital tax proposals at the European Union went nowhere, so individual countries pushed ahead on their own.
France got there first: Lawmakers earlier this year passed a 3 percent digital services tax on any tech company with global revenues of more than €750 million, of which at least €25 million comes from French users. Countries including Spain, Austria and the United Kingdom have proposed similar rules, hoping to pocket a slice of the billions that some of Silicon Valley’s biggest names generate each year.
Why is Trump sticking up for big tech companies?
It’s complicated. He has repeatedly accused Twitter, Facebook and Google of censoring and suppressing conservative speech on their platforms, although evidence is lacking and the companies deny it.
Trump’s most acrimonious tech relationship is with Amazon and its CEO, Jeff Bezos, whom he has repeatedly bashed on Twitter. The president’s criticism is often related to coverage in the Bezos-owned Washington Post. He also has attacked Amazon for not paying state and local taxes, even though it has in recent years.
Trump champions some tech innovation, however, given its potential to grow the economy: The U.S. is a leader in robotics, driverless cars and artificial intelligence.
Trump has defended the tech industry on the international stage, most prominently by going after China for theft of American intellectual property. He also has lashed out at European regulators’ antitrust and tax investigations of big tech companies, though his administration has launched similar probes.
His message seems to be: “We can beat up on our own tech firms, but foreigners keep your hands off.”
What do Champagne and cheese tariffs have to do with Facebook and Google?
Trump’s chief trade official, Robert Lighthizer, is threatening France with 100 percent tariffs on up to $2.4 billion worth of French products — including Champagne, cheeses, handbags, soaps and fine dinnerware. He also said the U.S. could impose fees or restrictions on French services firms, such as banking and engineering companies, operating in the United States. The final tally of any retaliation is expected to reflect the estimated harm of the new digital services tax on U.S. companies.
Lighthizer is giving importers an opportunity to argue that certain items should be excluded from the duties. On the flip side, domestic manufacturers or farmers can push for other products to be slapped with tariffs.
Once a public comment period is all done, Lighthizer will issue a final list of goods and services subject to onerous tariffs, fees or restrictions. The measures stick until Trump is satisfied France has addressed U.S. concerns, either by modifying the tax or killing it.
Can Trump beat the French?
Trump is imposing the taxes using a provision known as “Section 301,” which Congress approved in 1974 as part of broader trade legislation. It allows the administration to retaliate against foreign trade moves that hurt U.S. companies.
The U.S. stopped using it after the nations agreed in the mid-1990s to create a global overseer of trade — the World Trade Organization — and its binding dispute-settlement system. But Trump has revived use of the 1974 law, even though it appears to be at odds with WTO rules against unilaterally raising tariffs. [The administration is separately undercutting the WTO’s ability to settle disputes.]
When countries impose retaliation, including in those cases approved by the WTO, they try to hit products that will maximize pressure on their rivals to change policy. That’s what Trump is doing by targeting French sparkling wine and cheese, while simultaneously giving a boost to domestic companies.
Why shouldn’t tech companies pay their fair share in Europe?
The Trump administration says the tax is structured to punish large U.S. companies that are major players and spare French firms doing similar work on a much smaller scale. French policy makers fueled the perception with references to the new levy as a “GAFA” tax — short for Google, Apple, Facebook and Amazon.
The U.S. also worries a number of other countries, in search of new tax revenue, could follow France’s lead. Even close trade allies like Canada have said they want to impose similar taxes. Some of the most successful U.S. companies could soon face a web of discriminatory taxes around the world, giving domestic competitors in each of those markets an advantage.
Additionally, the United States says France and others considering a digital services tax are intruding into an area where the U.S. has taxing rights, but they don’t.
How does this end?
Discussions are taking place. In October, the Organization for Economic Cooperation and Development, a group of mostly rich nations, announced it would create a global set of rules to divvy up some of the profits created by the world’s tech giants.
The hope is for an initial agreement in early 2020 about how individual countries can impose their own tax rules. Finance ministers representing the Group of 20 nations discussed in recent weeks the proposals that will require unanimous support.
Even the French and Americans have shown a willingness to work with each other, despite the ongoing threat of potential economic sanctions.
But with roughly six weeks to go before the OECD’s self-imposed deadline to reach a worldwide agreement, any renewed tension between the U.S. and France could throw the yearslong negotiations into jeopardy.
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