Donald Trump turns his sights on Europe

Donald Trump turns his sights on Europe

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US president Donald Trump’s administration took another confrontational step against the EU on trade on Wednesday, launching a probe into the French tax on digital transactions that will hit US technology giants.

It could take months for Robert Lighthizer, the US trade representative, and his team to complete the investigation into whether the digital tax is an unfair barrier to US trade, possibly leading to new and higher tariffs on French goods.

US officials have repeatedly lobbied against European countries taxing American tech companies, and the timing of the French and US moves is surprising because they come on the heels of the G20 summit in Osaka at which countries pledged to find a “consensus-based” solution to the problem of digital taxation through the OECD. As Edward Alden, a senior fellow at the Council on Foreign Relations and professor at Western Washington University, pointed out on Twitter, Justin Muzinich, the US deputy Treasury secretary, told an audience in Berlin just last month that Washington was “actively engaging” on a “long-term multilateral” approach to the issue.

US officials must have concluded they were facing too much opposition multilaterally over several trade issues,so they decided to take matters into their own hands and move to unilateral forms of pressure — which is what Mr Trump prefers anyway.

The probe will fuel the increasing sense that Mr Trump is slowly training his sights on Europe as his next big target on trade after China, which could turn into a huge problem for EU leaders and Ursula von der Leyen, if she secures the post of European Commission president from November. That month will mark the expiration of the six-month reprieve granted by Washington to Brussels on auto tariffs, and there are few signs of any agreement in the works to prevent the tariffs from kicking in.

Meanwhile, the US has expanded a list of EU products on which it is considering placing higher tariffs in connection with the World Trade Organization probe into European subsidies to benefit Airbus.

One question that will be high in the minds of officials on both sides of the Atlantic is how effectively Washington can target punitive tariffs against individual countries, when they are all part of the EU trading bloc. In the case of the digital tax in France, the US could presumably identify products coming into the US that are mostly French, but inevitably others would be caught in the crossfire.

The US may struggle to put levies on French wines without roping in Italian, Greek and Spanish wines as well. When Matteo Salvini, the Italian vice-premier, came to Washington last week, he said he hoped that Italian products would be kept off the tariffs list, but received no specific commitment from US officials.

Both in Washington and in EU capitals, officials are talking and acting as if a major trade confrontation between the EU and the US lies ahead.

Signs emerge of US-China breakthrough

The scent of a trade deal between the US and China is starting to emanate again from the halls of power in Washington and Beijing.

It is not just that Mr Trump and Chinese president Xi Jinping agreed to hold off on a new escalation in tariffs in Osaka, and that negotiations have resumed between Mr Lighthizer and Liu He, the Chinese vice-premier.

It is the softening in confrontation on other fronts — such as the US limiting attacks on Chinese policy in Hong Kong, and the relaxation of the export ban affecting Huawei — that possibly signals an ultimate agreement.

However, it is hard to believe that the talks will lead to a better result than the last round, mainly because US incentives to strike a deal do not seem to have changed meaningfully. One could easily argue that Mr Trump is facing less pressure to strike a deal than he was in April or May, with stock markets hitting record highs, limited signs of economic or political damage from the trade war — and now Federal Reserve chairman Jay Powell pondering rate cuts to help shield the US economy from the trade tensions.

In reply

Has Donald Trump done the EU a huge favour? asks Free Trade co-author Lucy Hornby.

Privately, European officials will admit that if it weren’t for the US president’s highly confrontational approach of firing all guns in all directions, they would not have got moving as quickly as they did on trade deals with Japan or, most recently, with Mercosur, the South American trading bloc. 

The Mercosur talks had been under way for 20 years, the talks with Japan since 2012 or longer. Now both have been concluded, strengthening the EU’s international trade ties to a degree that could never have happened had the European bureaucrats been left to their own, meandering devices. Some are even becoming more optimistic about progress in talks with China, which had mouldered for years while Beijing focused on relations with the US. 

Now that the White House is training its cannons on the EU member states, it will be interesting to see what other longstanding obstructions suddenly melt away.

Big number: $7bn

The value of Indian goods facing higher US tariffs, (Chad Bown, Peterson Institute for International Economics)

Chart choice

Fears rise of an escalation in the US-EU trade dispute (FT)

US-EU trade war chart

Further reading

● Farm purchases continue to be a source of tension between the US and China (NYT)

● The new face on China’s trade team raises eyebrows in Washington (WaPo)

● Bretton Woods at 75 (Martin Wolf, FT)

● Stephen Vaughn, Bob Lighthizer’s general counsel at USTR, is returning to his old law firm (GNW)

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