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On December 2, 2019, the U.S. Trade Representative (USTR) announced that in response to a digital services tax law passed in France, it would be retaliating with stringent tariffs on luxury products coming from France. The potential tariffs could target up to $2.4 billion worth of French imports into the United States, with duties as high as 100%.[1]

Source of the Conflict and Potential Impact

The trade tensions began with a law passed in France in July 2019. Under that law, the French government levied a 3% tax on revenue earned in France from digital services. The tax, which was backdated to January 1, 2019, applied to all companies with revenue in excess of 25 million euros ($27.9 million) in France and 750 million euros ($845 million) worldwide.[2] Further, French President Emmanuel Macron has been actively working to encourage other European Union member states to move forward with digital tax regulation in the last couple of months. That push has led to backlash from many major American companies, who feel they are unfairly targeted by the law and President Macron’s efforts.

In response to the passage of this tax, the USTR issued a Federal Register Notice, [3] and determined that the French digital service tax is “unreasonable, discriminatory, and burdens U.S. commerce”. The USTR then proposed retaliatory action, including duties of up to 100 percent on certain French products. The notice lists a variety of tariff targets, including French cheeses such as Emmental, Roquefort, and Gruyère, in addition to handbags, sparkling wines, skincare & beauty products, and other luxury items.

This threat compounds a 25% tariff that was imposed on certain French wines in October 2019[4], following an arbitration victory by the United States. In that case, the WTO allowed the United States to impose tariffs on $7.5 billion worth of agricultural and industrial European products.[5] Existing U.S. tariffs target wines produced in Spain, France, Germany and the UK, but do not include wines with more than a 14% alcohol content or champagne. The new proposed tariffs could potentially reach any of the wines produced in France or the European Union.[6]

If these changes were to come into effect, the implications could be significant. While some consumers of these products are able to support the higher prices that may result from additional tariffs, that may not be enough to shield certain industry players from long term revenue losses.

Larger companies with production assets located in the United States may be shielded from most of the proposed tariffs. However, smaller businesses mainly producing in France or with a focus on importing French products are at a higher risk. A potential 100% tariff on European wine may spell disaster for small business owners, as local restaurants and bars may be forced to find substitutes for staple dishes and carefully cultivated collections of wine, lest they risk significant financial loss.

The Change in EU and U.S. Trade Relations

While the proposed tariffs may not go into effect, the decisive announcement by the Trump administration speaks to a larger and growing trade hostility between Europe and the United States—a sharp contrast with the parties’ positions a few short years ago. At the beginning of 2016, both Europe and the United States were in the midst of negotiating the Transatlantic Trade and Investment Partnership (TTIP), an ambitious trade deal which, had it passed, would have facilitated roughly half of the world’s GDP.[7]

Less than four years later, the climate of EU-U.S. trade relations has shifted drastically.[8] France has repeatedly called for a halt to any trade negotiations with the United States, citing environmental concerns and the entrance of U.S. agricultural goods in the French market as its primary deal breakers.[9] In recent years, France has consistently resisted U.S. efforts to change EU-U.S. trade, using its substantial influence in the European Union to keep negotiations from moving forward.[10] Notably, France has cited the primary reason for its current reluctance to negotiate with the United States as the U.S. decision to pull out of the Paris Climate Agreement in 2017. Since that time, French officials have repeatedly stated their objection to negotiating with any country who refuses to sign the agreement.[11]

The new U.S. threat of tariffs has only further escalated this tension, with France and the European Union vowing to take retaliatory action against the United States.[12] French Finance Minister Bruno Le Maire called the threatened tariffs “unacceptable” and has stated that France is willing to go to the World Trade Organization in order to challenge the tariffs in court, if need be.[13] It remains to be seen whether the damage done to EU-U.S. trade relations (particularly French-U.S. trade relations) can be repaired. Regardless of whether the proposed 100% tariffs are put into effect, the potential chilling effect these threats may have on Franco-American commerce are of great concern.

The Effects of Increased Pressure

For the moment, however, there is a glimmer of hope. On January 20, 2020, both President Macron and President Trump agreed to momentary halt punitive tariffs for this year. President Macron agreed that digital tax payments that were due in April would be pushed to December, in exchange for the halting of any proposed tariffs on French luxury products by the United States[14] (other than those already in place from October 2019).[15] The two leaders stated their commitment to avoiding any further tariff escalation. Meanwhile, the Organization for Economic Co-operation and Development (OECD), which coordinates global tax policy, is aiming to create a permanent taxation scheme for the digital economy by the end of 2020.

Occasional tariff threats against the EU are slowly becoming a new norm for the United States. At the World Economic Forum in Davos, Switzerland, a few days after the two leaders agreed to halt their respective plans, President Trump threatened to impose tariffs on imports of cars coming into the U.S. from the EU if a deal was not reached on digital taxation.[16]

The increased pressure may not, however, be completely detrimental. At the OECD talks at the end of January, European finance ministers discussed the issues surrounding digital taxation and reached a deal where 137 countries agreed to “affirm their commitment to reach an agreement on a consensus-based solution by the end of 2020”.[17]

As discussions continue, one can only hope that the trade relationship between both countries, like an expensive French wine, only gets better over time.