RaboResearch - Economic Research

The transatlantic trade war: Plenty of topics to be upset about

Economic Comment

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  • The relationship between the EU and the US has worsened over the past months. The EU’s trade commissioner, Phil Hogan, is currently in the US to improve the transatlantic relationship
  • With the phase one deal between the US and China signed, the US is shifting its focus to the EU
  • The digital service tax (DST) imposed by France has moved the Trump administration to threaten to retaliate. The DST cannot be seen in isolation; the US conceives EU tech regulations as unfriendly for US companies
  • There seems to be increased awareness in the EU regarding the threat from China, but there is no coherent strategy satisfying the Americans yet
  • The WTO Appellate Body is powerless due to the US blocking the appointment of new members, frustrating the EU. A positive development has been a trilateral agreement between Japan, the US and the EU, proposing to sharpen international trade rules

Transatlantic partnership has worsened

Now that the phase one trade deal between the US and China has been signed, the US will shift its focus to the EU. US frustrations related to EU trade policy have been mounting recently. In addition, little progress has been made on US requests related to defense spending and the EU’s China policy. Furthermore, the EU’s tech agenda and the paralysis of the WTO by the US has not made the relationship between the two trading blocs any better.

At this moment, the EU’s trade commissioner Phil Hogan is in the US to work on the transatlantic relationship, in an attempt to prevent the US from hiking tariffs on European goods.

French digital service tax agitates the United States

In December the US commerce department concluded that France’s digital services tax (DST) discriminates against US tech companies. As a response, president Trump threatened to retaliate with import tariffs of 100% on a package of €2.1 billion worth of French goods, including French wines, champagne and other luxury products.

In July 2019 the French senate approved the digital service tax (DST), a 3% levy applying to companies that have over €25 million in French revenue and over €750 million in worldwide revenue from digital services. The US commerce department estimated the revenues of these taxes to amount to €500mln, the majority of this figure will be paid by the ‘Big Five’ companies from Silicon valley such as Facebook and Google. The DST in other countries, such as Austria and soon maybe in Italy and Spain could also become an issue in the future. In any case, the EU has already told the Americans that the EU would side with France and retaliate if the US indeed raised tariffs on French products.

Phil Hogan’s visit to the US includes the topic, but is unlikely to end the discussion. Next week U.S. Treasury Secretary Steven Mnuchin and French Finance Minister Bruno Le Maire are expected to meet over the issue to try to find a compromise.

Issue of digital services tax cannot be seen in isolation

Just before the US commerce department’s conclusion on discrimination by France’s digital services tax, Angela Merkel, the German chancellor, urged Europe to claim digital sovereignty. In order to decrease the reliance on foreign tech giants such as Amazon and Alibaba and the related possible threat to European national security; Germany, France and the Netherlands have started the GAIA-X project. This project aims to create European alternatives and is heavily subsidized. US and Chinese companies are speaking of unfair competition.

To add to the unrest on this topic, Margrethe Vestager, Executive vice-President of the European Commission in charge of digital policy, has committed herself to combatting digital market abuse. Given the size and dominance of US tech companies such as Facebook and Google, measures mainly hit US companies. Needless to say, this is not going down well with the US, which accuses the EU of putting American tech companies at a disadvantage.

Unease with China policy is rising, but strategy is lacking

The US is increasing pressure on EU governments, Germany and the UK in particular, to exclude Chinese network providers from their telecom networks. US officials have warned repeatedly for the security breaches that could arise from using Huawei’s technology. While awareness of national security risks when dealing with Chinese companies is rising, so far, there is still is no consensus on the role of Huawei in the coming 5G revolution and investments and take-overs by Chinese companies in general in most Member States. Let alone on the EU level.

In Germany for example, chancellor Merkel does not want to formally exclude Huawei from the buildout of the 5G network. To the grief of the US ambassador, Germany’s economy minister even suggested that US companies posed just as much of a security threat as Chinese companies [1].That said, the German Bundestag is currently heavily debating on the issue, with part of its members arguing in favor of a ban.

A pan-European China strategy is in the making and is planned to be unveiled in the first quarter of this year. Yet at this point it seems unlikely that the European Commission will come up with a decisive EU-wide shared set of policy actions towards China that will please the US. This is because of a lack of cheap alternatives to Huawei and because of the short-term economic interests that countries like Germany have in not upsetting China.

WTO appellate body seizes to exist…

In December the Appellate Body of the WTO seized toexist because the Trump administration has vetoed the appointment of new judges to the body. It also choked off its funding. While the discontent of the US with the WTO’s dispute settlement system and the WTO at large is not exclusively confined to the Trump administration, nor to the US, block of the US to nominate new judges frustrates the EU, as it implies the WTO has become a paper tiger. WTO rulings that are appealed are not legally binding. With no Appellate Body to judge the appeals, rulings can be stalled indefinitely. This does not only frustrates the current Boeing-Airbus dispute, but could also frustrate any future disputes between the US and the EU. For a more elaborate analysis please see this article.

…Yet WTO cooperation on another front

On the bright side, in a bid to strengthen powers and cooperation, the US, EU and Japan issued a joint statement on Tuesday, calling for sharpening international trade rules to prevent trade distortions caused by companies that rely on largescale state support. While the statement does not mention China specifically, it is quite obvious that Chinese (trade) practices are targeted by the new trade rule proposal. According to the three economic super powers the existing ban on subsidies in the WTO’s rule book does not encompass all market distortions.

This new proposal should close existing loopholes. In order to make it easier to get the proposal to be accepted, they aim for a multilateral deal, only applying to those countries having signed the deal. The three countries 'hope' China would see the benefits of signing such a deal, according to officials, although that remains to be seen. In any case, whether implemented or not, the proposal shows a recently rare kind of cooperation between the US and other large trading blocks, providing hopes that international trade rules are not completely dead in the water now that the WTO’s appellate body has become completely powerless.

Hogan to the rescue

All in all, the above demonstrates that tensions between the EU and the US have again increased lately. We are currently awaiting a joint statement from Phil Hogan and his US counterpart Robert Lighthizer on the way forward. This should, at least give, us some indication on what to expect next in the transatlantic trade dispute. That said, given the limited willingness and ability of the EU to act on US demands we should not expect any major breakthrough. Behind the scenes the officials in Brussels are working on a strategy to ease the frictions between the US and the EU, but in the short run tensions will very likely persist.

Footnote
[1] American- and Chinese companies providing cloud services are obliged to hand over (potentially European) data to their respective government by law. See U.S. cloud actChina’s national intelligence law

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