Last week the US upped the stakes in a long-running dispute with the European Union over how to tax digital services providers, pulling out of global talks to secure an international approach to the issue. This ‘not playing anymore’ move by Washington leaves a number of questions in its wake, not the least of which is whether this (again) sets the scene for a trade war between the US and Europe?
On a wider note, can the two blocs ever agree on co-operation around digital with accusations flying about protectionist behavior on both sides? In the US, Donald Trump’s MAGA mentality already dominates any trade discussion, while there’s more then enough form in Brussels to justify leveling an ‘anti-American’ charge at a significant number of Eurocrats.
At the center of the latest tussle are the plans by various European states, most notably France, but also including Italy, Spain and the UK, to impose a Digital Services Tax based on the revenues generated by providers in specific geographies. The stated intention is to redress the balance so that digital firms, mostly US HQ-ed, can’t rack up huge sales in non-US territories, but not pay the sales tax on those earnings into the coffers of the country in which those sales were generated.
France led a heavy-handed campaign to herd all EU nations behind a pan-European tax back in 2018, but this was knocked into touch by a combination of self-interest on the part of some countries keen to safeguard their inward investment - hi Ireland! - or their car industry - hi Germany! - or just not to upset the Yanks - hi Brexit Britain! Being hectored by French politicians keen to grandstand to the home crowd didn’t exactly help build a consensus either.
So the party line became that EU states would go their own way on introducing national tax plans, but would hold off to allow a global solution to come from the OECD [Organization for Economic Cooperation and Development]. A first stab at this was promised around a year ago, but progress has been slow. Throw COVID-19 into the mix and now the US decision not to play and take its ball home and the prospects of international accord any time soon - which were already slim - seem to be receding.
So now the more bullish EU states are back looking at their own national proposals, while France is agitating for another attempt to rally an EU united front against the petulant Americans with Trump straight out of central casting as a convenient bogeyman upon whom to heap opprobrium.
French Finance Minister Bruno Le Maire - the prime mover of the previous pan-European efforts, called the US pullout a “provocation to all OECD partners” and warned that there would be “a digital tax in 2020 in France”, adding a rather smug “as I have always promised”, which isn't really helpful.
Meanwhile Paolo Gentiloni, the EU Commissioner for the Economy, has also rattled his saber, suggesting perhaps that the Commission is ready to mobilize its support:
We need an understanding in the global negotiations. If the American stop makes it impossible, a new European proposal will be put on the Commission's table.
Back in Washington, the original plans had been seen as an attack on US digital companies in the main, with Trump thrown into an uneasy alliance with the likes of arch-nemesis Jeff Bezos of Amazon, in response. Trump’s case is inevitably simple (if unfortunately worded!):
I'm not going to let people take advantage of American companies. If anyone is going to take advantage of American companies, it's going to be us.
Previously the US has threatened to slap tariffs on $2.4 billion of French goods, like wine and cheese, in retaliation, and this plays well in certain Washington circles, particularly in an election year. The US position isn’t about to soften at this point. US Trade Representative Robert Lighthizer told Congress last week:
What they’re doing is fundamentally unfair to American companies. They’re picking on them because they're the best and they're American companies.
It was ever thus?
This is hardly the first time that tensions around digital economy matters have been seen between Brussels and Washington. There was a period when Eurocrats had a seeming never-ending list of demands for the US, led by firebrand Vivian Reding, former Commission Vice-President. Data protection and data sovereignty were usually cited as motivations. The Safe Harbor data transfer agreement between the US and the EU was a high-profile victim, with the utterly inadequate Privacy Shield a lingering reminder of the divide between the two blocs.
From the US point of view, at the root of most EU petitions around digital economy standards is an underlying jealousy of Silicon Valley. The Europeans missed the boat on building their own tech sector, so they put all their efforts into making it as difficult as possible for US firms to compete in the EU, is the basic thrust - and one that undoubtedly plays well to a MAGA-mindset on the campaign trail.
But is there actually some validity to the claim? A recent debate on Europe’s future plans for digital economy policy, hosted by UK trade association techUK, threw up some useful insights on this point. Cameron Kerry was General Counsel at the US Commerce Department in the Obama administration and is now a Distinguished Visiting Fellow - Governance Studies, at The Brookings Institution’s Center for Technology Innovation. He admits that there is a feeling that:
One of the drivers of EU policy is a sense that the EU needs to play catch up, that it's been a bit of a laggard in tech development, and the digital economy, but clearly has taken a position of leadership in terms of digital policy. As somebody who, when I was in government, made the digital economy a priority of the Commerce Department and tried to elevate its importance in government to policymaking, I have admiration for that.
Acknowledging “tensions,” and “some of the rhetoric that we see on the US side”, he makes a valid point when he argues:
It is important to differentiate between the political rhetoric and the application. Certainly language [from the EU] like ‘digital sovereignty’ certainly set off some alarm bells, but so has language about ‘America First’ and looking down on multi-lateral institutions, of which the European Union is one.
But there is a good reason for the US and EU to get over themselves and realize that the benefits of collaboration and co-operation can be mutual:
Together the EU and the United States make up about half of the world's GDP and third of the world's trade flows. We are inexorably linked and there's an important opportunity to collaborate. The opportunity to operate at scale in knowledge, in the sharing of knowledge, in data sharing is certainly a great comparative advantage. But China has is the scale on which it can collect and analyse data. Liberal democratic countries are not going to operate in that way. So, we need to find ways to accomplish the same things together.
But ‘together’ is the key word here, he cautions:
If the EU is unilaterally setting the rules going forward, then I think that will be a challenge.
For its part, the EU’s representatives protest they only want to play nicely with everyone. Werner Stengg, is a Cabinet Member in Executive Vice-President Margrethe Vestager’s Executive Vice President of the European Commission for A Europe Fit for the Digital Age. (Vestager is the competition-crusading politician Trump calls “perhaps worse than any person I’ve ever met”.) He says it’s all been a misunderstanding:
Our view is that Europe is not turning more protectionist when it comes to digital, but rather more confident and assertive. We would not want to confuse being assertive with being protectionist. We are saying we are, 'We are Europe. We have a lot of talent’.
We have a big market as well. We want to play a stronger role in digital matters, having been a bit weak on there in the first wave of final consumer facing platforms. We think we have what it takes to succeed in the next generation of digital technologies and their use, from data to AI to what have you. We have a strong strong industrial base, so using that base together with digital tools can can make a huge difference.
In terms of competitiveness, we just want to be able to do certain things. We want to reduce dependency and become a strong player in our own right and that is what explains all the excellent type of policies [from the Commission].
If that’s the case, is there then a need to adjust the language in the interests of avoiding misinterpretation - and not handing the MAGA-machine some handy propaganda? Stengg insists:
Obviously, our objective is to work with the like minded countries across the globe... those that have similar value systems that we have. Of course we want to do that. We're just starting out from sort of this feeling of confidence and assertiveness that is saying, ‘Well, that's what we are. That's what we want’. And then we are happy to engage with anybody who is sharing our values.
But he concedes:
Just to stop the [side]show, this long issue of ‘inequality’, we’ve moved from from [talking about] Digital Sovereignty, which was being interpreted many different ways, [to] Strategic Open Autonomy. I think that's a very nice description. It's strategic, it's open but we also want to be independent and autonomous, as much as we can.
Will that sift in wording be enough to convince the powers-that-be in Washington that Europe isn’t hellbent in spoiling America’s fun? At the same techUK event, Sarah Cameron, Legal Director, Pinsent Masons LLP, observed:
Language is really powerful and can send very strong signals. Subjectively, when I first heard talk of Digital Sovereignty, Data Sovereignty, Technical Sovereignty, it did indicate some sort of protectionist signal, but actually, when you read the detail, it's understandable that the EU seeks to be less dependent on foreign infrastructure and cloud provision because market has been totally dominated by US companies. It's perfectly legitimate for the EU and others to try and find legitimate ways of rectifying that balance, and there's plenty of talent within the EU and a strong base to achieve that.
Indeed. But the political nature of the negotiations around matters such Digital Services Taxation can never be factored out. As Eline Chivot, Senior Policy Analyst, Center for Data Innovation and Moderator of the techUK debate, noted wrily:
I think some fear that if Trump is re-elected the transatlantic relationship may not improve.
Again, indeed. But it works both ways. Standing up to Trump will do no harm to French President Emmanuel Macron’s image at home - and he needs to take the wins where he can, however dubious they may be - while Trump can pitch his gospel of the anti-American EU - “set up to take advantage of the US” - to a lot more half-empty baseball stadiums between now and 3 November!
Meanwhile, the issue of taxing digital services hasn’t gone away…and there’s still no Plan B.