US allies must prepare for further trade shocks

US allies must prepare for further trade shocks

The editorial board - Hopes that Washington wanted to lower tensions were misplaced

Donald Trump has opened two new fronts against supposed allies in his trade war. He announced on Monday that Brazil and Argentina would lose exemptions from higher tariffs on steel and aluminium. Most worrying, however, is the disclosure that France could face 100 per cent tariffs over its digital services tax, which aims to ensure tech companies — often American — pay their fair share of corporation tax.

These tariffs on French products, ranging from champagne to handbags, come despite the fact the US is also supporting an OECD initiative to change how companies are taxed. The Paris-based forum proposes a new “taxing right” for governments based on a company’s proportion of sales within their territory. It has encouraged the G20 group of large countries to come to an agreement by the end of January.

Given his love of a deal, Mr Trump’s decision to levy tariffs on French imports is surprising. In August, the two countries’ finance ministers agreed that France would give US companies a rebate on the difference between the taxes when the new OECD scheme was introduced. The tax is set at 3 per cent of revenue for companies with more than €25m of French sales and €750m of revenue worldwide.

The timing may be related to President Emmanuel Macron’s critical comments on the state of Nato. On Monday, the US president tweeted triumphantly that he had persuaded alliance members to increase spending; the French president recently described Nato as “brain-dead”. This week’s alliance summit is seen as a chance for Mr Trump to tout a foreign-policy success.

The dispute risks jeopardising the progress in finding a new way of taxing multinational companies. US Treasury secretary Steven Mnuchin had participated in the OECD process, which would also give a right to tax French luxury companies who sell in the US. A simulation by the French Council of Economic Analysis said there would be no net increase in tax revenue for the European nation.

Hopes that Mr Trump was lowering trade tensions ahead of his re-election effort appear to have been misplaced. Talk of a “mini-deal” with China has come to nothing. Neither has his decision not to impose auto tariffs on the EU led to a lasting peace. Instead, on Tuesday, he said he was happy to wait until after the election before doing a deal with China. Washington also said it was mulling expanding punitive tariffs on European goods following a ruling from the World Trade Organization that subsidies to Airbus were illegal.

The damage done so far by the trade war has been substantial. Global manufacturing is still mired in stagnation — European data released on Monday pointed to the 10th consecutive month of contraction during November while the downturn in US factory activity worsened. This poor data combined with the tariff announcements pushed global stocks down by the most in nearly two months.

The European Commission should stand up for France: the threat of tariffs cannot be used to prevent sovereign nations from making their own decisions on tax. Yet the EU should not lash out indiscriminately. Instead it should pursue a solution within the existing international structures: the progress the OECD has made demonstrates the value of multilateralism.

Ultimately, however, this may just be the new normal. Deals with Mr Trump rarely seem to stick. Jair Bolsonaro, the Brazilian president, has invested a great deal of effort in allying himself with Mr Trump. So too did Mr Macron, on occasion. Those attempts appear to have come to little. Allies of the US must prepare for further shocks.

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