The Trump administration has been famous for its willingness to impose tariffs even in situations where doing so contravenes economic and political logic. Yet in one case where the actions of foreign countries against U.S. businesses are creating a genuine harm to American consumers and large tech companies, the office of the United States Trade Representative (USTR) is choosing to stand down. It seems their distaste for “Big Tech” is about the only thing that can convince them to abandon punitive trade taxes.
Many countries have covetously eyed the growth of U.S.-based tech firms, hoping to cash in on their success despite lacking the means or jurisdiction to do so. The solution, to these countries, has come in the form of proposed taxes on digital firms operating within their borders, which would target successful American businesses to a disproportionate extent.
As a clear violation of basic principles of free trade and competition, the United States has rightly pushed back against this aggression, though not with the vigor one might imagine considering that foreign countries are specifically targeting American companies with higher taxes. Despite efforts to implement digital taxes by major European countries, the European Union, and the Organization for Economic Cooperation and Development (OECD), no foreign state had ever gone through with enforcing a digital tax on American firms. Though France made noise about enforcing its digital tax at the start of last year, it temporarily backed off in the face of the threat of American tariff retaliation.
France reignited the issue recently when it sent enforcement notices to American tech firms over its previously-dormant digital tax. At first it seemed the USTR was positioned to respond with a 25 percent tariff on certain French goods totalling $1.3 billion. But now that the tariffs were scheduled to go into effect, the USTR is delaying the implementation for a further 90 days.
Tariffs are never an ideal solution — they represent a tax on American consumers and harm global trade. Part of the reason the United States led creation of the World Trade Organization (WTO) was to provide a more effective solution to trade disputes. The United States would be in a stronger position had the Trump administration strengthened the WTO instead of weakening it, since digital services taxes likely violate WTO rules.
But threatening tariffs only to abandon them later could lead to an even worse situation, with foreign governments declaring open season on U.S. companies with no fear of pushback. The fact that American businesses have not as yet had to pay digital taxes despite most of the developed world attempting to implement them shows the power that the threat of an American tariff response holds.
Failure to respond to the open aggression of the French sends the message that the United States will selectively defend American businesses from punitive digital taxes. This runs the risk of signalling to other countries that an American response can be avoided by targeting only certain companies.
Given this, the USTR’s decision to further delay American retaliatory tariffs could create additional problems down the line. If more countries decide to play the same game of brinksmanship that France appears willing to engage in, the United States would be left with two unpleasant choices: impose retaliatory tariffs on far more foreign nations, or simply accept the premise that successful U.S. industries can find themselves subject to targeted taxes in foreign states. While the threat of tariffs may make sense if it prevents foreign governments from imposing new digital services taxes on American companies, an end-game that results in both foreign digital services taxes along with retaliatory U.S. tariffs or escalating imposition of new foreign digital services taxes would both be costly outcomes.
Though the USTR’s sudden aversion to imposing tariffs would have served the American people well in plenty of other instances, the response to foreign tax aggression necessitates a consistent and effective response. Changing course at the last moment is anything but.