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March 23, 2018


The trade wars are beginning

The EU is off the hook for now, but the scene is set for a broader rollback of globalisation. The US imposed trade sanctions on China, with China promptly retaliating last night. The EU is imposing a digital tax largely aimed at US companies. Germany is considering to levy fines on social networks that breach data protection laws. And the US is toughening its takeover code to make it harder for Chinese acquirers. Welcome to a world of globalisation in retreat.

We already reported yesterday morning on the EU's exemption from the steel and aluminium tariffs. But we see this as a tactical retreat only. For all the irrationality behind Donald Trump's trade policies, he is not crazy enough to take on China and the EU at the same time. He prioritised a trade conflict with China with the announcement of a 25% levy on $60bn of annual imports. The US administration will identify a total of 1300 Chinese goods in the next few days. 

There is no official word yet on the conditions the US will impose on the EU as a price for exemption from the steel and aluminium tariffs, but we have no reason to doubt the list published by Spiegel last week: capping of EU steel exports to the US at 2017 levels, solidarity with the US in trade policy towards China, and proof of an increase in defence spending towards the 2% Nato target. The EU can probably agree to the first, but the European Council remains committed to the multilateral trading system, a point emphasised by Angela Merkel yesterday. On the 2% Nato target, German politics is currently moving in the opposite direction. We are not sure that the EU will be in a position to agree to the sanctions on China. The EU can be flexible on tariffs, but strategically it would make no sense for the EU to abandon the multilateral framework. This is not a done deal. 

Overnight, the Asian markets dropped sharply after Beijing announced its retaliatory measures - even though these are only a fraction of those adopted by the US - some $3bn relating to about 128 products, including steel pipes, aluminium, fresh fruit and wine. The markets seem to have taken this retaliation as the beginning of a wider process of rolling back globalisation. Trump is also cracking down on Chinese takeovers in the US, in a separate action.

The week when the EU is trying to avert a trade war with the US is not the most auspicious time for the EU to release a proposal to tax internet businesses primarily aimed at the likes of Google and Facebook, which happen to be US multinationals. But that is what happened to the Commission's digital taxation proposal this Wednesday. The Commission's proposal has been long in the making and is not aimed at US firms specifically. It just so happens that the largest internet firms affected by the proposal are American. It will be interesting to watch how the US government will react, also in view of its own efforts to get multinationals to repatriate profits currently held abroad. 

The issue is that it is possible for firms to generate profits from interactions with customers in a country and yet have no physical presence in that country. The Commission's proposal defines a taxable digital presence if a digital platform fulfils one of the following conditions: annual revenues in excess of €7m in a member state; more than 100,000 users in a member state in a tax year; or over 3000 digital contracts created with business users in a tax year.

In this context, we also note a report from FAZ that the German Justice minister Katarina Barley is threatening to levy fines on Facebook as a result of the massive misuse of its user data. The EU's new general data protection regulation GDPR, coming into force in May, provides for fines of up to 4% of annual turnover, which in the case of Facebook is a massive sum. The justice minister of the German state of Hesse is also quoted as saying that the idea of self-regulation has failed in this case. German anger at the Facebook data leak scandal should be taken seriously because the country is specially jealous of personal privacy. It was a German court case that established the concept of the "right to be forgotten", for instance, which has since forced Google to remove search results that infringe on personal privacy. We are not sure, however, that the fine can be applied retroactively.

Our other stories

We also have stories on the European Council issuing a much stronger statement in support of the UK on Russia than previously expected; on the high rate of participation in strikes against Macron's reforms; on the IMF and EU still not agreeing over Greek debt; on why re-nationalisation is not a solution for the eurozone; on the state of macroeconomics; and on why Olaf Scholz will be a huge disappointment for pro-Europeans.

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