France Vows Retaliation Over $2.4 Billion US Tariff Threat

The threat of punitive tariffs came after a US government investigation found France’s new digital services tax would harm US technology companies, and will intensify a festering trade dispute between Europe and the United States, Reuters reported.

Speaking in London on Tuesday morning ahead of a NATO alliance summit, Trump said he would not allow France to take advantage of American companies and that the European Union treated the United States very unfairly on trade.

French Finance Minister Bruno Le Maire branded the US threat unacceptable and said the French tax did not discriminate against American companies, according to Financial Tribune.

“In case of new American sanctions, the European Union would be ready to retaliate,” Le Maire told Radio Classique. He later told a press conference, “We are not targeting any country.”

France’s 3% levy applies to revenue from digital services earned by companies with more than €25 million ($27.86 million) of revenues from France and €750 million ($830 million) worldwide.

An investigation by the US Trade Representative’s office found the French tax was “inconsistent with prevailing principles of international tax policy”.

It said the tax was “unusually burdensome” for US companies including Alphabet Inc’s Google, Facebook Inc, Apple Inc and Amazon.com Inc.

French Luxury Stocks Fall

Shares in French luxury companies fell in response to the tariff threat against French champagne, handbags, cheeses and other products.

Hermes was around 1.9% lower, while LVMH and Kering fell 1.3% and 1.2% respectively.

“It’s too risky to go into the luxury sector. The sector was hit first of all by the Hong Kong protests, and now this will hit it even more,” said Clairinvest fund manager Ion-Marc Valahu.

French products will not face tariffs immediately as the US Trade Representative still intends to gather public comments and hold a public hearing in January.

Based on past experience of Section 301 tariffs, primarily applied to Chinese goods, France would face punitive tariffs in two to three months.

Any retaliatory action from France would have to be taken at an EU-wide level because the 28-nation bloc is a customs union, which applies duties at its border. The European Commission did not immediately react to the US trade threat.

The tariff spat marks a new low in relations between French President Emmanuel Macron and Trump, who were to meet on the sidelines of the NATO summit later on Tuesday.

From the two leaders’ early bone-crunching handshake to the US president appearing to flick dandruff off the younger man’s shoulder, Macron and Trump have had a testy relationship, at odds over the American’s unilateralist approach to trade, climate change and Iran.

The United States has already imposed 25% duties on French cheese as part of its WTO-sanctioned response to illegal EU aircraft subsidies, a move exporters warned would penalize US consumers while severely hurting French producers.

Possible Investigation

US Trade Representative Robert Lighthizer said the government was exploring whether to open investigations into the digital services taxes of Austria, Italy and Turkey.

“The USTR is focused on countering the growing protectionism of EU member states, which unfairly targets US companies,” Lighthizer said. His statement made no mention of proposed digital taxes in Canada or Britain.

The US trade agency said it would collect public comments through Jan. 14 on its proposed tariff list as well as the option of imposing fees or restrictions on French services, with a public hearing scheduled for Jan. 7. It did not specify an effective date for the proposed 100% duties.

The list targets some products that were spared from 25% tariffs imposed by the United States over disputed European Union aircraft subsidies, including handbags and make-up preparations—products that would hit French luxury goods giant LVMH and cosmetics maker L’Oreal hard.

Gruyere cheese, also spared from the USTR aircraft tariffs levied in October, featured prominently in the list of French products targeted for 100% duties, along with numerous other cheeses.

The findings won favor from US lawmakers and US tech industry groups, who have long argued that the tax unfairly targets US firms.

“The French digital services tax is unreasonable, protectionist and discriminatory,” US Senators Charles Grassley and Ron Wyden, the top Republican and Democrat, respectively, on the US Senate Finance Committee, said in a joint statement.

But prior to the release of the USTR’s report, a French official said that France would dispute the trade agency’s findings, repeating Paris’ contention that the digital tax is not aimed specifically at US technology companies.

The USTR’s report and proposed tariff list follow months of negotiations between French Finance Minister Bruno Le Maire and US Treasury Secretary Steven Mnuchin over a global overhaul of digital tax rules. The two struck a compromise in August at a G7 summit in France that would refund US firms the difference between the French tax and a new mechanism being drawn up through the Organization for Economic Cooperation and Development.

But Trump never formally endorsed that deal and declined to say whether his French tariff threat was off the table.