BREAKINGVIEWS-EU’s best US riposte is a focused digital strike

By George Hay

LONDON, April 4 (Reuters Breakingviews) - Europe’s trade war with the United States is no longer about hypotheticals. Donald Trump’s decision on Wednesday to impose 20% tariffs on goods imported from the European Union puts the onus on Brussels to formulate a robust response in tune with the 34% levy China just slapped on U.S. imports. One way to push back against the U.S. president is to move the focus away from the cars and other physical goods the bloc exports across the Atlantic, and onto services.

In Trump’s Manichean view of global trade, the fact that the EU last year exported $200 billion more goods to the U.S. than it received is a stick with which to beat Brussels. Up until the U.S. president dropped his tariff bombshell, European Commission President Ursula von der Leyen’s apparent strategy was to try and avoid a bad outcome by being conciliatory. Her 26 billion euro mix of new and old tariffs on U.S. goods, flagged last month and due to fully kick in by April 13, just matched the value of newly hiked levies on EU goods.

Now that the EU has been hit hard anyway, von der Leyen may as well think about how to be more aggressive. When it comes to the internet search, cloud computing and other services Europe buys from American companies, there is some scope to do so. Last year the EU ran a $77 billion deficit in such trade. Brussels could use the threat of nasty consequences for U.S. services exporters as leverage to force Washington to lower its goods tariffs.

On the face of it, von der Leyen has a handy way to push back on Big Tech groups like Apple AAPL.O, Meta Platforms META.O and Google owner Alphabet GOOGL.O. The trio have been the focus of probes into whether they have broken the EU’s flagship Digital Markets Act, which went live in 2023. The assumption had been that Brussels would try to avoid Trump’s wrath by imposing only minimal fines for transgressions.

Now that Europe has been smacked anyway, von der Leyen could slap these behemoths with the full potential fine of up to 10% of their global turnover. She could then use a probe under the DMA’s sister legislation, the Digital Services Act (DSA) to ramp up a penalty for Elon Musk’s X for alleged inadequate policies on removing disinformation. The New York Times reported on Thursday this could hit $1 billion, but it could theoretically be juiced up even further.

Belatedly souping up pre-existing probes wouldn’t be smart, though. With the U.S. retreating from global leadership, one of the EU’s few advantages is its championing of the rule of law and due process. Intervening to ramp up DMA or DSA fines would undermine that, and validate Trump’s gripe that the legislation is just there to target U.S. groups.

The EU’s other main weapon is the Anti-Coercion Instrument, a new legal tool that also dates from 2023. This gives the bloc sweeping powers to act in its 27 states’ name – via countermeasures such as intellectual property restrictions and services import barriers – if it’s deemed to be on the receiving end of trade policy aimed at cowing Brussels into dropping sovereign EU policies. Yet the use of such a “bazooka” option would be risky – an enraged Trump might consider more extreme responses like cutting off European banks’ access to dollar funding. Given the need to consult with potential targets and get member state agreement, it could also take up to a year to implement.

One option sounds more promising, though. More than 10 European states, like France and Poland, already impose a Digital Services Tax. Now that the EU has been collectively targeted, von der Leyen could set out a framework for all the states with pre-existing DSTs to hike them, or for other countries to launch similar levies. This wouldn’t need to be collected at EU level, and would send a message. With 29% of Alphabet annual revenues in the EU in 2024 and 27% of Apple’s, it could also hurt. A 5% levy on revenues derived from digital advertising and online marketplaces could raise 37.5 billion euros in 2026, the Centre for European Policy Studies estimates.

There’s a laundry list of reasons why a souped-up EU-wide DST is itself tricky. The fine print of Trump’s reciprocal tariffs explicitly warns of further escalation if countries fight back. Ireland, whose economy is heavily dependent on U.S. multinationals, might resist. Trump may decide not to stick up for the sector, and there’s a danger that Google, Meta and others pass on the tax in higher rates to European companies forced to advertise on their all-powerful platforms.

Still, Europeans realise that the bloc needs to uncouple itself from U.S. Big Tech as far as possible. With EU trade commissioner Maros Sefcovic due to speak with U.S. officials on Friday, China’s hardball on tariffs may even give Brussels a window to strike a de-escalatory deal. Opening a new front on services and moving the trade war to a theatre where Europe is less on the back foot may help it do so.

Follow @gfhay on X

CONTEXT NEWS

China’s finance ministry said on April 4 it would impose additional tariffs of 34% on all U.S. goods from April 10.

The European Union is preparing further countermeasures following the U.S. imposition of a 20% reciprocal tariff on its goods, Ursula von der Leyen said on April 3.

The European Commission president said that Europeans would promote and defend their interests and values, but flagged that there remained an “alternative path”, via addressing concerns through negotiations.

“I know that many of you feel let down by our oldest ally,” she said, addressing Europeans. “Yes, we must brace for the impact that this will inevitably have. Europe has everything it needs to make it through this storm. We are in this together. If you take on one of us, you take on all of us.”

“So we will stand together and stand up for each other. Our unity is our strength.”