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The digital tax brawl that Joe Biden must resolve

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Hello from Brussels. It would be an exaggeration to say that EU trade policy is the talk of the town here at the moment rather than the extraordinary events in Washington DC. But now that Joe Biden has been certified president, at least the preparations for trying to put together a constructive plan with his administration are that little bit more concrete.

Today’s main piece is on how the digital services tax, so disliked by the Trump administration, is a very good test case of whether some combination of multilateral agreements, bilateral talks and even measured litigation-as-negotiation can be used to prevent a dispute spiralling into a trade war. Charted waters examines how the souring of relations between Washington and Beijing has led Taiwanese companies to reshore their Chinese operations, while Tit for tat asks Cambridge university’s Lorand Bartels what the next steps are for the UK and the EU.

Don’t forget to click here if you’d like to receive Trade Secrets every Monday to Thursday. And we want to hear from you. Send any thoughts to trade.secrets@ft.com or email me at alan.beattie@ft.com

Trump bequeaths Biden a trade row over tech

Last week, understandably overshadowed by a violent insurrection in the nation’s legislature, the Trump administration took an unusual decision on trade. It decided not to hammer the EU — specifically France — with tariffs because of its digital services tax (DST) even though it had given itself the power to do so.

This might look like US trade representative Robert Lighthizer improbably going all squidgy and genial in his last few weeks in the job, but to us it seems more likely to be tactical. The decision defers the tariffs only until the US can work up similar hit lists for a bunch of different countries that have also imposed or considered tech taxes — a list that includes several EU member states.

That decision will now pass to the Biden administration, part of a series of ongoing or upcoming trade battles with the EU bequeathed by Trump. These will, at the very least, complicate the new White House’s ability to construct a common rules-based, China-focused position on trade with Brussels.

The conventional wisdom used to be that Trump cared a lot more about steel than tech, but as far as his administration was concerned, a fight with Europe was usually a fight worth having. And the assault on the DST was a Lighthizer special — aggressively litigious but of doubtful World Trade Organization legality, and of course entirely unilateralist. In 2019 he appeared to ambush even his own Treasury secretary, Steven Mnuchin, who was trying to negotiate with his fellow finance ministers an international version of the tax at the OECD, with the results of a “Section 301” investigation into whether the French DST was unreasonable or discriminatory.

Robert Lighthizer, US trade representative, speaks during a Senate finance committee hearing in June 2020 © Bloomberg

To no one’s amazement, the US found that the DST did indeed discriminate against American companies, and the USTR prepared a list of handbags, cheese, champagne and other notoriously French products to hit with 25 per cent tariffs. Those were the duties it last week deferred.

This chalice has now been handed on to Biden. He may not be Mark Zuckerberg’s biggest fan, but pulling out of the DST case looks weak, especially since France resumed collecting the tax in December. Obviously the US can try to make progress in talks at the OECD, showing that multilateralism can work, but there are never any guarantees of success there.

If negotiation fails and the US imposes Section 301 tariffs, the EU’s burgeoning collection of trade defence instruments may well get put to use. If Brussels brings a WTO case (it will) and the US loses and appeals to a WTO appellate body it hasn’t got around to reviving, the EU can use its new enforcement tool to hit back with tariffs anyway. If this or subsequent Section 301 cases drag on long enough for the EU to get a new anti-coercion instrument up and running (probably next year), Brussels can hit back unilaterally without bringing a WTO case at all. But that anti-coercion action will itself probably be met by US WTO litigation, maybe immediate retaliation, and the whole thing could escalate.

Neither side wants it to get that far. They’d rather be concentrating on a joint effort to constrain China. This case will probably test whether the Biden administration and EU can take one or more off-ramps — multilateral talks, a negotiated bilateral agreement between Washington and Brussels, the normal process of WTO litigation — rather than the US feeling itself compelled by domestic pressure to go full Lighthizer, whack on unilateral tariffs and damn the consequences.

It’s only one of the actual or potential trade conflicts with Brussels that Biden will inherit.

Jake Sullivan, Biden’s forthcoming national security adviser, gave no guarantees in a recent interview even that the administration would immediately lift the patently absurd (Trade Secrets’ words, not his) steel and aluminium tariffs on the EU. Brussels’ plans for carbon border taxes, which we’ll come back to, are another potential point of friction. In his previous incarnation as policy planning director to then secretary of state Hillary Clinton, Sullivan was all about a move towards “economic statecraft”, combining economic and geostrategic policy. Well, now’s his shot at making it work, and the DST is just one of the big challenges involved.

Charted waters

Kathrin Hille, our Taiwan correspondent, has an interesting read out today on how trade tensions between the US and China have led to reshoring by Taiwanese companies.

Kathrin writes that their default strategy of manufacturing in China has been undermined by Washington’s trade war with Beijing and efforts to pry the country out of global supply chains. Add to that higher labour costs and the removal of some incentives by Beijing and most of Taiwan’s leading contract electronics manufacturers are now relocating parts of their supply chains to south-east Asia and India, as well as back home.

The chart illustrates the scale of the fall in investment by Taiwanese groups and the sharp drop-off in remittances from China to Taiwan.

China investments by Taiwanese listed companies and remittances back to Taiwan

Tit for tat

Lorand Bartels has no doubt that the UK will conclude many new agreements with countries around the world but says the question is how valuable they will be

Lorand Bartels, reader in international law in the faculty of law, University of Cambridge, joins us to answer three quick questions about Brexit.

1. Brexit will not end with the deal. Arrangements in other areas not covered by the terms of the deal will need to be revisited. Which of these arrangements are the most important? 

I would focus first on making sure that the various headings in the TCA (the EU-UK trade and cooperation agreement) are followed up with solid content. Too often, they are not. Partly, this is because of raw protectionism, especially in services, perhaps inevitably. But trade under the TCA is also limited because the UK and EU have not yet agreed on mutually acceptable standards. Financial services, digital services and agricultural imports — these can be traded only if they meet accepted standards, which can mean that they cannot be traded at all. This should be fixable.

2. Even if standards can be agreed, they need to be enforced. How will that work? 

The EU prizes its tools for ensuring that its member states are able to trust each other (which is not to say these tools never fail). But now these tools are largely gone for the UK. This makes a difference. For example, the EU says that it can no longer trust UK quality control for products, even when testing is against EU standards. This is not because UK quality control is unreliable, but because the EU feels that it cannot do enough about it if it becomes unreliable. The same applies in other areas, including services. Again, this should be fixable, but for many sectors this requires some original thinking.

It is not only about any given missing sector, but also about finding new institutional mechanisms to give effect to goodwill, flexibility and trust between the UK and the EU so that they can trade more freely in all of them. 

3. Some in the UK believe that, post-Brexit, deals can be struck farther afield, in Asia-Pacific for instance, how likely do you think this strategy is to bear fruit?

I have no doubt that the UK will conclude many new agreements with countries around the world. The question is how valuable they will be. It is no accident that most of the important target markets were already covered by EU agreements, and the UK’s work in replicating these is accordingly of paramount importance.

What remains, in terms of maximum value, are agreements with Australia, and above all with the US. An agreement with Australia should be relatively straightforward (famous last words)! But an agreement with the US is politically much trickier. It will depend — at a minimum — on a politically acceptable compromise on agricultural market access (for the US) and agricultural standards (for the UK). There may be a workaround, if both the UK and the US join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, but this has its own challenges — not least within the US.

Don’t miss

  • China has implemented new rules designed to shield its companies from “unjustified” sanctions, as it seeks to counter a flurry of punitive measures issued by US President Donald Trump over recent years. The regulations, unveiled by the commerce ministry at the weekend, prohibit Chinese companies and individuals from complying with punitive measures mandated by foreign governments and take effect immediately.
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  • The FT’s deputy editor Patrick Jenkins writes about how the City of London will have to tap areas of growth, such as green finance and financial technology to plug the gap left by the decline in European business post-Brexit. The City has a long history of innovation and adaptive change. That is just as well — clinging to the status quo is not an option.
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  • Our European economics commentator Martin Sandbu goes on a philosophical journey to investigate what, for Brexiters, is sovereignty? 
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Tokyo talk

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  • The auto industry is facing a severe lack of semiconductors amid rising use of chips in other products, forcing Volkswagen as well as Honda and Nissan to reduce production. 
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  • Irish whiskey distillers are scaling up exports to China, Singapore and Japan as Brexit and Covid hit its key markets in the US and Europe. 
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Europe

What unites and divides Germany’s potential coalition partners

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Guten Morgen and welcome to Europe Express.

Germany’s election season is kicking into gear and both Angela Merkel’s centre-right CDU/CSU and the up-and-coming Greens have published their election manifestos. With polls indicating the two parties could end up bedfellows in the first post-Merkel government, we compare their Europe-related policies.

The Uefa Euro 2020 football championship is in full swing and gripping fans across the continent. But we explore a darker reality that has spilled out in stadiums and pitches: culture wars.

In Luxembourg, EU affairs ministers meet today to prepare for a summit, hear the latest on EU-Swiss relations and discuss the rule of law in Hungary and Poland.

This article is an on-site version of our Europe Express newsletter. Sign up here to get the newsletter sent straight to your inbox every weekday morning

Berlin calling

Germany’s ruling Christian Democratic Union and its Bavarian sister party, the Christian Social Union, have laid out their joint election manifesto after the Greens published theirs in past weeks. It is well worth looking at what unites and divides the potential government allies in the post-Merkel era.

In brief, the CDU/CSU wants to return to how things were before the coronavirus pandemic, especially on fiscal rules and the sacrosanct schwarze Null (a balanced budget). They seem lukewarm on disruptive digital and green policies and made a libertarian push for a retreat of the state from many areas of society under the motto: “throwing money at problems isn’t always the best way to solve them”.

Meanwhile, the Greens have put forward a transformational plan. Their ambition is to turn Germany into a carbon-neutral economy in the next 20 years. Here are three areas to watch closely:

Debt and spending 

  • The CDU/CSU have insisted that once the pandemic is over, so should be any relaxation of fiscal rules. They support the EU’s unprecedented, mutual-debt-fuelled €800bn recovery plan, but say it should be a one-off. They oppose consistent debt mutualisation across the bloc. (Here is Armin Laschet’s take in an interview with the FT)

  • The Greens are less dogmatic about what other EU nations should do in terms of borrowing. They even suggest a relaxation of Germany’s debt brake to allow public investment in schools and infrastructure, to be financed with more debt. 

Climate goals

  • The CDU/CSU have embraced the goal of CO2 neutrality by 2045 and a 65 per cent cut in carbon emissions by 2030. But there are caveats for some industries and climate activists have pointed to inconsistencies and omissions in the conservative parties’ manifesto — notably their vague commitments on a “stable, fair and transparent” price for carbon.

  • The Greens are seeking to raise the carbon price to up to €60 per tonne in 2023, along with subsidies and incentives to cushion the social impact of a greener economy. 

Europe and foreign policy

  • The CDU/CSU were more dovish on China and Russia and they failed to mention the controversial Nord Stream 2 gas pipeline. The Greens were more hawkish and maintained their opposition to the pipeline for environmental and geopolitical reasons (they worry about circumventing Ukraine, depriving it of transit revenues, and increasing energy dependence on Russia).

  • Both the CDU/CSU and the Greens favour majority voting in EU foreign policy, replacing the current model of unanimity. The Greens would also abolish the need for unanimous EU decision-making on taxation.

The September 26 election result will determine how much of these manifestos get translated into actual policy — and how much one or both political groups will have to compromise.

Chart du jour: Europe’s Covid bill

Bar chart of Government debt as GDP (%) showing National debt in Eurozone countries spiked in 2020

Public debt in the eurozone rose 14.1 per cent in 2020 compared with the previous year, the biggest leap in two decades, driven by the pandemic. Greece and Spain have recorded the biggest single increase in debt loads, while Ireland only recorded a marginal increase.

Beautiful game, uglier realities

International football’s biennial jamborees usually offer a few weeks of summer escapism for avid fans and newbies alike, writes Mehreen Khan in Brussels.

But this year’s European championships have become an extension of the psychodramas and culture wars that dominate political life on the continent.

The list of controversies runs long (and we are only 11 days in). Last month, France’s far-right kicked off a movement to boycott Les Bleus over a rap song. In England, the national team has defied criticism in the tabloid press by continuing to take the knee in support of Black Lives Matter, despite jeering from some of their own fans. 

Further east, Ukraine’s football association was ordered by governing body Uefa to partly modify its kit design. Russia had complained that the jersey included a map of Crimea, which Moscow annexed in 2014.

Greece has also complained to Uefa about neighbouring North Macedonia using the acronym “MKD”. The Greeks (who didn’t qualify for the tournament) say the abbreviation violates the terms of the 2018 agreement under which Macedonia changed its name to North Macedonia.

The latest conflagration came this weekend, when German captain and goalkeeper Manuel Neuer became the subject of an investigation by Uefa for wearing a rainbow armband in support of LGBT+ rights. News of the probe prompted senior EU officials to express support for the player.

The inquiry has since been dropped by the governing body, which concluded that the armband did not constitute a breach of its rules prohibiting the display of “political symbols”. 

Neuer’s Germany faces off tomorrow against Hungary, where LGBT+ rights have come under political assault from Viktor Orban’s ultranationalist government. Munich’s Allianz arena is preparing to welcome the visitors by lighting up the stadium in rainbow colours.

Separately, Uefa on Sunday said it was investigating “potential discriminatory incidents” during Hungary’s two opening matches in Budapest, where TV images captured homophobic banners among the 55,000-strong crowd. Monkey chants were also reportedly directed at French players on Saturday. 

Brussels risks getting ensnared in the politicisation of the world’s most popular game. EU diplomats have told Europe Express that the incoming Slovenian presidency, led by rightwing prime minister Janez Jansa, wants leaders to sign off on summit conclusions this week on the governance of sport. 

Under the banner of the European Way of Life, Jansa is pushing for leaders to agree language “reaffirming the uniqueness of the organisation of sport in Europe”. The request has baffled diplomats, particularly as the EU has little legal authority over sport.

Slovenian diplomats said the push was needed to prevent schisms such as the scuppered European Super League that rocked world football earlier this year. Jansa also has a long-running grudge against his compatriot and president of Uefa Aleksander Ceferin, often taking to Twitter to send pointed jibes at football’s governing chief.

Between all the spats and controversies, viewers could be forgiven for forgetting that some football is also going on.

In the dock

Poland and Hungary will be in the spotlight during ministerial meetings in Luxembourg today as member state ministers discuss Article 7 procedures against the two countries, writes Sam Fleming in Brussels.

These procedures allow the European Commission, European parliament or member states to take action against countries for serious breaches of the rule of law under threat of punishments such as the suspension of EU voting rights.

The commission triggered the process against Poland in 2017, while the parliament launched it against Hungary the following year.

In Poland, incursions into judicial independence have continued, as have apparent threats to the primacy of EU law. In Hungary, there are mounting concerns about the judiciary, anti-corruption frameworks, media pluralism and human rights. Last week, Hungary passed an anti-LGBT+ law that sparked criticism from rights groups. The commission said it would look into whether the legislation breached EU laws.

Nevertheless, the two countries can shield each other from punishments under the Article 7 regime by wielding their vetoes. The question ahead is whether the commission can obtain better results by deploying powers agreed last year to withhold EU funds over breaches of vital principles.

Commission vice-president Vera Jourova is due to address the ministers in the General Affairs Council, setting out the state of play in both countries.

“The last hearing on Poland took place in December 2018 and on Hungary in December 2019, and many things happened since then,” she told Europe Express. “Unfortunately most of them continued to raise our concerns.”

What to watch today

  1. EU affairs ministers meet in Luxembourg

  2. Germany’s chancellor Angela Merkel receives European Commission president Ursula von der Leyen in Berlin

Notable, Quotable

  • United front: French politicians from left to right have persuaded a Green candidate to withdraw from the second round of regional elections on Sunday. The move is aimed at ensuring that Marine Le Pen’s far-right Rassemblement National does not take control of the southern Provence-Alpes-Côte d’Azur region.

  • Belarus sanctions: EU foreign ministers approved sanctions against a further 86 individuals and organisations in Belarus and set their sights on industries including finance, potash and petroleum products to put pressure on President Alexander Lukashenko’s regime.

  • Government collapse: In a first for Sweden, the country’s prime minister Stefan Lofven has lost a no-confidence vote in his government. The vote, engineered by rightwing opposition party Sweden Democrats, means Lofven has a week to call an election or build a new ruling coalition.

  • German tech offensive: Germany’s Federal Cartel Office added Apple to the Big Tech companies in its crosshairs, launching a probe into whether the iPhone maker has established market dominance through its “digital ecosystem”.

  • St Schuman: “Founding father” of the EU Robert Schuman may soon become a saint. The former French prime minister was given the title of “venerable” in a decree by Pope Francis over the weekend, which is one of the steps that could lead to sainthood.

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Today’s Europe Express team: sam.fleming@ft.com, mehreen.khan@ft.com, david.hindley@ft.com, valentina.pop@ft.com. Follow us on Twitter: @Sam1Fleming, @MehreenKhn, @valentinapop.





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German conservatives pledge tax cuts and stability to voters

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German chancellor Angela Merkel’s party has promised a “decade of modernisation” in an election manifesto that pledges tax relief and a quick return to balanced budgets after the massive spending splurge during the Covid-19 crisis.

“Our offer is to combine consistency in fighting climate change with economic strength and social stability,” Armin Laschet, leader of the Christian Democratic Union, said. “We will turn Germany into a carbon-neutral industrial state that safeguards jobs.”

The CDU, and its Bavarian sister party the Christian Social Union, are currently leading the polls some 100 days ahead of federal elections that will bring the curtain down on Merkel’s 16 years as chancellor and could usher in the first conservative-Green coalition in Germany’s history.

The manifesto offers a series of tax reliefs, although it is vague on how they will be funded. It foresees a 25 per cent cap on corporate taxes, currently around 30 per cent, and pledges to abolish the “solidarity surcharge”, introduced in 1991 to help pay for German reunification, for the 10 per cent of taxpayers who still pay it.

It also promises income tax relief for people on low and middle incomes, while saying the CDU wants a return to balanced budgets “as soon as possible” and to bring Germany into compliance with the Maastricht treaty by bringing its debt-to-gross domestic product ratio below 60 per cent. The party rejected any attempt to remove the “debt brake”, a limit on budget deficits anchored in the German constitution.

Yet the manifesto fails to explain how a future CDU government would finance the promised tax relief without raising taxes elsewhere, or making spending cuts. The government is already taking on a record €240bn of debt this year with another €100bn forecast for 2022, partly to pay for the aid disbursed to businesses during the pandemic.

Arguing against tax rises, Laschet said the government had injected liquidity into German companies and “it would be completely crazy to take that out again, just when we want small and medium-sized enterprises and family-run businesses to start investing again”.

He also said Germany’s pre-coronavirus experience showed you can increase revenues without raising tax rates. “Because we had economic growth, a lot of people were in employment and paying into the system.”

Instead, he argued the focus should be to remove red tape and expand access to fast broadband services. In the past 25 years, “Amazon, Google and Tesla turned into tech giants while we played bureaucratic ping-pong”, he said.

Laschet presented his party’s 140-page manifesto alongside Markus Söder, the CSU leader and prime minister of Bavaria. It was their first joint appearance before the press since Laschet prevailed in a bitter contest between them over who should run as the CDU/CSU candidate for chancellor.

While pledging to implement the government’s existing goal of cutting greenhouse gas emissions to net zero by 2045, they face a strong challenge from the Greens, who enjoyed a stunning surge in popularity after naming 40-year-old Annalena Baerbock as their candidate for chancellor. A series of slip-ups have recently knocked the Greens off their perch.

“The Greens’ aura of invincibility is over,” said Söder. “The Germans won’t entrust the chancellery to the Greens — they have a lot of ideas but absolutely no experience.”



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Marine Le Pen falls short in French regional vote

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Marine Le Pen’s far-right Rassemblement National party fell short of expectations in the first round of France’s regional elections on Sunday, leaving the Les Républicains party and other centre-right politicians in a strong position for the second and final set of ballots next weekend. 

The relatively poor results for the anti-immigration RN — in a record low turnout of about 33 per cent — will also provide some comfort for Emmanuel Macron, who is expected to face Le Pen when he seeks re-election as president next year. 

Le Pen described the low turnout as a “civic disaster” that gave a false impression of the political situation. “If you want things to change, you must vote,” she said in a short speech as the results began to emerge.

Xavier Bertrand, the centre-right leader of the Hauts-de-France region in the north, was on course for re-election and received a boost to his own presidential ambitions, with early estimates from BFMTV after polls closed giving him 44 per cent of the vote, against 24.4 per cent for Le Pen’s RN. 

Recalling that the RN had been ahead in the region after the first round in 2015, Bertrand boasted in a speech of “breaking the jaws” of his far-right rivals in this year’s electoral battle. Le Pen had campaigned in the north and hoped to flip the region to her party in Sunday’s vote. 

Xavier Bertrand after casting his ballot © AFP via Getty Images

Early estimates suggested that Le Pen’s party might be within reach of a first-round lead in Provence-Alpes-Côte-d’Azur in the south. But even there the performance was less impressive than predicted by opinion polls, which had suggested the RN would take control of the region after the second round in the first such victory in its history. 

That now looks less easy to achieve for the RN, since other parties have in the past tended to unite in a so-called “republican front” in second-round votes to keep the extreme right from power.

Nationwide, centre-right lists were forecast to receive about 29 per cent of the votes cast in the first round, against 19 per cent for the RN, 16 per cent for the Socialist party, 13 per cent for the Greens and 11 per cent for Macron’s centrist La République en Marche party. 

Incumbent parties performed well, with LR politicians in the lead in the Grand Est region in the east, Auvergne-Rhône-Alpes in the south-east and Ile-de-France around Paris. The Socialists expected to hold Occitanie and Brittany in the west.

Gérald Darmanin, interior minister, said the record low turnout was “particularly worrying”, adding: “Our collective effort must be to mobilise the French for the second round.” 

The low turnout did not fulfil the fears of Macron’s ally François Bayrou by benefiting the extreme right or the extreme left, and may have been the result of voter weariness with politics and a desire to enjoy themselves after more than a year of the Covid-19 pandemic. 

“The French have their minds on other things completely,” Brice Teinturier of polling group Ipsos told a webinar last week. “We are coming out of the pandemic . . . and the outlook for the economy is getting much better.”



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