International

Are Tariffs the Right Response to Foreign Digital Taxes?

U.S. Trade Representative Katherine Tai testifies before the Senate Appropriations Subcommittee on Commerce in Washington, D.C., April 28, 2021. (Sarah Silbiger/Reuters)
Or would they harm the economy at home and fail to spark their intended reforms?

Last week’s G-7 meetings provided an opportunity to resolve the growing international tensions over tariffs. Simply removing the tariffs enacted by and against the U.S. over the past five years would create thousands of jobs while lowering prices on hundreds of billions of dollars of goods. It would also go a long way toward easing other diplomatic tensions. Sadly, there is no guarantee that leaders will do the right thing.

Take, for example, the prospect of digital taxes that several European governments have advocated in recent months. The rationale, of course, is that they would be a favorable way to tax wealthy U.S.-based tech companies. The U.S. government is not happy about this and at the beginning of the month, threatened to raise tariffs against six countries if they do enact them. The Biden administration would be wise to drop this idea and, instead, remove existing tariffs that are already hurting Americans.

The proposed digital-tax tariffs are technically already in effect, though they were immediately suspended for six months to allow time for negotiations, so no revenues have yet been collected. If the strategy fails and the administration follows through on its threat to introduce tariffs in response, American consumers will start paying higher prices in time for the holiday shopping season. The 25 percent tariffs would affect a total of about $2 billion of goods from Austria, India, Italy, Spain, Turkey, and the United Kingdom, most of whom were represented at last week’s meeting. Affected goods include clothing, cosmetics, and optical lenses.

U.S. Trade Representative Katherine Tai announced the tariffs on June 2, without congressional input, citing Section 301 of the Trade Act of 1974 — the same provision that President Trump used to justify his tariffs on China. The new boss, it turns out, is not that different from the old boss.

Tai views tariffs as a source of leverage. Yet our recent experience with China shows this not to be the case. Indeed, four rounds of tariffs plus the Phase One agreement — designed to encourage structural change in China’s economic and trade regime — netted no substantive reforms from Beijing.

To be sure, it might be different story with the six countries that the Biden administration is currently threatening. They are mostly allies who are more interested in maintaining a positive relationship with the United States than was China. But a new tariff is not the only source of potential American leverage. Existing tariffs are, too.

Why not scrap Trump’s steel and aluminum tariffs in exchange for scrapping proposed digital taxes? Carrots are often more effective than sticks.

The metal tariffs will also likely be an issue at this week’s U.S.–EU summit. European leaders want a December 1 deadline for ending them. In return, they would end the retaliatory tariffs they passed in response. A digital-tax moratorium should also be part of the deal.

Here at home, the metal tariffs are slowing the COVID recovery by raising auto and housing prices, which were already at record highs. They are also causing needless diplomatic frictions with allies. Removing them is a win-win.

There are also longer-term benefits. The U.S. is likely to negotiate a trade agreement with the U.K. in the next few years, and President Biden’s decision whether to use a carrot or a stick to deal with digital taxes will probably be remembered during that process. The U.S. also hopes to finalize future agreements with India and the European Union — of which Austria, Italy, and Spain are members. Meanwhile, relations with Turkey are burdened with their own diplomatic tensions that tariff threats will not help to ease.

Trade Representative Tai has a point: Digital taxes are a problem. American companies already pay sales, income, property, and other taxes in countries where they do business. Imposing an additional tax on companies just because they conduct their business online is unfair. It is a transparent revenue grab against wealthy and politically unpopular targets. She should also be on guard against efforts to fold digital taxes into President Biden’s proposed global minimum tax.

Those critiques notwithstanding, new tariffs are the wrong tool for pushing back. They are the closest thing policy-makers have to an own-goal: They harm the economy at home, cause even allies to retaliate against us, and routinely fail to spark their intended reforms. They should be liberalized instead.

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