US-France Agree on Digital Tax Postponement... One-Year Truce in Tariff War

President Macron: "Cooperating to Avoid Tariff Increases Based on Agreement"

Trade Tensions Expected to Ease Slightly

Tariff Disputes Remain Over NATO Defense Cost Sharing and Other Issues

[Asia Economy Reporter Kwon Jaehee] The United States and France have agreed to postpone tariff imposition, marking a one-year truce in the tariff war triggered by the 'digital tax' dispute between the two countries. This development also appears to temporarily ease trade tensions between the United States and the European Union (EU). However, concerns remain as U.S. President Donald Trump, facing re-election, may leverage this issue to increase his negotiating power in other areas such as NATO defense cost sharing, keeping the conflict's embers alive.

On the 20th (local time), French President Emmanuel Macron tweeted, "I had a good discussion with President Trump regarding the digital tax," adding, "We will cooperate based on an agreement to avoid any tariff increases."

Bloomberg News, citing French diplomatic sources, reported that France and the United States have agreed to continue negotiations until the end of this year to ensure that IT companies pay appropriate taxes, and during this period, they have agreed to postpone tariff imposition.

Previously, France decided to impose a digital tax (3% on domestic sales) starting this year on IT companies with global annual revenues exceeding 750 million euros (approximately 970 billion KRW) and domestic sales in France exceeding 25 million euros (approximately 32.4 billion KRW). France's digital tax targets not only U.S. companies but IT companies worldwide. However, the U.S. has viewed this as a measure effectively targeting itself and has threatened retaliatory tariffs of up to 100% on 63 French products, including handbags and wine, worth 2.4 billion dollars (approximately 2.8 trillion KRW). The digital tax is also known as the 'Google tax' or GAFA, an acronym derived from the first letters of the American IT giants Google, Amazon, Facebook, and Apple. This has led to assessments that the digital tax ignited a full-scale trade war between the U.S. and the EU.

The digital tax has been a contentious issue within the EU. IT companies have been generating astronomical profits in Europe while not paying sufficient taxes. These companies have avoided taxes by establishing subsidiaries in regions with the lowest tax rates within Europe, and the U.S. has responded by not intervening, which has heightened dissatisfaction among EU countries. Phil Hogan, EU Commissioner for Trade, has stated, "We want IT companies to pay taxes fairly in each region."

The EU is pushing for a digital tax at the EU level, but opinions are sharply divided within the union. The United Kingdom has decided to impose a digital tax of 2% on domestic sales for IT companies earning 500 million pounds (approximately 758.2 billion KRW) annually starting in April. Italy and Austria have also decided to impose tax rates of 3% and 5%, respectively, on IT companies' domestic sales starting this year. On the other hand, Ireland and Luxembourg, which have attracted many global IT companies through tax incentives, strongly oppose the tax. Germany and Sweden are also hesitant to introduce it, fearing that their automotive industries could suffer if relations with the U.S. deteriorate.

Although the 'digital tax' truce is expected to somewhat ease trade tensions between the U.S. and the EU, the conflict's embers remain. President Trump has threatened to impose tariffs if NATO countries do not increase their defense cost sharing, indicating that he may use tariffs as leverage to enhance his negotiating power on security and other issues in the future. In fact, regarding the Iran nuclear deal (JCPOA - Joint Comprehensive Plan of Action), President Trump threatened to impose a 25% tariff on European cars if Germany, the UK, and France did not initiate dispute resolution procedures under the nuclear agreement.