- The EU may restrict US digital services in response to Trump’s proposed tariffs, impacting American tech firms’ revenue in Europe.
- The EU’s Anti-Coercion Instrument (ACI) could allow it to impose restrictions on US services, addressing its trade deficit with the US.
- The EU’s potential retaliation could significantly impact the global economy and the tech industry.
- The unfolding of these events marks a critical juncture in international trade relations.
The global economic landscape could be reshaped by former US President Donald Trump’s proposed tariffs on the European Union (EU). Instead of imposing tariffs on American goods, the EU might restrict American digital services to counterbalance the trade measures from Washington. This strategy aims to address the EU’s significant trade deficit in services, potentially impacting billions in revenue generated by American tech firms in Europe.
The Goldman Sachs report released on Monday suggests that the EU could exploit its growing trade deficit in services by restricting American digital services. This move could hit a sector that generates billions in revenue from European markets. The report also predicts that the US may increase tariffs on European car exports by 25 percentage points and impose a 10% tariff on various critical imports, including metals and pharmaceuticals. This could affect EU exports worth €190 billion, representing approximately 40% of the EU’s total shipments to the US.
In response, the EU may adopt a strategy similar to its 2018 retaliation against US tariffs on steel and aluminum. At that time, Brussels targeted American products such as bourbon whiskey and motorcycles. However, this time, the EU has the Anti-Coercion Instrument (ACI) at its disposal, allowing it to impose restrictions on US services. The EU currently faces a trade deficit of nearly €150 billion in services with the US, primarily due to the dominance of American tech firms.
EU’s Potential Retaliation and the Anti-Coercion Instrument
The EU’s potential retaliation against US tech services is reminiscent of the 2018 trade war when Trump first targeted European steel and aluminum. At the time, Brussels retaliated with duties on key US products, covering about 40% of the affected EU exports. A second round of tariffs was prepared but never implemented, pending a World Trade Organization ruling. This time, the EU is likely to tread cautiously once again. Economists expect the EU to favor a de-escalation of trade tensions as much as possible and resort to strong retaliation only as a last resort.
The EU now has an additional tool at its disposal: the Anti-Coercion Instrument (ACI), a mechanism designed to counter economic pressure from third countries. The ACI, which grants Brussels the authority to impose tariffs and restrict access to European markets in response to coercive trade measures, could provide a framework for action against Washington.
One area that could come under scrutiny is the digital economy. While the EU enjoys a significant trade surplus in goods with the US, it runs an annual trade deficit of nearly €150bn in services – half the size of its goods surplus. A major factor in this imbalance is the dominance of American tech companies. These firms generate substantial revenues from European customers and repatriate earnings as royalties through low-tax jurisdictions like Ireland.
Implications for the Global Economy and the Tech Industry
Goldman Sachs economists suggest that targeting this sector could be a way for Brussels to push back without resorting to a tit-for-tat tariff war on physical goods. Services imported by the EU from the US span different sectors, including the financial sector, but the lion’s share are IT services that are then invoiced as royalties channeled to the US from Ireland, Goldman Sachs said, adding that any restrictions on these transactions could have a meaningful impact on the services trade balance.
Unlike traditional tariffs, which can be imposed quickly, any measures under the ACI would require approval from at least 15 of the EU’s 27 member states, a process that could slow Europe’s response. For now, Europe is watching Trump’s next move closely. If he follows through with his promise of new tariffs, Brussels will have to decide between direct retaliation on American goods or a more strategic approach – one that could put the US tech sector in the crosshairs of a trade war it has largely avoided until now.
This development is reminiscent of historical events when countries have used tariffs and trade restrictions as a tool for retaliation. For instance, during the 1930s, countries engaged in a series of tit-for-tat tariffs that exacerbated the Great Depression. More recently, the US-China trade war under the Trump administration saw both countries imposing tariffs on each other’s goods, leading to increased tensions and economic uncertainty.