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How Trump could use tariffs to combat the French tax on digital services

President Donald Trump

Joshua Roberts | Reuters

President Donald Trump could act against France's new tax on US technology companies by triggering pungent tariffs on French key commodities, according to trade experts.

The French Senate passed a 3% tax on Thursday that will affect American companies like Facebook and Google. The tax, which has already been approved by the French National Assembly, would apply to companies generating around $ 850 million in digital services worldwide and approximately $ 28 million from France.

Prior to the tax clearance, the US Trade Representative's Office has opened an investigation into whether the measure is "discriminatory or unreasonable and burdens or restricts United States trade," US Trade Representative Robert Lighthizer said Wednesday. Once the investigation is completed, the Agency could take countermeasures or other measures to prevent France ̵

1; and possibly other countries – from levying new taxes on US companies.

"Once the investigation is completed, the USTR will decide based on the findings of the investigation whether and what action should be taken," the USTR said in a statement Thursday when it was asked how the government could fight back France.

French wine drinkers Beware

Trump's government will most likely respond by beating tariffs on French cult goods, experts said. This could mean that tariffs of up to 100% on French signature products are charged. Think of wine, cheese or perfume.

"I would expect high tariffs for a very emblematic product, which is obviously the French spirits and wine industry, a symbol and also harmful to the economy," said Jorn Fleck, deputy director of the Future Europe Initiative The Atlantic Council.

In a CNBC interview last month, Trump suggested that he could impose tariffs on French wine. He said Californian wine producers complained to him that France imposed higher import tariffs than the US.

"And you know, it's not fair, we'll do something about it," he said.

France exported 3.2 billion euros of wine to the US last year, making America its largest export market. According to the Federation of French exporters of wine and spirits.

Trump's Other Ways to Avenge France

The investigation under section 301 of the 1974 Commercial Law gives Trump the opportunity to hit French industry beyond the wine. For example, it could impose lower tariffs of up to 5% on all French imports. However, according to Gary Hufbauer, a non-resident senior fellow at the Peterson Institute for International Economics, this step is unlikely.

The Trump administration has another alternative that experts think is more drastic. The White House may use Section 891 of the Internal Revenue Code to double taxes on French companies doing business in the United States.

When France questioned the digital tax last month, Sens. Chuck Grassley of Iowa and Ron Wyden of Oregon were in the lead Republicans and Democrats in the Senate Finance Committee urged Treasury Secretary Steven Mnuchin to consider a tax increase for French affiliates to draw. However, experts believe that the White House will prefer targeted tariffs to higher taxation.

"That would be pretty draconian and in my opinion would not be proportional to the digital tax in France," said Hufbauer.

As the US reviews its retaliatory options, it will also work to conclude a multilateral agreement with countries in France on digital taxation, the Organization for Economic Cooperation and Development or the OECD. However, a solution is not expected until next year.

The slow, multilateral OECD process is a tough sell for Trump, a showman who likes to make clear political points. He may prefer a move that he can denounce as a concrete example of how to tackle the European Union, especially if he stands for re-election in 2020.

"The president can use this for his political advantage," said Fleck. "They heard him talk about the fact that the EU is almost worse off China than any of its commercial practices."

It remains to be seen if Trump wants to open another front in his global trade dispute during an election season. He is already seeking an agreement with China as the world's two largest economies seek to avoid an expanding trade war.

In May, his government delayed import tariffs on EU cars and auto parts by up to six months.

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