Artillery Row

Grand Tax Auto

Will Javid’s tax on Amazon endanger a UK-US free trade agreement?

Is the British government heading towards a trade deal or a trade war with the United States?

The coming imposition in April’s budget of a 2 percent tax on social media, search engine and online marketplace companies on their UK-derived revenues above £25 million will be primarily felt by the American tech giants, Amazon, Apple, Facebook and Google. Little wonder therefore that the Chancellor, Sajid Javid, has traded jabs if not blows with US Treasury Secretary, Steven Mnuchin, on the matter.

Speaking at Davos, Mnuchin addressed Britain’s incoming digital services tax directly, suggesting that, “if people want to just arbitrarily put taxes on our digital companies we will consider arbitrarily putting taxes on car companies.” “Ka-pow! Take that Saj!” as the Treasury Secretary just about managed to internalise.

How bad would this be? The United Sates has been a significant growth market for British-made cars in recent years. About 200,000 cars – one in ten of the total number of cars manufactured in the UK – are exported to the United States. These sales are achieved despite there already being a 2.5 percent tariff imposed on all EU-made cars imported to the US.

Yet the EU is in no position to can-can from the moral high ground. As so frequently transpires to be the case, Brussels talks evangelically about free trade as if it was a religion to be imposed upon distant infidels, whilst being a serial backslider into sin itself. The EU imposes a 10 percent tariff on cars imported from the United States.

This is the context in which President Trump now threatens to raise the US tariff on EU cars to 25 percent. The prospect should certainly concentrate minds since 29 percent of the EU’s automotive export value is in the US market. 19 percent of the US’s equivalent export value is with the EU.

If Trump’s threat proves more than bluster, then Brexit may be coming not a moment too soon for the British car industry. Not a moment too soon, that is, if Anglo-US negotiations for a free trade agreement (FTA) do not replicate for the UK the same EU-US tariff mire. The equation, however, is not zero sum given the level of cross-Channel integration and supply chain complexity that would ensure that Europe’s burden would come with consequences for car manufacture in Britain. This, then, is about the UK escaping the worst case scenario, but not about getting away scot-free.

After next week there is nothing Britain can do to stop the EU and US revving-up their tariff engines if they want to. But the response to the digital services tax will be entirely our doing. Of course, if any US response to a 2 percent digital tax is proportionate, then the imposition on our auto industry will be slight, and a price that would be almost gladly paid if it proved to be the only levy, especially if EU-manufactured cars end up facing far higher barriers to entry into the American market.

But will that be all?  Whatever the prospects, this is not the best moment for the Chancellor to be doing anything antagonistic. Particularly towards a President with a tendency to take small international slights personally. It is not as if the revenue projections from the digital services tax are enticingly vast. The Treasury anticipates making £400 million from it in 2022/23.

There is nevertheless the question of whether Mnuchin’s attempted comparison between taxing car imports and a digital services tax is one of apples and pears.

The incoming digital services tax is not just a tariff for the sake of it. It seeks to address a genuine problem in which digital platforms – unlike other businesses – are inadequately taxed in the market from which they make their revenue.

George Osborne is right to call Javid’s imposition of a levy that will fall overwhelmingly on American tech companies “very brave.” But he will also recall the outcry directed at him for permitting a situation in which Amazon and Google were structured in a way that ensured they paid HM Treasury trivial amounts of corporation tax despite considerable UK-derived revenues.

Several countries are working-up similar proposals, but are facing the call to not do so unilaterally. Be patient, they are told and wait for the OECD to devise an international accord. That would be better than a free for all.

But will that accord get bogged down in interminable negotiation? Without the incentive of existing nationally imposed taxes to replace, would the United States really be in a rush to approve the accord when it eventually materialises?

France has already blinked. It dropped its own plan to introduce a 3 percent digital services tax when the US threatened to retaliate with a tax on French wine. In refusing to come to heel similarly, Javid looks like a man who could do with some Dutch courage. There could be a lot more than £400 million for the Treasury’s coffers riding on his bravery.

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